Final answer:
Working capital management is about managing a firm's day-to-day financial matters. It does not involve decisions on how to finance long-term assets or which assets to purchase. The focus is on managing short-term assets and liabilities to ensure liquidity and operational efficiency.
Step-by-step explanation:
Working capital management decisions help firms determine how a firm's day-to-day financial matters should be managed, which is essential for maintaining sufficient liquidity for ongoing operations and avoiding financial distress. Such decisions do not typically involve choices about how a firm should finance its assets or which productive assets a firm should purchase, as these are part of broader financial management and capital budgeting decisions. Working capital management specifically focuses on managing current assets and liabilities to ensure that a firm has adequate funds to meet its short-term obligations and to handle day-to-day financial tasks.
When a firm needs to raise financial capital for long-term projects, like buying machinery or building a new plant, it has several options, including securing early-stage financial capital, reinvesting profits, borrowing through banks or bonds, and selling stock. Each of these financing choices comes with its own set of implications for how the firm will repay the financial capital and how much control the firm's owners will retain.
For example, borrowing capital commits the firm to scheduled interest payments, but allows the firm to maintain control over its operations since it does not increase the number of stakeholders. In contrast, selling stock dilutes ownership and makes the firm responsible to a board of directors and the shareholders. It's essential for firms to carefully select the most appropriate mix of financial options to balance control, cost of capital, and financial risk.