Short term fund management practices and profitability -Liqudity - Risk relationship: A literature review

A company invests its funds both for long term purposes as well as for short term operations. That portion of a company's capital invested in short term or current assets to carry on its day to day operations smoothly are called the working capital. In our paper, the concepts of fixed and variable entities of the working capital are highlighted and careful decision by the management on the relative proportions of equity capital and borrowed capital to finance the current assets has been analyzed. The efficient working capital management is necessary for achieving both liquidity and profitability of a company as a whole for industry, because a poor and inefficient management leads to tie up of funds in idle assets which will reduce the liquidity and in turn, profitability of a company. Our paper makes an attempt to discuss some literature on working capital management along with relationship with profitability and liquidity as a short term fund.

The purpose of this literature review is to describe working capital concepts, to outline existing WCM performance measurement concepts and to identify value drivers that have been identified, analyzed, and tested. One fundamental change has taken place with regard to performance measurement: WCM is no longer seen as a discipline whose principal aim is to maintain sufficient liquidity in the event of liquidation. Rather, its purpose is now to underpin a company's operating cycle. The shift toward a focus on the operating cycle has highlighted WCM as a key success factor for a firm's profitability. This paper has been substantiated in numerous literature studies.