Examine the key reasons why a business may not want to hold too much or too little working capital.

• Too much working capital can be costly, as it ties up cash which could otherwise be used for investments that generate returns. The costs of accounting, handling and storage in the warehouse are also increased.

• Holding too little working capital can make it difficult for a business to pay its bills on time, leading to potential late payment penalties or bad credit ratings. Lack of working capital can cause financial difficulty in the short run if unexpected expenses occur or orders from customers cannot be fulfilled due to lack liquidity.

• Having the correct amount of working capital helps improve efficiency by ensuring sufficient funds are available when needed, such as during peak periods when there is increased demand for inventory or services. This buffer is also useful in the event of an unanticipated shortfall in revenues or an increase in costs due to factors outside your control.