WORKING CAPITAL
MANAGEMENT
Presented By
Erum Altaf
PBA02123014
Lahore Business School
University of Lahore, Lahore
WORKING CAPITAL
The capital of a business which is used in its day-to-day trading
operations.
FORMULA TO
CALCULATE WC
WC= Current Assets-Current Liabilities

This ratio indicates whether a company has enough short te...
WORKING CAPITAL
MANAGEMENT
WCM involves managing the firm’s current assets and current

liabilities and optimally financin...
PROFITABILITY
Measure of Amount by which company’s revenue exceeds its relevant
expenses.
Rate of return of firms investme...
LIQUIDITY
Having enough money in form of cash or near cash to meet
financial obligations.
Principal of risk and return.
WCM
WCM have been approached in numerous ways.
Researcher studied on
1.

The impact of Optimum inventory management.
2.

M...
IMPACT OF OPTIMUM
INVENTORY
Large inventory + Trade credit
(Rehman A Nasir, 2007)
(Long MS, Malitz IB 1993)

High Sales
TRADE CREDIT POLICY
An agreement where a customer can purchase goods on account
(without paying cash), paying the supplier...
MANAGEMENT OF
ACCOUNT RECEIVABLE
Lesser the time a firm needs to realize cash from its customers
relative to the time it r...
CASH CONVERSION CYCLE
AND PROFITABILITY
The gap in the midest of the disbursement made for the
procurement of raw material...
ESTIMATION OF CCC
CCC=Inventory conversion period+ Average collection period-Average
payment period
IMPORTANCE OF CASH
POSITION FOR
SUSTAINABLITY

25 years ago, Largay and Srickney in 1980 has reported the importance of ca...
IMPORTANCE OF WCM
In 1980, Smith discussed about importance of WCM, he said
WCM is important because of its effect on the ...
EFFICIENT WORKING
CAPITAL MANAGEMENT
Efficient WCM involves planning and controlling of current assets and
current liabili...
TRADE CREDIT, QUALITY
GUARANTEES, AND
PRODUCT MARKETABILITY.
Long, malitz and Ravid(1993), developed model of trade credit...
TRADE CREDIT AND
WCM
Previous studies have analyzed the high cost of trade credit,
Firms finance themselves with seller cr...
WORKING CAPITAL AND
BUDGETING
WC consist of large portion of firm’s total investment in assets, 40%
in manufacturing and 5...
WCM AND
LIQUIDITY, PROFITABILI
TY
Smith and begemann, 1997 emphasized that those who promoted WC
theory shared that profit...
WCM AND
PROFITABILITY
Standard measure of WC is CCC
Shin and Soenen (1998) found a strong negative relationship between th...
SOURCE OF FINANCING
In 1999 Smith and Smith said that Trade policy is a
spontanous source of financing that reduce the amo...
WCM AND CORPORATE
PROFITABILITY
Deloof (2003), used a sample of 1008 large Belgian non-financial firms.

Test Correlation ...
WCM AND INDIAN
CEMENT COMPANIES
In 2003, Ghosh and Maji examine the efficiency of indian cement company

Calculated 3 inde...
RELATIONSHIP BETWEEN
PROFITABILITY AND
LIQUIDITY
Profitability and liquidity measured by current ratio and cash gap on
sam...
WCM AND
PROFITABILITY
Lazaridis and tryfonidis (2006), conducted cross sectional anaylysis

Sample of 131 listed firms on ...
EFFECT OF WCM
Raheman and Naser in 2007, Sample of 94 Pakistani listed companies.
Used Correlation and regression analysis...
WCM AND SMES
In 2007, Garcia-Teruel and Martinez-Solano conducted Panel data analysis

on 8872 SMEs from Spain covering pe...
NON-FINANCIAL FIRMS
AND WCM
In 2009, Falope and Ajilore used sample of nigarian non-financial sector.
Panel data analysis
...
VARIABLES IN ALL
RESEARCHES
CCC

Retren on Investment

Debt to total assets

Return on Assets.

