(a) Explain the meaning of working capital and state its importance.
(b) Outline any seven factors which might affect the rate of turnover.
Explanation
(a) Working capital: The different transactions of a business makes it mandatory to have ready and available funds for its daily transaction. Therefore, the capital for the running of a business is called working capital. It is the excess of current assets over current liabilities. Working capital = Current assets less current liabilities.
The importance of working capital are:
(i) It provides the basis for profit-making.
(ii) It is used for financing the daily transactions of a business.
(iii) Working capital is a test of the solvency of a business.
(iv) The life of a firm depends on the working capital because business activities are carried out from it.
(v) It serves as a yardstick for investors.
(vi) Indicates that business is not being financed by the supplier.
(vii) Serves as a check against tying down too much money for current assets.
(b) Factors that might affect the rate of turnover are:
(i) Effective advertising and sales promotion will stimulate demand and hence turnover.
(ii) Offer of credit facilities can induce customers to buy.
(iii) The price of the goods will determine the demand, low prices will increase demand.
(iv) Type of goods is another factor.
(v) The reputation and goodwill of the trader play a part in enhancing turnover.
(vi) Another factor is the regularity in the supply of goods sold.
(vii) The location of the store i.e urban or remote centres.
(viii)The number of competitors in the market.