Measuring the Impact of Working Capital Management on Net Operating Profitability: A Comparative Analysis of Cement and Oil and Sector in Pakistan

Working capital is the key to a successful business. It is like their blood flow and the manager’s job is to help keep it flowing. Under the Generally Accepted Accounting Principles working capital is simply the difference between a company’s Current Assets, which are cash, inventory, accounts receivable and prepaid items, and Current Liabilities, accounts payable and accrued expenses.

George 's Train Shop is a family owned business that focuses on the sales and repairs of train toys. George is running a profitable business, but as he is aware of my MBA Managerial Finance class, he has asked for advice on his working capital practices. Although George is currently enjoying the benefits of a profitable business, there are opportunities for him to expand his business ventures. This first starts by dissecting degree of aggressiveness in working capital practices, current capital budgeting practices, and areas where he can improve in both arenas. In addition, careful management of the company 's cash flow will


3)Working Capital
: Working Capital is considering what the best way would be in terms of a management for short-term resources and obligations. The concept of this decision focuses on if it is possible to maintain enough capital for payments of its bills including and extra money earned as interest. Current assets and current liabilities are considered as the part of this decision.

To determine the working capital strategy Boeing, Co. should shift to, it is important to determine which strategy they have been using for the last five years. The decrease from 28.55% to 6.63% in five years seems to resemble an aggressive approach. To know for sure lets determine the amount of financial leverage the firm is using. This can be done using financial leverage ratios. According to Emery, Finnerty, and Stowe, the most commonly used ratios are the debt ratio, debt/equity ratio, and the equity multiplier (2007, p. 64). The debt ratio is simply: TOTAL DEBT/TOTAL ASSETS = DEBT RATIO PERCENTAGE. These ratios are different representations of the same information, and if anyone of them is known the other two can be determined

Working capital is defined as the current assets minus the current liabilities (Investopedia, 2012). As of the end of the 2003 fiscal year, Superior Living had $41,950 in working capital. This is a decrease of $150 from last year's working capital of $42,100. The working capital in FY 2001 was $39,500. The primary reason for the decline in the total amount of working capital appears to be that on the liabilities side, accounts payable increased 11.8%, and "other current liabilities" increased 19%. The increase in the current liabilities was greater than the increase in the current assets. Most current asset line items increased between 5-7% for the year.

Capital structure long term is looking at how assets for the business should be paid for. Through the article the common theme is to more efficiently change working capital into cash that can be used to pay for the debt and liabilities for the business. By converting the working capital into cash, the business can make payments without having to take out an extra loan or take on more debt for the business. The working capital management is evaluating the day-to-day finances of the firm and how to make sure it is paid for. Again converting working capital into tangible resources that can be used to pay for the firm is key to covering the businesses operating expenses day to day in this economy. It is more profitable for the company to do this. This will not change the overall total value of assets, but it would shift assets from being fixed into being current. Having more current assets creates a larger net working capital for the business, which is beneficial to them. Determinants of the businesses growth include total asset turnover and the dividend policy. The total asset turnover will be increased if the tips in this article are complied with. This is because having current assets that can and will be used increases this amount. The dividend policy is about choosing how much to pay shareholders versus reinvesting

The Gearing Ratio or Leverage Ratio is often used to describe this process. Resources of financing include but are not limited to corporate bonds, firm equity, and hybrid securities. Modigliani and Miller (1963) showed that existence of liabilities in a company can increase the firm value under assumptions. Ross et al (2009) claimed that utilization of debt has limitation. Graham and Harvey (2001) studied factors that affected utilization of debt. Others have proposed a Trade-off Theory of Capital Structure which states a company should balance the benefit of debt and the risk of agency costs.The difference between current assets and current liabilities is working capital. This difference shows the ability of a firm to pay off short-term debt. Working capital involves the arrangement of short term financing and investments (liabilities and assets).The standards of evaluating working capital management are closely related to some accounting ones, such as Cash Conversion Cycle, Return on Assets (ROA),Return on Equity (ROE) and so on.

Working capital can be defined as the way we measure how much liquidity a business has. It can be calculated by deducting the current liabilities from their current assets. It's of vital importance for large and small businesses to have cash accessible as this will reflect their credit worthiness and their capacity to meet their liabilities. However, this is not the only or most accurate measurement of their ability to pay their debt (Boundless Open textbook, n.d.).

On the other hand, the company has been growing constantly. In deed, according to the net income estimation for 2007 (see Table 7) the company increases its profits $25 thousand dollars more than the previous year. This is an evidence of how the company is been management and of its willing to grow year after year. Nevertheless, the first quarter of 2007 the working capital only has increased by $7 thousand dollars, which is the difference between the current assets and current liabilities but the importance of this is that according to the rotation on receivables and payable accounts, shown in Table 5 and 10, leads us to the conclusion that the company will have to pay its suppliers

The working capital also has a direct relationship with the company’s current assets and current liabilities. The working capital should be positive in order to be considered good. To determine the working capital the current liabilities are subtracted from the current assets. As in the current ratio example the same pattern will show in the working capital. It will decline from 2010 to 2011 and then will become negative in 2012. This pattern shows a decline in Tesla Motors ability to use current resources to repay its debts.

Analysing the historical values of the operating margins from the Income Statement, we forecast values for the 2007-2009 period. The executives of BKI expect the firm to achieve operating margins at least as high as the historical ones. Thus, we took averages and slightly adjusted them toward higher values. Since the declining tendency in the last three years was cause by integration costs and inventory write-downs associated with acquisitions, which already have been completed. To the EBIT, estimated by using those margins, subtract the taxes, Capex, adjust for Depreciation, Amortization and change in Working capital. The capital expenditures were just over $10m on average per year. The company is expecting the Capex remain modest. Thus, we assumed a Capex of $10m for the next three years. We estimated Net Working Capital by using the average ratio of NWC/Net income of the last three years.

What is working capital? Working capital is defined as the difference between current assets and liabilities. Current assets are assets that are expected to be turned into cash in within a year. Current liabilities are obligations that are due within one year. Working capital measures the amount leftover when you take the liabilities out of the assets, this number can be positive or negative.

Improving working capital position, a company is able to compare from year to year any increase in revenue; increase in production due to a decrease in variable or fixed costs, increase in sales due to a new sales workforce and any increase in liabilities; new short term creditors, a higher accounts payable account due to the need to purchase new materials. A company can improve its working capital by trying to keep a healthy balance between the two accounts, cutting costs, and analyzing its current short-term debt in terms of how to decrease it or find alternative ways to avoid it such as restructuring production procedures. (Schroeder, el. 2014)

The purpose of the report is to understand the capital structure of the chosen company on the basis of the financial statements of the company which includes the income statement, balance sheet and the cash flow statement of the company and do the capital analysis of the company as well to find out the advantages and disadvantages in working capital of the company and suggest company logical and useful ways for growing their economy.

The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.