An effective program of working capital management requires that:
A)the firm run with the absolute minimum in each current asset account.
B)a series of cost/benefit tradeoffs be considered because running a business is easier with more working capital than with less, but holding working capital costs money.
C)large inventories be maintained to adequately service customers.
D)credit can be easily granted to customers to encourage higher sales.

Question

Quizplus · Accepted Answer

Effective working capital management involves optimizing the balance between having enough working capital to support business operations and minimizing the costs associated with carrying excess working capital. Therefore, a series of cost/benefit tradeoffs must be considered. A) is incorrect because running with the absolute minimum in each current asset account may lead to operational difficulties. C) is incorrect because maintaining large inventories ties up cash and can increase the risk of obsolescence, theft, and damage. D) is incorrect because granting credit to customers can increase the risk of bad debts and tie up cash in accounts receivable.

An Effective Program of Working Capital Management Requires That