Abstract
The above paper appreciates the fact that most organizations go through difficult economic times and require effective working capital management. Moreover, the study recognizes the fact that inefficient management of the same has adverse effects on the financial performance of the business. Therefore, financial managers have an obligation to maintain a balance in liquidity as one approach to enhance the profitability of the firm. To achieve the study objective, the paper utilizes an efficient research design, which is believed to assist the business in achieving its set purpose. The study seeks to use data from three companies (Coca-Cola, Barclays PLC, and Boeing Co) which are listed on the London stock exchange. However, the study will rely on using most recent financial reports of the firms to evaluate the company's working capital. The study further reveals that working capital can either be positive or negative based on the nature of the industry. However, companies with positive WC can manage their daily operations in the most efficient way possible. Besides, different factors have a different influence on WC hence resulting in diverse impacts to the business. The study concludes by stating that WC is an important tool for financial management of an organization, and if well utilized, they have a significant impact on an organization.
Introduction
Working capital management (WCM) is a very great tool in analyzing group performance in the day-to-day business experience as managers struggle to maintain a balance amid liquidity and profitability. Ineffective management of working capital, it is imperative to maintain liquidity to support daily business activities (Haron & Nomran, 2016 p. 461-468). However, meeting the above objective has proofed to be a real challenge to most managers. Inequality in current assets and liabilities makes it difficult for firms to experience growth and profitability. Different scholars have mentioned that working capital helps corporate to find the existing gap amid short-term assets and liabilities. Besides, it plays a vital role in financial management as the key driver in the management of organizational capital.
In the current challenging economic climate, organizations seek to utilize effective policies to enhance growth, boost their financial performance as an effective strategy through which risks are managed. Working capital is, therefore, employed by organizations to help in supporting capital expansion and diversification (Ray, 2014 p. 19-30). Different types of risks are evaded once companies embrace effective WCM as they eliminate any form of business failure whatsoever.
Working capital as will be used for the above study indicates the liquid assets in a business, which is the difference amid current assets and liabilities. Working capital involves several areas in an organization that includes receivables, payables, and management among other sectors (Yilmaz, 2015). Moreover, the aim of the above concept is to maintain a balance in the different components that are involved in the process. Organizations that can manage their working capital engage in the optimal operation of their day-to-day activities. Moreover, according to Şamiloğlu & Akgün (2016 p. 1-14), the manner in which working capital is maintained has a significant influence on the profitability rate of a firm.
However, it is worth noting that while profit maximization is the ultimate goal of every business, working capital management seeks to maintain a balance amid liquidity and profitability. Besides, firms that tend to experience a lot of risks experience increased profitability than those with a low level of liquidity (Rahman, Uddin & Ibrahim, 2015). Therefore, businesses have to manage appropriate practices that support effective liquidity management for the company to experience profitability. However, from different research studies, it is evident that several factors have an impact on working capital in organizations.
Study Objective
In the current global setting characterized by tough economic times, companies experience difficult conditions and find it difficult to make profits, which are a matter of concern for most stakeholders. Financial managers, therefore, have an obligation to understand the adverse effects of poor WCM practices to business. Therefore, the above study seeks to achieve the following objectives;
Understand the existing relation amid working capital and profitability
The study aims to understand the adverse effects of poor WCM practices as far as profitability of a firm is concerned
Understand the relationship between liquidity of a firm and profitability rate
Aim
In the recent past, different financial firms have experienced failure, an aspect that has attracted a lot of concerns from various stakeholders. The above study, therefore, aims to understand whether better WCM during one period has a significant influence to enhancing the profitability of a firm. Past researched has proofed that maintaining an efficient WCM has a great influence on enhancing the profitability of a business.
Research Methodology
Research design
The above study seeks to understand the different factors that affect working capital management with the use of case studies of three main firms listed on the London Stock Exchange. Evaluation of the company's financial statement will be done using data collected in the period of 2015 onwards. The study is quantitative in nature and seeks to utilize data collected using a broad range of econometric tools.
Source of data
The primary sources for the research study are data collected from the financial reports of three firms (Barclays PLC, Coca-Cola, and Boeing Co) which are listed on the London Stock Exchange. The financial reports used indicate the financial evaluation of the respective companies during 2015 and 2016.
Findings
Barclays (Banking sector)
As mentioned earlier, working capital is an ideal measure of a company's efficiency and its respective liquidity level. For the case of Barclays, working capital is positive indications that the organization can continue its operation without any form of incapacitation like debt obligations (Barclays, 2016).
