Why is working capital a safety factor?

Working Capital plays a major role that's why it declared as a safety factor. It's shows the company equilibrium is maintained or disturbed. It's the first stage about the company financial condition, if a company fails to pay short term obligations, so initially working capital gives us the signal about company financial position. That's why it is consider the safety factor. Thanks 

 

it is the first implication showing the relationship between current assets and current liabilities as the  risk of  inability to meet short term liabilities can send companies to bankruptcy ,this indicator is always preferred to be positive means company can meet its current liabilities from current assets .

Because it is the source of profit from the operating activity of the company, which is indicative of the ability of the enterprise to continue

Working capital evaluates the short term obligations or claims of a firm. The safety factor indicates if a company is able to meet short term obligations when they come due, which is a 12 month period.

A detailed analysis must be conducted to the individual accounts that make up a firm's current assets and current liabilities.

The best Answer added by: Mohammed Qasem   Auditor 3 days ago

Its about control company needs and represent alarm and red flags for day by day need.. Its look like personal wallet; if its close to be empty you cant go to grocery.