Working capital management

Working capital represents the excess of current assets over the current liabilities. The details about current assets and current liabilities are already presented in Lecture 3 of this module. Working capital includes the cash or near-cash assets which are required for the daily operations in the business. Adequate working capital is required for ensuring regular supply of raw materials and other consumables, timely payment of wages and for meeting other short-term expenses so as to have smooth running of the operations in the business. Working capital measures the sort-term financial strength and a company must have sufficient working capital to meet the short-term financial obligations. Insufficient working capital may result in difficulty in meeting the cash requirement for the operations in the business. On the other hand, much of assets tied up in working capital reduces the profit level of the company as excessive working capital makes the funds idle. Thus working capital management aims at establishing the optimum level of working capital for smooth running of the operations in the business by maintaining the desired liquidity and profitability of the company. For a company, the main objective lies in increasing the profit level so as to maximize the wealth of stockholders and increase the market value of stock and at the same time maintaining the liquidity for meeting the short-term financial obligations. Liquidity and profitability are inversely related as higher investment in current assets with lesser short-term borrowings increases the liquidity and reduces the profitability of the company whereas, for a company lesser investment in current assets with higher short-term borrowings decreases the liquidity and increases the profitability. Thus it is essential to have a balance between liquidity and profitability by maintaining the satisfactory level of working capital with the help of working capital management which assists in managing the desired level of current assets and current liabilities of the company.