To Be a Good Retailer You Only Need to Manage Working Capital

To be a good retailer you only need to manage Working Capital
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_______________ Retail Paper by Jens-Peter Labus, December 1st, 2008

Introduction
This paper looks at the theory and practise of Working Capital in the retail industry and finally seeks to answer the question presented above.

The Definition of Working Capital
There are several definitions of working capital. They all circle around the idea that working capital is the money bound or incurred on the ‘Money-Go-Round’ (Teji, 2006), thus making working capital a time-money equation. Definition 1: Cash available for day to day operations of a firm (Business Dictionary). Definition 2: Current assets minus current liabilities (Investorwords). An empirical study from Switzerland suggests that for a manufacturer, the level of working capital corresponds to a quarter of its revenues (Wagner, 2008). Prof. Dr. Wagner uses a more sophisticated definition based on the same principals laid out above. Retailers commonly do not have liquid assets, defined as assets which are traded in standard units at high volume, thus allowing an asset to be liquidated speedily. An example would be government bonds. The standard assets of retailers can be liquidified only at substantial losses; by selling off stock in a store closure, for example. A good part of available liquidity is usually locked-up in assets, such as:

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Current assets, namely inventory and cash. Non-current or fixed assets, such as shelves, lorries, IT infrastructure, etc.

This locked-up money can be named working capital (Teji, 2006). The most widely accepted accounting definition of assets is the one used by the International Accounting Standards Board (IFRS). The IFRS Framework states: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise."

Negative Working Capital

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