FINANCIAL MANAGEMENT DISCUSSION Essay Example | Topics and Well Written Essays - 2500 words

FINANCIAL MANAGEMENT DISCUSSION - Essay Example Profitability is the difference between revenue and costs generated by both current and fixed assets during normal business activities. From working capital point of view risk is the probability of the inability of the entity to pay its current liabilities when those become due. Simply the more the working capital the lesser is such risk. Working capital management is to decide this level of working capital so that the criteria of risk and profitability are balanced off. Business operations are directly affected by working capital management. More the current assets in ratio with fixed assets the lesser is the risk of short term insolvency, but the current assets are less productive than fixed assets and thus affect business operations producing less profitability. Contrary to the when current liabilities are more used ( as compared to ling term liabilities) to finance total assets the profitability increases as current liabilities as source of finance are considered less costlier than long term sources of finance. According management of working capital directly affects the business activities of the company. Working capital mismanagement is aptly indicated by the adverse current ratio and this is what happened in the organization. Shortage of cash and near to cash current assets forced the entity to delay the timely liquidation of accounts payable forcing them to increase the liabilities by levying interest on delayed payments as per terms of credit. Suppliers forced renegotiations of agreements revising rates and terms of credit. Shortage of inventory forced delay in conversion to finished goods and that affected the flow of fresh sales orders and renewal of existing sales orders. These abnormalities affected the cash conversion cycle and average age of inventory. With the result operating cycle period started getting longer; and thereby