Impact of Working Capital

Topics: Working capital, Balance sheet, Inventory Pages: 45 (14311 words) Published: February 24, 2013

1.0 Background of Study
Rural banks are being considered as “key source of dynamism, innovation and flexibility in terms of a source of funds to retail businesses growth emerging and developing economies” like Ghana (OECD, 2006). The financing problems that rural banks frequently have to face has affected their working capital which impact their cash holding level, hence its operational difficulties like reaching out more to their client cash demands.

1.1 Significance of Rural Banks
The important role played by rural banks developing countries like Ghana has been increasingly realized over the past years. Not only are they important for vitality of retail and microfinance business sectors, but they also provide new jobs for citizens in the country. Besides, rural banks also have a significant qualitative input to the Ghanaian economy regarding innovative development about purchase of Akuafo Cheques by rural farming areas. Obviously, rural banks are vital importance to the Ghanaian economy .This leads to a strong increase of Ghanaian rural banks in quantity and therefore significant as well. The number of liquidations is still considerable and displays the importance of studying rural banks with regards to working capital management on cash holding levels.

1.2 Financial Constraints of Rural Banks
Many authors have studied the reasons accounting for rural banks failure. Working capital management is widespread factor that tend to underpin rural banks bankruptcy. OECD analyst agrees that access to working capital management is one of the most significant hindrances on cash holdings of rural banks for reaching out to more customers (OECD, 2005). Besides, rural banks do find it difficult to obtain external loans from other corporate financial institutions and even if they do, the cost of borrowing from such sources is becoming quite unbearable. Interest rates have been on the rise over the past years. Also, the government policies such as on-going structural changes in the economy, trade liberalization, inflation and general competition in banking industry are indications for the need to undertake a study into working capital management of rural banks. Besides, Ghana is becoming more of free market oriented economy; there is the need for a study like this. This could bring to the fore the evidence for working capital practices and recommend methods and procedures for improving their cash holding levels for expansion their operations (Peterson, Lozmetsky, Ridgway, 1983).

1.3 Statement of Problem
Despite the immense and increasing importance of rural banks for the Ghanaian economy, they are faced with financial problems and not much financial management theory exists with special regards to rural banks. Most theory in this field of study is related to corporate financial management. Besides, most of the studies are conducted in large corporate banks. Obviously financial management in rural banks and large banks depict some similarities. In any case, there are significant disparities that tend to underpin the study of working capital management in rural banks (Weston and Copeland, 1986). Since rural banks experience difficulties in accessing external finance, they rely more strongly on rural savings mobilization strategies. Working capital management thus plays an important role in the financing of rural banks. Ghanaian Chronicle, (Dec 19, 2000) cited that lack of good working capital management is among the significant reasons for the failure and collapse of businesses, of which some rural banks included. As working capital management is related to short-term financial planning and cash level or liquidity in general represents a significant indicator for short-term performance, hence the chosen of this topic study become crucial.

Howard asserted that “Working capital may be regarded as the life blood of business” of which rural banks are of no exception. When...
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