Working capital management concerns with the relationship between a company’s short-term assets and its short-term liabilities (Pandey, 2005). The objective of working capital management is to ensure that a company is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debts and upcoming operational expenses (Padachi, 2007).
The working capital requirement consists of capital from the company’s shareholders and debenture holders. The firm uses this capital along with the cash inflow to finance its business activities. For instance, when purchased material has undergone a manufacturing process and become finished goods, …show more content…
The three concepts consist of solvency, liquidity and financial flexibility. In this research has chosen a liquidity measure because this metric can provide managers a more complete and useful liquidity measure as they get information of how efficiency the short-term capital is performed (Richards & Laughlin, 1972). Therefore, the liquidity measure will be applied to this research as the cash conversion cycle, which is as a measure of working capital management. The cash conversion cycle indicates the time span between the company’s cash disbursement to suppliers and its collection from customers, which reflect from management of inventories, accounts receivable, accounts payable and …show more content…
The credit time runs from the invoice date until the due date of the invoice (Larsson & Hammarlund, 2009, p.23-24). The reason for shortening the credit period is due to the fact that longer credit time to customers. By allowing customers to keep the money during a credit time firm is exposing itself to higher risk of ending up in an unstable financial situation. The average number of days accounts receivable is used as a measure of accounts receivable policy (Appendix, p.). It indicates the average number of days that the company uses to collect payments from its customers. Similar to the inventories, a low number of days are desirable to keep the cash conversion cycle short (Lantz, 2008, p.115). There are several techniques can be applied such as strengthen their collection procedures, offer cash discount and trade credit, and use receivables factoring (Boisjoly,