(a) Explain the meaning of working capital and state its importance. (b) Outline any seven factors which might affect the rate of turnover.

(a) Meaning and importance of working capital

Meaning: Working capital is the excess of current assets over current liabilities. It is the part of a firm's capital used to finance day-to-day trading operations, that is:

\[\text{Working capital} = \text{Current assets} - \text{Current liabilities}\]

Importance:

• It is used to buy stock (goods) for resale and to keep the business trading.
• It enables the firm to pay wages, salaries and running expenses as they fall due.
• It enables the firm to meet its short-term debts (creditors) promptly, maintaining a good credit reputation.
• It allows the firm to take advantage of cash discounts and sudden business opportunities.

(b) Seven factors that affect the rate of turnover

1. Nature of the goods: perishable and everyday goods sell faster and have a high rate of turnover, while durable goods sell slowly.
2. Price of the goods: low-priced goods generally sell faster than expensive ones.
3. Location of the business: a shop sited where there are many customers records a faster turnover.
4. Demand for the goods: goods in high or steady demand move faster off the shelves.
5. Advertising and sales promotion: effective advertising increases sales and speeds up turnover.
6. Amount of credit given: selling on credit and after-sales service can boost the volume and speed of sales.
7. Level of competition and quality of service: good service, variety and competitive pricing attract more customers and raise turnover.

(Other factors include the season of the year and the income level of customers.)