Issues in Working Capital Management
Working capital management refers to the administration of all components of working capital cash, marketable securities, debtors (receivable) and stock (inventories) and creditors (payables). The financial manager must determine levels and composition of current assets. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time.
There are many aspects of working capital management which make it an important function of the financial manager.
o Time working capital management requires much of the financial manager’s time.
o Investment working capital represents a large portion of the total investment in assets.
o Criticality Working capital represents a large portion of the total investment in assets.
o Growth the need for working capital is directly related to the firm’s growth.
Empirical observations show that the financial managers have to spend much of their time to the daily internal operations, relating to current assets and current liabilities of the firms. As the largest portion of the financial manager’s valuable time is devoted to working capital problems, it is necessary to manage working capital in the best possible way to get the maximum benefit.
Investment in current in current represents a very significant portion of the total investment in assets For example, in the case of the large and medium public limited companies in India, current employed.
Working capital management is critical for all firms. but particularly for small firms. A small firm may not have much investment in fixed assets, but it has to invest incurrent assets. Small firms in India face a severe problem of collecting their debtors (book debts or receivables). Further, the role of current liabilities in financing current assets is far more significant in case of small firms, as, unlike large firms, they face difficulties in raising long-term finances.
There is a direct relationship between a firm’s growth and its working capital needs. As sales grow, the firm needs to invest more in inventories and debtors. These needs become very frequent and fast when sales grow continuously. The financial manager should be aware of such needs and finance them quickly, Continuous growth in sales may also require additional investment in fixed assets.
It may, thus, be concluded that all precautions should be taken for the effective and efficient management of working capital. The finance manager should pay particular attention to the levels of current assets and the financing of current assets. To decide the levels and financing of current assets. the risk return implications must be evaluated.