Description

INTRODUCTION

WORKING CAPITAL MANAGEMENT

The success of business, among other things depends upon the Manner in which its capital is managed in the dynamic business setting, the difference between the current assets and current liabilities. Constantly changes in Relation to the level of activity of the business concern and rates at which the current assets of current liabilities keep changing in Relation to each other and other things are significant factors also continuous review and direction of the financial manager. It is the task of the financial Maintain an Appropriate level of working capital that is enough current assets to pay off current liabilities neither excess nor less because excessive working capital leads to interruption in the smooth functioning of the business concern. There are numerous instances in the history of business world where inadequacy of working capital has led to business failures when a firm finds it difficult to meetings day-to-day. Operating expenses essential out lays may have to be postponed for want of funds, operating plans will go out of gear & enterprise objectives on investment fall the suppliers & creditors of the firm may have to wait longer to raise their dues & will hesitate to extend further credit to the firm.

Working capital management is important part in the firm of financial management decision. Working capital refers to company current assets. Current assets are cash and equivalents, account receivables, and inventory. Working capital management is applying investment and financing decisions to the current assets. Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the firm referring to the risk and return, investment with more risk will result to more return. Thus, firms with high liquidity of working capital may have low risk then low profitability. Conversely, firm that as low liquidity of working capital, facing high risk results to high profitability. The issue here is in managing working capital, firm must take into consideration all the items in both the accounts and try to balance the risk and return.

An optimal working capital management is expected to contribute positively to the creation of firm value. To reach optimal working capital management firm manager should control the trade of between liquidity (ability to pay bills, keep sales coming in keep customers happy, play it safe and profitability (size  earnings after taxes) accurately. Working capital management is the life blood of business and every manager’s primary task is to help keep it flowing and to use the cash flow to generate profits.