Working Capital Management Case Study

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CHAPTER ONE 1. INTRODUCTION 1.1 Background of the study Corporate financial management primarily deals with three core areas that have a bearing on a firm’s financial goals. As postulated by Firer et al (2008), these three core areas of corporate finance are as follows: (1) capital budgeting, which encapsulates the process of planning and managing a firm’s long-term investments; (2), capital structure, which outlines the specific mixture of long-term debt and equity maintained by a firm and last, (3) working capital management, which deals with management of a firm’s short-term assets and liabilities. One of the most important factors for a firm to consider is the management of working capital, which is related to short term financing and investment…show more content…
Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working capital is also known as revolving or circulating capital or short-term capital, Deloof (2003). When a business entity takes the decisions regarding its current assets and current liabilities it can be termed as working capital management. The management of working capital can be defined as an accounting approach that emphasize on maintaining proper levels of both current assets and current liabilities. Working capital management provides enough cash to meet the short-term obligations of a firm, Raheman and Nasr…show more content…
Working capital is a vital part of business investment which is essential for continuous business operations. It is required by a firm to maintain its liquidity, solvency and profitability, Lazaridis and Tryfonidis (2006). Working Capital management explicitly impacts both the profitability and level of desired liquidity of a business. Hence, it may have both negative and positive impact on firm’s profitability, which in turn, has negative and positive impact on the shareholders’ wealth, Raheman and Nasr (2007). If a firm invests heavily on working capital i.e. more than its needs, the profits which can be generated by investing these resources in fixed or long term assets diminishes. Moreover the firm have to endure the cost of storing inventory for longer periods as well as the cost of handling excessive inventory, Arnold (2008). It is therefore a critical issue to know and understand the effects of working capital management and its influence on firm’s profitability. Indeed, a lot of research have been conducted in different countries to show the impacts of working capital components on firms Profitability. However, there are a few studies with reference to Ethiopia on working capital management and firm profitability especially in the manufacturing sector. By looking on the importance of working capital management, the researcher need for a research on the impacts of firms performance. Accordingly, the general objective

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