Working Capital Management
Conglomerates Family Firms
In GCC Countries
An efficient Working Capital Management (WCM) has a significant effect toward the creation of a firm’s value. It is a fact that financial managers in the firms used to give concentration on managing long-term financial decisions, specially capital structure, investment decisions, company valuation & dividends decisions. Only little attention was given to managing the short-term assets and liabilities, managers began to realize the importance of investigating those short-term assets and liabilities since the working capital management has an important role for the firm’s profitability & risk and the overall value of the firm. There is no doubt about the criticality of this issue to firms as holding too much working capital is inefficient and holding too little is dangerous to the organization's survival. This study looks at some firms in multi-line industry in GCC country focusing on family owned conglomerates firms, to investigate their methods of managing their working capital and identifies how organizations creates balance in their working capital.. Introduction:
Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Working capital management is simple and a straightforward concept of ensuring the ability of the organization to fund the difference between the short-term assets and short-term liabilities (Harris 2005). Currently, working capital management became an important issue to all firms; overall, it can minimize companies’ risks and improves firms’ value. Identifying the 0ptimal value of working capital is not an easy issue; it requires a careful and continuous monitoring of the components of working capital including cash, inventories, receivables and liabilities. Business success heavily depends on the ability of Chief Financial Officers and the Financial Executives to effectively manage the mentioned components of working capital. Through minimizing the investments tied up with current assets, organizations can reduce their financing costs and increase the funds available for any expansion projects.
Some firms adopt an aggressive working capital management policy evidenced in high risk, high return strategies in working capital investment and financing. Other firms may adopt a moderate or matching strategies with low risks and low returns, lower risks and returns is used by companies who adopt a conservative strategy in investing and financing their working capital. Aggressive policies in working capital could be seen clearly in firms maintaining low level of current asset as a ratio of total assets or high level of current liabilities as a percentage of total liabilities. Maintaining an optimal level of current assets and current liabilities is an important issue to the firms, because excessive level of current assets affects the profitability of the firm, whereas low level of current assets will adversely affects the liquidity and may leads to stock outs leading to poor operations and lost of sales and profits. In this study, I will investigate how firms in Agriculture & Food Industry in the Kingdom of Saudi Arabia manages their working capital. Market Overview:
Two decades ago, the Saudi Government decided to embark and undertakes an ambitious promotion strategy to improve its Agriculture and Food industry as part of its efforts to diversify the structure of its economy and to reduce its dependence on Oil only. Despite the challenges faced the government (water and climate conditions),...