Literature Review On Working Capital Management

Literature Review On Working Capital Management-18
This is based on the understanding that both active and passive positions of a short-term nature influence company’s liquidity.

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These mainly include short-term financial liabilities, short-term provisions and other short-term liabilities.

In contrast to fixed capital or long-term assets, working capital is changed at a relatively fast rate.

Not only large, but especially medium-sized companies have recognized the contribution that working capital optimization can make in this context an integrated and enhanced cost management.

This has been confirmed by the events on the capital markets in recent years as well as the regulatory requirements, such as those arising from the Basel II guidelines for banks and their borrowers.

Similar to the short-term investments on the assets side of the balance sheet, various short-term financing alternatives are available to companies.

Short-term liabilities are defined as items that are settled within one year or during a business cycle.The purpose of this paper is to elaborate the relationship between working capital management (WCM) and company’s performance as well as related determinant factors based on literature review.It aims to identify gaps in the current body of knowledge which justify future research directions.Dewing, one of the leading financial authors in the first half of the twentieth century, argues that “the differentiation between fixed and current capital is practically as old as corporation accounting among the Anglo-Saxon nations” (Dewing, 1953, p. He refers explicitly to the balance sheet of the , which in 1571, was already differed between “fixed capital” and “current capital”.Despite this period, as in many terms of business management, a single definition has not been possible and there are semantic problems not only for the terms “working capital” and “management”, but in particular with regard to the scope of working capital management. The term “working capital” is often used as a generally accepted subject and collective term for short-term balance sheet items, which are attributable to current assets on the assets side and short-term liabilities on the liabilities side of the balance sheet (Brealey et al, 2011, p. “Current assets include all those assets which are not classified as non-current assets and which are therefore expected to be recognized within one year (or in the course of the normal business cycle) back into liquid funds”.This led Dewing at an early stage to the following statement: “Furthermore, I believe, owing to the confusion of terms, the expression ‘working capital’ had better be omitted altogether” (Dewing, 1953, p. Working capital is one of the most misunderstood terms in the terminology of accounting and it does not appear to be uniform today (Kulshreshtha & Jha, 2009, p. The lack of clarity or misunderstandings regarding the application of working capital was justified by the fact that there is no corresponding classification of working capital in the balance sheet (Meyer, 2007, p. A lack of unity and confusion about the understanding of working capital has led in the past to the fact that many authors have either completely neglected the concept and subject of working capital, or dealt with a low priority (Falope & Ajilore, 2009, pp. This is all the more remarkable since a large share of past corporate insolvencies was caused by inadequate management of working capital (Rafuse, 1996, p. The main balance sheet items therefore include inventories, trade receivables, other receivables, down payments and cash and cash equivalents.The items are generally classified in the order of liquidity in the preparation of the balance sheet.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.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.

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