1.

1 INTRODUCTION TO FINANCIAL MANAGEMENT:

DEFINITION, AIMS, SCOPE AND FUNCTIONS
Financial Management is a related aspect of finance function. In the present business
administration financial management is an important branch. Nobody will think over aboutbusiness activity without finance implication.
Financial management includes adoption of general management principles for financial
implementation. The following may be said as the related aspects of financial management
raising of funds, using of these funds profitably, planning of future activities, controlling of
present implementations and future developments with the help of financial accounting, cost
accounting, budgeting and statistics.
It acts as guidance where more opportunities for investment is available. Financial
management is useful as a tool for allotment of resources to various projects depending on
their importance and repayment capacity.

DEFINITION:
James Van Morne defines Financial Management as follows:
Planning is an inextricable dimension of financial management. The term financial
management connotes that funds flows are directed according to some plan. Financial
managements can be said a good guide for allotment of future resources of an organization.
Preparing and implementation of some plans can be said as financial management. In other
words, collection of funds and their effective utilization for efficient running of
and organization is called financial management. Financial management has influence on all
activities of an organization. Hence it can be said as an important one.
Its main responsibility is to complete the finance function successfully. It also has relations
with other business functions. All business decisions also have financial implications.
According to Raymond Chambers, Management of finance function is the financial
management.
However, financial management shall not be considered as the profit extracting device. If
finance is properly utilized through plans, they lead to profits. Besides, without profits there
wont be finance generation. All these are facts. But this is not complete.
The implication of financial management is not only attaining efficiency and getting profits
but also maximizing the value of the firm. It facilitates to protect the interests of various
classes of people related to the firm.

Hence, managing a firm for profit maximization is not the meaning for financial
management. Financial management is applicable to all kinds of organizations. According to
Raymond Chambers, the word financial management is applicable to all kinds of firms
irrespective of their objectives.

AIMS OF FINANCIAL MANAGEMENT:

The aims of financial management should be useful to the firms proprietors, managers,
employees and consumers. For this purpose the only way is maximization of firms value.
The following aspects have place in maximizing firms value:
1. Rise in profits:
If the firm wants to maximize its value, it should increase its profits and revenues. For this
purpose increase of sales volume or other activities can be taken up. It is the general feature
of any firm to increase profits by proper utilization of all opportunities and plans.
Theoretically, firm gets maximum profits if it is under equilibrium. At that stage the average
cost is minimal and the marginal cost and the marginal revenues are equal. Here, we cant say
the sales because there must be suitable market for the increased sales. Further, the above
costs must also be controlled.
2. Reduction in cost:
Capital and equity funds are utilized for production. So all types of steps should be taken to
reduce firms cost of capital.
3. Sources of funds:
It should be decided by keeping in view the value of the firm to collect funds through issue of
shares or debentures.
4. Reduce risks:
There wont be profits without risk. But for this reason if more risk is taken, it may become
danger to the existence of the firm. Hence risk should be reduced to minimum level.
5. Long run value:
It should be the feature of financial management to increase the long-run value of the firm. To
earn more profits in short time, some firms may do the activities like releasing of low quality
goods, neglecting the interests of consumers and employees.
These trials may give good results in the short run. But for increasing the value of the firm in
the long run, avoiding; such activities are more essential.

SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT:

The scope of financial management includes three groups. First relating to finance and
cash, second rising of fund and their administration, third along with the activities of
rising funds, these are part and parcel of total management, Isra Salomon felt that in view of
funds utilization third group has wider scope.
It can be said that all activities done by a finance officer are under the purview of financial
management. But the activities of these officers change from firm to firm, it become difficult
to say the scope of finance. Financial management plays two main roles, one participating
in funds utilization and controlling productivity, two Identifying the requirements of funds
and selecting the sources for those funds. Liquidity, profitability and management are the
functions of financial management. Let us know very briefly about them.
1. Liquidity:
Liquidity can be ascertained through the three important considerations.
i) Forecasting of cash flow:
Cash inflows and outflows should be equalized for the purpose of liquidity.
ii) Rising of funds:
Finance manager should try to identify the requirements and increase of funds.
iii) Managing the flow of internal funds:
Liquidity at higher degree can be maintained by keeping accounts in many banks. Then there
will be no need to depend on external loans.
2. Profitability:
While ascertaining the profitability the following aspects should be taken into consideration:
i) Cost of control:
For the purpose of controlling costs, various activities of the firm should be analyzed through
proper cost accounting system,

ii) Pricing:
Pricing policy has great importance in deciding sales level in companys marketing. Pricing
policy should be evolved in such a way that the image of the firm should not be affected.
iii) Forecasting of future profits:

Often estimated profits should be ascertained and assessed to strengthen the firm and to
ascertain the profit levels.
iv) Measuring the cost of capital:
Each fund source has different cost of capital. As the profit of the firm is directly related to
cost of capital, each cost of capital should be measured.
3. Management:
It is the duty of the financial manager to keep the sources of the assets in maintaining the
business. Asset management plays an important role in financial management. Besides, the
financial manager should see that the required sources are available for smooth running of the
firm without any interruptions.
A business may fail without financial failures. Financial failures also lead to business failure.
Because of this peculiar condition the responsibility of financial management increased. It
can be divided into the management of long run funds and short run funds.
Long run management of funds relates to the development and extensive plans. Short run
management of funds relates to the total business cycle activities. It is also the responsibility
of financial management to coordinate different activities in the business. Thus, for the
success of any firm or organization financial management is said to be a must.

