Final answer:
Working capital management helps a firm maintain sufficient liquidity to meet its short-term obligations. It includes managing current assets and liabilities, employing tools like balance sheets, and ensuring bank capital health through careful timing of assets and liabilities.
Step-by-step explanation:
The management of a firm's short-term assets and liabilities to ensure sufficient cash on hand to pay current obligations as they become due is often referred to as working capital management. This involves maintaining the balance through monitoring and managing the components of the company's working capital, which includes current assets and current liabilities. It is a crucial aspect of a company's overall financial health and involves using tools like balance sheets to track assets such as loans and reserves, and liabilities including deposits.
One critical concept in balancing these short-term assets and liabilities is the asset-liability time mismatch, where the bank must manage the differing maturity schedules of its assets and liabilities. Moreover, bank capital, or the net worth of the bank, can be influenced by how well the bank manages its short-term assets and liabilities. The role of banks in this process is foundational, as they act as intermediaries between savers and borrowers in the financial capital market.