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INTRODUCTION WORKING CAPITAL MANAGEMENT

Managing the firm’s working capital, that is it current assets
and current liabilities, is one of the financial manager’s

function as working capital represents a significant
proportion of total assets. Current assets comprise mainly
inventory, accounts receivable, marketable securities and

cash while current liabilities comprise mainly accounts
payable, accruals, creditors for expenses and bank

overdraft.

WORKING CAPITAL POLICY refers to the firm’s investment

in current assets such as cash, debtors and stocks. Working
capital is obtained by subtracting the total current assets by

current liabilities. For a firm to be liquid, or solvent it is
imperative that net current assets are positive. In

management, the company must ensure that there are
appropriate levels of working capital in order to obtain high

profits or returns from investments over the potential risks
encountered.

The higher the level of working capital, the lower the returns
earned and at the same time facing low risk. WHY? This is

because companies do not make full use of liquid assets held
to generate revenue for the company.

For example, high levels of working capital may be due to
the high level of cash and stock in a company. Returns

obtained would be doubled if the cash is invested in a
profitable investment instruments such as the purchase of

shares, purchase of new assets to enhance the ability of the
firm or others. While a high stock holding will only harm the

company because it is better if the stock is sold to customers.