Question

Describe the importance of working capital management. What are the pros and cons of maintaining high working capital?

Answer 1

Financial management is backbone for success of any company.

Working capital management is crucial part of financial management.

Higher the working capital, higher the financing cost for it which will directly impact bottom-line of firm. On other hand, lower working capital is risky in terms of meeting short term financial obligations. If we are unable to meet short term financial obligations it could have long term impacts on firm in credit review of company. Therefore it is important that Working capital should be managed effectively and efficiently.

Pros of maintaining high working capital:

• Higher working capital will ensure meeting short term obligations easily
• Maintaining high working capital can help us fetch the cash discount and other benefits in day to day operations
• It could help firm take strategical advantage in procuring raw materials at cheaper rate if there is sudden and sharp fall in prices of raw material
• Higher working capital is viewed by stakeholders as a sign of safety and lower risk
• It could help in good credit rating

Cons of maintaining high working capital

• Firm has to pay interest cost on funds blocked in working capital which will impact bottom line of firm