Working capital refers to the short-term assets and liabilities that a firm uses to

finance its day-to-day operations. It is the money a company has available to

meet its current obligations, and it is essential for the liquidity and profitability
of a firm.

 Liquidity: Working capital plays a critical role in a firm's liquidity by

ensuring that it has sufficient cash and other liquid assets to meet its
short-term obligations. This is important because if a firm is unable to
meet its short-term obligations, it may have to borrow money at high
interest rates or even go bankrupt. A company with a positive working
capital is in a good position to pay its bills on time, which helps maintain
good credit standing and relationships with suppliers and customers.
 Profitability: Working capital is also essential for a firm's profitability. A
company with a positive working capital is better able to invest in
growth opportunities and to take advantage of economies of scale. For
instance, a company with positive working capital can afford to purchase
raw materials in bulk, which reduces costs and increases profits.
Additionally, a company with positive working capital can afford to
purchase new equipment or to expand its operations, which can also
increase profits.
 Inventory Management: Good working capital management also
includes efficient inventory management. This means keeping an
optimal level of inventory that balances the need to have goods
available for sale and the cost of holding inventory. Having too much
inventory ties up working capital, while having too little can result in lost
sales.
 Accounts Receivable Management: Working capital management also
includes managing accounts receivable effectively. This means
minimizing the time it takes to collect money from customers. A
company can do this by offering discounts for early payments,
implementing credit policies, and sending invoices promptly. In addition,
effective management of accounts payable is also important to maintain
good relationships with suppliers and ensure that bills are paid on time.
 Capital Budgeting: Working capital management is also essential for
capital budgeting decisions. Capital budgeting is the process of
evaluating and selecting long-term investments that are in line with a
 company's goals and objectives. Working capital management can help a
company determine whether it has sufficient resources to undertake a
proposed investment. A company that has positive working capital is in a
better position to undertake investments that will generate positive cash
flows in the future.

In conclusion, working capital plays a vital role in a firm's liquidity and

profitability. Effective working capital management helps a firm meet its short-
term obligations, invest in growth opportunities, and manage inventory and
accounts receivable effectively. Additionally, working capital management is an
essential aspect of capital budgeting decisions. A firm with positive working
capital is in a better position to make investments that will generate positive
cash flows in the future.