WORKING CAPITAL MANAGEMENT

Working Capital Management and the Profitability of UK Companies

Working Capital Management and the Profitability of UK Companies

Chapter No. 1: Introduction

Capital has an important role in the structuring of the production process. In business terminology, there are numerous ways in which “capital” being used, such as “human capital”, “monetary capital” and “natural capital”. The human capital refers to skills of individual where as monetary capital includes the cash money. In business and economic geography, there are two types of capital which are: variable capital and fixed capital. Machinery, plant buildings and equipment categorized in fixed capital. In fixed capital, the firm must estimate the maintenance, repair and depreciation budget as well. On the other hand, the variable capital includes savings, corporate profit, bonds, stock and other various financial instruments. Theoretically speaking, liquid capital or variable capital is the most portable factor of production. In today's era, the transfer of liquid capital is almost negligible because it directly transmitted through electronically wired world. On the other hand, fixed capital is less portable and mobile then liquid capital. The cost of this capital, that interest paid from future earnings. Investment capital is a variety of sources: equity, family and friends, lending institutions such as banks and savings and loan associations, and the sale of stocks and bonds. Most of the capital in the advanced industrialized countries, the proceeds from the sale of stocks and bonds, although American companies use this approach more than firms in Europe, where banks play a crucial role in the trade financing. Adequate volume of capital investments is a function of the total national wealth and the share of total income which stored. Savings become investment capital for future expansion (Fink, 2001, 54).

What is working capital management?

Working capital management is the process of utilizing the limited cash resources in the most effective manner as possible.. The working capital is the cash available to the business to run their operating cycle or in other words to deal with its daily operations. This is because; cash is the most liquid asset for a company. The value of cash is being change on a daily basis. The factors such as inflation and recession, changes the value of cash with time. A company's main concern in capital management is to properly allocate its resources so as to attain maximum cash advantage and value. If a company fails to utilized and use its cash in an appropriate manner, then the company is likely to face cash deficit in the near future. Now days, many companies have realized the importance of the cash efficiency and is working on managing its cash on a daily basis. Through appropriate capital management, the company can save money which can be used for a unacceptable time period. The quickness of the cash conversion cycle and the speed at which inventory converts into receivables and then into cash determines the level of funding required from financial institutions and suppliers to stay in the business (Fink, 2001, ...