Term Paper on Working Capital Management | Management
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Term Paper on Working Capital Management
Term Paper Contents:
- Term Paper on the Working Capital Management Policies
Term Paper # 1. Meaning and Definition of Working Capital Management:
One of the most important areas in the day-to-day management of the firm is the management of working capital. Working capital management is the functional area of finance that covers all the current accounts of the firm. It is concerned with the management of the level of individual current assets as well as the management of total working capital. Procurement of funds is firstly concerned for financing working capital requirement of the firm, secondly for financing fixed assets.
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Working capital refers to the funds invested in current assets, i.e., investment in stocks, sundry, debtors, cash and other current assets. Current assets are essential to use fixed assets profitably.
Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and interrelationship that exist between them. The term current assets refer to those assets which in the ordinary cause of business can be, or will be converted into cash within one year, without undergoing a diminution in value and without disrupting the operations of the firm.
The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities which are intended at their inception to be paid in the ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are accounts payable, bills payable, bank overdraft and outstanding expenses.
“The goal of working capital management is to manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained.” This is so because if the firm cannot maintain a satisfactory level of working capital. It is likely to become investment and may even be forced into bankruptcy.
The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of firm while not keeping too high a level of any one of them.
Each of the short-term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way.
“The interaction between current assets and current liabilities is therefore the main theme of the theory of working capital management.”
The basic ingredient of the theory of working capital management may be said to include its definition, need, optimum level of current assets, the tradeoff between profitability and risk which is associated with the level of current assets and liabilities, financing-mix strategies and so on.
The requirements of current assets are usually greater than the amount of funds payable through current liabilities. In other words, the current assets are to be kept at a higher level than the current liabilities.
Term Paper # 2. Classification of Working Capital:
There are many classifications in use out of which a few important areas are as below:
1. From the point of view of concept
2. From the point of view of time.
1. From the Point of View of Concept:
From the point of view of concept the term working capital can be used in two different ways:
(a) Gross Working Capital (GWC).
(b) Net Working Capital (NWC).
(a) Gross Working Capital (GWC):
The term gross working capital refers to investment in all the current assets taken together. The total of investments in all current assets is known as gross working capital.
The term net working capital can be defined in following two ways:
1. The most common definition of net working capital (NWC) is the difference between current assets and current liabilities.
NWC = CA — CL
CA = Current Assets
CL = Current Liabilities
(b) Net Working Capital (NWC):
The alternate definition of NWC is that portion of current assets which is financed with long-term funds. (Means part of those current assets whose liability does not lie with current liabilities).
NWC is commonly defined as the difference between current assets and current liabilities. Efficient working capital management requires that firms should operate into same amount of NWC, the exact amount varying from firm to firm and depending among other things, on the nature of industry.
The justification for the use of NWC to measure liquidity is based on the premise that the greater the margin by which the current assets cover the short-term obligations, the more is the ability to pay obligations when they become due for payment.
The NWC is necessary because the cash outflows and inflows do not coincide. In other words, it is the non-synchronous nature of cash flows that makes NWC necessary.
In general, the cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflows are, however, difficult to predict.
a. The more predictable the cash inflows are the less -NWC will be required.
b. Where cash inflows are uncertain, it will be necessary to maintain current assets at a level adequate to cover current liabilities that are there must be NWC.
The task of the financial manager in managing working capital efficiently is to ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its ability to satisfy short-term obligations as they become due.
The three basic measures of a firm’s overall liquidity are:
(i) Current ratio.
(ii) Acid test ratio.
(iii) Net working capital.
The first two measures are very useful in inter-firm comparison of liquidity. Net Working Capital (NWC) as a measure of liquidity is not very useful for comparing the performance of different firms but it is quite useful for internal control.
The NWC helps in comparing the liquidity of the same firm overtime. For the working capital management, NWC can be said to measure the liquidity of the firm. In other words, the goal of working capital management is to manage the current assets and current liabilities in such a way that an acceptable level of NWC is maintained.
2. From the Point of View of Time:
From the point of view of time, working capital can be divided into following two categories:
(a) Permanent working capital.
(b) Temporary working capital.
(a) Permanent Working Capital:
It also refers to the hard core working capital. It is that minimum level of investment in the current assets that is carried by the business at all times to carry out minimum level of its activities.
(b) Temporary Working Capital:
It refers to that part of total working capital which is required by a business over and above permanent working capital. It is also called variable working capital.
Since the volume of temporary working capital keeps on fluctuating from time to time according to the business activities it may be financed from short-term services.
Term Paper # 3. Working Capital Cycle :
Working capital cycle refers to the length of time between the firms paying cash for materials, etc., entering into the production process/stock and the inflow of cash from debtors i.e., sales.
Suppose a company has a certain amount of cash it will need raw materials. Some raw materials will be available on credit but, cash will be paid out from the other part immediately. Then it has to pay labour costs and incurs factory overheads. These three combined together will constitute work-in-progress. After the production cycle is complete, work-in-progress will get converted into finished products.
The finished products when sold on credit get converted into sundry debtors. Sundry debtors will be realized in cash after the expiry of credit period. This cash can again be used for financing of raw materials, work-in-progress etc.
Thus there is a complete cycle from cash to cash wherein cash gets converted into raw materials, work-in-progress, finished goods, debtors and finally into cash again.
a. Short-term funds are required to meet the requirements of funds during this time period.
b. This time period is dependent upon the length of time within which the original cash gets converted into cash again.
c. This cycle is also known as operating cycles or cash cycle.
Working capital cycle indicates the length of time between a company’s paying for materials, entering into stock and receiving the cash from sales of finished goods. It can be determined by adding the number of days required for each stage in the cycle.
A company holds raw-material on an average for 60 days, it gets credit from the supplier for 15 days, production process needs 15 days, finished goods are held for 30 days and 30 days credit is entered to debtors.
Then, total no. of days = 60 – 15 + 15 + 30 + 30 = 120 days means 120 days is the total working capital cycle.
The determination of working capital cycle helps in the forecast, control and management of working capital. It indicates the total time lag and the relative significance of its constituent parts. The duration of working capital cycle may vary depending on the nature of the business.
The operating cycle (working capital cycle) consists of the following events which are continuing throughout the life of business:
1. Conversion of cash into raw materials.
2. Conversion of raw materials into work-in-progress.
3. Conversion of work-in-progress into finish stock.
4. Conversion of finished stock into account receivables through sales.
5. Conversion of accounts receivables into cash.
The duration of the operating cycle for the purpose of estimating working capital is equal to the sum of the durations of each of the above said events, less (-) the credit period allowed by the supplier.
In the form of an equation, the operating cycle process can be expressed as follows:
Operating cycle = R + W + F + D – C
R = Raw material storage period
W = Work-in-progress holding period
F = Finished goods store period
D = Debtors collection period
C = Credit period availed
Various components of the operating cycle can be calculated:
Above figure illustrates:
1. Level of current assets and cost of liquidity increases while cost of it illiquidity decreases.
i. A and B are financed by long-term financing.
ii. C are financed by short-term financing,
2. Conservative Approach:
This approach suggests that the estimated requirement by total funds should be met from long-term sources, the use of short-term funds should be restricted to only emergency situation or when there is an unexpected outflow of funds. In other words, under this approach a firm finances its permanent assets and also a part of temporary current assets with long-term financing. If relies heavily on long-term financing and is less risky so far as solvency is concerned, however the funds may be invested in such investment which fetch small returns to build up liquidity. Thus deviously affecting profitability.
Aggressive Approach :
The firm uses more short-term financing than is justified in this approach. The firm finances a part of its permanent current assets with short-term financing. This is more risky but may add to the return on assets.
Comparison of Hedging Approach with Conservative Approach :
The comparison of these two approaches can be done on the basis of following two attributes:
(a) Cost consideration
(b) Risk consideration
(a) Cost Consideration:
The cost of these financing plans has a bearing on the profitability of the enterprise. If in the previous example, the cost of short-term funds and long-term funds be 3% and 8% respectively.
Cost of financing under hedging plan can be estimated as:
(i) Cost of Short-Term Funds:
The cost of short-term funds is equal to average annual short- term loan × interest rate.
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The impact of working capital management on corporate performance in small–medium enterprises in the visegrad group.
1. Introduction
2. literature review, 3. research methodology, 5. discussion, 6. conclusions, institutional review board statement, informed consent statement, data availability statement, conflicts of interest.
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Share and Cite
Mazanec, J. The Impact of Working Capital Management on Corporate Performance in Small–Medium Enterprises in the Visegrad Group. Mathematics 2022 , 10 , 951. https://doi.org/10.3390/math10060951
Mazanec J. The Impact of Working Capital Management on Corporate Performance in Small–Medium Enterprises in the Visegrad Group. Mathematics . 2022; 10(6):951. https://doi.org/10.3390/math10060951
Mazanec, Jaroslav. 2022. "The Impact of Working Capital Management on Corporate Performance in Small–Medium Enterprises in the Visegrad Group" Mathematics 10, no. 6: 951. https://doi.org/10.3390/math10060951
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Working capital management and firm performance: are their effects same in covid 19 compared to financial crisis 2008?
