Trade-off Theory of Capital StructureIn the risk-return trade-off theory of capital structure, there is an optimum level of current assets and/or working capital that a company must maintain to gain the optimum level of profitability. There is another way to look into the risk-return trade-off theory of business companies. It is related to the liquidity of the company.In fact, there are costs of maintaining current assets at a certain level. One of these costs is the cost of liquidity while the other is the cost of illiquidity.Excessive Amount of Current AssetsA company’s level of liquidity will be very high if ... Read More

LiquidityThe liquidity and profitability of a company are directly related to the working capital. When a company maintains high temporary working capital in current assets, it is known to be more liquid. The companies that maintain a lower level of working capital are known as less liquid.Companies that maintain higher liquidity and considered to be at lower risk. They are able to meet the needs of the company and their reservoir of current assets lets them have the freedom to stay solvent.However, more liquid companies have lower profitability because their funds are tied up in operations and these funds cannot ... Read More

Significance of Current Assets over Fixed Assets RatioCompanies need certain levels of current and fixed assets to support a certain level of output. However, in order to support the same level of output, the organization needs to maintain a given level of current assets. The current assets of an organization generally increase with the increase in sales and revenues.In contrast to popular belief, the amount of current assets does not increase proportionally with the output of the companies. The current asset may generally increase with the decrease in output of a company. This theory is based on the assumption that ... Read More

Every business requires a smooth working capital management policy in order to remain in good health and compete with its competitors. The policies a business adopts affect its working capital management norms.For example, the credit policy of the firm and price level changes affect the firm’s financial norms greatly. Here’s how.Effect of Credit Policy On Working CapitalFirms often need to sell their goods in credit to remain attractive to the customers. However, a firm should not be slack in maintaining the credit policy in order to avoid unnecessary delays and missed opportunities. Credit sale creates debtors and managing debtors well ... Read More

What is Net Working Capital Management?The concept of net working capital management should be applied to organizations individually as there is no precise measure to which the net concept of working capital management should be applied to a firm. It depends on the financial status and needs of an organization to which the net concept should be applied to get a holistic solution for managing working capital.Working capital management is related to the management of all aspects of working capital. These aspects are marketable securities, cash, stock, debtors, and creditors. Financial managers must focus their attention on these aspects as ... Read More

Role of Credit PolicyIt is known to all that having a good amount of working capital is necessary for the smooth functioning of businesses. For example, the credit policy of a company plays a pivotal factor in managing the working capital of a company.Companies often need to sell their products on credit to keep and gain market share. It is not possible for all products to get sold instantly which can generate immediate revenues. Therefore, the retailers may ask for a credit to sell the products and then pay for them to the manufacturers.A business company therefore must adhere to ... Read More

What is Operational Efficiency?Operating efficiency is the efficiency that is obtained due to efficient utilization of fixed and current assets and other resources of the firms. It is an indicator of better management and good health of a business firm. Operating efficiency is not easy to obtain because all of the resources of a company must work in tandem to achieve it.Operating efficiency is the use of the resources of the company at the minimum cost. Therefore, it is the optimum utilization of funds at minimal expenses. As the companies strive to utilize all of the resources, the use of ... Read More

Although there are no hard and fast rules for determining the working capital for a company, there are many factors that affect it. It is the duty of management to judge the right amount of working capital for running the organization and keep the adequate amount of working capital available for the firm to stay competitive in the business operations.Factors Affecting Company’s Working CapitalHere are some of the most influential factors that impact the working capital of a company.Nature of the BusinessThe nature of the business influences the working capital to a large extent. Financial and trading firms do not ... Read More

What is a Working Capital?Working capital is the fuel for running businesses the companies. It may be stated that maintaining an adjusted amount of working capital is the first and foremost aim of business organizations. While having too much working capital is bad, an inadequate amount of working capital can create problems in running the businesses smoothly as well.While having too much working capital is bad, having too low working capital is also a sign of weakness of a business firm. In order to keep the business running on a smooth path, the firm must maintain a healthy amount of ... Read More

What is a Working Capital?Both temporary and permanent working capital are necessary to run a business smoothly. Working capital acts as fuel in running business activities. While temporary working capital provides the expenses to meet general day-to-day needs, permanent working capital helps businesses meet larger demands in the future.As working capital is an unavoidable part of businesses, one may think that having working capital in excess may be a good option for the businesses. Unfortunately, this is not true. While having low working capital is deteriorating, having working capital in excess also has its own perils.Risks of Having Excessive Working ... Read More