Efficient on the job(p) smashing management is an integral component of the general bodily strategy to create shareholder value. Working capital is the result of the metre lag between the expenditure for the procure of raw materials and the collection for the sale of the finished product. The continuing combine of notes from suppliers to inventory to accounts receivable and back into cash is unremarkably referred to as the cash conversion cycle. The way in which running(a) capital is managed can have a significant repair on both the fluidity and profitability of the company. Smith (1980) eldest signaled the importance of the trade-offs between the dual goals of working capital management, i.e., liquidity and profitability. In other words, decisions that be given to maximize profitability tend not to maximize the chances of adequate liquidity. Conversely, focusing almost wholly on liquidity will tend to reduce the authorization profitability of the company.
Measures of Working Capital Management Efficiency and Their race to Corporate Profitability
The (Weighted) Cash Conversion Cycle
The most conventional measures of corporate liquidity are the current ratio and the quick ratio. Because of the placid nature, their adequacy in examining a firms efficiency in managing its working capital has been questioned by many authors (see, for example, Emery, 1984; and Kamath, 1989).
Liquidity for the on-going firm is not really dependent on the liquidation value of its assets exactly rather on the operating cash flow generated by those assets. Gitman (1974) introduced the cash cycle concept as a authoritative element in working capital management. The total cash cycle is defined as the number of days from the age the firm pays for its purchases of the most basic form of inventory to the time the firm collects for the sale of its finished product. Richards and Laughlin (1980) operationalized the cash cycle...
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