WORKING CAPITAL POLICIES - Accounts and Finance for Managers

Working Capital Policy and Management

The working capital has to be adequately managed by the firm, neither more nor less than its requirement to meet out the needs. If the working capital is more than the requirement means that the firm is expected to unnecessarily keep short-term assets idle in state and vice versa. The maintaining of the working capital management is mainly depending upon three major influences of the organizations

  1. Profitability
  2. Liquidity and
  3. Structural health of the organization

Why the study of Management of working capital is required ?
If the working capital is less than the requirement means that the volume of current assets are inadequate to meet the short term obligations of the firm on time, which may lead to disrepute the name and fame of the organisation.

Contradictorily to the above, if the firm keeps more working capital that means more volume of current assets are maintained in the investment structure to meet out the short term obligations of the firm which poses more liquidity but on the other hand it hurdles the righteous opportunity to invest in the fixed assets to earn more income. The excessive volume of current assets drastically affects the profitability of the firm due to excess liquidity out of more amount of current assets.

As a firm should always maintain the righteous volume of working capital not only to maintain the liquidity of the firm but also to earn adequately from the investment volume of fixed assets.

The working capital management policies are studied in the following context viz

  1. Concerned with profitability, liquidity and risk of the firm
  2. Concerned with the composition of the current assets
  3. Concerned with the composition of the current liabilities

There are two major types of working capital policies
Conservative policy of working capital:
Under this policy, the firm minimizes risk by maintaining a higher level of current assets in meeting the liquidity of the firm.

Aggressive policy of working capital:
Under this policy , the firm enhances the risk by way of reducing the working capital in order to earn more and more profits.


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