Running Head: Research Proposal 1

Research Proposal on Working Capital Management and Firm Performance

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Research Proposal 2

Table of Contents

Research Proposal on Working Capital Management and Firm Performance......................1

1. Introduction............................................................................................................................3

1.2 Research Matter.....................................................................................................................4

1.3 Research Goal...................................................................................................................5

1.4 Research Question.............................................................................................................5

1.5 Research Objective...........................................................................................................5

Chapter 2: Literature Review.......................................................................................................6

2.1 Keynes's Theory of Money................................................................................................8

2.2 Financing Current Assets...................................................................................................9

Chapter 3: Research Methodology.............................................................................................10

3.1 Research design and case selection.................................................................................11

3.2 Data collection and analysis............................................................................................11

3.3 Analytical Procedures.....................................................................................................12

3.4 Timetable........................................................................................................................13

4. Conclusion............................................................................................................................13

5. References.................................................................................................................................15
Research Proposal 3

Working Capital Management and Firm Performance

1. Introduction

A key component of corporate monetary running is working capital management (WCM). It

demonstrates the relationship flanked by present liabilities and current assets. Effective WCM is

crucial for organizations to carry out daily operations. WCM's goal is to maintain a firm's

activities and ensure it has enough money to satisfy its obligations when they become due

(Orazalin, 2019). It mainly involves managing a company's inventories, cash, accounts payable,

and accounts receivable. Working capital management's (WCM) primary goal is to strike a

balance between the three working capital categories of liquidity, profitability, and risk in order

to provide sufficient backing for efficient business operations. WCM has a substantial impact on

corporate liquidity as a result, which is essential for a firm to continue running (Akenga, 2017).

Working capital management's (WCM) primary goal is to strike a balance between the three

working capital categories of liquidity, profitability, and risk in order to provide sufficient

backing for efficient business operations (Panigrahi, 2016). WCM has a substantial impact on

corporate liquidity as a result, which is essential for a firm to continue running (Akenga, 2017).

In order to enhance performance and maintain market competitiveness, this proposal aims

to identify the best working capital management practices for businesses. WCM still needs to

improve for many firms because it is essential to business performance. It is a major determinant

of success and a key consideration in making financial decisions for a business. Organizations

need the right capital to operate efficiently, regardless of the size or type of business. Therefore,

it is crucial to recognize that working capital is essential to every organization and that how well

it is planned can substantially impact the profitability and sustainability of an organization

(Panigrahi, 2016). On the other hand, ineffective WCM can raise business risks and result in
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subpar financial performance or failure. This essay seeks to give readers a thorough

understanding of WCM and its relation to company performance.

1.2 Research Matter

Financial management is well known for its importance in dealing with working capital. As

a result, the performance of a company directly depends on this turn. Even though the association

between performance and WCM is widely accepted, a thorough study of how capital structure,

size, and profitability influence this relationship has not yet been conducted. This research aims to

examine the moderating impact of these variables on to close this knowledge gap on business

working capital and and performance management. Working capital organisation's impact on

business performance is discussed in this learning, adding to the domain of understanding. As a

result, this study will offer comprehensive understanding of how businesses manage their working

capital as well as pertinent data regarding the potential applications of working capital

management to enhance business performance.

How businesses should structure their capital to enhance the efficiency of their working

capital will be a key learning from this research. In the accounting domain, there are many studies

on how working capital management impacts a company's success. An important gauge of a

company's effectiveness and liquidity is working capital. It is described as short-term liabilities and

assets (including cash, receivables, and inventories) (such as payables). The success of a

company's financial operations, access to capital markets, and level of competitiveness can all be

significantly impacted by its capacity to manage working capital effectively. Businesses must

allocate their money to improve their working capital's efficiency.The present asset-liability mix

can be optimized, the collection and payment cycles can be shortened, and inventory management
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can be improved, among other strategies. Companies should pay special attention to current assets

since they are the most crucial component in maximizing working capital performance.

In order to better understand how working capital management functions across different

industries, this research will also compare how listed and non-listed companies manage their

working capital. Doing this, we can discover efficient working capital management strategies to

enhance business performance. Companies can reduce risks and increase profits by identifying the

best practices and methods for managing working cash.

1.3 Research Goal

It seeks to ascertain how working capital management affects organizational effectiveness.

