ASSESSMENT OF WORKING CAPITAL MANAGEMENT PRACTICES Education Project T…
The main aim of this study is to assess the working capital practices of Orange Group Limited and determine whether such practices conform to the conventional working capital practices; which offer competitive advantage, as expounded in other literatures on this same topic. The study is purely qualitative in nature so the descriptive and exploratory designs were used. The case study research strategy was used in this study. The sample for the study comprises six (6) top officers of the company who were sampled using the purposive or judgemental sampling technique. The semi-structured interview was used to gather the data for this study which were subsequently categorised into sub-groups with similar themes. The themes were linked and inferences drawn to arrive at the conclusions made in this study. The results from the study highlighted that the kind of working capital policies adopted for an entity depends on the nature of business of that entity. As a result different policies were in place for the different Divisions of the company. The findings from the study show that working capital management practices at Orange Group Limited in many aspects conformed to the conventional working capital management.
1.1 Background of the Study
Most studies found in the literature of corporate finance are conventionally dealing with the financial decisions that are long-term oriented. The most of such studies examined structure of the capital, investment decisions, and dividend valuation decisions related to the company. According to Sanger in Bagchi and Kharmrui (2012, p. 1), working capital has always been ignored in financial decision-making because it involves investment and financing in short-term period and also acts as a restrain in financial performance, since it does not contribute to Return on Equity (ROE). Most managers of business organisations are inclined to focus more on long-term investment since those investments take a chunk of the cash resources of their organisations.
In as much as long-term goals provide focus and purpose for every business, these goals must be broken down into short-term operational, workable and achievable objectives for the organization to attain its mission. Short term financial decisions relating to current assets and current liabilities should also be equally important and should be analyzed carefully. The success of every long-term investment heavily depends on how effectively that investment is managed in the short-term.
Most of the operations of a firm in the short run deal with the management of current assets and current liabilities of the firm. Van Horn (2000) indicates that working capital management involves the administration of current assets and the financing (especially current liabilities) needed to support current assets. Atril (2006. p. 386) also asserts that working capital represents a net investment in short-term assets. These assets are continually flowing into and out of the business, and are essential for day-to-day
operations. Working capital is thus seen as the lifeblood of the business, the fuel that funds the daily operations and ability to pursue near-term growth opportunities for the business. Working capital is also defined as money tied up in the business and used to finance its day to day needs, such as buying raw materials.