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


Related Discussions:- Objective of working capital management, Assignment Help, Ask Question on Objective of working capital management, Get Answer, Expert's Help, Objective of working capital management Discussions

Write discussion on Objective of working capital management
Your posts are moderated
Related Questions
Reasons for Growth of Hedge Funds Many Hedge Fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets. Inclusion of Hedg

what are the limitations of using projected data

What are the benefits of the JIT inventory control system? The just-in-time that is abbreviated as JIT inventory control system lowers inventory carrying costs and tends to inc

The process of securitization can best be understood by taking the following example. Assume that there exists an NBFC which has hire purchase as its major busine

Q. Describe the Functions of Controller? (1) Planning and budgeting: - It comprises capital expenditure planning, profit planning, budgeting, inventory control, sales forecasti

Uses of operating cycle in business

Q.What is a Hedge Fund? A Hedge Fund is a fund established by one or else several partners with net worth of at least $1 million (although this maybe falling). It uses long as

How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market. In difference to the organized exchanges, which have physical locat

Scenario: Brands and businesses in just about every industry are in a state of war with their competitors through promotions and marketing strategies. Majority of renowned brands

SCOPE OF FINANCE FUNCTIONS The functions of Financial Manager can generally be sub-divided into two: The Routine functions and the Managerial Functions. Managerial Finance F