Question

Why is working capital a particularly important area of concern for financial managers?

At least 200 words.

Answer 1

Working capital is means by which day to day operation of the entity are conducted. Working capital has various component like Debtor, account receivable, Inventory, cash, account payable, other current liabilities. After analysing component of the following formula can be derived -

Working capital = Current assets - Current liabilities

It is important for financial manages beacsue of follwoing -

1. Maintaining Goodwill - Working capital helps business to make payment to creditor regularly which maintains good image of the company in the market.

2. Ease of obtaining loan - When company maintains good working capital then it can easily obtain loan from the bank or financial institution.

3. Blood of the organisation - It is food for the day to day operation of the company therefore regarded as blood of the organisation.

4. Regular raw material - Appropriate working capital help business to maintain reasonable input or raw material. Therefore healthy production keeps on going.

5. Business value - Effective Working Capital management helps business to generate regular cash flow that helps business to create value.

6. Competitive advantage - Company with better management of working capital always give extra edge in competition.

7. Business Crisis - In adversities, surplus of current assets over current liaiblity helps business to handle the shock or crisis.