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The recent covid 19 has increased the challenges for worldwide businesses to manage working capital. Compared to the studies on the financial crisis of 2008, management of working capital and firm performance relation during the covid 19 is less studied, particularly in developing countries. Therefore, this study examined the working capital management and firm performance relation in 577 firms from three Asian developing countries from 2004 to 2020. The working capital measurement includes working capital investment policy, working capital financing policy, cash conversion cycle (CCC), and net working capital (NWC). Firm performance is measured by return on assets (ROA) and Tobin’s Q (TQ). To examine the working capital management and firm performance during the crisis 2008 and covid 19, Kruskal-Wallis test is used. Results revealed that working capital management and firm performance were more affected during covid 19 than crisis 2008 period. In addition, this study compared the working capital management and firm performance relation for covid 19 and crisis 2008 using the dynamic panel system generalized method of moments (GMM). Results showed the difference in the effect of working capital management on firm performance during the covid 19 period as compared to the crisis 2008 period. CATAR significantly and negatively influenced ROA but significantly and positively influenced TQ. In contrast, CLTAR and CCC significantly and positively influenced ROA but significantly and negatively influenced TQ. NWC significantly and positively influenced ROA only. To the best of our knowledge, this study is the first empirical research study to extend cross-country analysis in respect of non-financial firms to the developing countries’ context. The results of this study provide important managerial implications for firms. The different results for different firm performance proxies imply that firm managers must adopt the working capital policies which are profitable for firms and shareholders. Thus, firms in developing countries would be able to optimize their working capital according to the economic conditions.
- working capital management
- firm performance
- financial crisis 2008
- working capital policies
- accounting-based performance
- market-based performance
Working capital management is the most important and challenging task for financial managers since they are among the decision-makers who improve the financial position of firms. This can be difficult for managers, but it is crucial because a business needs to make sure that it is running in an organized and advantageous way. If a firm has too little current assets compared to its current liabilities, this will affect the company’s growth and profitability. Thus, the importance of working capital policies cannot be overemphasized in corporate finance since it directly affects the firm’s performance.
Studies have stressed that economic downturns have increased the awareness and changed the firms’ attitude towards the management of working capital in order to increase firm performance (Akgün & Karataş, Citation 2021 ; Simon et al., Citation 2017 ; Zimon & Tarighi, Citation 2021 ). In late 2019, one of the major infectious diseases known as covid 19 outbreak in China and widespread to all countries. As a result, many economies experienced financial disruption (Gormsen & Koijen, Citation 2020 ). Covid 19 outbreak impacted economies through numerous channels. These include the decline of financial markets, sharp declines in domestic consumption, spillovers of weaker demand to other sectors and economies through trade and production linkages, severe declines in business sales (Liu et al., Citation 2020 ), and a decline in firm performance (Shen, Fu, Pan, Yu, Chen et al., Citation 2020 ). Businesses around the globe experienced significant deterioration in working capital performance. Customers delayed payments, which resulted in a 7% rise for both accounts receivable and payable days. Consequently, companies’ net working capital (NWC) days touched 5 years high in 2020 (PwC., Citation 2021 ). In such times of recession, working capital management becomes more important for businesses as mismanagement can lead to a loss of liquidity (Chang et al., Citation 2019 ; Salehi et al., Citation 2019 ). Thus, it is necessary to investigate the working capital management in the covid 19 period.
Researchers around the world have started to examine the financial effects of covid 19. Extant studies often focused on the impact of covid 19 on the macro level, such as impact of oil prices (Narayan, Citation 2020 ), exchange rates (Iyke, Citation 2020 ), and tourism (Sigala, Citation 2020 ). Very less attention has been given to firms’ financial challenges, particularly working capital management. Honda and Uesugi ( Citation 2021 ) investigated the relation between covid 19 and cash holdings in Japanese firms. Shen, Fu, Pan, Yu, Chen et al. ( Citation 2020 ) explored the relation between covid 19 and the financial performance of Chinese firms. We found only Zimon and Tarighi ( Citation 2021 ), who explored the relationship between working capital management policies and firm performance during the covid 19 for Polish SMEs. However, their study failed to find any significant influence of the covid 19 on working capital components, i.e, average collection period, inventory turnover, average payment period, CCC, operating cycle, and firm performance measured by return on sales. There were a few limitations. First, they employed only accounting-based measure of firm performance, i.e., return on sales. Marketing-based measure of firm performance captures the information which is readily available to investors; thus, it is also important to be applied in the studies (Deeds et al., Citation 1998 ; Ullmann, Citation 1985 ). Second, their data period is limited till June 2020, and results are based on traditional ordinary least square (OLS) estimation method which does not provide the clear picture for the impact of covid 19 on firm-specific effects.
The recent studies on covid 19 suggested that the effect of covid 19 is completely different from the previous financial crisis in terms of severity (He et al., Citation 2022 ). For example, interest rates touched their lows historically, and supply chains in all economies were affected because global financial markets are interconnected (Ozili & Arun, Citation 2020 ). This leads us to investigate the comparison of covid 19 with crisis 2008 in our context. Such evidence will help the firm managers highlight policies to avoid profit deterioration and liquidity issues during the crises.
Thus, our study covers all the above limitations and contributes to the literature of working capital in these ways. First, this study explores how working capital management and firm performance were affected during crisis 2008 and covid periods. For this purpose, we used Kruskal-Wallis test to compare the working capital management and firm performance pre-crisis, crisis, pre-covid and covid periods. Second, this study investigates the relation of working capital policies, cash conversion cycle (CCC), and net working capital (NWC) with firm performance which is measured by return on assets (ROA) and Tobin’s q (TQ). Third, this study compares the effect of covid 19 with the effect of crisis 2008 on working capital management and firm performance relation. Fourth, unlike Zimon and Tarighi ( Citation 2021 ), by taking the whole 2020 year data, this study employed dynamic panel system generalized method of moments (GMM) panel data technique to handle the issue of endogeneity. Effect of financial crisis 2008 on relation between working capital management and firm performance is previously discussed (Akbar et al., Citation 2021 ; Akgün & Karataş, Citation 2021 ; Chang et al., Citation 2019 ). Our findings showed the effect of covid 19 on working capital management and firm performance was stronger and worse than the effect of financial crisis 2008. Firms adopted conservative approach in managing working capital investment policies in the covid 19 compared to the crisis 2008. In addition, the effect of covid 19 was different for ROA and TQ. Covid 19 and crisis negatively influenced firms’ ROA while positively influenced TQ.
Further, this study is structured in the following sections. In section 2 , the literature review is presented and hypotheses are developed. In section 3 , research methodology and data collection are discussed. In section 4, all the empirical results are discussed. Finally, in section 5, conclusion of the study is provided.
For sustainable firm performance, the right choice of working capital is most important since it optimises the operating costs and maintains financial liquidity (; Zimon & Tarighi, Citation 2021 ). The working capital literature provides two types of policies: working capital investment policy and working capital financing policy. The investment policy is related to the determination of levels of current assets. The level of current assets can be measured by relating the current assets to total assets (Nazir & Afza, Citation 2009 ). Low ratio indicates the low investment in current assets relative to total assets. The working capital investment policy is sub-categorized into aggressive investment policy and conservative investment policy. The trade-off theory suggests that firms optimize their working capital policies by considering costs and benefits. If firms adopt aggressive working capital investment policy—that encourages low investments in current assets, they will be at greater risk of working capital inadequacy. Lower investments in the receivables and inventories may provide sufficient liquidity to the firm to operate effectively and efficiently but at the cost of low sales. In contrast, if firms adopt conservative working capital investment policy, that is, policies that encourage high investments in current assets, they will experience a high cost of liquidity. Increased investment in receivables and inventory balances may prevent interruption in the production process and build good relationship with customers, thus increasing sales, but firms may potentially face high interest expenses, which may negatively affect shareholders’ value (Aktas et al., Citation 2015 ; Baños-Caballero et al., Citation 2014 ; Nabi et al., Citation 2016 ; Nazir & Afza, Citation 2009 ).
Working capital financing policy is related to use of current liabilities to finance the current assets and is measured by total current liabilities to total assets ratio (; Koh et al., ( Citation 2014 ). This policy is also sub-categorized into aggressive financing policy and conservative financing policy. Aggressive working capital financing policy is the use of short-term debt to finance current assets, while conservative working capital financing policy is the use of long-term debt to finance current assets (Nabi et al., Citation 2016 ; Nazir & Afza, Citation 2009 ). The use of less current liabilities is less costly and high risky since firms are forced to settle this short-term debt early. In contrast, long-term liabilities are less risky and allow firms sufficient time to settle, however, on the cost of high interest expenses (Alrahamneh et al., Citation 2020 ). To manage working capital effectively, financial managers should consider the policy appropriate to the company in order to increase its profitability and market value.
Studies argued that firms’ working capital practices depend on the economic conditions (Mervill & Tavis, Citation 1973 ; Filbeck & Krueger, Citation 2005 ). In the study of Enqvist et al. ( Citation 2014 ), working capital management was found more pronounced in the economic downturns than the economic booms. Their findings concluded that working capital management is always vital for firm managers, regardless of the economic co Citation 2005 nditions because w Citation 1973 orking capital management directly deals with current assets, cost of operations, short-term liabilities and revenues (Zimon & Tarighi, Citation 2021 ).
Zimon and Tarighi ( Citation 2021 ) argued that firms must use the right working capital strategy to achieve sustainable growth since it optimizes the operating cost and maintains financial liquidity. It could be argued that during the covid 19 period, managers were more concerned to maintain sufficient working capital levels in order to stay competitive. However, there is limited research in this area, particularly less empirically known about what working capital policies firms adopted during the period of covid 19. Therefore, the current study determines what kind of working capital management policies were adopted during the covid 19. Specifically, unlike in the previous studies, our study analyses the working capital management policies in developing countries. This study also intends to observe if the firms adopted conservative or aggressive policies of working capital during the covid 19 period.
In the following, the recent studies that investigated the effect of working capital management including working capital policies in normal business periods and in crises periods are synthesized to suggest the research hypotheses.
