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Sir if question ask that discuss the central role of working capital management in financial management.(3-4 marks)
Does writing the below answer is fine or do I need to elaborate each of these 3 points further
Answer:
Working capital management is central to financial management for following reasons
1) Cash is the life blood of a company’s business activites
2) Current assets can account for more than a half of a company’s assets
3) For SMEs current liabilities are major source of financeNo, it is not enough.
You should be writing more about why working capital is needed (not just cash but inventory and receivables) to be able to keep the businesses running, and more about why it needs managing properly – that if it is not kept under control and it gets too high, then it means they will be borrowing more than the need to (and therefore paying more interest) and also things like not controlling receivables properly means more risk or irrecoverable debts; not controlling inventory properly means more risk of inventory become obsolete etc..
Writing that cash is the lifeblood of a business does not explain why it needs managing.
So what if current assets are half of a companys assets (and why do you think that anyway)?
Who says that SME’s use current liabilities as a major source of finance?The question asks about managing the working capital.
I explain all of this in my lectures.
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