Working Capital Management

Topics: Working capital, Inventory, Corporate finance Pages: 35 (8893 words) Published: December 3, 2010

1. Introduction of study

In the present competitive world, every firm, whether big, medium of small, needs working capital to carry on its operations and to achieve its targets. Proper management of working capital is an important role of firm’s life.

Working capital is essential to maintain the smooth running of business. No business can run successfully without an adequate amount of working capital. Inadequacy of working capital may lead the firm to insolvency and excessive working capital implies idle funds, which earns no profits for business.

Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the firm. A well-designed and implemented working capital management is expected to contribute positively to creation of firm’s value & profitability. A firm is required to maintain a balance between liquidity and profitability while conducting its day-to day operations. Liquidity is a pre condition to ensure that firms are able to meets its short-term obligations and its continued flow can be guaranteed from a profitable venture. The importance of cash as an indicator of continuing financial health should not be surprising in view of its crucial role with in the business. This requires that business must be run profitability.

Profit maximization is generally considered important objective of a business. Profit is also used as a tool for evaluating the performance of management. Profitability directly influences the creation of surpluses. Therefore, Management of working capital is one of the most important aspects of firm’s profitability. Analyzing the financial statement of the firm helps to make proper decisions about the strengths and weakness of the firm’s operations. These statements are useful in analysis of the profitability of the company by analyzing each individual element to the total figure of the statement. The statements will also assist in analyzing the profitability of the years and with the figures of the competitive firm in the industry for making analysis of relative efficiency.

In sri-lanka, selected all listed companies are divided as the sectors by Colombo stock exchange. Here researcher considers Impact of working capital management on profitability of the five firms in trading industry in listed companies and do research based on the five years data between the 2003-2007

1.2. Research problem

Research problem is focused in this research as follows.

1. Does the working capital management impact on profitability of trading firms in sri-lanka? 2 Are the current assets, current liabilities, working capital, current ratio, liquidity ratio, efficieny ratio of selected Trading firms near to the industry average?

1.3. Objective of the study

The focus of this study is Impact of working capital management on profitability of the trading industry in listed companies in srilanka . The basic objective of the study is.
• Assess the relationship between working capital and financial performance. Sub objectives are

• Identify the need and importance of working capital

• To analyze the financial position of trading firms

1.4. Significance of the study
This study will help to know how to impact on working capital on profitability of selected Trading firms. This study also helps to estimate the working capital decisions on the companies’ profitability. Therefore, to estimate profitability, financial, and effectiveness of firm and find out the weakness of the firm. This research will help to know profitability and compare with competitive firms. It is important to improve the competitiveness and liquidity of the trading sector in order to enhance its efficiency.

As well as, this study will create the further research question for further investigation in future. The fast growing but large company...
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