(a) State five factors that can affect the rate of turnover of a company. (b) What is working capital? (c) Explain four importance of working capital.

Answer Details

(a) Five factors that affect the rate of turnover

Rate of turnover is the number of times average stock is sold and replaced within a period. Factors affecting it are:

1. Type/nature of goods sold: perishable and everyday goods sell faster than durable or luxury goods.
2. Level of demand: high customer demand raises the rate of turnover.
3. Price charged: lower prices attract more sales and quicken turnover.
4. Location of the business: a shop in a busy, populated area sells stock faster.
5. Quality of goods and service (including advertising): good quality and effective advertising increase sales and turnover.

(b) What is working capital?

Working capital is the excess of current assets over current liabilities. It is the fund available for the day-to-day running of the business.

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

(c) Four importance of working capital

1. It enables the business to pay its short-term debts as they fall due.
2. It provides funds to buy stock and raw materials for continuous trading.
3. It is used to meet daily running expenses such as wages, rent and transport.
4. It allows the firm to take advantage of cash discounts and trade opportunities, and keeps it solvent.