Rasyid ( Citation 2017 ) investigated the effect of working capital investment and financing policies on performance of 393 Indonesian firms for the year 2014. They employed ROA and TQ as measures of firm performance. Findings revealed that working capital investment policy has significant and positive while working capital financing policy has significant and negative relation with ROA and TQ. Nanda and Panda Citation 2018 investigated the relation between working capital financing policies and firm performance for 1,211 Indian manufacturing firms for the period 2000–2016. Application of GMM estimation revealed that working capital financing policies significantly and negatively influenced firm performance. In another Indian state-wise study, Farhan et al. ( Citation 2021 ) not only found similar results to Nanda and Panda Citation 2018 , but they also explored the significant positive relation between working capital investment policies and firm performance. Results of both studies indicate that Indian firms generally adopted conservative approach for both working capital investing and financing policies.
Pestonji and Wichitsathian ( Citation 2019 ) investigated the relation between working capital policies and firm performance of 68 Thai firms for the period 2012–2016. Results revealed the significant positive influence of working capital investment policy and the significant negative influence of working capital financing policy on firm performance. Basyith et al. ( Citation 2021 ) investigated the relation between working capital policies and firm performance for 135 Indonesian firms from 2008 to 2019 from eight non-financial sectors. Findings revealed that working capital investment policy significantly and positively influences firm performance measured by ROA while negatively influences firm performance measured by gross profit margin (GPM). In contrast, a significant negative relation was reported between working capital financing policies and both measures of firm performance. Their findings were consistent with the previous study on Indonesian firms by Firmansyah et al. ( Citation 2018 ). These studies conclude that firms generally invest more in current assets and less use the current liabilities to finance current assets to increase performance.
Prior research widely used comprehensive measures of working capital such as cash conversion cycle and net working capital (Akgün & Karataş, Citation 2021 ; Bashir & Regupathi, Citation 2021 ; Prasad et al., Citation 2019 ; Yousaf et al., Citation 2021 ). CCC was also referred as net trade cycle (Akbar et al., Citation 2021 ; Laghari & Chengang, Citation 2019 ; Prasad et al., Citation 2019 ). CCC captures the average time a firm takes from payment of materials to collection of cash after sale of finished goods (Deloof, Citation 2003 ). Or in other words, CCC measures the average length of time firms’ funds are tied up in the cycle of raw material purchase, sale of inventories and collection of sales. Theoretically, the shorter CCC is better because it does not block the funds in working capital such as less days to collect receivables and more days to pay suppliers which positively increases performance (Amponsah-Kwatiah & Asiamah, Citation 2020 ; Enqvist et al., Citation 2014 ). In contrast, holding lower inventories and collecting earlier from customers can harm the firm performance. However, there is no best strategy to implement regarding length of CCC. NWC is the output of current assets minus current liabilities over the total assets and discovers whether a firm’s current assets are sufficient to cover the current liabilities when converted into cash.
The extant literature has provided mixed evidence for the influence of working capital management on firm performance. Sharma and Kumar Citation 2011 studied the working capital management and firm performance relation for Indian firms. Considering the sample of 263 listed firms for the period 2000–2008, they found CCC positively influences ROA. Similarly, in 52 listed Jordanian firms for the period 2000–2008 Abuzayed ( Citation 2012 ) found the positive influence of CCC on gross operating profit and TQ. Similar findings are reported for firms in China (Laghari & Chengang, Citation 2019 ), Czech (Yousaf et al., Citation 2021 ), Ghana (Amponsah-Kwatiah & Asiamah, Citation 2020 ), Indonesia (Basyith et al., Citation 2021 ), Spain (Rey-Ares et al., Citation 2021 ), and Visegrad Group countries (Mazanec, Citation 2022 ). In contrast, few studies reported negative relation between CCC and firm performance in India (Bhatia & Srivastava, Citation 2016 ), Malaysia (Bashir & Regupathi, Citation 2021 ) and Vietnam (Nguyen et al., Citation 2020 ). The negative relation suggests that higher CCC leads to lower firm performance. A study by Afrifa et al. ( Citation 2014 ) did not find any significant relation between CCC and firm performance. The findings for NWC and firm performance relation is not much different from the CCC. The positive relation is reported for firms in European countries (Akgün & Karataş, Citation 2021 ) and UK (Afrifa, Citation 2016 ), and negative relation is reported for firms in Poland (Anton et al., Citation 2021 ).
H1: The positive relationship between working capital investment policy and firm performance is stronger during covid 19 than the crisis 2008.
H2: The negative relation between working capital financing policies and firm performance is stronger in covid 19 than the crisis 2008.
H3: The negative relationship between CCC and firm performance is stronger during the covid 19 than the crisis 2008.
H4: The positive relationship between NWC and firm performance is stronger during the covid 19 than the crisis 2008.
3.1. Data source
To construct our sample, we used secondary data and retrieved it from Thomson Reuters Datastream. Datastream is also widely used by empirical studies such as Dang et al. ( Citation 2019 ) and Alkhataybeh ( Citation 2021 ). Past empirical studies in developing countries indicated the need for efficient working capital management in crisis or normal business periods (Akbar et al., Citation 2021 ; Altaf & Shah, Citation 2018 ; Ramiah et al., Citation 2014 ). However, the covid 19 study by Zimon and Tarighi ( Citation 2021 ) is concentrated on the Polish firms. This knowledge gap in developing countries suggests us to conduct this study. We examine the firms from three Asian developing countries, Malaysia, Thailand and Pakistan, for the period 2004–2020. At the initial level, data for the financial sector was removed. Datastream shows 32 non-financial sectors (1094 firms) in these countries. To standardize the currency, we retrieved the data in US dollar. 1 We filtered the extracted data for analysis purpose. Firms with incomplete observations for period 2004–2020 were also removed. Finally, we were left with 577 firms (9809 firm-year observations) from five sectors, which are as follows: (i) Automobile and Parts, (ii) Chemicals, (iii) Food Products, (iv) General Industrials, and (v) Pharmaceuticals and Biotechnology.
3.2. Variables measurement
There are two frequently used measures of firm performance, accounting-based and market-based. Prior studies have shown that investors are more concerned about the market-based information of the firm, and this measure is more appropriate to be applied (Deeds et al., Citation 1998 ; Ullmann, Citation 1985 ). Market-based performance measures consider the time value of money and opportunity cost (Fisher & McGowan, Citation 1983 ). Unlike accounting-based measures, market-based measures are not much influenced by firm-specific accounting rules (Johnson & Kaplan, Citation 1987 ; McGuire et al., Citation 1988 ). Moreover, these reflect the firms’ future performance. (Dubofsky & Varadarajan, Citation 1987 ; Wisner & Eakins, Citation 1994 ). On the other hand, despite the criticism, accounting measures of firm performance are still applied in many contexts (Akbar et al., Citation 2021 ) and in users’ decision-making process (Afrifa et al., Citation 2014 ; Akbar et al., Citation 2021 ). The results of studies that focus on accounting-based measures are often different from those that focus on market-based firm performance measures of firm performance. There are a number of previous studies that described the effect of working capital management on firm performance by employing different proxies of firm performance such as, return on asset, return on equity, net profit margin and Tobin’s q as a proxy of performance (Farhan et al., Citation 2021 ; Mandipa & Sibindi, Citation 2022 ; Pestonji & Wichitsathian, Citation 2019 ; Tahir & Anuar, Citation 2015 ). Based on the frequent usage, we used return on assets (ROA) as accounting-based and Tobin’s Q (TQ) as market-based measure of firm performance.
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Table 1. summary of variables and measurements.
where ROA and TQ are proxies of firm performance. Subscripts i is the firm while t is the time, i.e. from 2004 to 2020. β is the regression slope coefficient. CNTL denotes control variables: firm size, sales growth, leverage, inflation, and GDP. ɛ is the error term. All other independent variables, dummies and interactions are same as defined in Table 1 .
Data analysis was carried out in five stages. At the first stage, we explored the descriptive statistics for all variables, including mean, minimum, maximum, standard deviation, skewness, and kurtosis. At the second stage, Pearson’s correlation coefficients for all variables were produced. At third stage, we investigated the firms’ working capital management practices during normal business and crises periods. For this purpose, we compared the mean ranks for independent and dependent variables for pre-crisis, crisis, pre-covid and covid periods using Kruskal-Wallis non-parametric test. At fourth stage, using dynamic panel system generalized method of moments (GMM), we estimated the equation 1 and equation 2 for the crisis 2008 and covid 19 periods.
The corporate finance literature suggests that the most important problem in financial literature is related to the problems of endogeneity. Firm performance can be affected by certain unobserved characteristics in the equation. This leads to the heterogeneity. Moreover, the presence of endogenous variables in the equation is also expected to produce biased results. Consequently, the ordinary least square (OLS) method does not produces reliable results (Andres and Vallelado 2008). To deal with the endogeneity problem, dynamic panel generalized method of moments (GMM) has been suggested as the appropriate method by the econometric literature. GMM estimator deals with the problem of endogeneity, serial correlation, and unobserved heterogeneity (Arellano & Bond, Citation 1991 ). GMM estimator includes lagged dependent variable on the right-hand side of equation and allows to include the instruments for independent variables. The Hansen-J statistics confirm the validity of instruments, and AR-1 and AR-2 address the problems of first-order and second-order serial correlation (Arellano & Bond, Citation 1991 ; Roodman, Citation 2009 ). Blundell and Bond (1998) addressed that difference GMM poorly uses instruments that yield biased and inefficient estimates. They suggested the use of system GMM estimation. System GMM allows to perform one-step or two-step estimations. To select the appropriate estimator, we checked diagnostics (Hansen-J statistics, AR-1 and Ar-2) for each. We found that one-step system GMM estimation does not meet the basic model assumptions. Instruments validity was not confirmed in any of the models; therefore, we moved to two-step system GMM estimation. Following Essel and Brobbey ( Citation 2021 ), Moussa ( Citation 2019 ), Obeng et al. ( Citation 2021 ), and Rey-Ares et al. ( Citation 2021 ), this study applied two-step system GMM estimation technique for working capital management and firm performance.
