Working capital management is a very complicated process since it is related to current assets and current liabilities. Thus, this process applies to such elements that affect every ongoing decision that is made in each enterprise regardless of its size or the sector where it operates. According to Dewing (1941), it is, along with fixed capital, one of the "key elements" of the firm.

Currently, when analyzing and assessing the working capital management process in enterprises, two more important elements should be added as they have the direct impact on the level of working capital. These elements include costs and revenues. Net working capital (NWC) is the part of equity that finances current assets, so one can see that profit will have the large impact on its value. Especially when the profit is retained in the enterprise and increases the level of equity. Figure 1 presents the most important elements of the balance sheet and profit and loss account shaping the level of working capital.

Question 3

In the 2^nd paragraph of the article (Working Capital Management Strategies in Polish SMEs), the author states that profit will have the large impact on the net working capital (NWC) value especially when it is retained in the enterprise. However, the sentence was not made explicit.

Required:

In what way will profit have the impact on the NWC? Elaborate. (Word limit: 100 words) (2 marks)