Basically, working capital management is primarily concerned

with the management and financing of the working capital that

a business needs for its operation. However, there are other
objectives of working capital management as well.

Strengthen Liquidity Position

First of all, the objective of working capital management is to

strengthen the liquidity position of a business. Businesses can
achieve this by properly managing their cash flows through
useful management of current assets and current liabilities.

Smoothen the Operating Cycle

Another objective of working capital management is to

smoothen the operating cycle of a business. The operating
cycle of a business starts from when it initially purchases raw
materials and ends when it finally sells the product to
customers and receives cash for it. So, the objective of
working capital management is to ensure that all processes
within the cycle are performed efficiently, and there are no
stoppages during it.

Shorten the Operating Cycle

Similarly, another objective of working capital is to shorten the

operating cycle of a business. This may include targeting
the accounts receivable, inventories and accounts payable
of a business. For example, a business can decrease its credit
term offered to customers, achieve better efficiencies within
the production process and negotiate better credit terms with
suppliers. All of these will ensure that the operating cycle of
the business is shortened.

Lower Cost of Capital

As mentioned above, working capital management may also
consist of policies such as working capital investment
policies. In regards to this, the objective of working capital
management is to lower the rate of interest or cost of capital
of a business. By financing working capital with finance that
has the lowest cost, a business can also ensure that costs are
saved.

Manage Cash Flow for Seasonal Businesses

Finally, another objective of working capital management is

specific to seasonal businesses. In these businesses, working
capital may reach a surplus at one point in time and reach a
deficit at another point. Working capital management can help
these businesses manage their cash flows better in times of
surplus. Similarly, it can help businesses create a favourable
working capital position in the future, thus, helping them in
times of deficits.

Working capital management generally involves efficiently

managing all aspects of working capital to minimize the risk of
insolvency of a business while also maximizing its returns.
Generally, this is achievable through managing the cash flows
that generate from current assets and outflows as a result of
current liabilities. The goal of working capital management is
to help businesses meet their short-term operating needs and
short-term and long-term debt obligations.

Aside from that, working capital also includes the working

capital management financing or working capital investment
policies of a business. This includes deciding on which
sources of finance to use to finance the working capital
requirements of the business. The goal of working capital
investment policy is to arrange for working capital to be
obtained at the lowest possible cost for the business.

As mentioned above, working capital management mainly

involves managing the working capital of a business. Working
capital basically consists of current assets and current
liabilities. But mathematically, working capital can be
represented as the difference between current assets and
current liabilities. In other words, working capital is made of
current assets minus current liabilities of a business. This can
be presented in the following working capital formula:

Working Capital = Current Assets – Current Liabilities

Importance of working capital management

Proper management of working capital is essential to a company’s

fundamental financial health and operational success as a business. A
hallmark of good business management is the ability to utilize working capital
management to maintain a solid balance between growth, profitability and
liquidity.

A business uses working capital in its daily operations; working capital is the
difference between a business's current assets and current liabilities or debts.
Working capital serves as a metric for how efficiently a company is operating
and how financially stable it is in the short-term. The working capital ratio,
which divides current assets by current liabilities,1 indicates whether a
company has adequate cash flow to cover short-term debts and expenses.