OBJECTIVES OF FINANCIAL MANAGEMENT:

Profit maximization occurs when marginal cost is equal to marginal revenue. This is the main
objective of Financial Management.
Wealth maximization means maximization of shareholders' wealth. It is an advanced goal
compared to profit maximization.
Survival of company is an important consideration when the financial manager makes any
financial decisions. One incorrect decision may lead company to be bankrupt.
Maintaining proper cash flow is a short run objective of financial management. It is necessary
for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent
etc. A good cash flow ensures the survival of company.
Minimization on capital cost in financial management can help operations gain more profit.

1.2 INTRODUCTION TO WORKING CAPITAL

MANAGEMENT-MEANING AND CONCEPT OF WORKING
CAPITAL
Meaning Of Working Capital
Business organization require adequate capital to establish business and operate their

activities. The total capital of a business can be classified as fixed capital and working capital.
Fixed capital is required for the purchase of fixed assets like building, land, machinery,
furniture etc. Fixed capital is invested for long period, therefore it is known as long-term
capital. Similarly, the capital, which is needed for investing in current assets, is called
working capital.
The capital which is needed for the regular operation of business is called working capital.
Working capital is also called circulating capital or revolving capital or short-term capital.
Working capital is used for regular business activities like for the purchase of raw materials,
for the payment of wages, payment of rent and of other expenses. Working capital is kept in
the form of cash, debtors, raw materials inventory, stock of finished goods, bills receivable
etc.

CONCEPT OF WORKING CAPITAL

Generally, there are two concepts of working capital i.e. gross concept and net concept.
1.Gross Concept Of Working Capital
According to gross concept, working capital refers to all the current assets and represents the
amount of funds invested in current assets. Thus, gross working capital is the capital invested
in current assets. Current assets are those assets which can be converted into cash within the
short-time period.
Gross Working Capital = Total current assets
In this way, gross working capital refers to the firm's investment in current assets. Gross
working capital represents total of current assets which includes cash in hand, cash at bank,
inventory, prepaid expenses, bills receivable etc.
2.Net Concept Of Working Capital
According to the net concept, working capital is the excess of current assets over current
liabilities. In other words, the difference between current assets and current liabilities is called
net working capital.
Net Working Capital = Current Assets - Current liabilities
In this way, net working capital is the difference of current assets and current liabilities.
Need And Importance Of Working Capital
Working capital is the life blood and nerve center of business. Working capital is very
essential to maintain smooth running of a business. No business can run successfully without
an adequate amount of working capital. The main advantages or importance of working
capital are as follows:
1. Strengthen The Solvency
Working capital helps to operate the business smoothly without any financial problem for
making the payment of short-term liabilities. Purchase of raw materials and payment of
salary, wages and overhead can be made without any delay. Adequate working capital helps
in maintaining solvency of the business by providing uninterrupted flow of production.
2. Enhance Goodwill
Sufficient working capital enables a business concern to make prompt payments and hence

helps in creating and maintaining goodwill. Goodwill is enhanced because all current
liabilities and operating expenses are paid on time.
3. Easy Obtaining Loan
A firm having adequate working capital, high solvency and good credit rating can arrange
loans from banks and financial institutions in easy and favorable terms.
4. Regular Supply Of Raw Material
Quick payment of credit purchase of raw materials ensures the regular supply of raw
materials fro suppliers. Suppliers are satisfied by the payment on time. It ensures regular
supply of raw materials and continuous production.
5. Smooth Business Operation
Working capital is really a life blood of any business organization which maintains the firm in
well condition. Any day to day financial requirement can be met without any shortage of
fund. All expenses and current liabilities are paid on time.
6. Ability To Face Crisis
Adequate working capital enables a firm to face business crisis in emergencies such as
depression.

CLASSIFICATION OF WORKING CAPITAL

Working capital can be classified into the following types:
1. Permanent Or Fixed Working Capital
Permanent working capital represents the current assets required on continuing basis over the
entire year. A fixed amount of current assets are required to operate the business.
Every business organization must maintain minimum current assets to ensure effective
utilization of fixed facilities and for maintaining the circulating of current assets. Thus,
minimum level of current assets is called is called permanent or fixed working capital.
Permanent working capital or fixed working capital consists of minimum stock, minimum
cash and bank balance and minimum other current assets. Generally, permanent working
capital is financed by long-term sources of funds.
2. Temporary Or Variable Working Capital
Temporary working capital represents additional current assets required during the operation
of the year. It is the extra working capital needed to support the changing production and
sales activities of the firm. Any excess amount of working capital over the permanent
working capital is called temporary working capital. It is required to meet the seasonal
demands and contingencies. Temporary working capital is fluctuating, sometimes decreasing
and sometimes increasing. Generally, temporary working capital is financed from short term
sources of funds.

