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Importance of Capital Management for Financial Managers
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 most of their tasks are related to working capital management.
Importance of Capital Management
The aspects which make working capital management an important factor are the following −
Time − Much of the time of financial managers’ routine goes into managing working capital management.
Investment − A large portion of investment in assets of a company goes into working capital. This can be as high as 90 percent for big manufacturing companies.
Criticality − Working capital management is critical for all firms but it is especially critical for small firms.
Growth − The need for working capital is directly associated with the growth of a firm.
It has been found that most time of the financial managers go into managing current assets and current liabilities. As the maximum work of the management is spent on managing working capital, there is a need for the financial managers to be efficient in working capital management. The idea is to obtain the largest benefit from assets and to do so working capital must be managed optimally.
Current asset investment is the largest investment for most companies. For most companies, it is up to 60 percent of the total assets invested. For bigger firms, the current asset investment may go up to 90 percent. Therefore, a financial manager must be efficient in managing the investment of the current assets which is a part of working capital management.
Another important task that financial managers are associated with is to cut unnecessary investments. There may be many non-essential investments that won’t provide significant benefits in the long run. The managers must be able to identify such investments and curtail them in order to save the funds to invest in important investment items.
For small firms, managing working capital is one of the most important duties of financial managers. Small firms do not have too much investment in fixed assets. However, it has to invest a significant portion of current assets. Collection of debts may be a severe problem for small firms. Moreover, the utilization of current liabilities in raising current assets plays an important role in small firms. Small firms usually face troubles in raising debts, and financial managers must be able to find the resources to tap the debts.
It is also notable that the growth of a company and working capital needs are proportionate to each other. As a company grows it needs quick availability of working capital. This may be a frequent requirement and financial managers must be able to raise funds when necessary and multiple times in a sales cycle if needed. An efficient financial management team must therefore know the availability of the resources and how to avail them in the time of need generally. The continuous growth of a firm may need additional funds which must be arranged by financial managers without too much time to spend.
Working capital management is therefore a very important part of the duties of a financial manager. He/she must be efficient in managing the current assets and have the know-how to arrange the assets quickly in the time of need. An efficient financial manager must ascertain the needs of the firm correctly and work in sync with the requirements of the firm.
The financial management team must also be aware of the current condition of the firm and may be able to decide on the correct working capital option quickly and readily. Finally, the financial manager must be aware of the risk-return trade-off of investment and thereby decide which investment option will be the best for their firm.
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