Literature Review On Working Capital Management

Literature Review On Working Capital Management-77
Dewing, one of the leading financial authors in the first half of the twentieth century, argues that “the differentiation between fixed and current capital is practically as old as corporation accounting among the Anglo-Saxon nations” (Dewing, 1953, p. He refers explicitly to the balance sheet of the , which in 1571, was already differed between “fixed capital” and “current capital”.Despite this period, as in many terms of business management, a single definition has not been possible and there are semantic problems not only for the terms “working capital” and “management”, but in particular with regard to the scope of working capital management. The term “working capital” is often used as a generally accepted subject and collective term for short-term balance sheet items, which are attributable to current assets on the assets side and short-term liabilities on the liabilities side of the balance sheet (Brealey et al, 2011, p. “Current assets include all those assets which are not classified as non-current assets and which are therefore expected to be recognized within one year (or in the course of the normal business cycle) back into liquid funds”.This ratio is identical to the third-degree liquidity: The ultimate goal of corporate finance is to make the available capital as profitable as possible.

Dewing, one of the leading financial authors in the first half of the twentieth century, argues that “the differentiation between fixed and current capital is practically as old as corporation accounting among the Anglo-Saxon nations” (Dewing, 1953, p. He refers explicitly to the balance sheet of the , which in 1571, was already differed between “fixed capital” and “current capital”.Despite this period, as in many terms of business management, a single definition has not been possible and there are semantic problems not only for the terms “working capital” and “management”, but in particular with regard to the scope of working capital management. The term “working capital” is often used as a generally accepted subject and collective term for short-term balance sheet items, which are attributable to current assets on the assets side and short-term liabilities on the liabilities side of the balance sheet (Brealey et al, 2011, p. “Current assets include all those assets which are not classified as non-current assets and which are therefore expected to be recognized within one year (or in the course of the normal business cycle) back into liquid funds”.This ratio is identical to the third-degree liquidity: The ultimate goal of corporate finance is to make the available capital as profitable as possible.

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However, in order to take account of this increased interest, a stronger focus on qualitative empirical investigations is necessary from a scientific point of view, which has so far only been sparsely represented in the literature.

Besides this, the review of empirical studies explore the avenue for future and present research efforts related to the subject matter.

Working capital management amongst businesses (either large or small and medium scale) appears to have been relatively neglected despite the fact that a high proportion of failures in businesses is due to poor decisions concerning the working capital of enterprises (Tewolde, 2002).

Management of working capital is an important component of corporate financial management because it directly affects the profitability of the firms.

This ratio is often referred to more precisely as Working Capital indicates a short-term financing of long-term or fixed assets (Spremann, 1996, p. Working capital is therefore an absolute monetary amount.

In addition to working capital as an absolute monetary amount, there is also the working capital ratio, which is the ratio of current assets over current liabilities.

The purpose of this paper is to elaborate the relationship between working capital management (WCM) and company’s performance as well as related determinant factors based on literature review.

It aims to identify gaps in the current body of knowledge which justify future research directions.

These mainly include short-term financial liabilities, short-term provisions and other short-term liabilities.

In contrast to fixed capital or long-term assets, working capital is changed at a relatively fast rate.

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