A company’s financial management system and fundamental financial health impact the operational and financial health of the business through success rate. Appropriate utilization of the working capital is the key to business success. According to the understanding, the solid balance of growth, liquidity and profitability of a business is the result of an efficient working capital management system. In this research paper, the entire focus will be to analyze and examine the importance and effectiveness of working capital within different businesses and companies (Anton & Afloarei Nucu, 2020). The working capital management system will be analyzed with equal amounts of evidence whereas the secondary and qualitative data collection and analysis will help in attaining better results from the entire research study.
The research will provide a detailed idea about the efficiency of the company of how efficiently it is operating within the market by maintaining its financial stability. The entire paper will also result in the importance of a working capital management system within an organization. Along with justifying the choices, the appropriate methodology will be implemented to get the best possible results from the research data analysis study and tool (Jasmani, 2019). This research study will help in analyzing the working capital engagement to create better efficiency in maintaining financial stability and operational efficiency in the future.
The idea of methodology in a particular research paper is focused on the entire work on which the study will be planned and conducted. In this research paper, the main focus of the researcher is to identify and evaluate the importance of working capital in different business and companies’ contexts. The main context of the methodological approach in this study will be to focus on the research sampling, ethics and data analysis process. In this research paper, the secondary data collection will be considered along with the interference of the qualitative data analysis process.
It is assumed and identified that there is a vast amount of evidence already existing regarding the working capital management system and its importance in the business and company operation context (Laghari & Chengang, 2019). By the selection of the qualitative analysis, it is considered that the researcher will implement the thematic analysis process to analyze the collected data.
The thematic analysis will help in critically measuring and analyzing the in-depth evidence with self-analysis. The data will be collected from different journals and articles. The existing research papers will provide a significant baseline for this particular study. The evidence will be judged through thematic analysis as the thematic analysis will be based on 3-4 separate themes based on the research topic and its objectives. After the significant themes are chosen for the data analysis purposes, each theme will include 4-5 journals that will contribute to the specific themes through the research work (Jana, 2018).
After the entire analysis is done, the codes and findings will be discussed under the section of discussion as it will help in creating a better conclusion of the entire paper. The significance of the findings will evaluate the possibilities of the future scope for the companies to improve their business operations with the adaptability of the working capital management system.
In this section, the secondary analysis is conducted through the thematic analysis process where the importance of the working capital business sector will be identified. Segregation of a particular dataset into defined and smaller themes makes it easier to analyze and interpret. These integrations will help in creating a structure through the flexibility of the research team assessment process (Asif, Aslam & Abid, 2021). The generation of themes is done through the data collection process in this research study. First, various academic sources and information have been considered to collect the data on working capital and Working capital management system in businesses. Significant codes have been developed for the purpose of gathering information. These codes are referred to represent a smaller version of the entire theme that will provide information touchpoints. The multiple codes are combined to develop a distinct theme. The codes and their relevant themes are stated below.
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Codes |
Themes |
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· Working Capital · Management · Business · Profitability · Liquidity |
Role of Working Capital in business profitability |
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· Efficiency · Operations · Business Performance · Importance · Working Capital management |
Importance of Working capital in business operational efficiency |
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· Expenses · Current Assets · Current liabilities · Funding |
Effective management of working capital within a business context |
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· Working Capital · Financial performance · Sustainability · growth |
Working Capital influences on business growth and sustainability |
The working capital of a business refers to the excess surplus of current assets over all the current liabilities such as the cash in hand, debtors, stock and so on. The profitability and liquidity of the business are directly impacted and affected by the Working Capital Management of the company (Maramis et al., 2019). Along with the increase in the working capital, the liquidity will also increase. Current Assets offer a very low rate of return that increases the profitability through the increase in the Working Capital once the business falls (Bisht, 2021). The working capital is generally used for short term expenses which are due in a year. The role of working capital management in business profitability is done through the current assets and current liabilities management on a day to day basis. The more operations of the business will run smoothly, the better profitability can be gathered.
Working Capital serves as the metric which measures the efficiency of the company in its operations and its financial stability in the short term forum. The importance of working capital lies with the working capital ratio where the current assets and the current liabilities of the company are considered (Cutajar, 2020). Here the cash flow of the company indicates the adequate management of short term expenses and debts. The appropriate understanding of the working capital importance is done by considering the business performance through the evaluation of working capital management and the financial stability of the company. Here, appropriate operational efficiency is guaranteed while the company manages its current assets to cover the liabilities in the day to day business (Chalmers, Sensini & Shan, 2020).