3.3. Empirical results
Table 2. descriptive statistics, table 3. pearson’s correlation coefficients, table 4. kruskal-wallis non-parametric test for the effect of crisis 2008 and covid 19 on working capital management and firm performance, table 5. gmm estimation results for the relation between working capital policies and firm performance.
In addition, the results show strong evidence of negative relation between CCC and both measures of firm performance where the coefficient is negative and significant ( β = −0.002 and β = −0.001). It implies that decreasing the CCC will generate more profits for the firm. The negative CCC implies the shorter account receivable period, shorter inventory conversion period and longer accounts payable period. This all leads to the lesser funds block in the working capital and thus reduces the needs for external capital to finance operations. Moreover, the less external finance results in the less cash outflow in terms of the interest cost. Thus, working capital maintenance cost is reduced and in outputs provides better margins and increased performance. So, a firm manager can enhance the performance by shortening the CCC. It further entails that firms can create shareholder value by reducing the CCC to minimum. This result is consistent with the studies by Simon et al. ( Citation 2017 ), Soukhakian and Khodakarami ( Citation 2019 ), Basyith et al. ( Citation 2021 ), Yousaf et al. ( Citation 2021 ), and Bashir and Regupathi ( Citation 2021 ). However, the result contradicts Amponsah-Kwatiah and Asiamah ( Citation 2020 ) and Ebenezer and Asiedu ( Citation 2013 ). In contrast to CCC, NWC shows positive relation with both measures of firm performance. The coefficient is significantly positive ( β = 0.024 and β = 0.312). This result implies that the greater the proportion of current assets over the total assets, the higher the firm performance. This finding is similar to the studies by Akgün and Karataş ( Citation 2021 ) and Sheikh et al. ( Citation 2016 ). In firm-specific control variables, FS is negatively associated with firm performance measures. SG is positively associated with ROA and negatively associated with TQ. In contrast, LEV is negatively associated with ROA and positively associate with TQ. In country-specific control variables, GDP is negatively associated with TQ only and INF is positively associate with both ROA and TQ.
Table 6. GMM estimation results for effect of crisis 2008 and covid 19 on the relation between working capital and firm performance
The results for CCC and NWC are also different in covid 19 period than the crisis 2008 period, with ROA, CCC and NWC having significant positive relation in the covid 19 period. Higher length of CCC during the covid 19 positively influences ROA but negatively influence TQ. It could imply that during covid 19 period, firms experienced slow sales and faced difficulty in collecting the receivables from their customers (because they were also adversely affected); therefore, to stay liquid firms delayed payments to their own suppliers. This positively influenced the firms’ asset based returns. However, this policy is not in the interest of shareholders because all funds are tied up in working capital cycle. So, we can say that effect of covid 19 on CCC and firm performance was adverse for shareholders. On the other hand, the relation between NWC and TQ is still negative and insignificant. In addition, comparison of the coefficient size shows that magnitude of relation between CCC and TQ and relation between NWC and ROA is high compared to the crisis 2008 period. Thus, H3 and H4 are partially supported.
In control variables, FS negatively, but DR and GDP, positively influence the performance in all models. During the crisis 2008 period, SG is positively associated with ROA at 1% level but negatively associated with TQ at 10% level. During covid 19 period, SG and ROA relation remains positive but turns to insignificant negative with TQ. INF is significant positive with ROA during the crisis period but significant negative during the covid period. With TQ, relation is not significant in either model. Overall, study findings revealed that working capital and firm performance relation changes due to the economic conditions.
The current study aims three objectives. First, it explores the working capital practices during crisis 2008 with covid 19. Second, it investigates the direct relationship between working capital management and firm performance for the whole period 2004–2020. Third, for comparison, this study investigates the working capital management and firm performance relationship for crisis 2008 and covid 19 periods separately, which is not studied before, to the best of our knowledge. Several studies explored that during the financial crisis 2008, firms changed working capital practices, so the firm performance also changed in the firms around the world (Akbar et al., Citation 2021 ; Akgün & Karataş, Citation 2021 ; Simon et al., Citation 2017 ). Covid 19 became another reason to adversely affect the global working capital management practices (PwC., Citation 2021 ). By taking 577 firms from three Asian countries, Malaysia, Pakistan and Thailand, this study is a first attempt to show how firms responded to the covid 19.
To measure working capital management, we considered two measures of working capital policies namely, working capital investment policies and working capital financing policies, and two common and comprehensive indicators of working capital management known as CCC and NWC. For firm performance, we used ROA and TQ. Descriptive analysis results showed that Asian firms adopted conservative working capital investment and financing policies. Kruskal-Wallis non-parametric test is used to examine the differences for working capital management and firm performance pre-crisis, crisis, pre-covid and covid periods. These results confirm that effect of covid 19 was severe on working capital management and firm performance than the crisis 2008. In covid 19, ROA and TQ showed significant decline. To mitigate the adverse effect of covid 19, firms decreased the use of current liabilities to finance assets. NWC also showed a decline in the covid period relative to the pre-crisis, crisis and pre-covid period.
For the whole study period, results showed that CATAR and NWC positively while CCC and CLTAR negatively influence firm performance. Our results are consistent with previous studies (Bashir & Regupathi, Citation 2021 ; Basyith et al., Citation 2021 ; Simon et al., Citation 2017 ; Soukhakian & Khodakarami, Citation 2019 ; Yousaf et al., Citation 2021 ). Lastly, we compared the effect of crisis 2008 and covid 19 on working capital management and firm performance relation. The findings showed that covid 19 changed the relation between working capital management and firm performance. Both working capital policies and both working capital components showed different coefficient signs and sizes than the crisis 2008 period. However, the results were mixed based on proxies of performance. Although these findings are not comparable to past studies because of less work for covid 19, firm managers would be able to mitigate the effect of crises by adopting a suitable working capital management policy which eventually increases returns for both firms and shareholders. This study, however, is not without limitations. The two proxies of firm performance namely ROA and TQ are used. Other measures can also be included to provide strategic implications and more useful insights. This study used secondary data for analysis. Future researchers can also use survey data to understand the behavior of firms’ managers in managing the working capital in response to economic conditions.
Source: Authors’ calculations using stata statistical software
Source: Authors’ calculations using statistical package for the social sciences (SPSS)
Note: Mean ranks for each variable are given in respective rows. Periods in columns are defined as Pre-crisis: 2004–2007, Crisis: 2008–2009, Pre-Covid: 2010–2019, Covid: 2020. In last column, values in parenthesis are p-values for Kruskal-Wallis statistics, which are defined as * <1%, ** <5%, *** <10%.
Note: P-values in parenthesis are * <0.1, ** <0.05%, *** <0.01
Source: Authors’ calculations using Stata statistical software
No potential conflict of interest was reported by the author(s).
This article has been corrected with minor changes. These changes do not impact the academic content of the article.
1. Datastream provides option to standardize the currency. Other cross-country studies in corporate finance literature have adopted this approach (Nimtrakoon, Citation 2015 ).
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Analyzing the Efficiency of Working Capital Management: a New Approach Based on DEA-Malmquist Technology
- Ahmed Mohamed Habib ORCID: orcid.org/0000-0003-1728-6028 1 &
- Nahia Mourad 2
Operations Research Forum volume 3 , Article number: 32 ( 2022 ) Cite this article
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In this study, we analyze the efficiency of working capital management (WCME) for Gulf companies before and during the coronavirus crisis, then explore the influence of the coronavirus crisis on WCME. This study uses several techniques to achieve its goals, including the Malmquist index (MI), data envelopment analysis (DEA), and Tobit regression. The results demonstrate that most firms (approximately 84%) adopt a conservative strategy for their WCM. The WCME results revealed a statistical difference in the technological and pure efficiency scores for companies before and during the coronavirus crisis, while the results revealed no statistical difference in the technical, scale, and total factor productivity scores. Tobit’s results show that the coronavirus crisis had no significant influence on companies’ WCM performance. Finally, our results indicate that firms that are efficient in terms of WCM have higher sales returns and net income. The findings of this study have important implications for stakeholders to increase their awareness of companies’ WCM performance before and during a crisis. In addition, the results could have implications for trading strategies as investors and financiers seek to invest in companies with good WCM. The implications of WCM performance on social interests would cause decision-makers to use the best strategies and procedures to enhance WCM activities to improve their investments and image in the community in which it operates. We advance a novel contribution to the literature by analyzing and appraising the WCME for companies before and during the coronavirus crisis using a new approach based on DEA-Malmquist technology and then examining whether the coronavirus crisis has affected the WCME.
