To be financially effective, working capital management requires clear guidelines and objectives. Increasing profitability and ensuring adequate liquidity are the two main goals of working capital management. It is only advisable to invest in current assets if they are projected to generate acceptable returns. Maximizing shareholder wealth and maximizing profitability are equally important. Companies need liquidity to stay in business, but some choose to retain more cash than necessary to minimize risks. Liquid assets provide the lowest returns, whereas cash stored away generates no returns. Liquid assets and profitability conflict because liquid assets provide the lowest returns. For a business to function properly, capital management professionals must ensure a smooth working capital operating cycle. Maintaining working capital at a minimum cost must be insured in order to minimize the cost of capital.

Capital management refers to the strategic planning and control of a company's financial resources to achieve its goals and enhance shareholder value. The purpose of capital management is multifaceted, encompassing efficient allocation, risk mitigation, and sustainable growth.

Effective capital management involves optimizing the mix of debt and equity to fund operations and investments. This includes determining the appropriate level of leverage to maximize returns while minimizing financial risk. By striking the right balance between debt and equity, a company can enhance its overall financial health and resilience.

Capital management also plays a crucial role in supporting strategic initiatives. Companies need to allocate capital wisely, directing resources toward projects and opportunities that align with their long-term objectives. This may involve assessing the potential return on investment, evaluating market conditions, and considering the organization's risk tolerance.

Furthermore, capital management involves maintaining liquidity to meet short-term obligations and capitalize on unexpected opportunities. Adequate working capital ensures a company's ability to cover day-to-day expenses, preventing disruptions in operations.

In summary, the purpose of capital management is to optimize the financial structure of a company, allocate resources efficiently, mitigate risks, and support sustainable growth, all of which contribute to maximizing shareholder value and ensuring the long-term success of the organization.