The Relationship Between Wcm and Profitability
CHAPTER ONE: INTRODUCTION
1.1 Introduction
Working capital is an important issue during financial decision making since it is being a part of investment in asset that requires appropriate financing investment (Zariyawati et al, 2009). However it is always being ignored by companies because it is related to short term period. The companies or managers should understand that items or transactions in short term period may give significant impact in future if the responsible managers does not concern about it. Thus, it is actually has the same essential with financing or investing activities in longer term period.
Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.
One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it cannot pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor. All of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.
Subsequently, companies that have high inventory turns and do business on a cash basis such as a grocery store need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stockpile the proceeds
1.1 Introduction
Working capital is an important issue during financial decision making since it is being a part of investment in asset that requires appropriate financing investment (Zariyawati et al, 2009). However it is always being ignored by companies because it is related to short term period. The companies or managers should understand that items or transactions in short term period may give significant impact in future if the responsible managers does not concern about it. Thus, it is actually has the same essential with financing or investing activities in longer term period.
Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.
One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it cannot pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor. All of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.
Subsequently, companies that have high inventory turns and do business on a cash basis such as a grocery store need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stockpile the proceeds
References: Abuzayed, B. (2012). Working capital management and firms’ performance in emerging markets: The case of Jordan. 1-25. Akinlo and Olufisayo, O. (2011). The effect of working capital on profitability of firms in Nigeria: evidence from general method of moments (GMM). Asian Journal of Business and Management Sciences, Volume 1, Number 2, 130-135. Al-Debi’e, M. M. (2011). Working capital management and profitability: The case of industrial firms in Jordan. European Journal of Economics, Finance and Administrative Sciences, Volume 36, 75-86. Azam, M. and Haider, S. I. (2011). Impact of working capital management on firms’ performance: Evidence from non-financial institutions of KSE-30 index. Interdisciplinary Journal Of Contemporary Research in Business, Volume 3, Number 5, 481-492. Baltagi, B. (2001). Econometric analysis of panel data, John Wiley & Sons, Chichester. Deloof, M. (2003). Does working capital management affect profitability of Belgian firms. Journal of Business Finance and Accounting, Volume 30, Number 3 and 4, 573-587. Dong, H. P. and Su, J. (2010). The Relationship between Working Capital Management and Profitability: A Vietnam Case. International Research Journal of Finance and Economics, Issue 49, 59-67. Ebben, J. J. and Johnson, A. C. (2011). Cash conversion cycle management in small firms: Relationships with liquidity, invested capital, and firm performance. Journal of Small Business and Entrepreneurship, Volume 24, Number 3, 381-396. Falope, O. I. and Ajilore, O. T. (2009). Working capital management and corporate profitability: Evidence from panel data analysis of selected quoted companies in Nigeria. Research Journal of Business Management, Volume 3, Number 3, 73-84. Farzinfar, A. A., and Arani, Z. G. (2012). The assessment of the effect of working capital management on the profitability of pharmaceutical companies of Tehran stock exchange. American Journal of Scientific Research, Volume 48, 121-129. Gill, A., Biger, N., and Mathur, N. (2010). The relationship between working capital management and profitability: Evidence from the United States. Business and Economics Journal, Volume 1, 1-9. Lazaridis, I. and Tryfonidis, D. (2006). Relationship between working capital management and profitability of listed companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, Volume 19, Number 1, 26-35. Mathuva, D. M. (2010). The influence of working capital management components on corporate profitability: A survey on Kenyan listed firms. Research Journal of Business Management, Volume 4, Number 1, 1-11. Nazir, M. S., and Afza, T. (2009). Impact of aggressive working capital management policy on firms’ profitability. The IUP Journal of Applied Finance, Volume 15, Number 8, 19-30. Özatay, F. (2009). Financial crises and Turkey, 1st Edition. Istanbul: Dogan Kitap. Quayyum, S. T. (2011). Relationship between working capital management and profitability in context of manufacturing industries in Bangladesh. International Journal of Business and Management, Volume 7, Number 1, 58-69. Rehman, A. and Nasr, M. (2007). Working capital management and profitability: Case of Pakistani firms. International Review of Business Research Papers, Volume 3, Number 1, 279-300. Sathyamoorthi, C. R. and Wally-Dima, L. B. (2008). Working capital management: The case of listed retail domestic companies in Botswana. The Icfaian Journal of Management Research, Volume 7, Number 5, 7-24. Teruel, P. J. G. and Solano, P. M. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, Volume 3, Number 2, 164-177. Van Horne, J. C., and Wachowicz, J. M. (2004). Fundamentals of Financial Management, 12 Edition. New York: Prentice Hall. Zariyawati, M. A., Annuar, M. N., Taufiq, H. and Abdul Rahim, A.S. (2009). Working capital management and corporate performance: Case of Malaysia. Journal of Modern Accounting and Auditing, Volume 5, Number 11, 47-54.