Working Capital

Topics: Accounts receivable, Working capital, Cash conversion cycle Pages: 2 (413 words) Published: May 20, 2013
Over the years there have been numerous articles written about the importance of working capital management regarding the profitability of a firm (Shin and Soenen, 1998; Deloof, 2003; Garcia-Tereul and Martinez- Solano, 2007; Raheman and Nasr, 2007; Mathuva, 2009; Dong and Su, 2010). Various authors have conducted researches in different countries on employing working capital in an optimal way in order to pursue profitability. But some authors still have different findings on how working capital management in terms of cash conversion cycle and its components such as number of day‟s inventories, number of day‟s accounts receivable and number of days accounts payable are related to the profitability of a firm. Deloof (2003), who conducted his study on Belgian firms, suggests that working capital management has a vital effect on the profitability of a firm. He also states that firms have to make a trade-off between liquidity and profitability. Similarly, Raheman and Nasr (2007) posit that a company has to determine the equilibrium between liquidity and profitability because increasing profits at the expense of the liquidity of the firm can be harmful in terms of insolvency and bankruptcy of the firm. Accordingly, the three components of the cash conversion cycle are each managed in different ways to improve the profitability. This is due to firm specific (industry-wise) with different characteristics. Each of the researchers that have conducted case studies in different countries found different results on how the profitability of a firm is related to the cash conversion cycle and its three components. As far as is known, there has been no study on the effect of working capital on the profitability in Dutch firms. It is in this consideration that the research plan in this paper will be directed to the following research question: “What is the relationship between the working capital management components and profitability within Dutch listed firms?” In the section 2...
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