The Relationship Between Wcm and Profitability

CHAPTER ONE: INTRODUCTION

1.1 Introduction

Working capital is an important issue during financial decision making since it is being a part of investment in asset that requires appropriate financing investment (Zariyawati et al, 2009). However it is always being ignored by companies because it is related to short term period. The companies or managers should understand that items or transactions in short term period may give significant impact in future if the responsible managers does not concern about it. Thus, it is actually has the same essential with financing or investing activities in longer term period.
Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.
One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it cannot pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor. All of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.
Subsequently, companies that have high inventory turns and do business on a cash basis such as a grocery store need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stockpile the proceeds

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