REVIEW
OF LITERATURE
This chapter focuses on extant
literatures relating to the working capital management components of the
enterprises, and how its components impact on business performance. The
researcher critiques the relevant literatures for this study in terms of
accounting and financial concepts. The literature review section has been
arranged into two sections. The first section presents the theoretical review
of working capital management while the second section reviews the empirical
evidence pertaining to working capital management.
2.1
THEORETICAL REVIEW
2.1.1
OVERVIEW OF FINANCIAL
MANAGEMENT
The traditional definition of Finance is
the study of funds management and the directing of these funds in order to
achieve its particular objectives. The unique objective of a good financial
management is to maximise returns that associate with minimising of financial
risks simultaneously. In Financial management it is critical to understand the
business objectives and financial functions before recognising the major
component that is the short-term financial management or the Working Capital
Management relative to the day-to-day operations (Brigham and Ehrhardt, 2010;
Chandra, 2008; Keown, Martin, Petty, and Scott, 2002; D. Sharma, 2009).
Financial management is also concerned
with the creation of economic wealth, maximising the share price for shareholders’
equity, planning and increasing its profitability and maximising the rate of
returns on Equity. It is in the corporate environment that most of the finance
literatures have been literately focused on the study of the long-term
financial decisions making process (Chandra, 2008; Zietlow, Hankin, and
Seidner, 2007).
Financial management in firms operate
according to problems and opportunities. The owner/manager of a firm is primary
relying on its trade credit policy, bank financing, personal financial
contributions, operating financing and lease financing. The firms financing
options are limited, but also have the same financial problems as those faced
by large companies (Arnold, 2008; Gitman, 2009; Sagner, 2010; D. Sharma, 2009).
One of the major financial issues facing firms is the deployment of current
assets and current liabilities that are the critical elements of Net Working Capital Management (NWCM). The primary cause management of
Working Capital internally amongst its components.
Thus, the finance manager of an enterprise
must be alert to the level of working capital changes. The conceptual model
shown in Figure 2.1-2 illustrates the critical portion of the financial
management components for this study. The focus is on the operating cycle and
the four main components of Working capital that are cash, debtors (accounts
receivable), inventory, and accounts payable.
2.1.2 OBJECTIVE OF WORKING CAPITAL
MANAGEMENT (WCM)
According to Gitman (2009) the objective
of Working Capital Management (WCM) is to minimize the Cash Conversion Cycle
(CCC) the amount of capital tied up focuses on controlling account receivables
and their collection process, and managing the investment in inventory. Working
capital management is vital for all business survival, sustainability and its
direct impact on performance.
For complete
academic research materials, visit www.researchshelf.com
and note also that our mobile app will soon be launched where you can download
it and view all our academic research materials including past questions and
answers, assignments, e-books etc..
No comments:
Post a Comment