You can run out of working capital but not cash
An organization cannot have too much working capital at any given point of time, It must maintain the balance of working capital available all the time. Too much working capital means the money is just just not doing anything. It is often said you can only run out of cash once. The impact of unproductive working capital on a business is devastating. Effective cash flow management practices not only generate more cash for businesses, it gives the much needed plasticity to take advantage of new opportunities without worrying about getting investments or external finance.
This metric helps in making decisions regarding inventories, accounts receivable, accounts payable, and cash. This number effectively determines the time that an organization’s cash is tied up in operations and unavailable for other activities
The most useful metric to measure profitability is return on capital. A firm’s value is enhanced when the return on capital which results from effective working capital management exceeds the cost of the capital.
Liquidity management helps in better utilization of available funds and reduced interest costs through short-term bank borrowings. It helps setup and manage complex cash concentration and pooling structures.