Profitability in working capital management varies directly with the inability to borrow risk liquidity

Working Capital Management is an important decision to decide the optimal level of working capital to effeciently operate the business and giving due care to profitability. As we know, more liquid the assets is the least return that would asset provide.

For e.g: Cash balance doesn't generate any yield which is the most liquid asset. Bank balance which yield the small interest rate is second most liquid and if we ho higher up in less liquidity, the higher return would be there like investing in fixed assets provide very high returns.

So, working capital management is a decision to strike the balance between the liquidity and profitability as both are inversely related. More the liquidity, lower the profitability and vice - versa.

a) Inability to borrow: Inability to borrow funds for shorter duration of time would raise the finaning costs which is not good for profitability as it will reduce the overall level of profits. So, inability to borrow works indirectly or inveresly with profitability. So, this option is not correct as there is no direct relationship rather the relationship is inverse.

b) Risk: In working capital management, the most important risk is the liquidity risk which occurs when less assets are of liquid nature. Higher the liquidity risk means lower the liquid assets in the company which in turn means that higher the overall profits for company as there is inverse relationship between liquidity and profitability as discussed above. So, higher the risk would translate into higher profits and lower risk would mean lower profits. So, risk in working capital management is directly proportional to the profitability. Therefore, option (b) is correct.

c) Liquidity: This option is incorrect as liquidity and profitability is inversely related as discussed above.