Odondo and otieno 2012 conducted a study to investigate the effects of working capital management practices on the financial. Costs of investments need to manage the tradeoff between carrying costs and shortage costs. A working capital theory of the firm with empirical evidence by rosanna c. The different components of working capital management of any organization are. Working capital management page 8 words, it represents the current assets required on a continuing basis over the entire year. Approaches to working capital financing mba knowledge base. Cost of capital 50 capital structure theories 50 traditional approach 51 assumptions 51 comments 53. Working capital management is about the commercial and financial aspects of inventory, credit, purchasing, marketing. Now first let us discuss the paradigms of working capital management. Optimizing working capital management from processes. Profits need not always be a source of financing working capital. Companies search for liquidity and operational efficiency through minimizing their investment in.
On the liability side, there are a number of strategies a business owner can utilize to. When calculating working capital we think in terms of net working capital, which is calculated as current assets minus current liabilities. The theory of working capital management contends that if working capital is managed according to prescriptive theory then it would be expected that businesses would invest in working capital, financ e working capital, monitor factors that influence working capital, manage cash, accounts receivable, inventory, accounts payable, the cash conversion cycle aggregative approach, and measure and. Tandon committee has referred to this type of working capital as core current assets. Impact of working capital management on the profitability.
Nature of working capital working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelations that exist between them. The most important point of that, working capital management is not only for big companies it is also quite important for small firms. Working capital management is a core area of the syllabus and can form part, or the whole of, a 20mark question in the exam, as well as being examined by objective test questions. The efficiency of working capital management can be measured through a variety of methods and ratios. Working capital management has lately been a hot topic since the financial turmoil of the late 2000s. There are two possible interpretations of working capital concept. The evolution of working capital management research author. Unpleasant surprises are one thing you want to avoid or keep to a minimum, especially when its to do with your responsibilities at work. The components and determinants of working capital are summarized in the table below.
However, there are no robust and widely accepted theories about working capital management 5 and as indicate by 6, the pecking order theory originate by 7 is the nearest pertinent theory explaining the. Working capital may be classified in two ways k inds of working capital a c oncept based working capital. For the purpose of the determining working capital provided by net profit it is necessary to adjust the net profit for income tax, dividend, drawings and so on. Some of these studies can be summarized as follows.
An introduction to working capital management authorstream. Working capital management is the administration of current assets and current liabilities. The concept of working capital includes current assets and current liabilities both. We need to understand the following relationship in depth for understanding the concept in its true sense. In financial literature, there exist two concepts of working capital namely. Approaches to working capital financing boundless finance. There relationship between working capital management and profitability of nigerian firms. Working capital is said to be the life blood of a business.
This study will try to provide an understanding of how firms can manage their working capital in an optimal way during a crisis. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has. Working capital management is concerned with the management of all the aspects of both the current assets and current liabilities, so as to minimize the risk of insolvency while maximizing return on assets. Working capital management is the way a company manages the relationship between assets and liabilities in the short term.
Effects of working capital management on company profitability abstract. Current assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a. Saimaa university of applied sciences degree programme in international business management masters thesis, 2012 instructor. Working capital of a firm comprises on current assets. You would be now knowing that deciding the financing pattern is essentially determining the size and composition of. This accountants view of working capital, i e, net working capital is based on gone concern apptoach and, therefore, does not appeal much to modern finance managers who take on a going concern approach where both the current assets and current liabilities have a dynamic stability. Working capital management in the banking sector includes abstract and chapter one, complete project material available working capital management in the banking sector a case study of united bank for african plc lagos. The basic idea is that assets should be allocated so that their optimal potential is realized and thus minimize waste. Improving working capital management and cash flow intelligence 2011 apqc. Empirical evidence from manufacturing and construction firms listed on nairobi securities exchange, kenya daniel mogaka makori1 ambrose jagongo, phd2 abstract working capital management plays. On the basis of concepts gross working capital total current assets arguments in the favour of this concept. Working capital management authorstream presentation. Management is concerned with total current assets as they represent the funds available for operating expenses.
Abstract working capital is known to be the background and life wire of any business organizations in every part of the world. Park, cochair, university of oxford professor daniel s. Form this point of view, the management of working capital becomes a tedious exercise for a financial manager of a firm. These elements are money coming in, money going out, and the management of.
Carrying costs increase with the level of investment in current assets, and include the costs of maintaining economic value and opportunity costs. However, some studies claming opposite of it were determined. Working capital management wcm refers to the managing of shortterm finances. By maximizing supply chain management and insisting on a transparent environment throughout the process, firms will find that their working capital situation will, on average, substantially improve. It is difficult trying to achieve and maintain an optimum level of. Working capital is the money used to make goods and attract sales. It is, however, essential to study the whole syllabus and not only the specific areas covered in this article. We used a sample of 1 companies listed in the athens stock exchange ase for the period of 20012004. Concepts of working capital according to the real process of working capital, we can say working capital is the capital you require for the working for example, functioning of your business in the short run.
Effects of working capital management on company profitability. Abstract firms financial management policies compose ofvery important decisions including working capitalmanagement. Optimizing working capital management from processes perspective. Working capital has to be managed because the firm cannot always control how quickly the customers will buy, and once they have made purchases, exactly when they will pay. Working capital signifies funds required for daytoday operation of the firm. The study of working capital management as a financial. Every manager relies on the contributions of others both inside and outside of his or her organization.
Shortage costs decrease with increases in the level of investment in current assets, and include trading costs and. A handbook for bankers and finance managers himanshu gupta, r. Chapter iii concepts and approaches of working capital management in this chapter an attempt is made to present the structure and the theoretical determinants of working capital wc and the methods of forecasting the requirements, and the components of such working capital. Effects of working capital management on performance of. Working capital management theories introduction in. Mohd ridzuan darun, jamal roudaki and jack radford subject. A working capital theory of the firm with empirical evidence.
The management of working capital involves managing inventories, accounts receivable and payable, and cash. The management of current assets help affirm in building a good market reputation regarding its business and economic conditions. The terms methods of working capital management, strategies and approaches to working capital management are interchangeably used in general parlance. Lecturer saara heikkonen, saimaa university of applied sciences the purpose of this thesis was to study working capital management methods. Thus management of working capital is concerned with determining the investment needed and deciding the financing pattern. An assessment on determinant of working capital management from. Modern theories offer two alternative strategies of working capital management, that is, conservative working. Working capital management is about the commercial and financial aspects of inventory, credit, purchasing, marketing, and royalty and investment policy.
Financial management is an essential part of the economic and non economic activities. Operating environment, organizational context, theory and practice, working capital management, forcast created date. The elements of working capital that investors and analysts assess to evaluate a company determine a companys cash flow. But, ultimately the concept and achievement of the objective of working capital management are important. Companies search for liquidity and operational efficiency through minimizing their investment in working capital.
Working capital management is the regulation, adjustment and. The management function saddled with the responsibility of finding and implementing such a method is the working capital management. The influence of working capital management on profitability of listed companies in the netherlands master thesis university of twente school of management and governance master of research in business administration specialization in financial management researcher huynh ngoc trinh n. The evolution of working capital management research. The less working capital used to attract sales, the higher is likely to be the return on investment.
Effective management of working capital ensures that the organisation is maximising the benefits from net current assets by having an optimum level to meet working capital demands. This is the first book for bankers and students of mba finance on working capital in simple language covering various problems being faced by the new officers joining the banks since last one decade. In this paper we investigate the relationship of corporate profitability and working capital management. Relationship between working capital management and. Effects of working capital management on performance of nonfinancial companies listed in nse, kenya.
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