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An analysis of the role of working capital in improving the profitability and/ or the efficiency of a company
This essay highlights the significance of working capital in a company. I chose a manufacturing company i.e. East African Breweries Ltd. It gives an analysis of various issues pertaining to working capital like components of working capital, financing working capital, concepts of working capital etc. Finally a conclusion is drawn regarding this issues and how effectively profitability and/or efficiency in the company is achieved through good working capital management.
|language || ||english
|wordcount || ||5507 (cca 15 pages)
|contextual quality || ||N/A
|language level || ||N/A
|price || ||free
|sources || ||14
Table of contents
CONTEXT OF WORKING CAPITAL 3
REASONS FOR TOPIC SELECTION 3
AIMS AND OBJECTIVES OF THE REPORT 3
2. INFORMATION GATHERING
SOURCES USED 4
METHODS USED TO GATHER INFORMATION 4
POLICY VS MANAGEMENT 5
WORKING CAPITAL MANAGEMENT 5
WORKING CAPITAL FUNDING POLICIES 8
RATIO ANALYSIS 11
INVESTMENTS INTO WORKING CAPITAL 18
RISK RETURN TRADE OFF 18
Preview of the essay: An analysis of the role of working capital in improving the profitability and/ or the efficiency of a company
Working capital comprises current assets i.e. cash, inventory, accounts receivable and marketable securities (Pike & Neale, 2003) and current liabilities that are to be met within one year and which include accounts payable, bank overdraft and possibly taxation and dividends once declared (Walters & Halliday, 2005).
Working capital management is a short-term operational financial activity for any organization. Because of the short-term nature of working capital and the dynamic nature of its components, working capital management consumes much of a financial manager’s time and is likely to be an area where much of the marketing & financing activity occurs (Walters & Halliday, 2005)
There are 2 concepts of working capital:
(i) Gross- refers to total current assets
(ii) Net- refers to current assets less current liabilities
The need for the net concept ...
... the investments in current assets and current liabilities. Parkinson (2003) tells us it’s important for three reasons:
(i) The management of an organization should seek to ensure that the balance is neither too high nor too low. The former could result in an unproductive use of funds and the latter in skating on thin ice, with the possibility of not being able to carry on after current liabilities have been met.
(ii) There is need for the organization to remain liquid and able to meet its debts
(iii) An optimum balance will enable the cash tied up in working capital to remain in such investment for as short a period of time as is practicable.
4.2 RISK RETURN TRADE OFF
From this study, its worth noting that a low liquidity is associated with high rates of return. However it does not mean that low liquidity is in the best interests of shareholders. No doubt that profitability has to do with the overall goal of shareholders wealth but liquidity has to do with ensuring that the enterprise is able to satisfy its financial obligations (Radhe, 1986). The liquidity goal is therefore closely connected with management of working capital while profitability goal reflects both short-term and long-term decision making (Gitman, 1976)
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