Barclays PLC WC = Current Assets less Current Liabilities
Working capital can be positive or negative based on the debt obligation of the concerned organization. Therefore, companies with adequate working capital tend to experience a lot of growth as compared to their counterparts that do not have sufficient working capital (Barclays, 2016). Besides, companies with very small or negative working capital often lack funds to support business operations.
Boeing Co
The Boeing Company is listed on the New York Stock Exchange under the section of Aerospace and Defense. The company's returns fell below the market level, and in 2015, the return was rated at -0.0843%. This is an indicator that investing in the company will lead to a future loss and compared to the general industrial market, and the company has a low operating margin of 7.12% (Capital Cube, 2015). Besides, a healthy operating margin is important to a firm as it indicates the ability of a company to cater for its debt obligations so as to adequately engage in its business operation. Working capital ratio for the company has significantly varied over the years with the company experiencing its highest of 2.62 and 2.56 in 2015 and 2016 respectively (Capital Cube, 2015). On average, Boeing experiences a working capital ratio of about 1.1 and lows of 0.72 as for the case of 2014. In 2015, the company experienced an improvement in current assets and a decrease in liabilities. However, compared to other firms in the same industry, there are many companies with a higher working capital, about 15 companies hence the need for the company to enhance its operations so as to increase its profitability level.
Coca-Cola
The corporate is stated under beverages sections and according to the recent financial analysis, its working capital stands at 5.52 billion (Gardner, McGowan Jr, & Moeller, 2009 p. 11-15). The company also has outstanding shares although it is significantly lower than the previous two. The company's returns are also expected to increase at a lower rate than that of the market. The company is said to have an operating margin of 23.16% and is way below the market expectation, an indication for the need to improve (Macroaxis, 2016).
Results and Interpretation
Different factors influence working capital management, and they have different impacts based on the nature of the corporate. According to Akram et al., (2016 p. 10-25), management of WC varied from one industry to another and these variations were based on the sector of the company. For instance, Barclays is a service company, and it does not have to cater for the inventory costs as for the case of other production companies such as Coca-Cola. Another significant aspect that influences WC is seasonality of the business that varies from one season to another. However, development of effective policy has a significant impact on the WC requirement. It was further evidence that the nature of competition amid the respective firms varies and to maintain a high level of customer needs, there is a need to maintain a high level of inventory (Talonpoika et al., 2016 p. 277). In the production companies, it is evident that production cycle time has a significant influence on the working capital.
It is worth appreciating that cash operating cycles are some of the major aspects that affect WCM, and they have a significant impact on efficiency achieved. As indicated, operating cycle refers to the time taken for the purchase of inventory to receipt of cash. Particularly, operating cycle is the time from the time raw materials are purchased in an organization to the period that the sales proceeds are met. Long operating cycles indicate that the business has low capacity to access to cash that is used in settling the corporate debt obligations. However, the concept takes into consideration a number of issues such as accounts payable, receivable and the rate at which inventory are replaced. Therefore, operating cycle for a given business is achieved through addition of age of inventory and collection period.
On the other hand, cash cycle refers to net operating cycle, which simply means the number of days taken for cash used to purchase inputs to be received back from sales of the final product. Organizations that have a short cash cycle experience efficient management of working capital, which is necessary for the profitability of a given business. To embrace such practices, companies such as Toyota have turned to using just in time techniques to achieve efficiency in production and supply of products to final consumers. Companies that use the extended period to manufacture products have to put more cash in their inventory making customers pay more. Therefore, the two concepts have a significant influence on the extent of efficiency achieved by the different firms.
Despite the difference the nature of the industry, it is evident that when the company learns to shorten their (days of sales outstanding) DSO through various strategies such as developing lasting relations with the consumers, it affects well to the business. Moreover, it enhances the liquidity level of a firm, a feature that influences well to the firm leading to increased profitability (Agha, 2014 p. 374). Therefore, the business gets an opportunity to invest in different possibilities in the market setting leading to increased loyalty.
Conclusion
WC is vital for any particular organization as it helps the various companies in the management of their daily operations. The significance of the concept makes it necessary for the different companies to maintain WC at an optimum level to make the companies run their operations in the most efficient possible. From the analysis, it is evident that different aspects influence WC of corporate, which includes profitability rate, the size of the respective firms, growth rate of the companies, and cash flow of the respective companies with respective to working capital of the different corporate. The different factors require appropriate management of the various factors to evade the adverse impact of the aspects. It is evident that with an increase in the size of the firm, working capital requirement increases hence the need for efficient management. The situation requires the respective companies to consider employing appropriate measures to maintain adequate working capital level.
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