LITERATURE RE0IE
This chapter includes the abstract of all the )esearch papers on working capital management. 3ifferent research papers are included in this literature review.
PA"" C.L.. Pi*e R.H.23&445629ver the past 4- years major theoretical developments have occurred in the areas of longer
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term investment and financial decision making. $any of these new concepts and the related techni@ues are now being employedsuccessfully in industrial practice. By contrast, far less attention has been paid to the area of short
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term finance, in particular that of working capital manage ment. *uch neglect might be acceptable were working capital considerations of relatively little importance to the firm, but effective working capital management has a crucial role in enhancing the profitability and growth of the firm. Indeed, e5perienceshows that inade@uate planningand control of working capital is one of the more common causes of business failure.
Nori7aBinti-oh"aaThe paper is made with an attempt to bridge the gap in the
literature by offering empirical evidence about working capital management and its effect to the performance of $alaysian listed companies from the perspective of market
valuation and profitability. The secondary data for a nalysis is retrieved from Bloomberg>s 3atabase of ' listed companies randomly selected from Bursa$alaysia main board for five year period --+ to --. The study aims to e5plore the effects of working capital component i.e cash conversion cycles 7CCC8, current ratio 7C)8, current asset to total asset ratio 7C"T")8, current liabilities to total asset ratio 7C!T")8, and debt to asset ratio 73T")8 to the firm>s performance by looking at firm>s value i.e Tobin 7T8 and
profitability i.e. return on asset 7)9"8 and return on invested capital 7)9IC8. "pplying correlations and multiple regression analysis, the result shows that there are significant negative associations between working capital variables with firm>s performance. Thus it highlights the importance of managing working capital re@uirements to ensure an improvement in firm>s market value and profitability and this aspect must form part of the companys strategic and operational thinking in order to operate effectively and efficiently. eywordsF =orking Capital $anagement, %rofitability, Tobin0 and Cash Conversion Cycle.
"A-ILO8LU #. anDemir$!nes )..2 3&4496The aim of this study is to analy6e the effect of working capital management on firm profitability. In accordance with this aim, to consider statistically significant relationships between firm profitability and the
components of cash conversion cycle at length, a sample consisting of Istanbul *tock 5change 7I*8 listed manufacturing firms for the period of '((/0-- has been analysed under a multiple regression model. mpirical findings of the study show that accounts receivables period, inventory period and leverage affect firm profitability negatively while growth 7in sales8 affects firm profitability positively.
"ppuhami, )anjith B ". 7--/8 The purpose of this research is to investigate the impact of firms capital e5penditure on their working capital mana"ppuha mi, B. ". )anjith, International $anagement )eviewThe purpose of this research is to investigate the impact of firms capital e5penditure on theirworking capital management. The au thor used the data colleted from listed companies in theThailand *tock 5change. The study used *hulman and Co5s 7'(/;8 Aet !i@uidity Balance and=orking Capital )e@uirement as a pro5y for working capital measurement and developedmultiple regression models. The empirical research found that firms capital e5penditure has manag ement
."significantimpact on working capital management. The study also found that the firmsoperating cash flow, which was recogni6ed as a control variable, has a significant relationship management.
"h!lman an co:;s 3&44<6Theauthor used the data colleted from listed companies in the Thailand *tock 5change. The study used *hulman and Co5s 7--(8 Aet !i@uidity Balance and =orking Capital )e@uirement as a pro5y for working capital measurement
and developed multiple regression models. The empirical research found that firms capital e5penditure has a significant impact on working capital management. The study also found that the firms operating cash flow, which was recogni6ed as a control variable, has a significant relationship with working capital management, which is consistent with findings of previous similar researches. The findings enhance the knowledge base of working capital management and will help companies manage working capital efficiently in growing situations associated with capital e5penditure.
D!be% R 3&44969.2 The working capital in a firm generally arises out of four basic factors like sales volume, technological changes, seasonal , cyclical changes and policies of the firm. The strength of the firm is dependent on the working capital as discussed earlier but this working capital is itself dependent on the level of sales volume of the firm. The firm re@uires current assets to support and maintain operational or functional
activities. By current assets we mean the assets which can be converted readily into cash say within a year such as receivables, inventories and li@uid cash. If the level of sales is stable and towards growth the level of cash, receivables and stock will also be on the high.
