ACCA Applied Skills · Financial Management · The nature, elements and importance of working capital
Which statement best describes the central trade-off in working capital management?
The central trade-off is between liquidity and profitability. Holding too little working capital risks being unable to pay debts as they fall due, while holding too much ties up funds earning low returns, so management must balance both objectives.
- AMaximising profitability by holding as little working capital as possible, regardless of liquidity
- BBalancing the need for liquidity against the need for profitabilityCorrect
- CMaximising liquidity by holding as much cash as possible
- DMinimising the number of credit suppliers used by the business
Explanation
Working capital management aims to ensure the entity can meet its short-term obligations (liquidity) while not tying up excess funds in low-return current assets (profitability). Focusing on only one objective, as in the other options, leads to either insolvency risk or idle resources.
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