CHAPTER ONE INTRODUCTION Background to the Study

Working Capital (WC) is the excess of a firm’s current assets over its current liabilities (Sagan, 1955). A firm’s asset can be defined as the benefits that are due to the firm as a result of events, such as contractual obligations and sale of goods, that occurred in the past and from which the firm is expected to obtain benefits in the future (International Accounting Standards Board [IASB], 2010). Assets also include resources that the firm controls as a result of past events that it expects to derive benefits from in the future. Some of these benefits that accrue from assets may be realised within one year, while others may be accrued in more than one year. The assets that these short-term benefits relate to are known as current assets and these are the assets considered as working capital. On the other hand, liabilities are regarded as the obligations that have arisen due to past events and are expected to result in an outflow of resources from the firm to another entity. Those liabilities that are due within a year from the end of the accounting period are referred to as current liabilities and these are important for working capital. The difference between these two items (i.e. total current assets and total current liabilities) is what is termed working capital or net current assets. Finance practitioners regularly review the balance of working capital to ensure that their firm stays afloat and is able to settle its obligations in due time. The processes involved in ensuring that the firm stays afloat and liquid at all times is what practitioners term Working Capital Management (WCM). Thus, Working Capital Management consists of matching a firm’s short-term assets and liabilities as they fall due. Firms that fail to manage their working capital well will inevitably become insolvent. Hence, efficient management of working capital is essential for the survival of firms in the long run (Bagchi,

Chakrabarti, & Basu Roy, 2012). It is partly because of this that working capital management is considered a critical part of the financial management of firms, together with capital budgeting and capital structure (Ansah, 2011; Deloof, 2003b; Edmunds, 1983; Kesimli & Gunay, 2011; Malik & Bukhari, 2014; Shubita, 2013).

Statement of the Problem

Researchers have studied various aspects of working capital and have attempted to explain how they affect the firm’s varied objectives (Aregbeyen, 2013; Goel, Bansal, & Sharma, 2015; Kiarie, 2013; Viskari, Lind, Kärri, & Schupp, 2012). One area that existing studies have mainly  focussed on is the role Working Capital Management plays in improving the performance of firms in the non-financial sectors.

In the context of Ghana, there are few studies that have examined the WC-performance relationship. These studies have focussed on manufacturing firms (Korankye & Adarquah, 2013; Kwaku & Mawutor, 2014), SMEs (Agyei-Mensah, 2012; Attom, 2016) and listed firms (Agyemang & Asiedu, 2013; Fiador, 2016; Korankye & Adarquah, 2013; Kwaku & Mawutor, 2014). Notwithstanding the existence of these studies, it appears little is known, if any, about the differences in the relationship between the effects of WCM and performance of local and foreign firms. This is considered to be an interesting comparison for a number of reasons (Barine, 2012; Belt & Smith, 1991; Khoury, Smith, & MacKay, 1999; Moradi, Salehi, & Arianpoor, 2012).

First, foreign firms are generally bigger, and they have access to relatively cheaper funds, both in the local market and in their home country. Moreover, many of the firms have strong parent companies that support them in difficult times, and this has the potential of making them more

tolerant to risk (Anginer, Cerutti, & Pería, 2014; Jinjarak, 2007). Also, these firms are usually able to access trade credit more easily due to the perception that they are more creditworthy or ethical (Sweeney, Arnold, & Pierce, 2010). Foreign firms, however, also have exposure to currency and political risks which may adversely affect their bottom line (Cooper, 1984; García- Canal & Guillén, 2008; Sarno & Valente, 2005).

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