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1 Introduction
Businesses strive to make the best use of their limited resources. Resource allocation theory states that firms choose the most cost-effective distribution and allocation of resources for various productive activities [ 1 , 2 ]. As a result, firms that strive for excellence manage their WC to achieve best practices. The WC term arose from corporate finance and was initially mentioned at the inception of the twentieth century [ 3 , 4 ]. The WC is one of the most confusing accounting concepts. The lack of clarity concerning the employment of WC may be excused by the fact that there is no analogous classification of WC in firms’ balance sheets. WCM appears to have been primarily disregarded in businesses, even though bad WC decisions are responsible for a considerable portion of business failures, and WCM is essential for corporate financial management because it directly affects a firm’s profitability [ 5 ]. This is more striking as a large share of past firm bankruptcies was created by ineffective or inadequate WCM [ 6 ]. As WC significantly influences a firm’s operational and financial security, the literature confirms that it is necessary to develop an optimal WC strategy for a firm [ 7 , 8 ]. The literature suggests three strategies for managing WC: conservative, moderate, and aggressive [ 8 – 10 ]. The conservative strategy is safe for a firm and provides a high level of liquidity as it keeps current assets at high levels compared to current liabilities. In contrast, the aggressive strategy keeps current assets at low levels compared to current liabilities. Finally, the moderate strategy is considered a sensible method as it aims to minimize the drawbacks of the aforementioned methods and maximize their benefits. Exploring the suitable linkages between the items of current assets and liabilities will help a firm to adopt a good WC strategy. Therefore, a firm should adopt and manage its WC strategy on a solid and secure basis to achieve best practices.
The literature on corporate finance recognizes the significance of short-term business decisions on firm profitability. WCM is a recurring topic on a global scale because it is critical to ensure a business’s optimal path. WC is essential during economic downturns because it acts as a liquidity buffer [ 11 , 12 ]. Additionally, WC practices benefit firm profitability by facilitating solid sales and income growth [ 13 , 11 ]. While inventory stockpiling protects businesses from price fluctuations, trade credit increases sales and strengthens customer relationships. In addition, short-term debt related to financing the WC has low interest rates and is unaffected by inflation [ 14 ]. In contrast, the PricewaterhouseCoopers (PwC) Global report notes that promoting WC could free up €1.3 trillion in cash, allowing for a 55% increase in capital investment [ 15 ]. Furthermore, the report identifies new calls for global publicly traded firms’ business performance over the last 5 years as capital expenses have decreased, cash has shifted to be more costly and tough to convert, and the WC has slightly improved. Firms must cultivate and enhance their WC practices to improve business performance. On the other hand, excessive investment in WC necessitates financing and, as a result, additional payments, which may produce negative consequences and sacrifices for stockholders [ 13 , 16 ]. Kieschnick et al. [ 17 ] argue that an increase in WC financing increases the likelihood of bankruptcy because it requires additional financing requirements and financing expenses.
Moreover, various components of WCM contribute significantly to its effectiveness. Firms must make critical decisions about how much stock to keep on hand as having a large inventory protects them from costly stockouts and manufacturing process interruptions. Customers who are given more credit are more likely to use and verify products before making a payment, which benefits the company [ 18 ]. According to de Almeida and Eid [ 19 ], WC is a critical component of operational cash flow and is used to calculate the free cash flow. Effective WCM reduces a firm’s reliance on external funding, frees up cash for additional investments, and increases its financial flexibility. Business administration is constantly striving to maintain optimal WC volume. Increased WC investment energizes the sales process and provides discounts to suppliers for prompt payments at low WC levels. Nonetheless, once a certain level of WC investment is reached, additional interest costs are incurred, eroding firm value [ 20 ].
Two approaches have been used to assess a firm’s efficiency in terms of WCM. The first approach for assessing the WCME is to use ratio analysis as a parametric method. For example, quick and current ratios have been used to assess a firm’s liquidity [ 21 ]. In addition, Zimon and Tarighi [ 8 ] explored the WCM strategies of small- and medium-sized firms in Poland using liquidity and turnover ratios, cash conversion cycle (CCC), and other ratios. This approach has been criticized for its inherently static nature as a parametric method [ 22 ]. The CCC proposed by Richards and Laughlin [ 23 ] was also criticized for being mathematically incorrect, failing to focus on the total amount of funds committed, and lacking differentiation in the weights assigned to each component of WC [ 24 ]. According to Goel and Sharma [ 24 ], other measurement ratios, such as weighted CCC, have calculation issues owing to a lack of relevant data. Accordingly, researchers have developed alternative methods for measuring the WCME to overcome the weaknesses of the traditional approach. DEA is one such measure that has been used to calculate WCME as a non-parametric method in previous studies [ 25 – 30 ].
The DEA approach is distinguished by its ability to capture relationships between multiple outputs and inputs [ 31 – 33 ]. Additionally, DEA is a non-parametric technique that does not require prior assumptions about the distribution form of data or its residuals, and does not require any previous knowledge of the variable weights [ 34 , 35 , 36 ]. In addition, DEA is distinguished by its powerful benchmark in assessing the efficiency of firms, as it focuses on the best practices of firms rather than traditional methods, such as ratios and regression analyses, which rely on measures of average and central tendencies as criteria for evaluation, as it benchmarks a firm’s performance with maximum relative performance or best practices [ 37 , 38 ]. Therefore, DEA is considered a powerful approach for the continuous improvement process as it provides critical benchmark information for inefficient firms in achieving the best practices [ 33 , 38 ].
Empirical evidence shows that WCM has garnered substantial interest in accounting and finance research. Considering the Gulf firms, WCM is vital to firms’ economic development. Gulf member states are monarchies with distinct legal structures, and their public corporations operate in distinct institutional, economic, and political environments [ 39 ]. To integrate with the global economy, they shifted their focus from an oil-based economy to a knowledge-based one [ 40 ]. Gulf firms outrank the Middle East and North Africa (MENA) regions but not other regions with comparable per capita income levels. Thus, inefficient employment of assets and WC impedes progress toward sustainable and equitable growth. Gulf firms should invest in balancing their assets and WC to alleviate this trend. In addition, the existing literature on WCM has rarely focused on this crucial phenomenon in Gulf firms. Therefore, more research is needed to analyze the WCME for firms operating in the Gulf and investigate the influence of the coronavirus crisis on WCM performance, which is considered a novel contribution to the literature. Therefore, this study analyzes the efficiency of WCM by integrating the data envelopment analysis approach and the Malmquist productivity index in the context of a unique Gulf setting. The objective of this study was to investigate data from 2018 to 2020. The DEA-Malmquist analysis is extended to capture the efficiency of WCM in terms of technical efficiency (effch), technological efficiency (techch), pure efficiency (pech), scale efficiency (sech), and total factor productivity (tfpch) before and during the coronavirus crisis. The efficiency of the WCM results revealed a statistical difference in the technological and pure efficiency scores before and during the coronavirus crisis. Tobit’s results show that the coronavirus crisis had no significant influence on Gulf firms’ WCM performance. The findings of this study have important implications for stakeholders to increase their awareness of companies’ WCM performance before and during a crisis. In addition, the results could have implications for trading strategies as investors and financiers seek to invest in companies with good WCM. The implications of WCM performance on social interests would cause decision-makers to use the best strategies and procedures to enhance WCM activities to improve their investments and image in the community in which it operates.
The motivation for the study stems from market characteristics and the economic prospects of the Gulf. Most Gulf countries experienced increased inflation during the study period, resulting in higher interest rates, influencing a firm cost of capital. The Gulf Statistics Centre recently released a report on the Gulf countries’ inflation rates, which were 3.5% in April 2021, up from 3.5% the previous year. In April 2021, Saudi Arabia had the highest inflation rate in the Gulf, at 5.3%, up from 3.1% in April 2020, followed by Kuwait (3.1%), Oman (1.6%), and Qatar (1.6%). In the United Arab Emirates and Bahrain, inflation decreased about 0.5% and 0.1%, respectively. Besides, the coronavirus epidemic, on the other hand, had a tremendous impact on the entire world, as every country, industry, and civilization were affected in some way [ 41 ]. Many activities have been restricted because of the pandemic to slow the spread of the virus. We should turn everything off to limit the negative impact. When public authorities take decisive action to address the emerging health threat of coronavirus, business leaders are faced with the challenge of channeling their WCM through the issue. Recognizing the crisis impact on the people who drive the firm’s operations is critical. That highlights the importance of a resilient leader in a fast-changing environment and working differently. Also, the author has not found any research by reviewing previous studies on WCM in the context of the coronavirus pandemic. Using MI and DEA, this study is thought to be one of the earliest attempts to analyze and appraise the WCM performance of the firms. Moreover, Gulf firms were adversely impacted by the numerous issues that arose because of the outbreak. Based on these arguments and evidence, this study investigates the following:
RQ1. Are there, on average, significant differences in firms’ WCME over the study period? RQ2. Has coronavirus crisis affected firms’ WCME over the study period?
The remainder of this paper is organized as follows. Section 2 presents a literature review and hypotheses formulation. Section 3 clarifies the data and the methodology used. Section 4 presents the empirical results. Finally, Sect. 5 presents a summary and conclusions of the study.
2 Literature Review and Hypotheses Formulation
WCM is a critical component of a firm’s success [ 42 , 43 ]. Furthermore, the WCM can help with risk management and increase the value of a business [ 44 ]. Furthermore, a conservative approach to WCM necessitates increased inventory and accounts receivable investment, which has the advantage of lowering supply-chain costs and price fluctuations, posing less risk to businesses [ 21 , 45 ]. Increased sales and market share generate profits [ 46 ]. Firms that take a proactive approach to WCM reduce risk exposure by reducing inventory investment and credit terms with customers [ 13 ]. Besides, a study of Indian industrial firms between 2004 and 2013 revealed continuous growth in WCME. The DEA-based approach effectively overcame the limitations associated with traditional WCME measures [ 26 , 27 ]. Furthermore, an examination of Indian industrial firms revealed a high degree of efficiency volatility among manufacturing firms, with those operating at 50 to 60% efficiency lacking liquidity management expertise [ 28 , 29 ]. According to Ukaegbu [ 47 ], there is a negative relationship between WCM and Egyptian manufacturing firm profitability. According to a study conducted in 46 countries, lowering CCC could increase business profitability and value [ 16 ]. Furthermore, publicly traded European hospitals with a low leverage ratio show that increasing WCM increases profitability [ 48 ].
