To operate profitably, every organization requires effective financial management. Funds can be invested for permanent or long-term purposes such as acquisition of fixed assets, diversification and expansion of business, renovation or modernization of plant and machinery, and research & development. Funds are also required for short-term purposes, that is, for current operations of the business. For example, payment of wages, meeting routine expenses, etc.

Working capital refers to a firm's investment in short-term assets, viz. Cash, short-term securities, debtors, inventory, etc. In other words, Working capital is the investment needed for carrying out day to day operations of the business. The management of working capital is equally important as the management of long-term financial investment.