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Analysis of effectiveness of working capital management
Review of literature on working capital management
Review of literature on working capital management
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1. Introduction
Working capital in an important component of financial management and basically Working Capital Management (WCM) has been approached in numerous ways. It focuses attention to the managing of the current assets, current liability and their relationships that exist between them. In other words, working capital management may be defined as the management of a firm’s liquid assets, cash, marketable securities, accounts receivable and inventories. In the present day context of rising capital cost and scarce funds, the importance of working capital needs special emphasis. It has been widely accepted that the profitability of a business concern depends upon the manner in which its working capital is managed. The inefficient management of working capital not only reduces profitability but ultimately may also to financial crisis.
On the other hand, proper management of working capital leads to a material savings and ensures financial returns at the optimum level even on the minimum level of capital employed. It is a known fact that both excessive and inadequate working capital is harmful for a firm. Excessive working capital leads to un-remunerative use of scarce funds. On the other hand inadequate working capital usually interrupts the normal operations of a business and impairs profitability (Soenen, 1993).. There are many instances of business failure for inadequate working capital. Further, working capital has to play a vital role to keep pace with the scientific and technological developments that are taking place in the concerned area of pharmaceutical industry. If new ideas, methods and techniques are not injected or brought into practice for want of working capital, the concern will certainly not be able to fac...
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... between the company’s size and its profitability.
H04: There is no negative relationship between debt used by cement and oil and gas companies and profitability.
Ha4: There is a negative relationship between debt used by companies and profitability.
The study is organized as follows:
Section two reviews literature on relevant theoretical and empirical work on working capital management and its effect on profitability. Section three presents the conceptual framework which includes variables and their relationship and model specification. Section four discusses sample and data collection techniques. Section five discusses data analysis and statistical results. Section six discusses findings and Section seven includes conclusions.
Works Cited
(Soenen, 1993),(Eljelly, 2004),(Rao 1989). (Soenen, 1993). (Long and Ravid, 1993; Deloof and Jegers, 1996).
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
Financial statements are a vital factor of any business organization; they show where a company’s money came from, where it went, and where it is now, according to Securities and Exchange Commission website (2008). In addition, four main financial statements consist of the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity. These four financial statements will be evaluated from Nike Inc. and more in depth information will be included from information on the previous paper which will be link to the working capital strategies. Furthermore, a detail working capital recommendation to senior management will be included and the impact of Nike Inc. revenue increase of their working capital.
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financning have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business.
The following are the reasons that lead an organization to a situation of difficulties in terms of arranging its finance for the payments and for carrying out the various day to day activities which is termed as the management of working capital are as follows
It may require additional working capital (operating expenditure) to solve cash flow challenges; it may require the additional capital for a particular acquisition (capital expenditure) or it may require a one-off borrowing to avert a looming financial crisis .
As we know working capital is the life blood and centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management if working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.
The shareholders of Event Planners Ltd; a business specialised in planning events such as birthdays, weddings, etc., are disturbed regarding the unprofitable state of the business and the cash flow problem the business faces in recent times. This report discusses the importance of cash and profit for business survival, outlines how the problem of cash flow arises, effects of cash flow problems for the business, and identifies methods for dealing with cash flow problems. It gathered and applied information from several sources such as academic articles, reports, and documents, assumed to be credible enough for the discussions.
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
The main purpose for the working capital management is to continue its operations with the sufficient ability in satisfying both maturing short-term debt as well as upcoming operational expenses in a firm. Inventories, accounts receivable, payable, and cash are all managed by the working capital management with the necessary of a well working capital management system needs to continue to be a way for many companies to improve their earnings. Ratios analysis and management of individual components of a working capital are two main aspects of this capital.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
Many organizations have maximized the use of cash on hand by effective cash management techniques and the use of short-term financing. This paper will discuss various cash management techniques and short-term financing methods used by organizations.
In simple term, working capital is an excess of current assets over the current liabilities. Good working capital management results in higher returns of current assets than the current liabilities to maintain a steady liquidity position of the organisation. Otherwise, working capital is a requirement of funds to meet the day to day working expenses. So a proper management of working capital is highly essential to ensure a dynamic stability of the financial position
The capital maintenance concept used results in differences between the relevance and faithful representation of the data that appears in the balance sheet and income statement. The difference between financial capital maintenance and physical is the treatment of unrealized holding gains and losses. Financial capital maintenance does not allow for unrealized holding gains and losses. Only realized gains and losses are included in income because they “are considered a return on capital” (Schroeder et al., 2013). This means, “income is measured only after the investment is recovered” (Gamble, 1981). Physical capital maintenance “consider[s unrealized holding gains and losses] as returns of capital and do[es] not include them income.” (Schroeder et al., 2013). Instead, they are treated as adjustments to equity and included in other comprehensive income. Therefore, with physical capital maintenance “an increase in an entity’s wealth as...
Managing an organization’s financial operation requires a good understanding of the economy and ways to maximize revenue. For an organization to operate on a daily basis, adequate cash flow is required. Poor cash management within an organization might make it hard for the organization to function because there may be shortage of cash in case of inconsistences in the market. In most companies, management is interested in the company 's cash inflows and outflows because these determines the availability of cash necessary to pay its financial obligations. Management also uses this information to determine problems with company’s liquidity, a project’s rate of return or value and the timeliness of cash flows into and out of projects (used as inputs
If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal.