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PROJECT TOPIC: EFFECT OF WORKING CAPITAL MANAGEMENTS ON THE PROFITABILITY OF AN ORGANIZATION

Project Body:


CHAPTER ONE

 

INTRODUCTION

1.1      Background of the study

The Working capital is a financial metric which represents the operating liquidity available to a business concern. As regarding fixed assets such as plants and equipment working capital is considered as a part of a company’s operating capital, referring to current assets such as cash at hand, cash on bank account raw materials working progress, finished goods, account receivable etc. To measures the efficiency of company’s working capitals, net working capital is often used which is  defined as the difference between current assets and current liabilities if current assets are higher than current liabilities, the company has working capital efficiency explaining the company’s ability to continue its operations and to have sufficient funds to satisfy both maturing short term debt and upcoming  operational expenses. Working capital management involves planning and controlling current assets and current liabilities in a manner that dominates the risk of liability to meet due short-term obligations on one hand and avoid excessive investment in these assets on the other hand. According to (Elijelly, 2004) there is a combination of policies and techniques for the management of a company’s working capital. These policies involves inventory management debtor’s management etc. a popular measures of working capital management is the cash conversion cycle, which tells how cash is moving through a company in terms of duration. According to Brigham and Daves (2002) working capital management involves both setting working capital policy and carrying out that policy in day to day operation. It also involves making appropriate investments in cash, marketable securities, receivable and inventories as well as the level and mix of short-term financing (Emery Finnety and Stowe 2004). In essence, the research tried to examine working capital management issues, specially how a company manages its working capital by shortening or lengthening its cash conversation cycle in order to contribute for a superior operating profitability. Management seeks to contain an optimum balance of cash working capital component thereby ensuring that firm operates with sufficient fund (cash flow) that will service their long-term debt and satisfy both maturing short-term obligation and upcoming operational expenses. Therefore, makes it more glaring that working capital has a pivotal  role to play in a company’s drive to achieve great or high profitability. One can then say that decision relating to working capital must not be taken for granted. To this end, Arnold (2005) assets that if there is too little working capital or lack of working capital can account for inefficiencies in a company’s operation when it is not able to play-off. Its due obligations. On the other hand, without sufficient working capital, the company will not either be able to provide goods or service required to customers due to lack of money to buy materials for producing goods. The company’s profitability can be jeopardized as a result. Therefore the ultimate goal of working capital management is to ensure that firm’s are able to continue their operations with sufficient cash-flow that will service their long-term debts and satisfy both maturing short-term obligation (debts) and upcoming operational expenses. Hence, organization should try as much as possible to meet up with this goal so as to avoid being caught up in the trap of ineffective management of working capital components.



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