Money is the most critical factor for every business. Right from the time someone thinks of a business idea, there arises need for funds. As the business grows the need for money increases. Every business irrespective of small or large needs money to fulfil its short term and long term obligations.
Capital of the concern may be divided into Fixed Capital and Working Capital. Fixed capital means that capital, which is used for long-term investment of the business concern. For example, purchase of permanent assets. Working Capital is that part of the capital which is needed for meeting day to day requirements of the business concern. For example, payment to creditors, salary paid to employees, purchase of raw materials etc.
Working capital management is one of the important parts of financial management. It is concerned with short-term finance of the business concern which is closely related to trade off between profitability and liquidity. Efficient working capital management leads to improved operating performance of the business concern.
It is a known fact that no business can survive if it has no liquidity. A firm may even exist without making profits but cannot survive without liquidity. Liquidity and Profitability are two important aspects which determine success of the organisation. The ultimate purpose of working capital management is to ensure that a firm is able to continue its operations and enhance the Liquidity and Profitability of the business.
Working capital if properly managed will help the organsiation to operate the business smoothly without any financial problem for making the payment of short-term liabilities. Positive working capital also indicates well-being of the company. Working Capital has now become one of the basic and broad measures of judging the performance of a firm.
The Finance Team of the organisation should should spend good amount of time in managing current assets and current liabilities of the business. Working capital provides key information about the financial condition of a company for both investors and managements. For investors, it helps them measure the ability for a company to get through difficult financial periods. For the management, it helps them to predict any financial difficulties that may arise in future and also to keep enough working capital to handle any unpredictable difficulties.
It is important for the firm to maintain a sound Working Capital position. It should have adequate Working capital to run its business operations. A firm’s profitability is determined in part by the way its working capital is managed. The objective of working capital management is to manage firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. If the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent. Thus, need for working capital to run day-to-day business activities smoothly cannot be ignored.