Q. Explain the Working capital management?

Working capital management

Working capital management is administration of current liabilities and currentassets.Effective management of working capital makes sure that organisation is maximising thebenefits from net current assets by having an optimum level to meet working capitaldemands.

It is difficult to achieve and maintain an optimum level of working capital for organisation. For instance having a large volume of inventories will have two effects, firstly there will never be stock outs, so consequently customers are always satisfied, but secondly it means that money has been spent on acquiring inventories, which isn't generating any returns (i.e. Inventories is a non-productive asset), there are also extra costs of holding the inventories (i.e. Warehouse space, insurance etc.).

The vital aspect of working capital is to keep the levels of inventories, cash, trade receivables etc. at a level which ensures customer goodwill though also keeps costs to the minimum. With trade payables, the longer the period of credit the better as this is a form of free credit however again the goodwill with supplier may suffer.