The Working capital management is to manage the firm’s current accounts to achieve a required balance among profitability and risk. Working capital management is important factor it is a management of current assets and current liabilities. It is directly affects the profitability of the firm. The main objective of this article is to determine the impact of account receivables days, inventory days, account payables days and cash conversion cycles on return on total assets and to analyze the variation in working capital needs and its impact on profitability.
Working capital management is important due to many reasons, current assets normally accounts for half of the total assets. Excessive level of current assets results in a valuable return on investment, however firm have shortages of current assets may face difficulties in maintaining smooth operations. Critical importance of net working capital is proportion of total financing requirement. Higher working capital results higher profitability.
The main objective of every firm is maximizing profit but companies prevent them from liquidity also, to avoid this there must be a balance between these two objectives of the firm. Working capital meets the short term financing requirements of any business. Lesser working capital may affect the profitability. Working capital management of the firm affects the profitability by different variables like average collection period, average payment period and cash conversion cycle. Working capital and profitability of the firm have opposite relation with each other.
The profitability of the firm can be enhance by adopted following ways first is increase the opportunity cost of the float. Second is transaction cost of moving cash should be increase within and between countries. The profitability of the firm and its value is also effect through the working capital management because profitability and risk of the firm become low due to the greater increase in investment in current assets.
Specific research study on the impact of working capital management on profitability is scanty, especially in Pakistan. This area of study in developing countries and especially in Pakistan is ignored area. The management creates value for the shareholders by increasing inventory level, account receivable. The firms are capable to attaining competitive advantage by using affective and efficient utilization of resources.
Working capital is the lifeblood of every firm. If it is managing efficiently it is beneficial for firm because it has a direct impact on firm’s profitability but inefficient working. Capital management negatively impacts the firm’s profitability. This article provides essential, additional and different evidence on WCM and its impact on profitability. The results of this study provide the way on how to develop an efficient and effective working capital management that surely increase productivity.
Article Source: http://www.articlesbase.com/accounting-articles/impact-of-working-capital-management-on-profitability-4648329.html
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Writing by professional author Farooq Khilji http://khilji-co.blogspot.com”>Burewala. He is a well reputed writer amongst the leading writers on Banking & Finance.