Otherwise the working capital management of the firm is an integral part of its total financial management. It is in fact an extension of the long-term capital framework and investment structure of the firm. Both have to co-relate in terms of policy and planning to fulfill the business objectives of the firm. The underlying keystone of financial management, i.e. the trading off between risk and reward in operational decisions involving financial outlay, is common to both long-term investment and working capital management.

Cash/bank balance are deemed and included in current assets. Cash and bank balance may result/inflow on account of long term liabilities like raising new equity or debentures or long dated term loans etc. Similarly cash/bank balance may get diminished on account of repayment of long-term liabilities, purchase of fixed assets etc. In all these cases an increase or decrease in current assets influences long-term liabilities or block assets in the opposite direction. Thus providing depreciation on fixed assets at year-end diminishes the value of fixed assets, but increases correspondingly the availability of working capital. Thus different assets and liabilities of the firm are inter-connected and inter-operatable and cash/bank balance acts as the bridging factor.

An integrated financial management & policy extending to all stages of different business activities is needed to achieve the financial goals of the firm, that of maximising the present wealth of the firm's equity shareholders. It is therefore necessary to briefly analyse the financial management as a total process and study its objectives and goals, before dealing with working capital management in more detail.

The objective of a business is to provide present investment of capital to secure future anticipated flow or streams of returns. Capital constitutes the essential driver of business activities. When a business organization is incorporated, it derives a legal framework, i.e. a shape but with no substance. It is confined at this stage solely to the realms of its promoters with no scope for outside-interaction. The business unit has come into existence with a name and an address, but it remains a static entity capable of no activity or public dealings.

At the next stage when the business mobilizes its initial capital, it now embarks implementing a quick schedule of its programmed activities bringing instant contacts and finding stakeholders to its fold. Flow of financial resource brings life to the business organization. The business at once secures a corporate mind to vibrate and venture into diverse areas of business planning. The process of strategic planning starts defining the corporate Mission (a business policy & program that should motivate and steer its activities in the coming years) the long-term Vision, the accomplishment of which constitutes its cherished ambition. Business objectives are set and performance goals budgeted. All these are resource-centered tasks. The business organization is now a corporate entity with a legal status, but more than that it is a financial entity with a purpose and pre-set goals and with ambitions to soar to new standards of business performance and achievement. It is finance, identified by the business as "Capital" that gives it the dynamic strength and makes all business activities possible. Fulfilling its corporate ambitions, defining its contractual relations with its stakeholders etc.- all these do have a financial content. Needless to point that the CFO becomes the most important person next only to the CEO in any business organization. A study of a business in short is a study of how the business is concerned with the acquisition and use of its funds. And anyone who is interested in knowing about the business unit may not call for the bio-data of all the corporate executives, who constitute the business organization and govern it, but would definitely look towards its balance sheet, its Trading & Profit and Loss Accounts for a consecutive period of three to five years.

It is therefore considered appropriate that raising and the effective use of the resources of the business is the central task in the management of the business. This is what constitutes financial management. A commonly accepted definition of financial management is that it should concern with the procurement of funds and its effective utilization in the business. In his Classic Work "The Theory of Financial Management" Ezra Solomon defines the scope of the financial management in terms of the following three questions:

1. How large should be the firm and how fast should it grow?

2. What should be the composition of the firm's assets?

3. What should be the mix of the firm's financing?

The Objective or goal-setting statement defining the Mission and Vision of the business should provide the guidance to get the answer to these questions. The aims of financial planning involving the raising of resources, its allocation and control of its effective use are intended to implement these answers and take the organization along the path towards fulfilling these cherished goals. And this task can only be initiated or commenced by the process of prudent investment capital management, but could be completed or concluded by the judicious process of working capital management. While the process of investment in block assets once effected does not provide further options, the management of working capital could be put to constant and continuous review and policy revisions towards improvement is always possible.

While long term capital and investments are planned and made, keeping in view the destination of the goals of the business, it is working capital planning and management that guides along the road map to actualize this goal. This is the reason that calculation of working capital requirement is done at the project formulation stage and forms an integral part of the project report, though actual working of the project may commence much later, when such working capital would be needed or put to use. The wisdom of the investment decision to acquire the costly plant, building and machinery are checked, tested and confirmed by conducting viability studies with regards to the future projected working of the unit to be set up. The project formulator prepares projected working charts indicating estimated cost of operation and calculation of expected profitability month/quarter or year-wise based on the anticipated/estimated working of the plant. The potential strength (economic, financial and commercial viability) of the project is assessed by forecasting the profitability and fund flow calculations from the anticipated working of the plant during its future term of years to estimate the Internal Rate of return or the pay back period of the investment proposed or when the project financed would break-even and start yielding profitability. Prudent investment decisions are made on this basis. Financial planning is therefore an integrated process of investment & working capital decisions.

1. The ultimate goals of working capital management should be identical to the accepted financial goals of the firm or the objectives of financial management. This in other words. Is to secure the optimum production and sales turnover at the minimum cost to ensure adequate profitability to the business venture. Indiscreet and tactless working capital management would turn an otherwise viable and potentially sound business unit into a sick and loss-making venture leading to its final extinction. Many manufacturing units turn sick because of poor management of working capital resources or due to inadequate utilisation of such resources, including the lack of its timely availability.

2. The task of working capital management is to ensure that the invested capital assets in the business are fully put to optimum use in productive business activity as projected when the investment planning was made at the project formulation stage. An ideal project should operate utilising 70% or more of its installed capacity. This is the core responsibility of the manager responsible for working capital management along with production and marketing executives.

3. Working capital needs are planned and crystallised at the earliest, i.e. at the time of the project formulation, while assessing the cost of the project and finalising the means of its finance. The Net Working Capital Calculated should be raised out of long term sources. Search for sources of working capital finance should not start leisurely after completion of the project and after trial production, but should be arranged sufficiently earlier.

4. Quantum of working capital should correlate to the project assumptions of estimated capacity utilization, sales turnover and profitability assumed. Working capital must be adequate but at the same time not excessive or short. This is also a rule governing total financial needs of the firm.

5. Sources and flow of working capital should also be timely. Delay in getting working capital would result in time/cost over runs and put project projections behind schedule, & face additional constraints.