Explain the effects on a business of having a high level of working capital.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2021). The mark or mark type is shown in brackets.

1. [4-5] Effective explanation of the effects on a business of having a high level of working capital.
2. [2-3] Explanation of the effects on a business of having a high level of working capital.
3. [1] Descriptive information about working capital.
4. Answers could include: Working capital is current assets minus current liabilities. Also called net current assets. Capital needed to pay for raw materials, day-to-day running costs. Ability to offer credit offered to customers. Ability to offer more prompt payment to suppliers. Is the lifeblood of the business, needed day-to-day. Without enough working capital, the business will be illiquid/unable to pay debts. Less reliance on overdrafts/short-term borrowing. High level of working capital can be a disadvantage due to opportunity cost. Too much capital tied up in inventories, payments receivable (goods sold on credit), idle cash. Results in opportunity cost decisions. (Money) could be used to make more money for the business. Money could be used elsewhere e.g. invested on fixed assets. There may be advantages and disadvantages for a business having a high level of working capital - it may not be high enough or it may be too high.