Working Capital Management and Profitability
Posted December 7, 2011on:
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.