Debt to equity ratio

Net ...
SUMMARY/RESULTS
The research indicates that working capital management impacts on the profitability of

the firm but there...
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Working capital management year wise research

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This presentation is about the research which have been done in field of Working Capital. Different esearchers done research on WCM in different aspect,

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Working capital management year wise research

  1. 1. WORKING CAPITAL MANAGEMENT Presented By Erum Altaf PBA02123014 Lahore Business School University of Lahore, Lahore
  2. 2. WORKING CAPITAL The capital of a business which is used in its day-to-day trading operations.
  3. 3. FORMULA TO CALCULATE WC WC= Current Assets-Current Liabilities This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets.
  4. 4. WORKING CAPITAL MANAGEMENT WCM involves managing the firm’s current assets and current liabilities and optimally financing its net working capital needs, WCM is very important because it directly affect the liquidity and profitability of the firm.(Smith, 1980)
  5. 5. PROFITABILITY Measure of Amount by which company’s revenue exceeds its relevant expenses. Rate of return of firms investment. An unwarranted high investment in current assets would reduce this rate. (Vishani, 2007).
  6. 6. LIQUIDITY Having enough money in form of cash or near cash to meet financial obligations. Principal of risk and return.
  7. 7. WCM WCM have been approached in numerous ways. Researcher studied on 1. The impact of Optimum inventory management. 2. Management of account receivables.
  8. 8. IMPACT OF OPTIMUM INVENTORY Large inventory + Trade credit (Rehman A Nasir, 2007) (Long MS, Malitz IB 1993) High Sales
  9. 9. TRADE CREDIT POLICY An agreement where a customer can purchase goods on account (without paying cash), paying the supplier at a later date. Usually when the goods are delivered, a trade credit is given for a specific amount of days - 30, 60 or 90. Jewelry businesses sometimes extend credit to 180 days or longer. Basically, this is a credit a company gives to another for the purchase of goods and services.
  10. 10. MANAGEMENT OF ACCOUNT RECEIVABLE Lesser the time a firm needs to realize cash from its customers relative to the time it require to pay off its creditors the better it is for its liquidity position and reduce the risk of dependency on external and more expensive sources of capital.
  11. 11. CASH CONVERSION CYCLE AND PROFITABILITY The gap in the midest of the disbursement made for the procurement of raw material and the assortment of sales of finished goods.. (Deloof, 2003)
  12. 12. ESTIMATION OF CCC CCC=Inventory conversion period+ Average collection period-Average payment period
  13. 13. IMPORTANCE OF CASH POSITION FOR SUSTAINABLITY 25 years ago, Largay and Srickney in 1980 has reported the importance of cash position for sustainability of the firm. analysis of the W. T. Grant Company’s bankruptcy and subsequent liquidation helped give rise to a general recognition among financial analysts of the need for inclusion of the statement of cash flows in corporate financial reporting. While standard ratio analysis of profitability, turnover, liquidity, and solvency as applied to W. T. Grant’s balance sheet and income statements though the mid-1970’s gave investors confidence in the continuing viability of that firm, these ratios belied an anemic multi-year trend in the company’s operating cash flows that continued until its bankruptcy in 1975. Largay and Stickney demonstrate that disparate signals can - and in the case of W. T. Grant most certainly did - arise between standard ratio analysis involving the balance sheet and income statement on the one hand, and measurements of cash flow on the other.
  14. 14. IMPORTANCE OF WCM In 1980, Smith discussed about importance of WCM, he said WCM is important because of its effect on the firm’s profitability and Risk & consiquently its value.
  15. 15. EFFICIENT WORKING CAPITAL MANAGEMENT Efficient WCM involves planning and controlling of current assets and current liabilities. Current assets are short lived investment that are continually being converted into other assets type. (Rao, 1989) And for this purpose, manager spend considerable time on day-to-day problems that involve working capital decisions. (Eljelly, 2004)
