The financial management decisions that are most impacted by the amount and state of working capital

are the INVESTMENT DECISIONS.

Financial management is concerned with the acquisition, financing, and management of assets with
some overall goals in mind. These are broken down into three major decisions: (1) Investment decision
(2) Financing decision, and (3) Dividend decision.

Investment Decision begins with a determination of the total amount of assets needed to be held by the
Company. In other words, investment decision relates to the selection of assets, in which a Company will
invest funds.

The required assets fall into two groups:

(1) Long-term Assets (fixed assets / PPE) which involve huge investments and yield a return over a
period of time in the future. It may be defined as the company’s decision to invest its current funds
most efficiently in fixed assets with an expected flow of benefits over a series of years.

(2) Short-term Assets (current assets – raw materials, work-in-process, finished goods, debtors, cash,
etc.,) that can be converted into cash within a financial year without diminution in value. It relates to
the management of current assets that are used in the day-to-day operations of the Company.

Working capital is the difference between a business's current assets and current liabilities or debts.
This means that it is directly related to short-term assets (as defined above). The more funds invested in
short term assets will consequently directly impact your capacity to invest in long-term assets.

It is an important decision, as short survival is the prerequisite for long-term success. A Company should
not maintain more or less assets. More assets reduces return and there will be no risk (tied up to
inventory or fixed assets), but having less assets is more risky and more profitable (dynamic sales and
faster inventory turnover). Hence, the main aspects of working capital management are the trade-off
between risk and return. A bad investment decision affects the liquidity and profitability of a business
which in the long run severely damages the financial fortune of a business.