DECA+ Business Management and Administration Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Boost your business management skills with the DECA+ Business Management and Administration Exam. Practice with interactive questions, hints, and detailed explanations. Ace your exam today!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

Why is it necessary for businesses to maintain adequate working capital?

To maximize investment returns
To ensure they can meet short-term liabilities
To acquire more long-term investments
To decrease overall operating costs

The correct answer is: To ensure they can meet short-term liabilities

Maintaining adequate working capital is essential for businesses primarily because it allows them to meet their short-term liabilities. Working capital is defined as the difference between a company's current assets and current liabilities. It serves as a measure of a company's operational efficiency and its short-term financial health. When a business has sufficient working capital, it can easily cover its day-to-day operations, pay suppliers, and meet other financial obligations as they come due. This liquidity ensures that the business can maintain normal operations without the threat of bankruptcy or financial crisis. If a company cannot meet its short-term liabilities, it risks damaging its credibility with creditors and suppliers and may face penalties, fees, or even legal action. While maximizing investment returns, acquiring long-term investments, and decreasing overall operating costs are important business strategies, they do not directly address the need for sufficient liquidity to manage immediate operational needs. Thus, the emphasis on meeting short-term liabilities underscores the importance of working capital in sustaining the day-to-day functionality of the business.