  16. 16. TRADE CREDIT, QUALITY GUARANTEES, AND PRODUCT MARKETABILITY. Long, malitz and Ravid(1993), developed model of trade credit in which asymmetric information leads good firms to extend trade credit so that buyers can verify product quality before payment. They found evidence consistent with the model. The find suggest that producer may increase the implicit cost of extending trade credit by financing their receivables through payable and short-term borrowing.
  17. 17. TRADE CREDIT AND WCM Previous studies have analyzed the high cost of trade credit, Firms finance themselves with seller credit when they do not have other more economic sources of finance available. (Petersen and Rajan, 1994 & 1997)
  18. 18. WORKING CAPITAL AND BUDGETING WC consist of large portion of firm’s total investment in assets, 40% in manufacturing and 50%-60% in retailing and wholesale industries respectively. Moyer, Mcguigan and Kretlow (1995).
  19. 19. WCM AND LIQUIDITY, PROFITABILI TY Smith and begemann, 1997 emphasized that those who promoted WC theory shared that profitability and liquidity comprised the salient goals of working capital theory. Results indicates that there were no significant differences amongst the years with respect to the independent variables.
  20. 20. WCM AND PROFITABILITY Standard measure of WC is CCC Shin and Soenen (1998) found a strong negative relationship between the length of the firms net trade cycle and its profitability, They also suggest that one possible way to create shareholder value is to reduce firm’s NTC.
  21. 21. SOURCE OF FINANCING In 1999 Smith and Smith said that Trade policy is a spontanous source of financing that reduce the amount required to finance the sums tied up in inventory and customer account.
  22. 22. WCM AND CORPORATE PROFITABILITY Deloof (2003), used a sample of 1008 large Belgian non-financial firms. Test Correlation and regression. Found significant negative relationship between gross operating income and CCC. Suggests that manager can increase corporate profitability by reducing the number of days A/R and inventory
  23. 23. WCM AND INDIAN CEMENT COMPANIES In 2003, Ghosh and Maji examine the efficiency of indian cement company Calculated 3 indexes, Performance index, Utilization Index, and Overall effficiency index. Run regression analysis Results found that some of the firms successfully improved efficiency during these years.(1992-1993), (2001-2002).
  24. 24. RELATIONSHIP BETWEEN PROFITABILITY AND LIQUIDITY Profitability and liquidity measured by current ratio and cash gap on sample of 929 joint stock companies in Saudi Arabia. Using correlation and regression analysis, Results found a negative relationship between the firms profitability and liquidity.(Eljelly, 2004)
  25. 25. WCM AND PROFITABILITY Lazaridis and tryfonidis (2006), conducted cross sectional anaylysis Sample of 131 listed firms on Athens Stock Exchange for period of 2001-2004. Using correlation and regression analysis. Suggest that manager can create profit for their companies by collecting handeling CCC and by keeping CCC at optimal level.
  26. 26. EFFECT OF WCM Raheman and Naser in 2007, Sample of 94 Pakistani listed companies. Used Correlation and regression analysis. Found negative relationship between variables of WCM and profitability of the firm.
  27. 27. WCM AND SMES In 2007, Garcia-Teruel and Martinez-Solano conducted Panel data analysis on 8872 SMEs from Spain covering period of 1996-2002. Demonstrate that managers could create value by reducing their inventory and the number of days for which their accounts are outstanding. Shorten CCC and increase profitability.
  28. 28. NON-FINANCIAL FIRMS AND WCM In 2009, Falope and Ajilore used sample of nigarian non-financial sector. Panel data analysis Negative relationship
  29. 29. VARIABLES IN ALL RESEARCHES CCC Retren on Investment Debt to total assets Return on Assets. Debt to equity ratio Net Operating Profit. Age of inventory Account Recievable. Age of debtor Sales Growth. Age of creditor GDP Ratios
  30. 30. SUMMARY/RESULTS The research indicates that working capital management impacts on the profitability of the firm but there still is ambiguity regarding the appropriate variables that might serve s proxies for WCM. Slow collection of A/R is correlated with low profitability. Manager can improve profitability by reducing the credit period granted to their customers.

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