The effective management of working capital in businesses and companies can be done through several strategies. Here, the importance of effective management in the business working capital is important for improving the profitability, liquidity and success rate of the company (Kayani, De Silva & Gan, 2019). Managing procurement and inventory adequately will help in creating an efficient working capital within the organization. Here, customer relations can be improved and managed properly so that the stocks can be monitored properly with the help of procurement and inventory management (Gonçalves, T., Gaio, C., & Robles, 2018). Payment to vendors on time will help in managing the procurement and inventory management system through this the timely payments and the vendor dockets can be approved properly.
Theme 4: Working Capital influences on business growth and sustainability
In any manufacturing firm, the influential elements are subjected to working capital as they influence the business’s growth and sustainability rate. Although there is no substantial proof that the Working Capital Management system directly impacts the growth and sustainability of the company but indirectly it influences the profitability and sustainability of the firm (Nastiti, Atahau & Supramono, 2019). Through the improvement and impact on profitability, growth and sustainability come in naturally for the business. Most of the businesses directly impact profitability and focuses on the financial performance and business performance of the company. Here, the profitability of the business results in the improved and sustainable growth of the company. In every business context growth and sustainability are the two most important criteria which are interrelated with profitability (Baker, Kumar & Singh, 2019). Working Capital Management system helps in improving and increasing the growth and sustainability of the company.
From the aforementioned discussion, it is clearly aligned that most of the companies are trying to establish an appropriate and efficient working capital management system to co-create and improve the sustainability and growth rate goals of the companies. Here, it has been considered that the profitability of the companies are justifying the use of an appropriate working capital management system. With changes in time and invention, the requirements of business success have also been changed along with the landscape of using tools and techniques. In this situation, the positive relationship of Working Capital has become a necessity for businesses to achieve success (Zalaghi, Godini & Mansouri, 2019). The profitability is continuously impacting the business reputation and its smooth operational flow. The indication is towards the firm and its managers along with their utilization of the Working Capital Management System.
The importance of Working Capital is helping with the operational efficiency in every industry. The improvement of operations is done through implementing appropriate financial stability within its operational activities. In this system, the operational activities are completed with utmost financial stability and it is strengthening the course of the Working capital management system throughout the financial period. According to the cash conversion period, it is also considered that the shareholders are trying to pry for the best possible options. With improved WCM, the Cash Conversion Cycle will decrease and it will help to increase profitability and operational efficiency (Panda, Nanda & Panda, 2021).
In the case of an effective management system of the working capital within any business context, it is important that the inventory reduction is a must virus the increase in inventory turnover is another important facet of the entire context. With the primary objective of managing the working capital properly, it is important that the vendors are being paid on time so that the management of debtors is done effectively. The procurement system needs to be maintained properly in order to avoid any unnecessary fuss over the payment system. With the ability of technological advancement converting electronic payables and receivables is a significant criterion that needs to be fulfilled. By making the electronic peoples and receivables the manual processing will avoid any intentional or unintentional abruptions which might become an imperative inefficiency within the business context (Boisjoly, Conine Jr & McDonald IV, 2020).
Finally, from the inter understanding, it can be identified that the working capital is continuously influencing the business sustainability and growth because it is directly influencing the profitability of the business. According to the importance, the working capital helps in better a decision making criterion which simultaneously impacts the availability of funds and the value addition to the business firm. The working capital management system helps to influence the work culture of the entity so that the short term profits are continuously available for the company’s operations through which it will be conducting stay to the businesses. It can be identified that the entire process of working capital management system helps with the smooth and sound business operations within the organisational structure through continuous available and appropriate completion of operational activities.
Throughout the entire research study, it can be identified that the working capital is important to be calculated so that the working capital ratio can be identified and the short term financial health of the business can be charged. Analysis of the short term financial health of the company is based on the formula of working capital which is stated to be Current assets / Current liabilities = Working capital ratio. In the below figure it can be easily seen that the current assets have been combined and their summation is calculated following the summation of current liabilities. The working capital is generated after subtracting the total current liabilities from the total current assets. The effective working capital analysis helps in identifying the short term assets and the short term liabilities through which the funds will be gathered at the end of a significant financial period.