Prior research in developed countries revealed various WCME and firm performance outcomes [ 49 ]. While these studies have been extensive in developed countries, they have only recently been extended to developing countries. In developing countries, the relationship between WCME and profitability has been documented using a variety of proxies. Over 10 years, Akinlo [ 50 ] investigated the relationship between WCME and non-financial sector firm profitability in Nigeria. Inventory days, average payment period accounts receivable, and WCM efficiency were all calculated by WCME. The data were analyzed using fixed effects and a pooled ordinary least squares model. Nigerian businesses’ return on assets (ROA) decreases as accounts receivable, accounts payable, and inventory turnover days increase, but increases as CCC decreases. Altaf [ 51 ] investigated the effect of WCME on the performance of the Indian hospitality sector using a two-step efficient GMM (generalized method of moments). WC financing is calculated using the short-term debt-to-working-capital ratio. The results were a non-monotonic relationship with ROA and Tobin Q. That means that a low level of short-term debt benefits the performance of the business.
Wasiuzzaman [ 49 ] calculated the WC using inventory, receivables, payables, and WC balance. According to this study, WC is negatively correlated with ROA in Malaysian manufacturing firms. The payables and hypothesized relationships were incompatible. Soukhakian and Khodakarami [ 52 ] investigated whether WCME could significantly improve the ROA and economic performance of publicly traded Iranian industrial firms. Even though CCC was negatively associated with ROA, there was no significant relationship between WCM and refined economic value added when endogeneity was considered. Wang et al. [ 46 ] investigated the corporate relationships of non-financial listed firms in Pakistan over their existence. According to the findings, an increase in WCME (as measured by the net trade cycle) decreased ROA regardless of the life cycle stage. Zimon [ 10 ] analyzed WCM in small firms in Poland using a sample of 96 commercial firms operating in the construction industry from 2015 to 2017. The results demonstrate that firms operating within purchasing groups focus on financial safety and adopt a moderate-conservative strategy. Lyngstadaas [ 53 ] investigated the link between WCM packages and financial performance using a sample of 589 firms in the USA from 2012 to 2019. The results indicate that out of the 11 effective packages in terms of WCM, six are significant. Additionally, the results confirm that the six packages systematically relate to operational and financial WC performance.
In addition, Chamberlain and Aucouturier [ 54 ] explore the influence of WCM on the performance of publicly traded companies in Europe from 2004 to 2016. The results indicate that the links between WCM, profitability, and firm value are positive and significant. This study suggests that directors should take a nuanced view of WCM’s influence on performance. Zimon [ 7 ] reviewed prior research on WCM. This study shows that higher WC levels enable firms to increase their sales volume. The study concludes that directors should base their WCM strategies on high sales volumes to enhance firms’ WCM efficiency, profitability, and financial security. Aldubhani et al. [ 55 ] explored the linkage between WCM policies and profitability of manufacturing firms in Qatar from 2015 to 2019. The results reveal that firms with a shorter duration of receivables and CCC, and a longer duration of accounts payable and inventory turnover are more profitable. Jaworski and Czerwonka [ 56 ] explored the linkage between WCM measures using a sample of 326 Polish firms from 1998 to 2016. The results revealed a significant nonlinear linkage between working capital, liquidity, and profitability. Mazanec [ 57 ] explored the influence of WCM on a firm’s performance using 3828 transport firms in the Visegrad Group in the European Union in 2019. The results indicate that cash ratio affects firm performance in all models, excluding the Polish and Czech models. In addition, small firms are at a disadvantage in terms of WCM compared to medium-sized firms in Slovakia and the Czech Republic. Zimon and Tarighi [ 8 ] examined the influence of the COVID-19 crisis on WCM using a sample of 61 Polish firms from 2015 to 2020. The results demonstrate that firms manage a moderately conservative strategy for their WCM. Additionally, the results indicated that the COVID-19 crisis did not significantly alter firms’ WCM strategies. Tarkom [ 58 ] investigates the influence of the COVID-19 crisis on firms’ WCM using a sample of 2542 US-publicly traded US firms from 2019 to 2021. The results show that firms with more investment options and government incentives operate at lower levels during cash-conversion cycles. Additionally, the results demonstrated a significant negative influence of COVID-19 on WCM. This finding suggests that the influence can be mitigated by increasing government incentives and investment opportunities. Struwig and Watson [ 59 ] critically examined the WCM research conducted during the COVID-19 crisis in South Africa. The study concludes that during a crisis, the WC examination focuses on workforce safety and demand volatility. This suggests that effective cash management and digital transformation shifts are necessary to relieve undesirable changes in supply chains. Based on these arguments and evidence, this study hypothesizes the following:
H 1 . On average, there were significant differences in firms’ WCME over the study period. H 2 . The coronavirus crisis has affected the firms’ WCME over the study period.
3 Data and Methodology
The sample size included 459 publicly traded companies in the following industries: communication services, consumer discretionary, consumer staples, energy, health care, industrials, materials, real estate, and utilities. These companies are located in Oman, Qatar, Saudi Arabia, Kuwait, Bahrain, and the United Arab Emirates. According to Pastor and Ruiz [ 60 ] and Portela et al. [ 61 ], negative data values would limit the capacity of the DEA model to perform the analysis. As a result, 273 firms were excluded due to negative values in some cases and a lack of data in others. As a result, the final decision-making units (DMUs) are 186 firms. The primary data sources were based on the annual reports of the selected firms. These firms’ annual reports were obtained from the standard and poor’s DataStream, the platform of Mubasher-info, and firms’ websites.
Among the numerous approaches available for assessing DMU efficiency scores, the DEA approach was chosen to evaluate the efficiency of the firms under study because of its unique characteristics. First, as Mourad et al. [ 31 ], Shahwan and Habib [ 32 ], and Tone [ 33 ] argue, DEA is a versatile and powerful technique for capturing the relationship between specific outputs and inputs. Furthermore, DEA can provide critical information for continuous improvement, assisting inefficient DMUs in achieving best practices. Second, like Cooper et al. [ 37 ] and Habib and Shahwan [ 38 ] argued, DEA stands out as a benchmark technique that focuses on the best practices of DMUs rather than traditional methods that rely on measures of central tendencies. Finally, as demonstrated by Habib and Kayani [ 36 ], Mourad et al. [ 31 ] and Tuskan and Stojanovic [ 35 ], DEA distinguishes itself as a non-parametric technique that does not require prior assumptions about the distribution form of data (or its residuals). Furthermore, DEA does not require any previous knowledge of the variable weights.
To calculate efficiency using DEA, we require a set of inputs and outputs pertinent to the analysis’s primary objective [ 36 , 37 , 62 ]. DMUs are expected to provide outputs based on their possible inputs related to the primary objective under analysis. According to prior research, e.g., Gill and Biger [ 25 ], Goel and Sharma ( 24 , 26 , 27 , and Seth et al. [ 30 ], the inputs for calculating the WCME should include those items that account for a significant portion of WC investments. Additionally, each firm invests in WC to maintain consistency and increase sales. Thus, firms that generate more sales while supporting the same WC can be considered more efficient. As a result, net sales should be chosen as an output variable. Almost all prior research has overlooked the significance of net income as a by-product of WCM. A business that generates a higher net income while investing the same WC is more efficient. Following a review of the prior literature, the current DEA-WCME model used inventory, accounts receivable, accounts payable, and cost of goods sold as inputs and net sales and net income as outputs. Finally, the radial Malmquist DEA model is obtained by solving the next linear optimization problem:
where \({x}_{\mathrm{in}}^{\mathrm{s}}\) (resp. \({y}_{\mathrm{rn}}^{\mathrm{s}}\) ) is the value of the \(i\) -th input (resp. \(r\) -th output) of the \(n\) -th DMU observed in period \(s\) , the \({\left({\lambda }_{\mathrm{n}}\right)}_{\left\{1\le \mathrm{n}\le \mathrm{N}\right\}}\) are the weights corresponding to the DMUs. The DMU is considered relatively efficient in period \(s\) measured by frontier technology \(t\) if \({\delta }^{\mathrm{s}}\left({X}_{\mathrm{n}}^{\mathrm{t}},{Y}_{\mathrm{n}}^{\mathrm{t}}\right)=1\) ; otherwise it is inefficient. It should be noted that, \({e}_{n}^{1}=\frac{1}{{\delta }^{1}({X}_{n}^{1},{Y}_{n}^{1})}\) (resp. \({e}_{n}^{2}=\frac{1}{{\delta }^{2}({X}_{n}^{2},{Y}_{n}^{2})}\) ) is the constant return to scale (CCR) efficiency score for the \(n\) -th DMU in the first (resp. second) period.
Following the evaluation of the firms’ WCME using the DEA approach, the current study used the Tobit regression analysis to identify the potential statistical effect of the coronavirus on firms’ WCME. This model is a valuable tool for assessing the relationships between variables when the dependent variable contains censored data or has a range constraint [ 38 ],Verbeek 2008). The equation represents the Tobit linear regression relationship:
where \({e}_{i}\) represents each firm’s WCME; \({v}_{1}\) is the coronavirus as an independent variable defined by a dummy variable. To put it another way, if the time is related to the time before the coronavirus crisis, this indicator variable equals 1, and if it is associated with the time before the coronavirus crisis, it equals 0. Furthermore, to improve the accuracy of the analyses, the study used various control variables such as size, age, and leverage. Thus, \({v}_{2}\) represents the firm size as defined by the natural logarithm of total assets; \({v}_{3}\) represents the firm age as defined by the natural logarithm of firm age from the start of the activity until the end of the current year; \({v}_{4}\) represents firm leverage as defined by dividing a firm’s total liabilities by shareholders’ equity; \({v}_{5}\) refers to the communication services sector; \({v}_{6}\) refers to the consumer discretionary sector; \({v}_{7}\) refers to the consumer staples sector; \({v}_{8}\) refers to the energy sector; \({v}_{9}\) refers to the health care sector; \({v}_{10}\) refers to the industrials sector; \({v}_{11}\) refers to the materials sector; \({v}_{12}\) refers to the real estate sector. \({\beta }_{0}\) is a constant; \({\beta }_{i}\) represents the Tobit regression coefficients; and \({\varepsilon }_{i}\) are known by the Gaussian noises or errors.
