Literature Review On Working Capital Management

This ratio is identical to the third-degree liquidity: The ultimate goal of corporate finance is to make the available capital as profitable as possible.The funds made available appear as equity or borrowings on the liabilities side of the balance sheet and as investment or current assets on the assets side.

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At the same time, its presence in the literature is still comparatively low, concentrating on the analysis of the link between WCM and company’s performance with the help of publicly available data and key ratios from the annual financial statements.

Especially, in view of the growing volatility and uncertainties in the credit and financial markets that have been observed for a number of years and the corresponding increase in regulatory capital in the area of external capital raising, the company's focus increasingly shifts to internal liquidity generation from the operating business on the structure of working capital.

However, in order to take account of this increased interest, a stronger focus on qualitative empirical investigations is necessary from a scientific point of view, which has so far only been sparsely represented in the literature.

Besides this, the review of empirical studies explore the avenue for future and present research efforts related to the subject matter.

But what could working capital and working capital management mean? It is not a new one, but very important topic in business economics.

The term “working capital” originates from the field of corporate finance and was first mentioned at the beginning of the 20th century (Firth, 1976, p. Its basic importance can be inferred from the following, nearly one hundred year old quotation from Lough: “Sufficient Working Capital must be provided in order to take care of the normal process of purchasing raw materials and supplies, turning out finished products, selling the products, and waiting for payments to be made.

Working capital is a term taken from corporate finance and is often used as a term for short-term balances (Meyer, 2007, p. Independent studies of the profit and loss accounts and balance sheets of large companies in the U. and Europe have shown that they hold an average of a quarter more cash in working capital than is required.

Such an unnecessarily high level of liquidity is often associated with particularly high levels of receivables, unnecessary levels of inventory, higher operating costs or debt, which are often accompanied by inadequate implementation of strategic initiatives.

If the original estimates of working capital are insufficient, some emergency measures must be resorted to or the business will come to a dead stop” (Lough, 1917, p. According to Bhattacharya (2009), the concept of working capital was first evolved by Karl Marx in 1914, though in a somewhat different form, and the term he used was “variable capital”.

Since the explicit distinction of capital by Adam Smith into fixed and working capital over 300 years ago, economists have recognized the important role of working capital in the company.

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