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. It also increases costs associated with accounting, warehouse storage and handling.

• 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. This can also lead to financial difficulties in the short term if unexpected expenses arise or customer orders cannot be filled due to lack of 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. It also provides a buffer in case there is an unexpected shortfall in revenue or an increase in expenses due to external factors beyond control of the business.