FACTORS AFFECTING WORKING CAPITAL OR

DETERMINANTS OF WORKING CAPITAL
Requirements Of working capital depend upon various factors such as nature of business, size
of business, the flow of business activities. However, small organization relatively needs
lesser working capital than the big business organization. Following are the factors which
affect the working capital of a firm:
1. Size Of Business
Working capital requirement of a firm is directly influenced by the size of its business
operation. Big business organizations require more working capital than the small business
organization. Therefore, the size of organization is one of the major determinants of working
capital.
2. Nature Of Business
Working capital requirement depends upon the nature of business carried by the firm.
Normally, manufacturing industries and trading organizations need more working capital than
in the service business organizations. A service sector does not require any amount of stock of
goods. In service enterprises, there are less credit transactions. But in the manufacturing or
trading firm, credit sales and advance related transactions are in large amount. So, they need
more working capital.
3. Storage Time Or Processing Period
Time needed for keeping the stock in store is called storage period. The amount of working
capital is influenced by the storage period. If storage period is high, a firm should keep more
quantity of goods in store and hence requires more working capital. Similarly, if the
processing time is more, then more stock of goods must be held in store as work-in-progress.
4. Credit Period
Credit period allowed to customers is also one of the major factors which influence the
requirement of working capital. Longer credit period requires more investment in debtors and
hence more working capital is needed .But, the firm which allows less credit period to
customers needs less working capital.
5. Seasonal Requirement
In certain business, raw material is not available throughout the year. Such business
organizations have to buy raw material in bulk during the season to ensure an uninterrupted
flow and process them during the entire year. Thus, a huge amount is blocked in the form of
raw material inventories which gives rise to more working capital requirements.
6. Potential Growth Or Expansion Of Business
If the business is to be extended in future, more working capital is required. More amount of
working capital is required to meet the expansion need of business.
7. Changes In Price Level
Change in price level also affects the working capital requirements. Generally, the rise in

price will require the firm to maintain large amount of working capital as more funds will be
required to maintain the sale level of current assets.

8. Dividend Policy
The dividend policy of the firm is an important determinant of working capital. The need for
working capital can be met with the retained earning. If a firm retains more profit and
distributes lower amount of dividend, it needs less working capital.
9. Access To Money Market
If a firm has good access to capital market, it can raise loan from bank and financial
institutions. It results in minimization of need of working capital.
10. Working Capital Cycle
When the working capital cycle of a firm is long, it will require larger amount of working
capital. But, if working capital cycle is short, it will need less working capital.
11. Operating Efficiency
The operating efficiency of a firm also affects the firm's need of working capital. The
operating efficiency of the firm results in optimum utilization of assets. The optimum
utilization of assets in turn results in more fund release for working capital.

REVIEW OF LITERATURE

1.AN ANALYSIS OF WORKING CAPITAL MANAGEMENT RESULTS ACROSS

INDUSTRIES BY GREG FILBECK AND THOMAS M. KRUEGER

The authors scrutinized that the firms are able to reduce financing costs and/or increase the
funds available for expansion by minimizing the amount of funds tied up in current assets.
We provide insights into the performance of surveyed firms across key components of
working capital management by using the CFO magazines annual Working Capital
Management Survey. We discover that significant differences exist between industries in
working capital measures across time. In addition, we discover that these measures for
working capital change significantly within industries across time.

2.MANAGING WORKING CAPITAL CRISES A SYSTEM DYNAMICS

APPROACH BY M.K. KOLAY

The author explained the pros and cons of different strategies to be adopted to manage
and avoid working capital crisis situations in any organization. The working capital position
depends on many organizational parameters which are interrelated and interdependent, and
also vary over time. In such a situation, the use of a system dynamics approach has been
advocated to reflect the relevant dynamic causeandeffect relationships for the development
of appropriate longterm and shortterm strategies.

3.THE MECHANICS, DETERMINANTS AND MANAGEMENT OF WORKING

CAPITAL INVESTMENT BY G.H. LAWSON

The author examined that the multiperiod analysis of working capital investment is outlined.
An attempt is also made to clarify the objects of working capital management by reference to
wealth maximization orthodoxy.
4.AN OVERVIEW OF WORKING CAPITAL MANAGEMENT AND CORPORATE
FINANCING BY C.L. PASS AND R.H. PIKE

The author studied that over the past 40 years major theoretical developments have occurred
in the areas of longerterm investment and financial decision making. Many of these new
concepts and the related techniques are now being employed successfully in industrial
practice. By contrast, far less attention has been paid to the area of shortterm finance, in
particular that of working capital management. Such neglect might be acceptable were

working capital considerations of relatively little importance to the firm, but effective
working capital management has a crucial role to play in enhancing the profitability and
growth of the firm. Indeed, experience shows that inadequate planning and control of
working capital is one of the more common causes of business failure.

