Aspects like the shareholder’s concern regarding the working capital management will also be discussed in the following sections.
Working capital management refers to the money used for the making of goods and sales. It has been defined as, “A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses” (Investor Words, 2010).
Working capital management involves a strong relationship between the short term assets of a company and the short term loans. The main aim of this concept is to ensure that there is enough cash in the firm to continue all the operations. It also aims at keeping enough liquidity for facing both the short term debts as well as the operational expenses. Inventories, accounts receivable and accounts payable and cash fall into the category of working capital management (Study Finance, 2010).
As has been discussed earlier, working capital management is based on the needs of the company and the ability to keep liquidity level at all times. It is essential to be understood that the profit margins of a company and the working capital are inversely proportional to each other. A company with high levels of profit margins generally tend to have a low level of working capital. Similarly a company with low level of working capital will have much higher levels of liquidity (Bhattacharya, 2001). The working capital management mainly deals with the amount of liquidity of the firm and the profitability. The main aim is to ensure that both are in place while dealing with the day to day processes and operations.
The short term and long terms financial planning play a major role in the overall liquidity of the company. The long term