Literature Review On Working Capital Management

Literature Review On Working Capital Management-66
Within the scope of the normal business cycle, for example, the capital invested in inventories and receivables is again available to the company after the sale of inventories and the collection of receivables.In contrast, long-term assets usually require several years to amortize the initial investment (Moyer et al However, working capital does not refer to a general term as short-term operational asset and liability position, but “allows the liquidity ratio to provide information on the short-term financing behaviour of a company”.As a result, there are bigger losses in the generation of potential cash flows, profits or distributions for shareholders, as well as an increased vulnerability to possible takeovers.

Within the scope of the normal business cycle, for example, the capital invested in inventories and receivables is again available to the company after the sale of inventories and the collection of receivables.In contrast, long-term assets usually require several years to amortize the initial investment (Moyer et al However, working capital does not refer to a general term as short-term operational asset and liability position, but “allows the liquidity ratio to provide information on the short-term financing behaviour of a company”.As a result, there are bigger losses in the generation of potential cash flows, profits or distributions for shareholders, as well as an increased vulnerability to possible takeovers.

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Not only large, but especially medium-sized companies have recognized the contribution that working capital optimization can make in this context an integrated and enhanced cost management.

This has been confirmed by the events on the capital markets in recent years as well as the regulatory requirements, such as those arising from the Basel II guidelines for banks and their borrowers.

For the concept of working capital used in finance and accounting area, there are often different definitions, both from the theoretical as well as the practical point of view, depending on which short-term balance items are ultimately taken into account (Schneider, 2002).

In general terms, working capital can be divided into two concepts: .

These mainly include short-term financial liabilities, short-term provisions and other short-term liabilities.

In contrast to fixed capital or long-term assets, working capital is changed at a relatively fast rate.

This is based on the understanding that both active and passive positions of a short-term nature influence company’s liquidity.

In terms of liquidity, this difference is of great importance in the context of balance sheet analysis, since it allows a statement about the liquidity status of a company as a key ratio.

Dewing, one of the leading financial authors in the first half of the twentieth century, argues that “the differentiation between fixed and current capital is practically as old as corporation accounting among the Anglo-Saxon nations” (Dewing, 1953, p. He refers explicitly to the balance sheet of the , which in 1571, was already differed between “fixed capital” and “current capital”.

Despite this period, as in many terms of business management, a single definition has not been possible and there are semantic problems not only for the terms “working capital” and “management”, but in particular with regard to the scope of working capital management. The term “working capital” is often used as a generally accepted subject and collective term for short-term balance sheet items, which are attributable to current assets on the assets side and short-term liabilities on the liabilities side of the balance sheet (Brealey et al, 2011, p. “Current assets include all those assets which are not classified as non-current assets and which are therefore expected to be recognized within one year (or in the course of the normal business cycle) back into liquid funds”.

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