An organization's current assets and obligations are managed through working capital

management. Commercial organizations could be affected by it when it comes to how smoothly

and profitably they operate. This Research intends to provide light on how working capital affects

business efficiency as well as how WCM and corporate profitability are related. It'll benefit us us

better understand how strong short-term asset management can enhance business performance,

such as management of marketable securities, cash, receivables, inventory, and accounts

receivables. In order to determine whether various techniques can positively impact corporate

performance within the context of managing working capital, the most recent research on the

subject will be examined.

1.4 Research Question

These are the research queries:

 What is the connection flanked by WCM as well as business effectiveness?

 What impact does WCM have on a firm's runniness and effectiveness?

 What are the best methods for managing working capital?

1.5 Research Objective

The research objectives are:

 To identify the components of WCM that are associated with firm performance

 To look into the long-term impacts of WCM on business performance

 To examine the connection between financial distress and WCM

 to research WCM's influence on business profitability.

Through this research, we want to understand how firms use their capital resources and

how this affects their overall performance.

Chapter 2: Literature Review

How a company's total profitability is impacted by working capital management The

study's findings, which were based on an examination of a number of significant non-financial

enterprises in Belgian Germany between 1992 and 1996, imply that management can boost

corporate profitability by lowering days with receivable. As a result, the business will become

more effective. All day operations, a company needs to balance profitability and liquidity.

Because it meets the firms' daily or short-term responsibilities, liquidity is crucial for effective

working capital management. Consistent liquidity flow also improves performance and increases

the likelihood of profitable ventures (Padachi ,2006).

Small businesses are essential for the prosperity of the nation and a better economy of a

country because they are seen as playing a crucial role in the promotion of entrepreneur culture

and creating jobs, lowering unemployment in an economy, according to Padachi. According to

the survey, WCM is quite imperative for small firms (2006). As the National Bank of Belgium

reported in 1997, working capital management expenses for most businesses were 17 percent or
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10 percent of account receivables and 13 percent of account payables of the business's total

assets (Deelof, 2000).

The cash conversion cycle, or the time between spending money on buying raw materials

and selling the finished goods, is one of the most crucial working capital management metrics

(Nurein, 2014). More extended periods need higher investments, which can result in excess sales

and more profitability. According to Padachi (2006), the many analytical experiences that were

used to study management practices revealed that managers needed to focus on areas where they

might or might not be able to advance the company's monetary performance. Working capital

management is subject to daily change. Thus, managers must assess these changes in light of

their ongoing activities (Padachi, 2006). Mathuva (2010) claims that profitability is defined as

the rate of return on investment; hence increasing investment in current assets will decrease

profitability.

The control and arrangement of present resources and liabilities, however, are necessary

for effective WCM in order to reduce or manage the risk of investing additional current assets

and to diminish or manage the risk of enterprises failing to achieve short-term performance goals

(Mathuva, 2010). The most delicate portion of financial management is working capital

management, which entails setting budgets, dividing up current assets into their component

pieces, and financing those parts to boost profitability (Mathuva, 2010). 60 percent of small

enterprises and organizations, according to Padachi's (2006) survey, require assistance with cash

inflows or outflows. They assert further that formal working capital management practices are

used by small enterprises to lessen the risk of failure and enhance overall performance (Padachi,

2006).
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Nurein (2014) found that most companies spend more money than necessary on working

capital management because they think that doing so will have a major positive influence on

their recital and rate of return. Nurein (2014) identified a significant link flanked by working

capital management and business success for enterprises in a recent study. After completing

multiple studies in various markets, Sharma and Kumar (2011) claim to have demonstrated a

positive association among liquidity and profitability in Indian businesses. The study also finds a

connection between the company's value and the days of accounts payable and inventory on

hand. A positive correlation between firm corporate profitability, days of cash conversion, and

mean days of accounts receivable turnover is also demonstrated by additional studies (Sharma &

Kumar, 2011).

Nurein (2014) argues that businesses can acquire a sustained competitive edge over their

rivals if they manage WCM resources properly, appropriately use these resources inside their

organizations, or reduce to a minimum the cash conversion cycle. The firm would anticipate

improved or increased performance and profitability due to doing this. Management can also

increase shareholder wealth by keeping inventory at an appropriate level. The study also reveals

that management can benefit the firm's shareholders by boosting account payable days and

decreasing account receivable days (Mathuva, 2010). According to Mathuva (2010), a company's

credit strategy can help it raise sales significantly, which boosts profitability and improves the

company's performance.