5.AN OPERATIONAL AUDIT OF WORKING CAPITAL MANAGEMENT BY

DALE L. FLESHER

The author studied that an operational audit (or valueformoney audit) is an organized search
for ways of improving efficiency and effectiveness. Although internal auditors have
traditionally performed most operational audits, such audits are also conducted by external
auditors and by company managers who wish to make selfaudits. Whoever performs an
operational audit, the objective is to assist managers in performing their daily functions more
effectively and economically. In effect, an operational audit is an early warning system for the
detection of potentially destructive problems. Traditionally, operational audits have been
conducted by means of a questionnaire interview of departmental employees. Virtually all
large companies conduct operational audits in their major production and service
departments. However, working capital management has often been ignored in these audits.
Perhaps this oversight is caused by the view that the controllership and treasury functions are
high level departments that are not susceptible to scrutiny by internal auditors. Alternatively,
the oversight may be attributable to the feeling that there is little standardization of duties
among controllers and treasurers in the management of working capital. Whatever the reason,
this article is intended to end the oversight. An operational audit can lead to better
management of working capital in the same way that it can lead to better management of a
production area. The questionnaire in Exhibit 1 can be used by internal auditors, or by a
treasurer who merely wants to perform a selfaudit of his or her own department's efficiency
and effectiveness.

6.INTELLECTUAL CAPITAL AND KNOWLEDGE MANAGEMENT

EFFECTIVENESS BY BERNARD MARR, OLIVER GUPTA, STEPHEN PIKE AND
GRAN ROOS

Building on the complexities of organizational knowledge creation the paper explores the
alignment of knowledge management practices with the epistemological beliefs of
individuals or groups in organizations. A panEuropean research project investigated
individuals philosophy about truth, knowledge and the optimum approach of knowledge
creation. These individual viewpoints and requirements are then contrasted with the
knowledge management practices implemented in organizations. The results highlight
significant misalignment between knowledge management requirements in epistemological

terms and individuals perception of organizational knowledge management activities. The

paper claims these differences lie at the heart of problems companies experience with
extracting value from knowledge management initiatives. The paper suggests ways of
identifying and evaluating resource transformations in organizations, in order better to
understand and manage knowledge creation to grow the intellectual capital of organizations.

7.MANAGEMENT OF WORKING CAPITAL: A NEGLECTED SUBJECT BY

CHRISTOPHER PASS AND RICHARD PIKE

Economic recessions have severely stretched the financial resources of many businesses. One
result has been to focus attention on the management of working capital in companies that
have often had to remain solvent by shrinking.

8.WORKING CAPITAL MANAGEMENT AND THE MANAGEMENT OF FOREIGN

EXCHANGE RISK BY KERRY COOPER

As is true for all areas of financial management, working capital management is more
complex for the multinational corporation (MNC) than for firms engaged in only domestic
operations. Such incremental complexity is due to a number of reasons related to the effects
of operating in diverse economic and political climates and tax jurisdictions. This article is
concerned with selected aspects of how foreign exchange riskthe potential impact on a
MNC's profitability, net cash flows, and market value of a change in exchange ratesmay
affect working capital management.

9.EXPLORING INTELLECTUAL CAPITAL MANAGEMENT IN SMES: AN INDEPTH ITALIAN CASE STUDY BY GIUSEPPE MARZO AND ELENA SCARPINO

The purpose of this paper is to analyze intellectual capital (IC) in SMEs. In particular two
research questions are posed: how SMEs acquire or develop knowledge and intangible
resources; and how they manage and exploit IC.
An in-depth case study of an Italian SME operating in the automobile industry is carried out
in order to answer the two research questions.
The case study evidences the impossibility to sharply divide all of the knowledge-related
elements of a firm into the three generally accepted categories of human, organisational
(structural) and relational capital. The analysis of IC as a set of stock of resources is

important but really partial due to the fact that IC and knowledge continuously change. In this
light, the focus on activities and processes help in understating how the firm manages IC. In
the studied SME, formal and informal knowledge coexist but in different areas of the firm.
Again, the relationships with external stakeholders, suppliers and clients especially, are the
source for improving IC. The case study also supports the important role that dialogue and
familiarity play in knowledge management. However the focus of management is not
knowledge per se, but the solution to problems the firm must deal with, IC and knowledge
being just one of the issues to be considered in order to solve problems.
The paper is useful since it addresses the management of IC in SMEs which is a topic underresearched with respect to the economic importance of SMEs. The conclusions of the work,
emerging from an individual case study analysis, cannot be generalised. However, they offer
support for other studies findings and highlight some specificities of the way SMEs manage
IC.
The paper explores the characteristics of IC management in SME in order to contribute
towards the differentiation of the view of IC in relation to the size of the firm. Approaches
originally developed for larger firms fail to consider SMEs characteristics, which indeed are
not smaller large firms; therefore, it is in general impossible to think of SME management
systems as simpler or smaller than those adopted by large firms. The key point is in fact that
SMEs (at least the one here analyzed) have management systems which are ontologically
different.
Besides the relevant role of SMEs in economy, very few papers have been published on the
way IC is developed and managed in SMEs. A gap therefore exists between the economic
importance of SME and the attention IC research has given to them, which calls for more
research on this area. The paper is a step forward on the way of reducing that gap, since it
provides a case study on knowledge and IC management within an Italian SME. Finally, the
analysis reinforces similar results of other studies adopting a dynamic perspective for the
analysis of IC, which found IC management in SMEs to be more based on informal systems.

