Discuss how Working capital affects both the liquidity and profitability of a business.

Short term Investment decisions are concerned with the decisions about the level of cash, inventory and debtors etc. (working capital)

Efficient cash management, Inventory management and receivable management are essential ingredients of sound working capital management.

The working capital should be neither more or less than required. Both the situations are harmful. If the amount of working capital is more than required, it will no doubt increase the liquidity but decrease the profitability. Similarly if there is a shortage of working capital, it will face the problem of meeting day to day requirements.

Thus optimum amount of current assets and current liabilities should be determined so that the profitability of the business remains intact and there is no fall in the liquidity.

Sanisha Maharjan
Jan 16, 2022
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