Figure 1: Application of Working Capital
(Source: Created by Author)
Conclusion
From the entire analysis, it can be identified that the working capital plays an essential role in increasing the efficiency of the company and its operations. The profitability and growth along with sustainability come naturally after implementing the efficient working capital management system which generally focuses on the short term financial health through which it generates short term profitabilities. With the help of a short term financial management system, long-term profitability also becomes a natural outcome throughout the financial period. Working capital helps with the outstanding management of long-term and permanent requirements of the working capital system. Without the appropriate temptation, the working capital management will fail to understand the simple requirement of the business that needs to be managed. In a business’s Working Capital Management system can never be underestimated because its objective is the liquidity of the business enhances the operating efficiency and decreases implicit and explicit interest costs. Overall the profitability of the business increases due to the official effective working capital management system. The efficiency of the business is based on making the payments on time strategically, early managing the inventory and separating the personal and business expenses through which the determination of profits growth and sustainability is guaranteed.
References
Anton, S. G., & Afloarei Nucu, A. E. (2020). The impact of working capital management on firm profitability: Empirical evidence from the Polish listed firms. Journal of risk and financial management, 14(1), 9. DOI: https://doi.org/10.3390/jrfm14010009
Asif, R., Aslam, R., & Abid, H. (2021). An Investigation into the Impact of Power Outage on Working Capital Management in Textile Sector of Pakistan. Journal of Accounting and Finance in Emerging Economies, 7(4). DOI: https://doi.org/10.26710/jafee.v7i3.1962
Baker, H. K., Kumar, S., & Singh, H. P. (2019). Working capital management: evidence from Indian SMEs. Small Enterprise Research, 26(2), 143-163. DOI: https://doi.org/10.1080/13215906.2019.1624386
Bisht, M. (2021). Impact of Working Capital Management on Business Profitability (Doctoral dissertation, Dublin, National College of Ireland). DOI: https://norma.ncirl.ie/id/eprint/5408
Boisjoly, R. P., Conine Jr, T. E., & McDonald IV, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1-8. DOI: https://doi.org/10.1016/j.jbusres.2019.09.025
Chalmers, D. K., Sensini, L., & Shan, A. (2020). Working capital management (wcm) and performance of SMEs: Evidence from India. International Journal of Business and Social Science, 11(7), 57-63. DOI: 10.30845/ijbss.v11n7p7
Cutajar, M. (2020). Working capital management of a food manufacturing and retail group: a case study (Master’s thesis, University of Malta). DOI: https://www.um.edu.mt/library/oar/handle/123456789/65682
Gonçalves, T., Gaio, C., & Robles, F. (2018). The impact of Working Capital Management on firm profitability in different economic cycles: Evidence from the United Kingdom. Economics and Business Letters, 7(2), 70-75. ISSN-e 2254-4380
Jana, D. (2018). Impact of working capital management on profitability of the selected listed FMCG companies in India. International Research Journal of Business Studies, 11(1), 21-30. DOI: https://doi.org/10.21632/irjbs
Jasmani, J. (2019). The Effect of Liquidity and Working Capital Turnover on Profitability at PT. Sumber Cipta Multiniaga, South Jakarta. PINISI Discretion Review, 3(1), 29-38. DOI: https://doi.org/10.26858/pdr.v3i1.13269
Kayani, U. N., De Silva, T. A., & Gan, C. (2019). A systematic literature review on working capital management–an identification of new avenues. Qualitative Research in Financial Markets. DOI: https://dx.doi.org/10.1108/QRFM-05-2018-0062
Laghari, F., & Chengang, Y. (2019). Investment in working capital and financial constraints: Empirical evidence on corporate performance. International Journal of Managerial Finance. DOI: https://doi.org/10.1108/IJMF-10-2017-0236
Maramis, J. B., Lengkong, V. P., Sepang, J. L., & Tampenawas, J. L. (2019). PKM Analysis of Working Capital and Return to Main Livestock Business B2 Likupang District, Minahasa Utara. Journal of the Community Development in Asia (JCDA), 2(1), 1-5. DOI: https://doi.org/10.32535/jcda.v2i1.349
Nastiti, P. K. Y., Atahau, A. D. R., & Supramono, S. (2019). Working capital management and its influence on profitability and sustainable growth. Business: Theory and Practice, 20, 61-68. DOI: https://doi.org/10.1080/13215906.2019.1624386
Panda, A. K., Nanda, S., & Panda, P. (2021). Working capital management, macroeconomic impacts, and firm profitability: evidence from Indian SMEs. Business Perspectives and Research, 9(1), 144-158. DOI: https://doi.org/10.1177%2F2278533720923513
Zalaghi, H., Godini, M., & Mansouri, K. (2019). The moderating role of firms characteristics on the relationship between working capital management and financial performance. Advances in Mathematical Finance and Applications, 4(1), 71-88. DOI: 10.22034/AMFA.2019.581878.1158
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