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Financial Management
Question
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How does working capital affect both the liquidity as well as profitability of a business?

Answer

The working capital should neither be more nor less than required. Both these situations are harmful. If the amount of working capital is more than required, it will no doubt increase liquidity but decrease profitability. For instance, if large amount of cash is kept as working capital then this excessive cash will remain idle and cause the profitability to decrease. On the contrary, if the amount of cash and other current assets is very little, then lot of difficulties will have to be faced in meeting daily expenses and making payment to the creditors. Thus, optimum amount of both current assets and current liabilities should be determined so that profitability of the business remains intact and there is no fall in liquidity.

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Some More Questions From Financial Management Chapter

Explain briefly the factors affecting the investment decision.

Explain, in brief, any five factors that should be taken into consideration while determining the long-term dividend policy.

Or

Explain factors affecting the dividend policy of a company.

“Determining the relative proportion of various types of funds depends upon various factors”. Explain any five such factors.

Or

“Determining the overall cost of capital and the financial risk of the enterprise depends upon various factors”. Explain any five such factors.

Investment decision can be long-term or short-term. Explain long-term investment decision and state any two factors affecting this decision.

Identify the financial decision which determines the amount of profit earned to be distributed and to be retained in the business. Explain any four factors affecting this decision.

Explain, in brief, any three decisions involved in financial management.

What is meant by investment decision?

From the point of view of ‘Floatation costs’ which source of finance is most appropriate?

From the point of view of ‘Control’ which source of finance should be avoided?

How the ‘Stability of Earning’ affects the dividend decision?