Liquidity of an organization plays a very critical role in smooth functioning of its day to day operations. Management of working capital ensures that liquidity of firm is maintained and assets are optimally utilized. Fixed and Current assets plays very important role in the success of any firm. Current assets are necessary for continuous business operations and optimal utilization of fixed assets is necessary to maximize the return on investment in fixed assets hence the firm will have to keep adequate level of working capital to harmonize the capacity utilization and value realization. The increase in working capital helps in improving its liquidity, scarcity of working capital will firstly lower the capacity utilization secondly will lower turnover and because of that profits decreases. Surplus working capital will remain idle and can’t be utilized and this could be the main reason for decreased profits. Consequently, a company should maintain balance between both the variables liquidity and the profits of the firm. There is a positive relationship between the liquidity and working capital. As business expands, the firm will have to make huge investments in inventories and debtors and these investments will increase as the business grows. If a firm maintains inadequate level of working capital, it will have to face financial difficulties or sometimes even bankruptcy, whereas maintaining excessive levels can decrease the corporate profitability. A finance manager should be aware of such needs and plan the working capital management methods accordingly. Auditing is necessary to maintain the safe level of the different elements of working capital, like cash, inventories and current liabilities etc. Liquidity of a firm depends upon the availability of cash so that firm can fulfill daily needs, scale up operations dispose of liabilities or bills at the time of their maturity. Liquidity management has a greater significance for small firms in managing their current assets and current liabilities.