Examine the key reasons why a business may not want to hold too much or too litt

Question

Examine the key reasons why a business may not want to hold too much or too little working capital. Provide examples that illustrate the consequences of either situation.

B7        * From the scenario, analyze TFCbs cash budget to determine key methods in which the budget may be optimized (e.g., by renegotiating terms and conditions on some of its payables, etc.). If you believe that there is room for improvement, recommend key strategies for TFC to use in order to optimize its cash budget. If you do not believe that this is the case, provide a rationale for your response.

Explanation / Answer

Answer related to working capital:

Generally, businesses don't hold too little working capital, as this would hamper growth, the business needs to have a decent amount of working capital in hand to meet the new orders as and when they come, and business comes with risk, there is risk related to everything, and opportunities(extra order) seldom come, so in order to take advantage of opportunities as and when they come, business needs to maintain a certain amount to working capital, also there may be a case when we get delayed payments from our customers, in such cases business continuity is at risk if we maintain too little working capital, thus a decent amount of working capital should be maintained.

On the other hand, businesses cannot maintain too high working capital, as this would lead to an extra cost of financing that capital and that would reduce our profits, thus one needs to maintain a decent amount of capital which can be forecasted based on future business prospects and past records of the company.

Answer of question 2 cannot be given as question is incomplete, data is missing.

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