Working Capital Management

Working capital management is a significant in financial management due to the fact that it plays a vital role in keeping the wheel of business enterprises running. Working capital management is concerned with short term financial decision. Shortage of funds for working capital has caused many businesses to fail and in many cases, as retarded their growth. Lack of efficient and effective utilization of working capital leads to low rate of return on capital employed or sustain losses. It is a short term financial management which is concerned with the decisions relating to current assets and current liabilities. The key difference between the long term financial management and the short term financial management is in terms of the timing of cash. Long term financial management involve cash flows over an extended period of time (more than 3 years), short term financial management involve cash flows involves within a year or within the operating cycle of the firm. The lead for skill working capital management has thus become greater in recent years. A firm invests a part of its permanent capital in fixed asset and keeping part of it for working capital i.e. for meeting a day to day requirement. 

Each organization is faced with its own limits on the production capacity and technologies it can employ there are fixed as well as variable costs associated with production goods. The most important areas in the day to day management of the firm, is the management of working capital. Working capital management is the functional area of finance that covers all the current accounts of the firm. It is concerned with management of the level of individual current assets as well as the management of total working capital. Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital. A few key performance ratios of a working capital management system are the Current Ratio, Liquidity/Quick Ratio, Debt-Equity ratio, Inventory T/O ratio, Net Profit ratio, Gross profit ratio, Return on investment, Return on equity, Operating ratio, Current assets to proprietor’s fund ratio, Asset turnover ratio, Return on assets ratio For example, an organization may be faced with an uncertainty regarding availability of sufficient quantity of crucial inputs in future at reasonable price. This may necessitate the holding of inventory ie., current assets. Similarly an organization may be faced with an uncertainty regarding the level of its future cash inflows and insufficient amount of cash may incur substantial costs. This may necessitate the holding of a reserve of short – term marketable securities, again a short term capital asset. The unpredictable and uncertain global market plays a vital role in working capital.