WORKING CAPITAL: A TOOL FOR SMALL AND MEDIUM SCALES ENTERPRISE EFFICIENCY
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WORKING CAPITAL: A TOOL FOR SMALL AND MEDIUM SCALES ENTERPRISE EFFICIENCY
Chapter one
INTRODUCTION
Background to the Study
Working cash is the lifeblood and nerve centre of any business. Working capital is as important to the smooth operation of a firm as blood circulation is to the human body. No business can run properly without an adequate quantity of working capital.
Working capital is designed to ensure that a company’s asset investment is used effectively and efficiently. Working capital appears to have been relatively overlooked among Small and Medium Scale Enterprises (SMEs), despite the fact that a large number of business failures are caused by poor working capital decisions (Tewolde 2002).
Working capital management is an important component of corporate financial management since it has a direct impact on the firm’s profitability.
According to Bhattacharya (2009), Karl Marx introduced the concept of working capital in 1914, albeit in a somewhat different form, and referred to it as “variable capital”. Working capital is the capital required to fund a company’s day-to-day operations.
It is equal to the difference between current (short-term) assets and current (short-term) liabilities. Adequate working capital is critical for a company’s liquidity.
Working capital management, on the other hand, is concerned with a company’s short-term assets (stocks, debtors, and cash), liabilities (creditors and borrowing), and cash flows (Park and Gladson, 2003).
According to McMenamin (2005), the purpose of working capital management is to achieve the best possible investment in working capital while remaining compatible with the overarching financial goal of maximising shareholder profit.
Small and medium-sized businesses may have an ideal level of working capital, maximising their worth. Raheman and Nasr (2007) proposed that a large inventory and a favourable trade credit policy could contribute to high sales.
However, one of the most significant aspects of working capital management for small and medium-sized businesses is the source of financing working capital, which serves as the foundation for the company’s existence and continued survival.
1.2 Statement of Problem
Despite the fact that Small and Medium-Sized Enterprises (SMEs) are the driving force behind a country’s development, this sector is plagued by a number of restrictions, including poor working capital management practices, which continue to undermine its admirable goals.
It is well known that a company’s profitability in comparison to Small and Medium Scale Enterprises (SMEs) in Supermarket is heavily influenced by how its working capital is managed (Planware, 2011).
Both too much and too little working capital are detrimental to a business. Excess working capital causes unprofitable utilisation of scarce funds. In contrast, insufficient working capital frequently disrupts SMEs’ routine operations. Small and medium-sized businesses frequently face a number of challenges in working capital management
including a lack of knowledge about the necessary sources of financing working capital, ineffective cash flow management, no established collection policies for accounts receivable, frequent inventory stock-outs, poor control over accounts payable, and a failure to evaluate risk on investment (Lyytinen, 2009).
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