A Comprehensive Study on Banks

Topics: Inventory, Investment, Asset Pages: 6 (2019 words) Published: February 27, 2013
Literature Review
Every business needs funds for two purposes for its establishment and to carry out its day-to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, etc. Investments in these assets represent that part of firm's capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purpose for the purchase of raw material, payment of wages and other day-to-day expenses etc. These funds are known as working capital. In simple terms, working capital refers to that part of the firm's capital which is required for financing short-term of current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and this cash flow out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital. 1) Jeng-Ren, C. & Cheng, L. (2006) in their article, “Determinants of working capital” investigate the determinants of working capital management. This study investigates the relation of business indicator and management of short-term capital from the perspective of a firm's working capital management, which traditionally is rated by current ratio, quick ratio, and net working capital.The authors have used net liquid balance and working capital requirements as measures of a company's working capital management. Results indicate that the debt ratio and operating cash flow affect the company's working capital management, and how it influences the business cycle, industry effect, growth of the company, performance of the company and firm size. From the data it can be seen that companies could maintain relatively loose capital management during the prosperous period (1999-2000), when capital was readily available in the market. When the economy slumped dramatically at the end of 2000, financial institutions began to tighten their capital policies, forcing companies to gradually operate a looser policy in working capital management. The regression results show the company has to operate a looser working capital management policy in times of recession, as it is not easy to raise capital from outside the firm, so more liquid assets are kept to maintain a relatively higher NLB. The authors conclude that debt ratio and operating cash flow evaluated by both WCR and NLB exert influence on working capital management. 2) Harris, A. (2005) conducted a study “Working capital management: difficult, but rewarding”. It focuses on the different requirements and the important role that human beings play in the working capital management process. There are various important steps that need to be met in order for them to manage their short term needs primiarily. The author compares Working Capital Management in theory and practice. Internal considerations - such as organizational structure, shared systems, autonomous business units, multinational operations and even information technology can impact working capital. The author also stresses on the importance of proper forecasting for efficient Working Capital Management. 3) Filbeck, G. & Krueger, T. (2005) in their article, “An Analysis of Working Capital Management Results Across Industries,” find that all industries use different modes of working capital managament techniques for their functioning. Even their techniques change over time. Industry factors may impact firm credit policy, inventory management, and bill-paying activities. Some firms may be better suited to minimize receivables and inventory, while others maximize payables. Given everything the importance of working capital cannot be ignored and its reticfication to cope with the changing environment should be the main focus of the company. 4) Pimplapure, V. &...
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