Theoretically, the ultimate objective of an effective working capital management policy is to enable a firm to strike a balance between the two core objectives of the firm, i.e. profitability and liquidity. But increasing profitability would tend to reduce firms’ liquidity and too much attention on liquidity would tend to affect the profitability. No doubt, every firm tries to maximize the profitability so as to maximise the shareholder’s wealth but increasing profits at the cost of liquidity might cause serious trouble to the firm and this problem might lead to financial insolvency as well. However excessive liquidity on one hand indicates the accumulation of idle funds that don’t fetch any profits for the firm and on the contrary, insufficient liquidity might damage the firm’s goodwill, deteriorate firm’s credit ratings and that might lead the firm towards bankruptcy. A company unable to make profits might be termed as a sick company but a company having no liquidity might cease to exist

The relationship between working capital and the profitability has been an interesting debate in financial management. Theoretically working capital decision affects both liquidity and profitability. Excess of Investment in working capital may result in low profitability and lower investment may result in poor liquidity. Management need to trade-off between liquidity and profitability to maximize shareholders wealth. But there are instances where companies running with negative working capital earning good rates of return. Negative working capital is a reverse situation as compared to normal working capital. It is a situation in which current assets are lower as compared to current liabilities. A negative working capital is an indication of managerial efficiency in a business with low inventory and account receivables. This happens because customer pays in advance and so quickly, the business enjoys cash transactions; products are delivered and sold to the customer before the company even pays their suppliers and creditors

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