-cCl!re B 3&44=6., =orking Capital =orks describes that Cash is the lifeline of a company. If this lifeline deteriorates, so does the companys ability to fund operations, reinvest and meet capital re@uirements and payments. #nderstanding a companys cash flow health is essential to making investment decisions. " good way to judge a companys cash flow prospects is to look at its working capital manage ment 7=C$8. Cash is king, especially at a time when fund raising is harder than ever. !etting it slip away is an
oversight that investors should not forgive. "naly6ing a companys working capital can be managed.
Thomas -. )r!e$er 3&44,6 studied distinct levels of =C$ measures for different industries, which tend to be stable over time. $an y factors help to e5plain this discovery. The improving economy during the period of the study may have resulted in improved turnover in some industries, while slowing turnover may have been a signal of troubles ahead. 9ur results should be interpreted cautiously. 9ur study takes places over a short
survivorship bias : only the top firms within each industry are ranked each year and the composition of those firms within the industry can change annually.
Elell% 3&44&6Theye5amined the relationship between profitability and li@uidity, as measured by current ratio and cash gap 7cash conversion cycle8 on a sample of (( joint stock companies in *audi "rabia. #sing correlation and regression analysis, ljellyfound significant negative relationship between the firms profitability and its li@uidity level, as measured by current ratio. This relationship is more pronounced for firms with high current ratios and long cash conversion cycles. "t the industry level, however,he found that the cash conversion cycle or the cash gap is of more importance as a measure of li@uidity than current ratio thataffects profitability. The firm si6e variable was also found to have significant effect on profitability at the industry level.
La7ariis an Tr%#oniis 3&44+6, conducted a cross sectional study b y using a sample of '+' firms listed on the "thens *tock 5change for the period of --' 0 --4 and found statistically significant relationship between profitability, measured through g ross
operating profit, and the cash conversion c ycle and its components 7accounts receivables, accounts payables, and inventory8. Based on the results analysis of annual data by using correlation and regression tests, they suggest that managers can create profits for their companies by correctly handling the cash conversion cycle and by keeping each
component of the conversion cycle 7accounts receivables, accounts payables, and inventory8 at an optimal level.
Raheman an Nasr 3&44+6 studied the effect of different variables of working capital management including average collection period, inventory turnover in days, average
payment period, cash conversion cycle, and current ratio on the net operating profitability of %akistani firms.
>alope an Ailore 3&44'6Their study utili6ed panel data econometrics in a pooled regression, where time0series and cross0sectional observations were combined and estimated. They found a significant negative relationship between net operating profitability and the average collection period, inventory turnover in days, average payment period and cash conversion cycle for a sample of fifty Aigerian firms listed on
the Aigerian *tock 5change. Hurthermore, they found no significant variations in the effects of working capital management between large and small firms.
)o!ma 8!%2 3&4418 in a study on, O=orking capital management in healthcareP, =orking capital is the re@uired to finance the day to day operations of an organi6ation. =orking capital may bere@uireto bridge the gap between buying of stocked items to eventual payment for goods sold on account. =orking capital also has to fund the gap when products are on hand but being held in stock. %roducts in stock are at full cost, effectively they are company cash resources which are out of circulation therefore
additional working capital is re@uired to meet this gap which can only be reclaimed when the stocks are sold 7and only if these stocks are not replaced8 and payment for them is received. =orking capital re@uirements have to do with profitability and much more to do with cash flow.
-ehmet "EN2 Ea ORUC 3&44,6 The study O)elationship between the efficiency of working capital management and company si6eP, "s it is known, one of the reasons
which cause change in working capital from one period to another is the change in management efficiency.
Breale%2 R. 3&44'6 . " business enterprise re@uires not only fi5ed assets but also current assets for its efficient functioning. Current assets are re@uired to make effective
utili6ation of fi5ed assets. The amount invested in fi5ed assets is called fi5ed capital 7long term8. The amount invested in current assets is known as working cap ital 7short term8. Thus the business enterprise re@uires two type of capital, namely, fi5ed and working capital. =orking capital management involves the relationship between a short term liabilities. The goal working capital management is to ensure that a firm is able continue its operations and that it has sufficient ability to satisfy both maturing short term debt and upcoming operational e5penses. The management of working capital involves managing inventories, account receivables and account payables and cash. "ccording to smith, Oworking capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the interrelationship that e5ist between them, It involves both formulating working capital policy and carrying policy in day0 today operations. The objectives of working capital management are two fold maintaining of working capital and availability of sufficient funds at the time of needed =orking
capital management ensures a company has sufficient cash flow in order to meet its short0 term debt obligations and operating e5penses.