The finance manager should understand the management of working capital because of the following reasons:
a) Time devoted to working capital management
A large portion of a financial manager’s time is devoted to the day to day operations of the firm and therefore, so much time is spent on working capital decisions.
b) Investment in current assets
Current assets represent more than half of the total assets of many business firms. These investments tend to be relatively volatile and can easily be misappropriated by the firm’s employees. The finance manager should therefore properly manage these assets.
c) Importance to small firms
A small firm may minimise its investments in fixed assets by renting or leasing plant and equipment, but there is no way it can avoid investment in current assets. A small firm also has relatively limited access to long term capital markets and therefore must rely heavily on short-term funds.
d) Relationship between sales and current assets
The relationship between sales volume and the various current asset items is direct and close. Changes in current assets directly affects the level of sales. The finance management must therefore keep watch on changes in working capital items.