Aveneu Park, Starling, Australia

There requirements of working capital different from

There
is sufficient evidence in existing financial literature that presents the significance
of WCM. Results of empirical analysis show that there is statistical evidence
of a strong relationship between a firm’s profitability and its WCM efficiency.
However, many earlier studies undertaken on WCM efficiency reveal that measures
of WCM efficiency basically differ across different companies. Those studies
also clearly emphasize significant evidence that issues of WCM are different
for different industries and firms from different industry sectors, as they
adopt different approaches to their working capital management. Firms follow an
appropriate working capital management approach that is quite favorable to
them. As the working capital requirement of a manufacturing sector industry
will be different from trading sector and it will have requirements of working
capital different from the service sector industries. Anyhow, the attention of
the academicians and the managers to optimize the working capital is not very
new, many have provided a number of thoughts for the welfare of business over
many years. A relationship between the working capital management efficiency
and profitability had found by, (Lazaridis and Tryfonidis (2006)) and many
others before them. Joshi, (Joshi
P. , (1995) (1995) has considered the working capital
management a necessary component of the firm’s financial management. The impact
on the working capital management policy due to economic activity was observed
by (Lamberson, (Lamberson, (1995)) 1995), and to
determine this impact he took a sample of 50 small firms from US for a time
span covering 12 years i.e. 1980-1991. By this study he found no effect
economic expansion on the increment of working capital during a specific
period. In conclusion, he suggested the existence of a slight impact on working
capital management of any change in economic activity of these firms.

Some
other researchers specifically, Jose, Lancaster, and Stevens (Jose, (1996).)(1996) carried out thorough
analysis on the association of financial returns and the cash conversion cycle
and found an inverse association of cash conversion cycle and profitability of
firm.

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With
an aim to establish relationship between the working capital management the
profitability of the firm a number of research studies have been published by
different authors in different journals. Maximum number of the studies
published found a relationship between the cash conversion cycle and
profitability of the firm is negative. Cash conversion cycle indicates the
length of time between the outflows of cash for acquisition of raw materials
and the cash inflows by selling the goods, also reflects the decisions on the
amount invested in inventory, credit obtained by suppliers and loans provided t
customers. The aggressive approach of working capital management tends to
enhance the profitability of the corporation. (see, Lazaridis and Tryfonidis, (Lazaridis, (2006))2006; Raheman and
Nasr, 2007; and among others).

The
impact of different working capital management variables including inventory
turnover in days, average collection period, average payment period and cash conversion
cycle on the net operating profitability of the firms, was studied by Rehman (Rehman A. , 2006) (2006). He concluded
by indication the strong negative relationship between the profitability and
these working capital financial ratios. Furthermore, the study revealed that by
reducing the cash conversion cycle up to an optimal level a positive value for
the shareholders can be created by the firm’s managers.

Strategic
working capital management ant its role in corporate strategy development,
ultimately ensuring the survival of the firm was studied by (Chakraborty and
Bandopadhyay (Chakraborty P. B., 2007) 2007).  They highlighted the multidimensional impact
on the performance of a firm, of strategic decisions on current assets and
current liabilities.

To
study the effect of different variables of working capital management on the
net operating profitability, (Raheman and Nasr (Rehman A. N., 2007)(2007)) selected a sample
of 94 Pakistani firms listed on Karachi Stock Exchange for a period of six
years from 1999-2004. From the results of this study, they have proved a
negative relationship between variables of working capital management including
the average collection period, inventory turnover (in days), cash conversion
cycle and profitability of the firm. Besides, they have also indicated that
size of the firm measured by natural logarithm of sales has a positive
relationship with profitability. Samiloglu and Demiraunes (Samiloglu, 2008.)(2008) have analyzed
the effect of working capital management on profitability of firms. The study
has depicted that the accounts receivable period, inventory period and leverage
affect the profitability of the firm negatively while growth affects the firm’s
profitability positively.

The
relationship between the working capital management and the profitability of
the firm was also analyzed on pharmaceutical companies of India by (Chakraborty
(2008)). And he has also pointed out that two distinct schools of thought are
available there on this issue: one school of thought among these says that,
there is no effect on improvement of profitability on the base of working
capital size, there is possibility of negative relationship between the
profitability and the investment in the working capital. While the second
school of thought says, a very important role is played in the improvement of
corporate profitability by the investment in working capital, and output and
sales cannot be maintained unless there is no minimum investment in the working
capital; in fact, the fixed assets are kept inoperative in case of not
availability of adequate investments in working capital.

Another
study conducted in US on a large sample of 58987 US firms covering a time span
of 20 years 1975-1994 by (Shin and Soenen (1998)). They suggested that for
generating greater volume of wealth for the shareholders of a firm, it is very
crucial to manage the working capital of that firm effectively and in an
efficient manner. They also recommended that profitability and net trade cycle
both are inversely related to each other.

Harsh et
al.,  (2017) in meta- analysis of
firm profitability and the working capital management selected 46 research
papers that directly studies the relationship between the profitability of firm
and the working capital management, and the result of meta-analysis supported
the traditional view that an aggressive working capital policy leads to higher
profitability and cash conversion cycle is found to be negatively associated
with profitability of the firm.

(Hien Tran, 2017) studied 200 SMEs of
Vietnam to test the impact of working capital management on the profitability
from 2010-2012, as the result of this study they indicated that working capital
management is a significant area of financial management; the efficient working
capital management can significantly impact on the profitability and the
liquidity of the business and they found a significant relationship between
gross operating income and the number of days of accounts receivable, accounts
inventories and cash conversion cycle.  

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