Liquidity Management
Liquidity Management
Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds, Current asses should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligation within the ordinary operating cycle of a business. In order to protect their interests. Short-term creditors always like a company to maintain current assets at a higher level than current liabilities. It is a conventional rule o maintain the level of current assets vis/a/vis current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity, and may prove to be harmful for the company’s reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore, prompt and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm.
Net working capital concept also covers the question of judicious mix of long-term and short-term funds for financing current assets. For every firm, there is a minimum amount of net working capital which is a minimum amount of net working capital which is permanent. Therefore, a portion of the working capital should be financed with the permanent sources of funds such as equity share capital, debentures, long-term debt, preference share capital or retained earnings. Management must, therefore, decide the extent to which current assets should be financed with equity capital and/or borrowed capital.
In summary, it may be emphasized that both gross and net concepts working capital are equally important for the efficient management of working capital. There is no precise way to determine of working capital. There is no precise way to determine the exact amount of gross, or net working capital for any firm. The data and problems of each company should be analyzed to determine the amount of working capital. There is no specific rule as to how current assets should be financed. It is not feasible in practice to finance should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use.