2.1 Keynes's Theory of Money

Investigating the trade-off between profitability and liquidity can be done using

Keynesian theory. The idea holds that there are three reasons why people are motivated to keep

their money. First, the speculative incentive persuades people to have money to invest and profit
Research Proposal 9

from possible ventures that might materialize and need a monetary outlay (Akenga, 2017). For

speculative purposes, many businesses keep cash on hand to invest in marketable assets. For

instance, when a government creates the chance, a corporation may have the cash to invest in

treasury bonds. Second, cautious incentives arise when organizations or people keep money on

hand to cover unforeseen circumstances. For instance, businesses in the consumer electronics

sector keep cash on hand to pay for warranties, which is a frequent contingency.

Third, it is believed that funds organizations maintain to support their ongoing operations

are motivated by the transaction incentive (Akenga, 2017). These motives all have essential

components that go along with them. For instance, retaining too much cash for transactions or

safety precautions results in the loss of potential profits from investing in businesses that can

generate income. The situation of banks, where central banks force them to maintain statutory

minimum cash reserves, is an excellent example of implementing the Keynesian theory.

Therefore, some organizational activities that have a significant impact on their WCM practices

and are reflected in their liquidity can be explained by this hypothesis.

2.2 Financing Current Assets

How businesses finance their current assets is another crucial WCM decision. Companies

can use either short-term or long-term money to finance their current assets. Each business must

maintain a fixed minimum level of net working capital (Rashi, 2016). The required current asset

quantity is sometimes different. While it varies over time, businesses frequently require a certain

minimum of current assets to maintain their operations. Permanent current assets are defined as

this minimum quantity. In a trading phase, businesses frequently swap out equivalent assets for

permanent current assets (Farouq, 2016). They might divide their assets into permanent and

transient groups. Organizations cannot, however, use a classification like that in their financial
Research Proposal 10

statements. This is so because there is no distinction between the two groups on the balance

sheet.

Instead, a company's management keeps track of its baseline current asset levels

internally to assure sufficiency and reduce surplus amounts in reaction to changes in current

assets (Farouq, 2016). Seasonally, a company's temporary assets increase, for example, during

special occasions like year-end celebrations or when the volume of activity picks up for other

reasons. More sales will increase inventories, receivables, and cash above the level required for

current assets in a firm's permanent state. Despite not being strictly correct, businesses always

finance permanent current assets with long-term debt since they view them as more fixed assets

(Orshi, 2016). Permanent current assets may be hampered by the annual short-term loan

repayment deadline.

Chapter 3: Research Methodology

This research project aims to inspect the affiliation between WCM and business success. This

will be accomplished mostly through primary research, which will involve surveys and interviews

with corporate executives and financial specialists. The purpose of this study is to determine how

WCM affects business performance. The major info will be the business's performance statements.

In order to assess how WCM and financial success relate, financial ratios will also be computed

and studied. Further, an interview-based survey will be conducted with accounting professionals in

various countries to evaluate their opinions and experiences with working capital management

practices. Using this data, the research will seek to understand how different decisions surrounding

working capital management have an impact on business performance, allowing for better

strategies to be developed in the future that can optimize a company's financial success.
Research Proposal 11

The literature on how working capital management influences a company's success will also

be examined in this study. The data gathered using the survey instrument will be examined using

several statistical tests to ascertain their relevance. The outcomes will also be compared to those

of the literature review conducted using secondary sources to establish consistency. Additionally,

a stakeholder study will be done to comprehend their viewpoint and any prospective impacts of

working capital management on business performance.

3.1 Research design and case selection

A quantitative method will be used for the research design. Three countries in total—India,

China, as well as the United States—will participate in the study. The research will conduct use of

a range of financial indicators to ascertain how these three states' business performance is affected

by working capital management. The impact of WCM on company performance in these three

states will be examined using a variety of financial measures. The main objective will be achieved

by collecting and then examining pertinent financial data from companies with stock exchange

listings. Financial data spanning five years is gathered for a sample population of 300 Stock

Exchange-traded enterprises. A linear regression model is used to ascertain whether WCM and

business success have a statistically significant relationship.

3.2 Data collection and analysis

A survey will be used to determine the key performance indicators for companies in

various industries. The effectiveness of these organizations' financial records will also be

scrutinized to ascertain the results of their WCM strategies. To see if there are any correlations, the

data from the survey and the financial records will be examined. The primary focus of this study

will be on the use of financial ratios to evaluate working capital management effectiveness. The

debt-to-equity ratio, current ratio, money ratio of supply to assets, and the ratio of cash flow to
Research Proposal 12

assets are the precise ratios that will be used. This study proposal will analyze the performance of

businesses utilizing various working capital management approaches to better comprehend how

WCM and business performance are related.

