Question

Explain why Working Capital Management is an integral part of the financial management of a company especially in today’s circumstances.

Answer 1

Working capital management is an integral part of the financial management of a company especially in today's circumstances.

Explanation:

Management of working capital is an essential task of the finance manager. He has to ensure that the amount of working capital available is neither too large nor too small for its requirements.

A large amount of working capital would mean that the company has idle funds. Since, funds have a cost, the company has to pay a huge amount as interest on such funds.

If the firm has inadequate working capital, such firm runs the risk of insolvency. Paucity of working capital may lead to a situation where the firm may not be able to meet its liabilities.

Maintaining working capital is not just important in short term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long term as well. When businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc., but also must take account of the additional current assets that are usually required with the expansion of activity. For eg.

• Increased production leads to holding of additional stocks of raw materials and work in progress.
• An increased sale usually means that the level of debtors will increase.
• A general increase in the firm's scale of operations tends to imply a need for greater levels of working capital.

Thus, in today's competitive business environment, it becomes important to manage working capital effectively and efficiently.