4 Results and Discussion
4.1 results of the efficiency model.
Table 1 , panel A, shows the Malmquist index summary for the top ten DMUs under analysis (tfpch > 1) over the study period (2018–2020) in terms of WCME changes. In terms of improvement, the KWSE:HUMANSOFT achieved the best results (2.331), followed by the SASE:9510 (2.100), the DSM:NLCS (1.960), and so on. Table 1 , panel B, displays the Malmquist index summary for all DMUs under consideration during the study period (2018–2020) regarding WCME changes. According to the Malmquist index summary, technological efficiency or frontier-shift (techch) was the primary source of the increasing efficiency of the total factor productivity index of the DMUs under study, rather than technical efficiency or catch-up changes (effch). In terms of improvement (tfpch > 1), 100 DMUs out of 186 under investigation achieved the best results (tfpch > 1). Only 86 DMUs appeared to be inefficient, and they should reconsider operating processes and improve performance through necessary corrective actions to achieve best practices and improve overall factor productivity.
The DEA-Malmquist index summary of annual means in terms of WCME changes over the study period is shown in Table 2 , panel A. The Malmquist index increased by about 1.002 (0.2%) from the base year in the first period (2018–2019) before the coronavirus crisis. This increase is the result of an increase in technological efficiency or frontier-shift changes (techch) of about 1.083 (8.3%) multiplied by a decrease in technical efficiency or catch-up changes (effch) of about 0.926. (7.4%). Similarly, the situation has not changed significantly during the crisis; the Malmquist index for the second period (2019–2020) increased by about 1.034 (3.4%), with this increase attributed to the rise in technological efficiency changes of about 1.135 (13.5%) multiplied by a decrease in technical efficiency changes of about 0.911. (8.9%). Over the study period, the Malmquist index increased by about 1.018 (1.8%), the technological efficiency increased by approximately 1.108 (10.8%), and the technical efficiency decreased by about 0.918 (8.2%).
Table 2 , panel B, shows a complementary statistical test for confirming significant differences in firm efficiency scores regarding WCM over the study period using Wilcoxon tests (via IBM-SPSS ver26). The results showed no statistical difference in technical efficiency scores at a 5% significance level before and during the coronavirus crisis. Similarly, at a 5% significance level, there was no statistical difference in scale efficiency scores and total factor productivity scores. As a result, we retain the null hypothesis that the median of differences between effch (before the crisis) and effch (during the crisis) equals 0; sech (before the crisis) and sech (during the crisis) equal 0; tfpch (before the crisis) and tfpch (during the crisis) equal 0. Furthermore, the results revealed a statistical difference in technological efficiency scores and pure efficiency scores at a 5% significance level before and during the crisis. As a result, we reject the null hypothesis that the median of differences between techch (before the crisis) and techch (during the crisis) equals 0; pech (before the crisis) and pech (during the crisis) equals 0. All previous results indicate that H1 is partially supported.
4.2 Results of the Tobit Regression Model
Following the evaluation of the firms’ WCM performance using the DEA approach, it is helpful to identify some of the factors that affect WCM performance. In this section, the following factors are investigated for their impact on performance: the coronavirus crisis, size, age, leverage, and sector classification.
Tobit regression analysis was used to investigate factors influencing WCM performance using Stata/MP ver16. Table 3 depicts the effect of the variables under investigation on the WCM performance of the firms over the study period. Table 3 shows that firm size and sector (Sec1, the communication services sector; Sec2, the consumer discretionary sector) have a significant favorable influence at the 0.10 significance level or less. Furthermore, at the 0.10 significance level or less, the leverage and the industry sector (whether Sec5, the health care sector; Sec7, the materials sector) negatively influence.
The current study’s findings revealed that the coronavirus crisis had no significant influence on WCM performance. As a result, the H2 hypothesis is unsupported. This findings are consistent with Zimon and Tarighi [ 8 ] study as they reveal that the COVID-19 crisis did not significantly alter firms’ WCM strategies. In contrast, the findings are inconsistent with Tarkom [ 58 ] study, as they demonstrate a significant negative influence of the COVID-19 crisis on WCM. In contrast, the findings revealed that firm size and leverage significantly impact WCM performance. Moreover, the results showed that the sector category (whether Sec1, the communication services sector, Sec2, the consumer discretionary sector; Sec5, the health care sector; Sec7, the materials sector) have a significant influence on the WCM performance at the same time the sector category (whether Sec3, the consumer staples sector; Sec4, the energy sector; Sec6, the industrials sector; Sec8, the real estate sector) have no significant influence on the WCM performance.
4.3 Sensitivity Analysis and Model Validation
Internal and external validity can be used to analyze findings. Internal validity investigates whether the methods utilized to change the results are valid, whereas external validity explores whether could generalize the results away from the present data [ 63 , 38 , 64 ]. Sensitivity examinations are helpful for both types of evaluations. Thus, the internal validity is appraised by utilizing various variables’ combinations. Table 4 , panel A, presents the results of sequentially removing different variables used from the basic model. The current study adopted the Mann–Whitney U test to examine the efficiency scores of the modified DEA-WCME models to the original efficiency scores via the basic DEA-WCME model to verify if the removal of variable occurred a significant difference in the relative efficiency scores. Besides, the correlations of Spearman rank were computed as well.
It is exposed in Table 4 , panel A, that the accounts payable removal significantly decreased the model’s efficiency distinction by diminishing the average of firms’ efficiency scores of 0.61 to 0.51 and the rate of the efficient DMUs of 12.9 to 9.1%. Similarly, removing either input accounts receivable, cost of goods sold, or inventory significantly influenced the model results concerning the efficiency score distribution and the rate of the efficient DMUs. Moreover, the high correlations of Spearman ranks suggest that the firms’ rankings were not significantly altered through the efficiency models. It is not surprising that removing either input impacted the model results because they blend various resource kinds. Therefore, excluding each would occur significant information removal.
Finally, the current study used the consistency of the results over time to assess the external validity of the firms’ efficiency model. The firms’ efficiency model was re-applied utilizing 2018 data in this analysis and then matched the relative efficiency scores to the 2019 and 2020 results (Table 4 , panel B). The Mann–Whitney U test revealed no statistically significant variance in the efficiency score distribution for the study years 2018–2019 ( p = 0.497), 2019–2020 ( p = 0.944), and 2018–2020 ( p = 0.684). The Kruskal–Wallis H test revealed no statistically significant variation in the efficiency score distribution over the study ( p = 0.814). The correlation of Spearman rank between each year was also highly significant. As a result, the general distribution of efficiency scores and the rate of the efficient DMUs not appear to change significantly from period to period, and the firms ranked as efficient remain mostly harmonious from period to period.
5 Summary and Conclusion
Empirical evidence shows that WCM has garnered substantial interest in accounting and finance research. Tewolde [ 5 ] shows that inadequate WC decisions are responsible for a considerable portion of business failures, and that WCM affects a firm’s profitability. This is striking because an ineffective WCM strategy creates a large share of past firm insolvencies [ 6 ]. As WC significantly influences a firm’s operational and financial security, the literature confirms that it is necessary to develop a good strategy for a firm’s WCM [ 7 , 8 ]. Drawing on this, there are increasing concerns regarding the coronavirus crisis toward firms that adopt WCM strategies, which may harm their performance and value. Using a unique Gulf setting, this study analyzes the efficiency of WCM before and during the coronavirus crisis using an integration between the data envelopment analysis approach and the Malmquist productivity index, and then explores the influence of the crisis on WCME using Tobit regression. To the best of our knowledge, the current study is the first to develop and apply the data envelopment analysis methodology using the Malmquist productivity index to evaluate WCME. Besides, the authors advanced a novel contribution to the literature by examining whether the coronavirus crisis has affected the WCM for firms under investigation. This study is essential for regulators, management, and investors to increase their awareness of firms’ WCM performance before and during a crisis. In addition, it provides insight into how the coronavirus crisis affects firms’ WCM, which is likely to strengthen firms’ financial policy and improve their strategies. These findings are consistent with Zimon and Tarighi [ 8 ] study as they reveal that the COVID-19 crisis did not significantly alter firms’ WCM strategies. In contrast, the findings are inconsistent with Tarkom [ 58 ] study, as they demonstrate a significant negative influence of the COVID-19 crisis on WCM.
