Working Capital Management and the Profitability of the Firm

What has been the impact of changes in the management of working capital between 2007- 2011 on profitability of firms.

Every business needs capital for two purposes. The first require for long term purpose which is called fixed capital. Such funds are required for production activities (investment in plant, land and building etc). The second require for short term purpose which is called short term capital or working capital. Such fund require for work-in-progress, finish goods, purchases of raw material, payment of wages and other day to day expenses which is called working capital and it is also called operating liquidity.

According to John J. Hampton, "Working capital is defined as all the short term assets used in daily operation. They consist primarily of cash, marketable securities, account receivables and inventories."

According to Weston and Brigham defines "working capital refers to a film's investment in short- term assets such as cash, short term securities, accounts receivable and inventories.

In gross we can say that, working capital refers to that part of capital which is required for financing short term or current assets. And net working capital is the result of subtraction of current liabilities form current assets. The decision related to working capital on the bases of various criteria (like: cash conversion cycle, ROC) is called working management.

The working capital management is very much important factor in corporate finance as well as in any corporate sector. Working capital is treated as the life blood of any organization. Without working capital we cannot imagine organization. Working capital is not only for smooth operation of organization but it also important to create goodwill, build value and solvency of organization in corporate market. It deals with current assets and current liabilities. Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on one hand and avoids excessive investment.

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