Question

What does working capital management encompass? What functional decisions are involved, and what underlying principle or trade-off influences the decision process?

Answer 1

Answer:-

Working capital management (WCM) measures how efficient the company is and its short term financial health. It means the difference between the current assets and current liabilities. It is the firm’s holdings of current, or short-term, assets such as cash, marketable securities, inventory and receivables. It gives the liquidity position of firm.

WCM paves way to measure the financial health of the company and the ability of the company to meet the short term obligations. It can be more accurately accessed by calculating the liquidity ratios ( current ratio, cash ratio and quick ratio), solvency ratios ( debt/ equity ratio ) and profitability ratios.The management decision making starts from meeting the short term and long term obligations. When the company is not able to meet its short term obligations ie expenses for day to day activities the management generally borrows money in form of loans from banks, raises equity or issue commercial papers or some other forms of capital raising.

The company may involve in the capital raising issues to meet short term obligations and expansion purposes and may be some part to par debt which is of high interest rate. WCM forms the basis of foundation of the judgement by many investors and analysts to rate the company and the long term survival of the company and the profitability of the company.