10.ASSESSMENT OF WORKING CAPITAL REQUIREMENTS BY FUZZY SET

THEORY BY VELLANKI S.S. KUMAR, AWAD S. HANNA AND TERESA ADAMS

The systematic assessment of working capital requirement in construction projects deals with
the analysis of various quantitative and qualitative factors in which information is subjective
and based on uncertainty. There exists an inherent difficulty in the classical approach to
evaluate the impact of qualitative factors for the assessment of working capital requirement.
This paper presents a methodology to incorporate linguistic variables into workable
mathematical propositions for the assessment of working capital using fuzzy set theory. This
article takes into consideration the uncertainty associated with many of the project resource
variables and these are reflected satisfactorily in the working capital computations. A case

study illustrates the application of the fuzzy set approach. The results of the case study
demonstrate the superiority of the fuzzy set approach to classical methods in the assessment
of realistic working capital requirements for construction projects.

11.DEFINED STRATEGIES FOR FINANCIAL WORKING CAPITAL

MANAGEMENT BY ANNA-MARIA TALONPOIKA , TIMO KRRI , MIIA
PIRTTIL , SARI MONTO
The author has examined to develop strategies for financial working capital management and
to present previous literature on financial working capital management and its measures.
Qualitative comparative analysis is used to formulate the strategies, and the variables in the
analysis have been selected from previous literature. Empirical data consists of 91 companies
listed in the Helsinki Stock Exchange during 2008-2012.The results indicate 11 possible
strategies for financial working capital management which all aim at increasing financial
working capital. There are suitable strategies for all companies independent from their
profitability, capital intensity or working capital requirements. The presented strategies have
been created theoretically and have not been tested in companies, which could be done in
future research. This study has three contributions. First, previous literature on financial
working capital management is reviewed. Second, a novel measure for financial working
capital is developed. Third, strategies for financial working capital management are
presented.

12.WORKING CAPITAL MANAGEMENT: EVIDENCE FROM NORWAY BY

HAKIM LYNGSTADAAS AND TERJE BERG
The purpose of this paper is to provide empirical evidence of whether working capital
management (WCM) has an effect on the profitability of small- and medium-sized
Norwegian firms. The data comprise 21,075 Norwegian small- and medium-sized enterprises
and 84,300 observations made between 2010 and 2013. Panel data regressions were applied
with fixed effects and a two-stage least squares analysis was employed to control for
endogeneity. The results indicate that reducing cash conversion cycle will increase
profitability. Even though endogeneity may exist, this does not affect the results from the
previous analysis. Similar results are also obtained when industry-specific effects are
controlled for, supporting the robustness of the results. The relevance of quadratic
dependencies of the profitability on independent variables was also identified and suggests a
decreasing trend of return on assets with increasing values of the WCMs characteristic
variables. Drawing on similar studies, this study confirms that WCM is relevant for firms
profitability. The practice of aggressive working capital policy in Norwegian firms is
confirmed by the results of this study. This study contributes to the current research on the
relationship between WCM and profitability by using a large dataset to add further robustness
to results, and thus verifying whether or not the results in previous studies may be confirmed
or not. Moreover, this is the first published study about this relationship among Norwegian

firms in different industries, thus filling a gap in similar research conducted in other
European countries.

13.WHY SOME SMALL BUSINESSES IGNORE AUSTERE WORKING CAPITAL

MANAGEMENT ROUTINES BY LAURA ASERU OROBIA, KESSEVEN PADACHI
AND JOHN C. MUNENE
The purpose of this paper is to investigate factors explaining take-up rate of working capital
management routines in small-scale businesses. A cross-sectional survey research was
employed using a sample of 450 small-scale businesses in the central business district of
Kampala, Uganda. Common working capital management routines and activity rates were
analyzed using descriptive statistics. While binary logistic regression analysis was conducted
to discriminate between businesses that engage in working capital management frequently
and those that do so less frequently. The results show that on average, the most frequently
performed routines relate to safeguarding cash and inventory, and credit risk assessment.
Payment management routines are least performed. Second, business size, perceived
usefulness and attitude explain high take-up rate of working capital management routines in
small-scale businesses. Business age, level of education and financial management training
are inconsequential in determining the likelihood to undertake working capital management
frequently. Paucity of studies world over on the input perspective of working capital
management limited comparison of the findings with previous research. Future studies should
be conducted to confirm the results. The study findings imply that policy makers should
develop work-based training programs that take into account the business size effect. This
study contributes to existing working capital management literature by explaining activity
rate in a developing country perspective.

14.WORKING CAPITAL MANAGEMENT AND SMES PROFITABILITY:

PORTUGUESE EVIDENCE BY MARIA AMLIA PAIS AND PAULO MIGUEL
GAMA
The purpose of this paper is to provide empirical evidence on the effects of working capital
management on the profitability of small and medium-sized Portuguese firms. Panel
regressions (fixed effects) and instrumental variables were used to model a sample of 6,063
Portuguese small and medium-sized firms (SMEs), covering the time period 2002-2009.
Also, industry-demeaned values and industry-specific dummy variables allow for industryspecific effects robustness tests. Results indicate that a reduction in the inventories held and
in the number of days that firms take to settle their commercial liabilities and to collect
payments from its customers are associated to higher corporate profitability. Similar results
are obtained when industry-specific effects are controlled, supporting the robustness of the
previous analysis. The relevance of quadratic dependences of the profitability on some
variables was also identified and suggests a decreasing trend of return on assets with
increasing values of the working capital management characteristic variables. The practice of

more aggressive working capital management policies increase firms profitability. Moreover,
the importance of a good practice in working capital management is stressed by the evidence
suggesting the existence of an optimal level for the working capital components. The
consensus that SMEs play a crucial role in the development of the national economy, the lack
of published industry wide studies of this type for the case of Portugal, justifies the
importance of the present study.

