How does working capital affect both the liquidity as well as profitability of a business?

Working capital is the difference between current assets and current liabilities. It affects both liquidity and profitability of the business.

● The increase in current assets increases the liquidity position of the business but affects the profitability adversely because the return on current assets is quite low.

● Low working capital will affect the liquidity of the business which may disturb the day to day operation

So the working capital should be maintained at such a level that a proper balance could be maintained between profitability and liquidity.