Question

Working Capital Management and Capital Budgeting are two functions of the financial manager. Explain which of these two functions you believe is most important for the financial manager of a small business. (minimum 200 words)

Answer 1

Working Capital Management mainly deals with the liquidity aspect of the business. Working Capital is the most important part in routine business. Working capital is nothing but Net current assets i.e. Total Net Current Assets - current liabilities. Working capital is required to run the business. It is important to have sufficient amount of working capital for smooth functioning of day to day business activities. Adverse ratio of working capital can disrupt routine business activities.

Capital Budgeting is mainly required for decision making relating to acquisition, leasing, replacement, disposal etc. of capital assets. It gives answer as to which option is better from finance perspective. For example when a company requires any capital asset then the company can buy the asset or lease.Capital budgeting deals with such decisons. In bigger scenario, when a company is in the process of starting new project or plant, capital budgeting is used for feasibility study. However capital budgeting is not much useful in day to day activities as this activities are not frequent.

In case of Small business, problems relating to acquisition of capital asset will not arise more often. However small businesses are required to manage their working capital on regular basis to avoid disruption of daily business activities. Thus we can conclude that even though Capital bulgeting is one of the most important function in financial management, in small business managing working capital is more important. Thus Management of Capital is the most important function for finance manager small business.