15.WORKING CAPITAL MANAGEMENT AND FIRM PROFITABILITY: A METAANALYSIS HARSH PRATAP SINGH, SATISH KUMAR AND SISIRA COLOMBAGE
The main objective of this study is to quantitatively aggregate the findings of prior literature
on the effect of Working capital management (WCM) on corporate profitability using the
meta-analysis technique developed by Hunter et al. (1982). A set of 46 research articles that
directly studied the relationship between WCM and profitability was analyzed for the
purpose. In addition to overall meta-analysis, a detailed subgroup study was also conducted
to test whether the differences in results are due to moderating effects related to different
profitability proxies, economic development of a specific country, and size of the firms under
study. The findings of this meta-analysis confirm that WCM is negatively associated with
profitability, which means an aggressive WCM policy leads to higher profitability. Overall,
and in all the subgroup studies, the cash conversion cycle (CCC) was found to be negatively
associated with profitability. Unlike narrative literature review papers, this meta analysis
provides quantitatively aggregate evidence on the relationship of WCM and firms
profitability. To the best of authors knowledge no previous meta-analysis paper is published
on the topic.

16.WORKING CAPITAL MANAGEMENT: AN URGENT NEED TO REFOCUS BY

MAYNARD E. RAFUSE
The author argues that attempts to improve working capital by delaying payment to creditors
is counterproductive to individuals and to the economy as a whole. Claims that altering
debtor and creditor levels for individual tiers within a value system will rarely produce any
net benefit. Proposes that stock reduction generates systemwide financial improvements and
other important benefits. Urges those organizations seeking concentrated working capital
reduction strategies to focus on stock management strategies based on lean supplychain
techniques.

17.EFFECTS OF WORKING CAPITAL MANAGEMENT ON SME PROFITABILITY

BY PEDRO JUAN GARCATERUEL AND PEDRO MARTNEZSOLANO
The object of the research presented in this paper is to provide empirical evidence on the
effects of working capital management on the profitability of a sample of small and medium

sized Spanish firms. The authors have collected a panel of 8,872 small to mediumsized
enterprises (SMEs) covering the period 19962002. The authors tested the effects of working
capital management on SME profitability using the panel data methodology. The results,
which are robust to the presence of endogeneity, demonstrate that managers can create value
by reducing their inventories and the number of days for which their accounts are
outstanding. Moreover, shortening the cash conversion cycle also improves the firm's
profitability. This work contributes to the literature in two ways. First, no previous such
evidence exists for the case of SMEs. Second, unlike previous studies, in the current work
robust test have been conducted for the possible presence of endogeneity problems. The aim
is to ensure that the relationships found in the analysis carried out are due to the effects of the
cash conversion cycle on corporate profitability and not vice versa.

18.HOW DOES WORKING CAPITAL MANAGEMENT AFFECT THE

PROFITABILITY OF VIETNAMESE SMALL- AND MEDIUM-SIZED
ENTERPRISES? BY HIEN TRAN, MALCOLM ABBOTT AND CHEE JIN YAP
Well-designed and implemented working capital management (WCM) will encourage
positive returns for a business and establish the firms value, while ineffective management
will undoubtedly lead to failure of the enterprise. The paper aims to discuss these issues. In
business, fixed capital and working capital are the two main forms of capital used. The
current assets used in the business as working capital for day-to-day operations include raw
materials, work in progress, finished goods, bills receivable, cash and bank balance. This
paper analyses the relationship between WCM and profitability in Vietnamese small- and
medium-sized enterprises (SMEs) after integration into the global economy. The results
suggest that SME owner-managers can increase their firms profitability by reducing the
number of days of accounts receivable, accounts inventories and accounts payable to an
optimal minimum. In addition, a robustness check of this study indicates that high
profitability will be achieved, with an optimal level of working capital investment in accounts
inventories, accounts receivable and accounts payable. No work of this sort has been applied
to Vietnamese circumstances. It is also rare in SE Asia more generally.

19.PROFITABLE WORKING CAPITAL MANAGEMENT IN INDUSTRIAL

MAINTENANCE COMPANIES BY SALLA MARTTONEN ,SARI MONTO AND
TIMO KRRI
The purpose of this paper is to analyze the impact of working capital management on
profitability. This connection is further studied in industrial maintenance service companies.
Analytical modeling has been used as the research method. The empirical analyses have been
made on the basis of financial statements. The paper presents an analytical flexible asset

management (FAM) model, which reveals a significant negative correlation between the
cycle times of operational working capital and the return on investment. The importance of
working capital management is emphasized in the industrial maintenance service sector,
because of light fixed assets and good profitability. There are some mathematical limitations
in the applicability of the model introduced in this paper. These limitations should be
addressed in further research. The FAM model can be utilized as a tool in decision making in
firms, both in the short term and in the long term. On the basis of this paper, the decision
makers can consider how important working capital management is in their industry. In the
industrial maintenance service business, more attention should be paid to active management
of working capital. The FAM model is a new decision-making tool. The paper also
contributes to the unexplored perspective of industrial maintenance companies. The paper is
valuable to service companies, as the research of working capital management has mostly
focused on manufacturing industries.

