TUTORIALS

Working Capital Management

Working capital management is regularly associated with short-term financial decision making.  It involves managing current assets and current liabilities continuously in order to generate cash flow sufficient to meet the current obligations and operational expenses. The financial manager has considerable responsibility and control in managing the level of current assets and current liabilities. Current assets are essential for any business but it should be remembered that there is cost associated with holding them and therefore the company should find the optimal levels of current assets and finance the working capital at the least cost. 

The level of working capital varies widely among different industries. Trading industries keep more than 50% of their assets in current assets, meaning they carry idle funds which bear costs in form of interest payments. On the other hand, carrying inadequate amount of working capital carries a risk of insolvency. Liquidity and profitability are likewise directly affected by working capital management. Without sufficient liquidity, a firm may be unable to pay its liabilities as they mature. The firm’s profitability is also affected because current assets must be financed. Higher levels of current assets are needed to support production and sales growth. It is therefore absolutely essential for the company to have an adequate working capital not only in the short term but also in the long term to ensure the survival of the business during difficult times and growth during good times.