Objective of working capital management, Financial Management

What is the Objectives of Working Capital Management? Describe please.

Posted Date: 2/14/2013 1:11:27 AM | Location : United States

Objectives of Working Capital Management:

1. The aim of working capital management is to manage the firm’s current assets and current liabilities in such a manner that a satisfactory level of working capital is maintained, to assemble the short-term obligations as and while they arise.

2. An important objective of working capital management is to ensure short-term liquidity and to see that profitability is not influenced by the way current assets and current liabilities are managed.

3. The major theme of working capital management is the interaction among the current assets and the current liabilities and arrives at the optimum level of both. The optimum level so arrived must have provision for contingencies.

4. Trade-off among the Profitability and Risk: The level of a firm’s Net working capital has a bearing on its profitability also risk. The word profitability used in this context is measured by profits after expenses. The word risk is defined as the probability that a firm will become technically insolvent that is why it will not be able to meet its obligations when they become unpaid for payment. The risk of becoming technically insolvent is measured by using Net Working Capital. The greater the net working capital, the much more liquid the firm is and therefore the less likelihood of it becoming technically insolvent. The relationship among the liquidity, net working capital and risk is such that if either net working capital or liquidity increases, the firm''s risk decreases.

5. Trade-off: If a firm wants to increase its profits, it must as well increase its risk. Inversely, if it reduces risk, its profitability too tends to reduce. The trade-off between these variables is that regardless of how the firm increases its profitability by the manipulation of working capital, the consequence is a corresponding raise in risk as computed by the level of Net working capital.

6. Except for the profitability – risk – trade-off, another important ingredient of the theory of working capital management is determining the financing mix. Financing mix consider to the proportion of current assets that would be financed by current liabilities and by long-term resources.

Posted by Bella | Posted Date: 2/14/2013 1:15:36 AM

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