Literature Review On Working Capital Management

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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.

Similar to the short-term investments on the assets side of the balance sheet, various short-term financing alternatives are available to companies.

Short-term liabilities are defined as items that are settled within one year or during a business cycle.

This led Dewing at an early stage to the following statement: “Furthermore, I believe, owing to the confusion of terms, the expression ‘working capital’ had better be omitted altogether” (Dewing, 1953, p. Working capital is one of the most misunderstood terms in the terminology of accounting and it does not appear to be uniform today (Kulshreshtha & Jha, 2009, p. The lack of clarity or misunderstandings regarding the application of working capital was justified by the fact that there is no corresponding classification of working capital in the balance sheet (Meyer, 2007, p. A lack of unity and confusion about the understanding of working capital has led in the past to the fact that many authors have either completely neglected the concept and subject of working capital, or dealt with a low priority (Falope & Ajilore, 2009, pp. This is all the more remarkable since a large share of past corporate insolvencies was caused by inadequate management of working capital (Rafuse, 1996, p. The main balance sheet items therefore include inventories, trade receivables, other receivables, down payments and cash and cash equivalents.

The items are generally classified in the order of liquidity in the preparation of the balance sheet.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”.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: .Working capital management has attracted serious research attention in the recent past, and has become a hot topic since the financial crisis of 2008.Working capital management is a topic that has been well-known in science as well as in business practice for a long time.At the same time, its presence in the literature is still comparatively low, concentrating on the analysis of the link between WCM and company’s performance with the help of publicly available data and key ratios from the annual financial statements.Especially, in view of the growing volatility and uncertainties in the credit and financial markets that have been observed for a number of years and the corresponding increase in regulatory capital in the area of external capital raising, the company's focus increasingly shifts to internal liquidity generation from the operating business on the structure of working capital.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.Against this background, the need for an effective and optimized working capital management becomes more and more obvious, which in the past was at the lower end of the entrepreneurial priorities list.


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