Study note on working capital

Study note on working capital

References with extracted contents

Vahid, T.K., G. Elham, A.K.ME. Mohammadreza. 2012. "Working capital management and corporate performance: evidence from Iranian companies" Procedia - Social and Behavioral Sciences 62, Elsevier: 1313-1318.

"Most of the empirical studies support the traditional belief about working capital and profitability that reducing working capital investment would positively affect the profitability of firm (aggressive policy) by reducing proportion of current assets in total assets. Deloof (2003) analyzed a sample of Belgian firms, and Wang (2002) analyzed a sample of Japanese and Taiwanese firms, emphasized that the way the working capital is managed has a significant impact on the profitability of firms and increase in profitability by reducing number of day's accounts receivable and reducing inventories";

Pais, M.A. and P.M. Gama. 2015. "Working capital management and SMEs profitability: Portuguese evidence" International Journal of Managerial Finance 11(3), Emerald: 341-358.

"... most firms have a large amount of cash invested in working capital, as well as substantial amounts of short-term payables, as a source of financing (Deloof, 2003). Since these have a direct impact on liquidity and profitability (Appuhami, 2008), inattention to the liquidity management process may cause severe difficulties and losses due to adverse short-run developments even for a firm with favorable long-run prospects (Richards and Laughlin, 1980)";

"In general, the working capital management policy is driven by one of two approaches: the first consists of practicing an aggressive policy, with high levels of non-current assets and little investment in current assets, particularly with low cash balances, low level of inventories and a very limited grant credit to customers, so as to generate more profits. However, it presents a high risk with regard to the possibility of insufficient funds for daily operations and to pay short-term debts (Van-Horne and Wachowicz, 2008). The second is based on a more flexible and conservative policy, with less investment in non-current assets and more in current assets, especially with larger cash balances, inventory levels and customer loans, which can create value for the company";

"Most of SMEs do not have long-term assets such as buildings or vehicles and, consequently, the percentage of current assets over total assets is quite high (García-Teruel and Martínez-Solano, 2007), i.e., most of the assets consist of inventory, accounts receivable and cash balances. In this sense, an efficient working capital management is crucial because it directly affects the company’s growth and long-term survival, since high levels of working capital are needed to meet the production and sales growth";

Howorth, C. and P. Westhead. 2003. "The focus of working capital management in UK small firms" Management Accounting Research 14, Academic Press: 94-111.

"Small firms need to particularly control and monitor their working capital. This is because they are generally associated with a higher proportion of current assets relative to large firms, less liquidity, volatile cash flows, and a reliance on short-term debt (Peel et al., 2000). Evidence suggests that relatively few small firms utilise basic working capital management routines and they show a greater prevalence of ad hoc or subjective working capital decision-making (Nayak and Greenfield, 1994; Khoury et al., 1999)";

"Knowledge and understanding of the working capital management routines of smaller firms is currently inadequate. Research in this area is dogged by absence of an agreed framework for model development and hypothesis formulation. Little theoretical justification has been provided for the lower take-up of working capital management routines by smaller firms (Pike and Pass, 1987; Mitchell et al., 1998)";

Jędrzejczak-Gas, J. 2017. "Net Working Capital Management Strategies in the Construction Enterprises Listed on the NewConnect Market" Procedia Engineering 182, Elsevier: 306-313.

"In the subject literature, the concept of working capital is not clearly understood. The most common, however, are two concepts relating to working capital: gross working capital and net working capital. The former is associated with current assets that constitute the total amount of circulating capital owned by the company [9, 10]. The latter, meanwhile, is defined as the difference between [11]: the size of current assets and current liabilities (property approach), capital employed (sum of long-term sources of financing assets) and fixed assets (equity approach). The property approach is also known as short-term approach, while the equity approach – as long-term approach. Net working capital can be either positive, negative or neutral (i.e. assume value zero), at least in theory";

"Positive NWC [net working capital] occurs when part of the current assets is financed by long-term capital. Positive NWC means that the company has an operational buffer in the form of appropriate reserve funds, which will allow it safe operation during the period between paying the liabilities and charging the receivables. The higher the NWC, the safer the company’s conditions for financing its business operation. The increase in positive NWC, however, involves the increase in the weighted average cost of capital (WACC).";

Panda, A. 2012. "The status of working capital and its relationship with sales: An empirical investigation of Andhra Pradesh Paper Mills Ltd (India)" International Journal of Commerce and Management 22 (1): 36-52.

"In a practical sense, the entire fund of an organization is invested in its assets which are of two kinds: one is fixed assets and the second is current assets ..... Investment in current assets is of utmost importance as it rapidly changes its shape from one form to another and vice versa many times in a financial year (Smith, 1938; Gerstenberg, 1959; Mathur, 2002). Therefore, researchers and financial analysts usually put much emphasis on the study of current assets due to its natural significance in day to day business to maintain liquidity status and to pay off the current obligations as and when due";

"Many researchers have conducted empirical investigations on the aspect of “working capital” from different perspectives and in diverse environments. Kotia (1978), Shankaraiah and Sudarshan (1986), Sathyamoorthi (2002), Chakraborty (2005) and Raheman and Nasr (2007) for example extended a theoretical understanding regarding working capital and focused on the importance of its efficient management to keep a balance between the liquidity-risk and profitability aspects of a business firm as a part of their research work. Rao and Prasad (1985) analyzed the size of working capital in private corporate sectors in India over a period of ten years from 1961-1962 to 1981-1982. ....... In the past Panda (1986), however, emphasized the issue of inter-relationship that existed between sales and working capital in small scale industries in India";

Mun, S.G. and S.C. Jang. 2015. "Working capital, cash holding, and profitability of restaurant firms" International Journal of Hospitality Management 48, Elsevier: 1-11.

"The U.S. economy has shown many positive signs in the years since the National Bureau of Economic Research (NBER) declared the end of the 2007–2009 recession in June 2009. However, there are still significant drags hampering recovery, such as continued distress in the housing market and high unemployment rates. More importantly, economic policy uncertainty has increased in the U.S. and globally since the recession, which has negative effects for both firms and nations alike (Baker et al., 2012). In line with this increased economic uncertainty, between 1995 and 2010, U.S. corporations have been holding a record-high amount of cash (from $1.22 trillion to $4.97 trillion), with an annual growth rate of 10%";

"A firm’s working capital reflects its operating aspects (i.e., operating efficiency) and liquidity aspects (i.e., financial risks) simultaneously. In other words, operating and liquidity aspects are mingled within a working capital measurement. Therefore, if the two are not considered separately it is difficult to identify which aspect really influences restaurant firms’ profitability. Previous empirical studies of other industries reveal this difficulty, suggesting that traditional working capital measures, including cash, accounts receivable, inventories, accounts payable, and current debts, disregard the interactive effects among the components of the working capital measure (Jose et al., 1996)";

Sagner, J.S. 2011. "Cut costs using working capital management" The Journal of Corporate Accounting & Finance March/April, Wiley: 3-7.

"Working capital management involves the organization of a company’s short-term resources to sustain ongoing activities, mobilize funds, and optimize liquidity. The two critical cost efficiencies are float and processing expenses. • Float involves funds in the process of collection or disbursement.....  • Processing expenses are similarly important, as each transaction—whether performed internally or outsourced— has a cost, and that cost directly impacts your profitability";

"Any attempt at a comprehensive working capital effort will seem daunting when management is faced with the variety and quantity of issues present in a business enterprise. A useful approach may be to assign specific sets of tasks to ad hoc committees composed of representatives of each functional area likely to be affected. The list could be organized by working capital account";