Importance of Working Capital Management

The finance manager must understand the management of working capital since of the following purpose:

a) Time devoted to working capital management

A financial manager's time is devoted in a large portion of for the day to day operations of the firm and hence, more time is spends on working capital decisions.

b) Investment in current assets

Current assets represent more than half of many business firms of the total assets. These investments tend to be relatively volatile and can easily be misappropriated by the firm's staff of employers. The finance manager must therefore properly arrange these assets.

c) Significance to small firms

A small firm may minimize its investments in fixed assets via renting or leasing plant and equipment, although there is no way it can avoid investment in current assets. The small firm has relatively limited access also to long term capital markets and as a result has to rely heavily on short-term funds.

d) Relationship between current and sales assets

The relationship between and the various current and sales volume asset items is close and direct. A change in current assets straight affects the level of sales. The finance management must then remain watch on changes in working capital items.