Literature Review Of Working Capital Management
This study, which investigates the impact of the WCM on the profitability of Turkish industrial firms, is considered to contribute on the determination of working capital investment levels of these firms, determination of the distribution among the working capital components, effective use of scarce resources, and resource supply and sustainability of future investments by applying a working capital that will increase the profitability.
There are a number of studies covering the developed countries in the literature, while there are limited studies covering the emerging countries.
In this context, firms that invest heavily in inventory and accounts receivables may be exposed to low profits .
Another component that has an impact on the working capital requirement is accounts payables.
While lower investment in the working capital expressed as aggressive working capital policy is associated with higher returns and higher risk, more investment in the working capital expressed as conservative working capital policy is associated with lower return and lower risk .
The firm has to choose between aggressive and conservative working capital policies depending on its purpose .
Working capital management is concerned with the day-to-day activities rather than long-term investment decisions .
Working capital is a part of firm’s current assets, which are converted into cash within a year or less .
Because sales on credit allow the customer to examine the product before paying, it may increase sales .There are some advantages to work with high inventory levels such as preventing customer losses caused by not having enough stock level and protecting against price volatilities .However, the high inventory and loose trade credit policies lead to the locking of the money to the working capital .The firm that invests more in current assets is more liquid than a firm that does not invest.This will reduce the firm’s liquidity risk, while decreasing overall rate of return, because the return of current assets is less than the return of other assets .Working capital, which is seen as the lifeblood of a business, has an important role in the return of the owner’s reckoning, and has a decisive influence on liquidity , is important at this point.Firms need working capital to begin its business operations, carry on its activities efficiently, and meet its short run obligations .According to the World Bank data, the industry sector’s share in GDP is 32% .The share of the industry sector in exports is around 92% .In this case, the level of accounts payables of the firm may affect the firm’s profitability.The style of WCM may have a considerable influence on the profitability, risk, and liquidity of the firm .