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How working capital relates to profitability



The topic of capital versus profitability has always interested the financial capitalists and economists all around the globe. The underlying debate rallies behind the variables of returns, on the assets ratio, to measure the profits or losses or gains. It also applies to the turnover from the creditors,

inventory and capital management of the assets. In the financial affairs of the companies, the working capital has a significant impact on the profitability as well as the liquidity of the company as well. Liquidity and profitability are just like two sides of the same coin. A good level of liquidity means effective management of the company by meeting small debts on the way to increase profitability. 

Capital Vs Profitability

The balance between capital and profitability is very relatable like mangoes on a tree. More the mangoes, the heavier it gets for the tree to manage the weight. It’s the same, as the capital increases so do the liquidity of the assets and in turn, decreases the profitability of the business. A well thought out balance between the both can achieve optimum level of profitability. 

Importance of Working Capital Management 

The importance of working capital relates to a vital aspect of achieving small goals since it is required to make timely payments for your primary business essentials. They are required to run a business, cover costs when needed and also pay small-term loans or debts. It includes inventory management which in turn will help the company to increase the optimal level of profitability. Also, it is to keep track of the accounts payable, receivable and maximizing the returns on the asset management as well. Firms like lends capital to new business owners who are looking for funding to start their business and this in turn helps the growth of a developing country that is dependent on its small and large scale businesses. 

Working Capital equates A person’s monthly budget

In short, understanding the effects of working capital management is like managing one’s budget effectively. A person will have to pay for rent, bills, cover day to day expenses throughout the month and also make sure he has enough savings in hand to last for bad times. 

Key terms 

Like in any business, there are certain key terms one must know when dealing with capital management 

ROA(Returns of Assets Ratio) – It is the ratio of net annual income divided by the total assets of a business during the financial year between April- March. 

DTO(Debtors turnover Ratio) :- It shows how many times annually, a company collects its receivable accounts which in turn will increase the liquidity over a period of time. 

CTO(Creditor’s turnover Ratio) :-  It shows how credit worthiness of the company increases the credit limit. 

ITO(Inventory Turnover Ratio) :- It is the ratio which shows the inventory progress. It varies from business to business. A fast moving inventory ratio inclines to higher profit and slow moving shows inventory being stuck or obsolete. 


Indifi is helping realize the dreams of many startups and small scale businesses by providing them with financial support. It is devoted to the development of businesses that are high on promise.


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