Working Capital Management- Sources & Its Effects On Profitability

“ Working capital is the life – blood and controlling nerve centre of a business.” Without proper working management a firm can’t achieve its pre determined objectives and it is not possible to maintain its financial soundness. The amounts which a firm invests in working capital are often high in proportion to the total assets employed so it is necessary to use these amounts in efficient and effective way. Therefore, the aim of working capital management is to maintain a balance between liquidity and profitability while conducting the day to day operations of business concern. Working capital management plays a significant role in  the improved profitability of a firm. With the help of this, firms are capable of gaining sustainable competitive advantage by means of effective and efficient utilization of the amounts of the organisation. In doing so, the profitability of the firm is expected to increase. An efficient working capital management is very important to create and increase value for shareholders. The main purpose of any firm is to maximize profit but to maintain liquidity is also an important objective. In a firm, there should be proper balance between profitability while conducting its day to day operations. Because inadequacy of working capital may lead to insolvency of a firm and excessive funds implies idle funds which earn no profits.The way the working capital has managed is great impact on both profitability and liquidity. The management can take the help of various techniques like comparative statements, cash flows statements, cost – volume – profit analysis, ratio analysis etc. to evaluate its financial performance. The aim of this paper is to analyze the effect of working capital management on firm’s profitability.