20.THE IMPACT OF CORPORATE GOVERNANCE ON WORKING CAPITAL

MANAGEMENT EFFICIENCY OF AMERICAN MANUFACTURING FIRMS BY
AMARJIT S. GILL AND NAHUM BIGER
The purpose of this study is to investigate the impact of corporate governance on working
capital management efficiency. This study also seeks to extend the findings of Gill and Shah.
This study applied a corelational research design. A sample was selected of 180 American
manufacturing firms listed on the New York Stock Exchange (NYSE) for a period of 3 years
(from 20092011). The findings of this study indicate that corporate governance plays some
role in improving the efficiency of working capital management. This is a corelational study
that investigated the association between corporate governance and working capital
management efficiency. There is not necessarily a causal relationship between the two,
although the paper provides some conjectures to the findings. The findings of this study may
only be generalized to firms similar to those that were included in this research. This study
contributes to the literature on the factors that improve the efficiency of working capital
management, and in particular on the association between several features of corporate
governance and the efficiency of working capital management. The findings may be useful
for financial managers, investors, financial management consultants, and other stakeholders.

21.THE RELATIVE IMPORTANCE OF WORKING CAPITAL MANAGEMENT AND

ITS COMPONENTS TO SMES' PROFITABILITY BY VENANCIO TAURINGANA
AND GODFRED ADJAPONG AFRIFA
This paper aims to report the results of an investigation of the relative importance of working
capital management, measured by the cash conversion cycle (CCC), and its components
(inventory, accounts receivable and accounts payable) to the profitability of SMEs. The paper
employs panel data regression analysis and a questionnaire survey on a sample of 133
Alternative Investment Market (AIM) listed SMEs. The panel data analysis utilize financial

data for the period 2005 to 2009. The questionnaire survey results are based on 19 SMEs that
responded. Panel data analysis results show that the management of accounts payable (AP)
and accounts receivable (AR) is important for SMEs profitability. However, AP management
is relatively more important than AR management. Inventory (INV) and CCC management is
not important for SMEs profitability. Questionnaire results suggest that management of CCC
and all its components is perceived as important for SMEs profitability. In terms of relative
importance, AR management is most important, followed by AP, INV and CCC respectively.
The sample is limited to AIM listed SMEs, and therefore the findings cannot be generalized
to all companies. Overall the results imply that the SMEs need to concentrate their limited
resources on managing AR and AP in order to be more profitable. The study is the first to
investigate the relative importance of WCM and its components to SMEs profitability and
use both regression analysis and questionnaire survey.

22.WORKING CAPITAL AND FIRM VALUE IN AN EMERGING MARKET BY

SHAISTA WASIUZZAMAN
The purpose of this paper is to examine the relationship between working capital efficiency
and firm value and the influence of financing constraints on this relationship. Data from 192
firms spanning a period of ten years (1999-2008) are used for this purpose and analyzed
using the ordinary least squares regression technique. The study finds that improvements in
working capital efficiency through reduction in working capital investment results in higher
firm value. However, this relationship is influenced by the financing constraints faced by a
firm. For financially constrained firms, working capital efficiency significantly increases firm
value but it is found to be insignificant for unconstrained firms. To the authors knowledge,
this is the first study on the value of working capital in Malaysia or in any emerging market.
Most studies on working capital valuation concentrate on developed countries and that too
are only a handful. Hence this study contributes to the scarce literature on the valuation of
working capital. This study also uses the model by Fama and French (1998) to evaluate the
relationship between working capital and firm value, which has hardly been used in studies
on working capital valuation.

23.DOES CORPORATE GOVERNANCE INFLUENCE THE EFFICIENCY OF

WORKING CAPITAL MANAGEMENT OF LISTED FIRMS: EVIDENCE FROM
GHANA BY VERA FIADOR
The purpose of this paper is to explore the relevance of corporate governance in the quest to
attain organizational efficiency in the working capital management of listed firms. There is a
consensus that efficiency of working capital management is vital for firms growth and
survival, yet another consensus is the role of corporate governance in limiting managerial
self-serving behavior and ultimately improving firms efficiency. If the foregoing views hold,
then the empirical question Is corporate governance important for firm-level working capital
efficiency? becomes important. Panel data on 13 non-financial firms listed on the Ghana

