Working Capital Management Nature - Purpose - Significance

Here we discuss about Working Capital Management Nature, Purpose and Significance. So let us start:

Purpose of Working Capital Management

The main objective of WCM is to maintain a balance between liquidity and profitability of the business. Business must have sufficient amount of funds in liquid form but not too much to reduce the level of profitability.

In W.C.M, not only those sources, which are utilized for short period of time, normally one year, are studied but also those sources that are used for more than one year. Short-term sources of finance are for variable working capital while long-term sources of finance are for fixed working capital.

Nature of Working Capital Management

In WCM, the company makes a plan for its resources to meet obligations. This plan should be implemented by taking into account the prevailing nature of the current resources and current obligations. Current resources are assets which have life of one year. Current obligations are liabilities that are payable for one year. Examples of these assets are:

Ø Cash and Cash Equivalent

Ø Merchandise

Ø AR /Debtors

Examples of Current obligations are:

Ø AP/ Creditors

Ø Bank Overdrafts

Ø Bills Payable/ BP

Ø Accrued Liabilities

Working capital management helps the company in achieving its goals by managing its current resources and obligations.

If the resources of the company meet the current obligations of the business then, it is favorable position for the company. Otherwise, the company may go into liquidation or bankruptcy.

Significance of Working Capital Management

WCM is helpful in running the business effectively and efficiently. In order to meet the daily operations of the business, it plays the key role and helps in managing our current assets to meet our obligations.

Ø WCM helps the company to meet the obligations in time because the company has optimal amount of current assets in liquid form for meeting the daily operations of the business.

Ø A working capital management is also helpful in meeting day-to-day expenses of the business, like wages, factory expenses, and helpful in carry out the smooth flow of the operations of the business without any delay.

So we can say that Working Capital Management Nature, Purpose and Significance is very 
important for the financing of working capital of company businesses.