Objectives of Working Capital Management

Principle & Practice of Management

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Objectives of Working Capital Management

The working capital Objectives management is to make sure that a firm can keep operating and to ensure that it has enough money to take care of short-term debt and upcoming expenses. This means that the company must maintain the right ratio of assets, liabilities and working capital.

Working Capital Objectives

Working Capital Objectives

The working capital Objectives management could be stated as,
1. To ensure optimum investment in current assets.
2. To strike a balance between the twin objectives of liquidity and profitability in the use of funds.
3. To ensure adequate flow of funds for current operations.
4. To speed up the flow of funds or to minimise the stagnation of funds

Aspects of Working Capital Management

Management of working capital involves the following four aspects:
1. Determining the total funds required to meet the current operations of the firm (i.e., determination the level of current assets);
2. To decide the structure of current assets (i.e., the proportion of long-term and short-term capital to finance current assets);
3. To evolve suitable policies, procedures and reporting systems for controlling the individual components of current assets (Mainly cash, receivables and inventory); and
4. To determine the various sources of working capital.
For determining the sources of working capital (short-term and long-term) capital the net concept becomes useful. However, for determining the level and composition of working capital it is the gross concept, which becomes more meaningful.