The results show that 157 firms (approximately 84%) adopt a conservative strategy as a safe strategy for their WCM, while 29 firms have adopted an aggressive strategy, suggesting that most firms strive to provide a high level of liquidity and maintain current assets at high levels compared to current liabilities. In addition, the results of the DEA-Malmquist analysis revealed that the annual means of WCME increased by approximately 0.2% before the coronavirus crisis due to technological efficiency or frontier-shift changes. The results did not change significantly during the coronavirus crisis, with only a 3.4% increase due to technological efficiency or frontier-shift changes. Furthermore, at the 5% significance level, the Wilcoxon test revealed no statistical difference in the efficiency scores of technical and scale efficiency, and total factor productivity before and during the coronavirus crisis. In contrast to previous findings, the results revealed a statistical difference in technological efficiency and pure efficiency scores at a 5% significance level. In addition, the current study’s findings showed that the coronavirus crisis and firm age have no significant influence on WCM performance. By contrast, the findings reveal that firm size and leverage substantially impact WCM performance. Furthermore, the results indicate that sector category (communication services, consumer discretionary, healthcare, and materials) significantly influences WCM performance. Finally, our results indicate that firms that are efficient in terms of WCM have higher sales returns and net income, as the sales and net income averages of firms with relative efficiency in terms of WCM are approximately 11 and 30 times higher, respectively, than inefficient firms in terms of WCM.
Given the study findings, decision-makers and WC managers of firms should develop the necessary means and schemes to ensure the best practices of WCME and address the inefficiency aspects in terms of technical efficiency and scale efficiency to ensure that a firm operates efficiently, which would likely positively reflect on the firm and the confidence of many stakeholders. These findings highlight the need to disclose WCM practices within traditional firm reports or integrated reporting, where conventional statements alone would be insufficient to appraise firm performance, especially given the current ecosystem’s rapid and consecutive development. The findings would also pique the interest of decision-makers and WC managers, who could use the DEA methodology to investigate and identify weaknesses in firm performance, and then take significant actions to optimize performance and achieve best practices.
This study has some limitations. This study focuses on 186 firms (558 firm-year observations) in the Gulf Cooperation Council (GCC), and the findings are limited to the period 2018–2020. Based on the findings of the sensitivity analysis and model validation, the findings can be generalized to other firms in GCC and Middle Eastern countries, and future research may include all non-financial sector firms for broader applicability. Managerial ability, intellectual capital, real earnings management, ESG criteria, and the likelihood of financial distress are also important elements of financial policy that are not considered in this study but can be investigated in future studies. Despite these limitations, our study contributes to the literature by providing empirical evidence that most firms adopt conservative WCM strategies. Additionally, the WCME results revealed a statistical difference in firms’ technological and pure efficiency scores before and during the coronavirus crisis. The study also shows that the coronavirus crisis had no significant influence on firms’ WCM performance. Finally, this study may have implications for many stakeholders, including decision-makers, WCM managers, financiers, investors, financial consultants, researchers, and others, in increasing their awareness of firms’ WCM performance before and during a crisis. In addition, the results could have implications for trading strategies as investors and financiers seek to invest in companies with good WCM. The implications of WCM performance on social interests would cause decision-makers to use the best strategies and procedures to enhance WCM activities to improve their investments and image in the community in which it operates.
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The first author conceived the project and planning; fundamental analysis; the framework and statistical models; collected data and analyzed it; wrote the abstract, introduction, literature review and hypotheses formulation, data and methodology, results and analyses, and conclusions and implications; reviewed and edited the manuscript; responding to coming reviewers’ comments. The second author conceived the project and planning; results and analyses; reviewed the manuscript.
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Habib, A.M., Mourad, N. Analyzing the Efficiency of Working Capital Management: a New Approach Based on DEA-Malmquist Technology. Oper. Res. Forum 3 , 32 (2022). https://doi.org/10.1007/s43069-022-00155-7
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DOI : https://doi.org/10.1007/s43069-022-00155-7
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A RESEARCH PAPER ON "THE IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY"
2012, Independent University, Bangladesh
Abstract Companies can use working capital management as an approach to influence their profitability. This paper studies the impact of working capital management and its components upon the profitability of Bangladeshi pharmaceuticals companies. Cash Conversion Cycle, Average days of collection period, inventory turnover period, Deferred payables Period are used as a comprehensive measure for working capital management and Gross Operating Profitability used as a measure for profitability. The purpose of this study is to analyze the impact of working capital management on companies’ profitability from Bangladesh County. The relation between the components of the working capital management and profitability is examined using Pearson correlation analyses and using a sample of 14 annual financial statements of companies covering period 2009-2010. The conclusion to our study is that there is a positive relationship among deferred payables period, inventory turnover period and corporate profitability. On the other hand, there is a negative relationship among cash conversion cycle, average days of collection periods and corporate profitability. Keywords: Working Capital Management, Corporate Profitability, Cash Conversion Cycle, Average days of collection period (AR turnover Period), Inventory turnover period, Deferred payables Period, Liquidity.
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This research work carry out a comparative analysis on working capital management of brewery companies in Nigeria. The study aimed to examine the cost of working capital and the effect on firm performance and to take a critical view of the adopted liquidity measures of the Nigeria firm and attempt to see how it has been achieved. Secondary data were employed in this study from journals, textbooks and annual reports of the selected companies. How-ever, ratio analysis was used to analyze the data collected which is the best statistical techniques for working capital man-agement. The result of the test analyzed indicates Guinness Nigeria possessed huge amounts of current assets than Consolidated breweries. It was also deduced that inventories and debtors were very high in case of the Guinness Nigeria whereas current liabilities where still on the moderate level except in 2013 which recorded a higher current liabilities than the current asset. Cash balances were comparatively high in both cases. On the behalf of Receivable Management for the companies, it can be concluded that, undoubtedly, the Guinness Nigeria was much more efficient in the management of cash as compared to the Consolidated breweries which was laming in this regard and was way behind it. On the behalf of study of payables management it was observed and concluded that the consolidated breweries was better off than Guinness Nigeria as re-gard liquidity and payment to creditors as their credit periods were much shorter than the Guinness Nigeria, nevertheless the Guinness Nigeria derived benefits from the massive credit periods. The major recommendation of this study is that working capital management should be the concern of all the manufacturing sectors firms and need to be given due importance. The collection and payment policies of the firms in manufacturing sectors, in general, need to be thoroughly reviewed. It is generally argued that firms need to accelerate their cash collections and slowdown their payments. This can only be possible with some professional advice and supervision. The findings indicate that firm managers/executives can enhance performance of the firms by reducing the number of days in inventories, Cash Conversion Cycle and Net Trade Cycle to a reasonable minimum.
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The purpose of this study is to find out the effect of working capital management on company profitability. The study aims at examining the statistical significance between company’s working capital management and profitability. In light of this objective the study adopts quantitative approaches to test a series of research hypotheses. A sample of three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange (DSE) is used for a period of ten years (2002-2012) with the total of 30 observations. Data is analyzed on quantitative basis using Pearson’s correlation and Regression analysis (Ordinary Least Square). The key findings from the study are; Firstly, there exists a positive relationship between cash conversion cycle and profitability of the firm. This means that as the cash conversion cycle increases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders by increasing the cash conversion cycle to a reasonable level; Secondly, there is a negative relationship between liquidity and profitability showing that as liquidity decreases, the profitability also increases; Thirdly, there exists a highly significant negative relationship between average collection period and profitability indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively; Fourthly, there is a highly significant positive relationship between average payment period and profitability. This implies that the longer a firm takes to pay its creditors, the more profitable it is.; and Fifthly, there exists a highly significant negative relationship between inventory turnover in days and profitability hinting that firms which maintain sufficiently low inventory levels reduce the cost of storing the inventory which results to higher profitability.
Habib Ahmad
A research conduct on topic "IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF THE FOOD AND PERSONAL CARE PRODUCTS SECTOR IN PAKISTAN" From above stated purpose, succeeding exact research questions were framed to investigate: 1: “What factors affect a performance of firm’s working capital management?” 2: “How efficiently a firm converting its working capital into ready money?” 3: “How company value enhances through efficient working capital management?” Scope of Study: The scope of study considers the selected Food and Personal care products companies listed in Karachi Stock Exchange of Pakistan. Four companies are selected for the study purpose as random sampling. The selected companies are: 1) Unilever Pakistan Ltd. 2) Nestle Pakistan Ltd. 3) Mitchell’s Foods Farm Pakistan. 4) National Foods Pakistan Ltd. The scope of this study includes the relationship b/w independent variables & dependent variable. Independent Variables are: 1) Average collection Receivable Period. 2) Average Inventory Conversion Period. 3) Average Payment Period. 4) Cash Conversion Cycle. While dependent variable is 1) Return on Asset
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Cash, cash equivalents, inventory and accounts receivable are examples of working capital. Calculating net working capital is a way to measure the liquidity of an entity. Net working capital is calculated by subtracting the current liabilit...
Capital in accounting, according to Accountingverse, is the worth of the business after the total liabilities owed by a company is subtracted from that company’s total assets. Capital may also be labeled as the equity in a company or as its...
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ADVERTISEMENTS: Working capital cycle refers to the length of time between the firms paying cash for materials, etc., entering into the production process
Working capital management (WCM) refers to the managing of short-term finances.
The term working capital management refers to overall administration of all the current assets and current liabilities of the firm. Current ratio, days sales
Abstract: Efficient management of working capital is essential for firms to avoid overinvesting in short-term assets for maximum
The main idea of this special management is the ability to satisfy the short-term debt and operational expenses. The paper aims to model the profitability of
policy) and short-term financing management, and etc. A popular measure of working capital management is the cash conversion cycle, which tells us how cash
3)Working Capital : Working Capital is considering what the best way would be in terms of a management for short-term resources and obligations
The recent studies on covid 19 suggested that the effect of covid 19 is completely different from the previous financial crisis in terms of
The literature on corporate finance recognizes the significance of short-term business decisions on firm profitability. WCM is a recurring topic
Based on the result of the study, firms may need to extend credit terms for customers, may prolong their cash conversion cycle, may need an extended payment
Keywords: Working Capital Management, Corporate Profitability, Cash Conversion Cycle, Average days of collection period (AR turnover Period), Inventory turnover