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Literature Review: Working Capital Management And Probability

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Literature Review
Working Capital Management and Probability
Working capital management refers to managerial accounting strategy adopted by the company to utilise the two components of working capital, which is current assets and current liabilities. The importance of this strategy is to ensure the most financially operation of the company. The primary purpose of working capital management is to ensure the cooperation maintain sufficient cash flow to meet its short term and long term debt obligations.
Results from Journal of Business and Financial Affairs, research article by Jakpar.S
Typically, working capital management involves monitoring asset, liabilities and cash flow through ratio analysis of operating expense, including collection …show more content…

Working capital determine a company’s ability to continue its operations without harming its liquidity. Undoubtedly, making profit is the main objective of the company, but this must not be make at the expense of liquidity of the company. Thus, holding a lot of liquidity will results in reduction of profitability, while holding small quantity of liquidity will lead to bankruptcy. Thus, an efficient management of liquidity is important.
An inefficient management of working capital can damage the company profitability. When a company does not make full use of short term asset to earn sub-optimal return, and when a company does not manage its short term liabilities well, may run into debt which affect their long run performance. At the end, this may damage the profitability of company.

Working Capital Management and Cash …show more content…

But, there is a direct relationship between company liquidity level and their operating cash flow. This is because by increasing liquidity level, the company is able to meet its obligation before third parties such as suppliers, and to accelerate the value chain of the company which includes purchasing, transferring raw material, production and receiving cash. Therefore, an increase in liquidity level can help company to reach desired operating cash flow. Result from third party indicates that the degree of operating leverage has no significant effect on operating cash flow of the company. This is because several factors affect the ratio of profit change before deduction of interest and the sale price which is used in the operating leverage calculation. Thus, it is possible that a receivable period exceed 1 year but have no significant effect on the operating cash. Based on the above results, the managers and investors are recommended to emphasize on the liquidity criteria when investing because of the direct relationship between liquidity level and cash flow.
Result from Jurnal Intelek (2017) Vol 12(1), research done by Wahida

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