It is an important and integral part of financial management as short-term survival is a pre-requisite to long-term success. One aspect of the working capital management is the trade-off between profitability and risk (liquidity). There is a conflict between profitability and liquidity. If a firm does not have adequate working capital, i. it does not invest sufficient funds in current assets, it may become illiquid and consequently may not have the ability to meet its current obligations and thus invite the risk of bankruptcy. If the current assets are too large, the profitability is adversely affected.
The key strategies and considerations in ensuring a trade-off between profitability and liquidity is one major dimension of working capital management. In addition, the neither inadequate nor unnecessary funds are locked up. To summarise, the management of working has two basic ingredients, namely (i) an overview of working capital management as a whole, and (ii) efficient management of the individual current assets such as cash, receivables and inventory 3.The second major decision involved in financial management is the financing decision. The investment decision is broadly concerned with the asset-mix or the composition of the assets of a firm.
The concern of the financing decision is with the financing-mix or capital structure or leverage. The term capital structure refers to the proportion of debt (fixed-interest sources of financing) and equity capital (variable-dividend securities/sources of funds). The financing decision of a firm relates to the choice of the proportion of these sources to finance the investment requirements. There are two aspects of the financing decision. First, the theory of capital structure which shows the theoretical relationship between the employment of debt and the return to the shareholders.
The use of debt implies a higher return to the shareholders as also the financial risk. A proper balance between debt and equity to ensure a trade = off between risk and return to the shareholders is necessary. A capital structure with a reasonable proportion of debt and equity capital is called the optimum capital structure. thus, one dimension of the financing decision is: Is there an optimum capital structure? In what proportion should funds be raised to maximize the return to the shareholders?
The second aspect of the financing decision is the determination of an appropriate
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