Working Capital Management and Profitability
Posted on: December 7, 2011
- In: Finance | Marketing
- 2 Comments
Working Capital is the total of the amounts invested in current assets of the company. Net working capital results from the deduction of current liabilities from current assets; Working Capital Management consists of determining the volume and composition of sources and uses of working capital in such a way that would increase the wealth of stockholders. Working capital management is the management of current assets and current liabilities such that would result in the most desirable level of working capital and maximum company profitability. Inadequate working capital leads the company to bankruptcy. On the other hand, too much working capital results in wasting cash and ultimately the decrease in profitability.
Conventionally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of profitability. Hence, a company should strike a balance between liquidity and profitability.
Refer to the ppt working-capital mgmt on Working Capital Management and how it affects Profitability.
2 Responses to "Working Capital Management and Profitability"
December 9, 2011 at 10:23 am
Yes even a lot of Retailers buy on credit and sell on cash, maximizing their working capital
December 7, 2011 at 6:18 pm
Historically companies like Nirma have operated at a low working capital but achieved good profitability with the huge volume sales.