WORKING CAPITAL MANANGEMENT
Perfection in managing WC enables businesses to realize an optimum amount of available operating liquidity to facilitate day-to-day activities. It entails the reflection on two primary conflicting objectives, that is, profitability and liquidity. The analysis reflects on primary considerations influencing business to hold either too much or too little working capital.
There are diverse factors that influence the decisions by an organization’s management to either hold working capital or not. Working capital refers to the amount of cash needed by an organization to finance or cater to the current assets. As such, the capital is fundamental in enabling organizations to meet their daily financial needs. Organizations that hold too much working capital are said to be overcapitalized hence having high levels of inventory, cash, and receivables. Besides, firms with too much working capital are said to have low levels of payables.
Organizations may want to hold too much working capital to have the ability to cater to the current obligations using the available existing assets (Buck et al., 2013). Such an organization enjoys a minimized risk of being liquid. For example, an organization with high working capital is considered financially stable, thus encouraging other trading partners to enter into working deals. On the other hand, some organizations may want to low levels of working capital due to several considerations. Organizations maintaining low levels of working capital realize increased profitability. It is worth appreciating that deficient levels of working capital may risk organizations to illiquidity. For example, having too little working capital may mean that it has poor financial performance, thus discouraging trading partners. Hence most organizations opt to avoid extremes.. Don't use plagiarised sources.Get your custom essay just from $11/page
In short, diverse factors influence the decision by managers to hold either too much or too low working capital. Organizations may want to have too much working capital to avoid the risk of illiquidity. On the other hand, some organizations may opt to hold low working capital since it points to increased profitability. Notably, organizations should avoid any extreme since it may pose operational problems.
References
Buck, N., Gordon, I., Hall, P., Harloe, M., &Kleinman, M. (2013).Working capital: life and labour in contemporary London. Routledge.