How does working capital affect liquidity?

Working capital affects liquidity because a portion of the company’s financial resources is tied up in day-to-day operations. For example, if accounts receivable or inventory levels rise, more liquidity may be tied up. Conversely, if accounts receivable are collected more quickly, inventory levels are optimized, or payment terms are used efficiently, liquidity can be freed up. Working capital management is therefore an important tool for managing short-term liquidity.