CHAPTER TWO
LITERATURE REVIEW
2.1 Theoretical Literature
In literature, working capital management can be defined as current assets less current liabilities where current assets normally include three main components that are; inventories, account receivables and cash and cash equivalent. On the other hand, current liabilities include account payables. Previous studies have revealed that working capital management may have an impact on a firm’s performance. According to Shin and Soenen (1998), Lazaridis and Tryfonidis (2006), Reheman and Nasr (2007) and many other researchers studied working capital management with that of cash conversion cycle. They stated that the more investment is in working capital; there is likelihood that a firm’s profitability …show more content…
It is said to have a direct impact on a firm’s value. In other words, it affects the net working capital (current assets minus current liabilities) as well as the operating costs such as storage, insurance, wastage of inventory amongst others of the inventory management of a firm. Holding much of inventory levels reduces the risk of going out of business and hence eliminating several cost which are directly related to inventory such as supply costs and price fluctuations (Dimitrios, 2008). Nowadays through use of tailor made software for firms, it is convenient enough to manage inventory levels. Mathematical models are used to fix reorder levels, reorder quantity, minimum and maximum inventory …show more content…
The more a firm lengthens its credit period, the more likely sales are to be boosted up. This allows the receivables to assess the product in terms of quality before paying. However, a reduction in accounts receivables may also increase performance because it will increase cash flow available to a firm, which can be used to run the day-to-day operations (Tauringana and Afrifa, 2013). Adding to the former idea, a reduction in both inventories and accounts receivables may harm sales, thereby decreasing performance (Baños-Caballero et al., 2012). In order to benefit from trade receivables period, a firm should maintain its receivable days at an accepted level by computing the trade receivables collection
LITERATURE REVIEW
2.1 Theoretical Literature
In literature, working capital management can be defined as current assets less current liabilities where current assets normally include three main components that are; inventories, account receivables and cash and cash equivalent. On the other hand, current liabilities include account payables. Previous studies have revealed that working capital management may have an impact on a firm’s performance. According to Shin and Soenen (1998), Lazaridis and Tryfonidis (2006), Reheman and Nasr (2007) and many other researchers studied working capital management with that of cash conversion cycle. They stated that the more investment is in working capital; there is likelihood that a firm’s profitability …show more content…
It is said to have a direct impact on a firm’s value. In other words, it affects the net working capital (current assets minus current liabilities) as well as the operating costs such as storage, insurance, wastage of inventory amongst others of the inventory management of a firm. Holding much of inventory levels reduces the risk of going out of business and hence eliminating several cost which are directly related to inventory such as supply costs and price fluctuations (Dimitrios, 2008). Nowadays through use of tailor made software for firms, it is convenient enough to manage inventory levels. Mathematical models are used to fix reorder levels, reorder quantity, minimum and maximum inventory …show more content…
The more a firm lengthens its credit period, the more likely sales are to be boosted up. This allows the receivables to assess the product in terms of quality before paying. However, a reduction in accounts receivables may also increase performance because it will increase cash flow available to a firm, which can be used to run the day-to-day operations (Tauringana and Afrifa, 2013). Adding to the former idea, a reduction in both inventories and accounts receivables may harm sales, thereby decreasing performance (Baños-Caballero et al., 2012). In order to benefit from trade receivables period, a firm should maintain its receivable days at an accepted level by computing the trade receivables collection