Effects of working capital management on company profitability abstract. Working capital management and profitability academic journals. Manufacturing firms, working capital management, ghana stock exchange, cash conversion cycle, profitability. Issues in working capital management homework help in.
Working capital management page 8 words, it represents the current assets required on a continuing basis over the entire year. Working capital management is the administration of current assets and current liabilities. The main aim of this article is to examine the effect of working capital on profitability of indian firms. Analysis of the effect of working capital management on. It was found that the trends of the firms, size and future sales growth affect the efficiency of the working capital management.
However, some studies claming opposite of it were determined. The two major components of working capital are current assets and current liabilities. Generally, it is the difference between current assets and current liabilities. Pdf working capital management and its impact on profitability. This study had the implication for small and mediumsized issuers, which was they were expected to be able to accelerate the companys cash conversion cycle to improve working capital management. Working capital management a number of authors have given meaning to working capital management, machiraju 2001 understand working capital management as that which involves the administration. Working capital management has lately been a hot topic since the financial turmoil of the late 2000s. When the working capital management efficiency is improved by decreasing days of working capital, there is. This is related to shortterm assets and shortterm sources of financing. American journal of business education julyaugust 20. The effect of working capital management and external. To achieve this onerous task, we identify and analyze opinions, comments, suggestions and conclusions of various researchers and scholars alike in this critical area of corporate financial management.
The less working capital used to attract sales, the higher is likely to be the return on investment. Companies search for liquidity and operational efficiency through minimizing their investment in working capital. Capital structure also influences working capital management through required interest and dividend payments. Working capital management involves managing the relationship between a firms short term assets and its short term liabilities. Working capital is part of the total assets of the company. Consistent with their view that working capital management is a high value. Some of these studies can be summarized as follows. There relationship between working capital management and profitability of nigerian firms. Mba working capital management summary ebook lecture. Padachi 2006 considered the relationship between the working capital management. Working capital management plays a significant role in improved profitability of firms. Pdf working capital management and profitability researchgate. Hence it deals with both, assets and liabilitiesin the sense of managing working capital. The management of the working capital is equally impor tant as the.
It was observed by venkatraman and ramanujana that business economic performance is being measured by using sales growth, net income growth and return on investment. We prefer focusing on both working capital balancesnormalized for uncontrollable factors such as currency exchange rates, major input prices, and inflationas well as working capital days. Effect of working capital management on firm profitability. The purpose of this paper is to provide empirical evidence of whether working capital management wcm has an effect on the profitability of small and mediumsized norwegian firms. Working capital management is concerned with the management of all the. Pdf main purpose of the study is to identify the impact of working capital. Working capital is defined as current assets minus current liabilities. Working capital management practices of small firms in the. It is, however, essential to study the whole syllabus and not only the specific areas covered in this article.
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. Some of the factors that determine the amount of working capital. One of the major aspects of an effective working capital management. Practically speaking, it is the daily, weekly and monthly cash requirement for the operations of a business. A rolling average of working capital days is best to mitigate seasonality. Working capital management wcm plays an imperative role in corporate. Cfos viewed the performance of working capital management as only being better than the performance of pension management. Thus, leverage, capital structure, dividend policy, and working capital management. Tandon committee has referred to this type of working capital as core current assets. Concept, importance and objects chapter 1 page 6 the use of existing resources properly classifiable as current assets, or the creation of other current assets, or the creation of other current liabilities. Demonstrate the operation of working capital management.
The results showed that working capital management had a negative effect on smes going concern, while the external capital had a positive effect. 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. This is one of the latest trends in working capital management. The working capital management should aim at having balanced, optimal proportions of the wcm components to achieve maximum profit and cash. Working capital performance, corporate working capital management, money market in india india money market, india market size, global integration of indias money market, model and estimation simply click the download link below to get mba working capital management summary ebook and lecture notes pdf. Article pdf available august 2018 with 8,932 reads. Transforming the culture of managing working capital. The interplay between working capital management and a. View working capital management research papers on academia. Working capital management is most important part of firms shortterm financial matters. This paper analyzes the effect of working capital management. Working capital may be classified in two ways k inds of working capital a c oncept based working capital. Firms can achieve optimal management of working capital by making the tradeoff between profitability and liquidity.
Firms of all sizes have to strictly manage its working capital regarding their profitability alipuor, 2011. The significance of working capital management has been a common opinion among researchers. The following working capital items were studied in the article. The results reveal that the selected small medium enterprise company was less efficient in managing their working capital during this study period. The effect of working capital management on profitability. Pdf of working capital management was made on the fixed capital and the working capital.
Working capital management involves managing the firms current assets and current liabilities by optimizing financing its net working capital needs from the difference. In an ordinary sense, working capital denotes the amount of funds needed for meeting daytoday operations of a concern. Working capital management, firm performance and macroeconomic factors. Working capital management refers to the administration of all components of working capital cash, marketable securities, debtors receivable and stock. The study of working capital management as a financial. Rafuse 19961 in his study working capital management says that the working capital meets the shortterm financial requirements of a business enterprise. Working capital management research papers academia. Raheman, afza, qayyum, and bodla analysed the working capital management. We collected data about a sample of 263 nonfinancial bse 500 firms listed at the. Working capital can be categorized on basis of concept gross working capital and net working capital and basis of time permanent fixed wc and temporaryvariable wc. Therefore, the present article tries to examine the impact of working capital management on profitability of the firms of indian steel industry. The impact of working capital management on the value of 150 firms during 1990 to 2004 was examined by laplent 2005.