In order to comprehend the relationship among WCM and business growth, the findings of

this study will also be evaluated across a number of nations. This comparison can help identify any

geographical differences in how working capital management affects company success. The

problem will also be reviewed in existing research articles, and current working capital

management laws will be looked at. Throughout this course, you will gain a thorough

understanding of the link between your company's success and WCM.

3.3 Analytical Procedures

To assess how the business' WCM practices affect productivity, a variety of analytical tools

will be employed, including descriptive analysis, regression analysis, and correlation analysis. A

quantitative method for comprehending and illuminating the relationships between variables is

descriptive analysis. It will be utilized to assess the data gathered for this research project and draw

conclusions about how well business’s function based on their level of working capital.

The correlation study will assess how closely two variables—in this case, working capital

management and company performance—relate to one another. The correlation analysis will show

whether there is a significant link between the two variables and whether changing one will have

an impact on the other. Information for the correlation study will be gathered from a variety of

sources, such as databases, published financial accounts, and firm financial records. It is significant

to remember that the study's correlation analysis was based on a sizable sample of businesses from

various industries. The results of the correlation analysis (FP) will be used to compare WCM

management and firm recital.

WCM and firm success will be evaluated through regression analysis. The company's

performance will be scrutinized primarily in relation to stock management, credit control, and the

cash flow. Short-term debt, current liabilities, current assets, and cash holdings are among the

independent factors that will be compared to the dependent variable, company performance. For

the five years ending in 2020, data on publicly traded US corporations will be gathered as part of

the study' approach.

For the purpose of determining the precise influence of working capital administration on a

company's success, the study will also take into account macroeconomic conditions and industry-

specific factors.

3.4 Timetable

4. Conclusion

A corporation should maintain proper working capital levels depending on its liquidity to

successfully meet its obligations when they are due. The profitability of a company is

significantly impacted by liquidity. However, companies should refrain from overcapitalizing or

keeping a disproportionate amount of current assets. Instead of being held in reserve with no

return, excess current assets related to the firm can be utilized in short-term investments to

generate additional income and, as a result, boost profitability. Businesses should also avoid

overtrading, which involves spending excessive money on trading. This could lead to financial

problems and eventual insolvency. Therefore, businesses must make every effort to keep enough

operating capital on hand in order to boost business performance.

5. References

Nurein, S. (2014). Effect of Working Capital Management and Financial Constraints on

Corporate Performance. Akenga, G. (2017). Effect of Liquidity on Financial Performance

of Firms Listed at the Nairobi Securities Exchange, Kenya. International Journal of

Science and Research (IJSR), 6(7), 279–285. https://doi.org/10.21275/art20175036

Farouq, B. (2016). Effect Of Financial Management Practices On The Business Efficiency Of

Small And Medium Enterprises In Nigeria (Ph.D.). Jomo Kenyatta University of

Agriculture and Technology.

Kumar, S. & Sharma, A.. (2011). Effect of Working Capital Management on Firm Profitability.

Global Business Review. 12. 159–173.

Kazimoto, P. (2016). International Journal of Research in IT, Management and Engineering.

Working Capital Management and Financial Performance of Selected Companies in

Kampala, 6(4), 54–67.

Musah, M., Kong, Y., & Antwi, S. (2019). Corporate liquidity and financial performance: A

panel study of non-financial firms on the Ghana stock exchange (GSE). International

Journal of Finance and Commerce, 1(4), 29-46.

Mathuva, D. M. (2010). The Influence of Working Capital Management Components on

Corporate Profitability: A Survey on Kenyan Listed Firms. Research Journal of Business

Management, 4(1), 1–11. https://doi.org/10.3923/rjbm.2010.1.11

Orazalin, N. (2019). Working capital management and firm profitability: evidence from

emerging markets. International Journal of Business and Globalisation, 22(4), 524–540.

https://doi.org/10.1504/ijbg.2019.10021970
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Padachi, K. (2006). Trends in Working Capital Management and its Impact on Firms'

Performance: An Analysis of Mauritian Small Manufacturing Firms. International

Review of Business Research Papers. 2.

Orshi, S. (2016). Impact of Liquidity Management on the Financial Performance of Listed Food

and Beverages Companies in Nigeria (Masters). Nigerian Defence Academy.

Panigrahi, A. (2016). Understanding the Working Capital Financing Strategy (A Case Study of

Lupin Limited). Journal of Management Research and Analysis, 1(1), 109-120.