Stock Exchange were employed in a pooled OLS regression. The results of the study indicate
mostly a negative effect of internal governance mechanisms on the cash conversion cycle, the
inventory, receivables periods and payables periods, implying that governance structures do
affect the efficiency of working capital management. Firm characteristics like age, size and
profitability also emerged as relevant influences on the efficiency of working capital
management. Data for the study cut across several sectors thus limiting the specificity with
which findings can be applied. These findings have implications for board composition in the
quest for firm-level efficiency while raising the need for more industry-specific enquiries.
24.WORKING CAPITAL MANAGEMENT AND FIRMS PERFORMANCE IN
EMERGING MARKETS: THE CASE OF JORDAN BY BANA ABUZAYED
The purpose of this paper is to examine the effect of working capital management on firms
performance for a sample of firms listed on a small emerging market, namely Amman Stock
Exchange. The paper includes a conceptual as well as empirical analysis, in which data from
a sample of listed firms for the period from 2000 to 2008 are analyzed to examine if more
efficient working capital management improves firms accounting profitability and firms
value. Cash conversion cycles as well as its components are used as measures of working
capital management skills. In this study, two performance measures are used: one accounting
and one market measure, believing that wealth maximization is shareholders main concern.
To bring up more robust results, this study used more than one estimation technique,
including panel data analysis, fixed and random effects, and generalized methods of
moments. Using robust estimation techniques this study found that profitability is affected
positively with the cash conversion cycle. This indicates that more profitable firms are less
motivated to manage their working capital. In addition, financial markets failed to penalize
managers for inefficient working capital management in emerging markets. The paper's
originality and value lies in suggesting that policy makers in emerging markets need to
motivate and encourage managers and shareholders to pay more attention to working capital
through improving investors awareness and improving information transparency.

25.WORKING CAPITAL MANAGEMENT DURING THE GLOBAL FINANCIAL

CRISIS: THE AUSTRALIAN EXPERIENCE BY VIKASH RAMIAH, YILANG ZHAO
AND IMAD MOOSA
This paper aims to document the measures taken by Australian corporate treasurers in the
areas of cash, inventory, accounts receivable, accounts payable and risk management to
survive the global financial crisis (GFC). Using qualitative techniques like interviews and a
survey questionnaire, this paper summarizes the various measures adopted by working capital
managers. The results show that more than half of the participants in the survey altered their
working capital management practices during the crisis. Capital expenditure was curtailed, as
they aimed at preserving their cash levels while reducing inventory levels. Credit worthiness
of institutions became more important, and there was a general decline in credit availability.
The results also show that Australian working capital managers exhibit behavioural biases,

particularly overconfidence. It is the first paper that uses open-ended questions to capture the
effects of the GFC on working capital management in Australia.
26.HOW DO SMALL BUSINESS OWNERS MANAGE WORKING CAPITAL IN AN
EMERGING ECONOMY?: A QUALITATIVE INQUIRY BY LAURA A. OROBIA,
WARREN BYABASHAIJA, JOHN C. MUNENE, SAMUEL K. SEJJAAKA AND DAN
MUSINGUZI
The purpose of this study was to examine the actions ownermanagers of small businesses
undertake in managing working capital. The study adopted an exploratory research design.
The point of saturation was achieved after ten ownermanagers were interviewed. Data were
analyzed using content analysis technique with the aid of NVivo software. Verbatim texts
were used to explain the emergent themes. The findings indicate that in the absence of
systems, structures and procedures, small business ownermanagers intuitively plan, monitor
and control their working capital. The activities undertaken include; reliance on memory and
oral agreements, informal planning, assuming inventory limits, unconventional record
keeping, cash flow based information management and giving credit to close associates. A
more detailed investigation of the steps in the action sequence ma y advance our
understanding of the process. Future studies need to test the effect of personal characteristics
on working capital management process. Ownermanagers of small businesses do not require
the same degree of sophistication employed in planning, monitoring and controlling working
capital. They require soft skills. Therefore, academicians, practitioners and policy makers
need to emphasize knowledge management and cash accounting. This study examines the
process perspective of working capital management, an aspect that has not been adequately
highlighted in previous studies.
27.WORKING CAPITAL MANAGEMENT: A LITERATURE REVIEW AND
RESEARCH AGENDA BY HARSH PRATAP SINGH AND SATISH KUMAR
The purpose of this paper is to review research on working capital management (WCM) and
to identify gaps in the current body of knowledge, which justify future research directions.
WCM has attracted serious research attention in the recent past, especially after the financial
crisis of 2008. Using systematic literature review (SLR) method, the present study reviews
126 articles from referred journal and international conferences published on WCM. Detailed
content analysis reveals that most of the research work is empirical and focuses mainly on
two aspects, impact of working capital on profitability of firm and working capital practices.
Major research work has concluded that WCM is essential for corporate profitability. The
major issues with prior literature are lack of survey-based approach and lack of systematic
theory development study, which opens all new areas for future research. The future research
directions proposed in this paper may help develop a greater understanding of determinants
and practices of WCM. Till date, literature on classification of WCM has been almost nonexistent. This paper reviews a large number of articles on WCM and provides a classification
scheme in to

various categories. Subsequently, various emerging trends in the field of WCM are identified
to help researchers specifying gaps in the literature and direct research efforts.
This paper contains a comprehensive listing of publications on the WCM and their
classification according to various attributes. The paper will be useful to researchers, finance
professionals and others concerned with WCM to understand the importance of WCM. To the
best of the authors knowledge, no detailed SLR on this topic has previously been published
in academic journals.