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WORKING CAPITAL MANAGEMENT IN TELECOMMUNICATION SECTOR A CASE STUDY OF VGC TELECOMS
BY GBENGA SEGUN AKINWANDE
The knowledge and understanding of the working capital management practices of small, medium and large companies are presently not enough and many firms have gone into liquidation over the years as a result of running a deficit cash flow from operations.
Fact shows that relatively, only fraction of small and medium companies employ basic working capital management practices and they show a higher prevalence of subjective working capital decision-making. In line to the submissions of various researchers, the existence of ‘finance gap’ in the free enterprise economic system is one of the basic causes for the liquidation of small business.
The focus of working capital management (WCM) is sustenance of the optimum balance of each of the working capital component. According to Wilson (1996), smaller company should embrace formal WCM practice with the hope of minimizing the probability of business failure, as well as to enhance business performance.
Small Medium Enterprise (SME) is the live wire of any economy as cash is the live wire of any organisation. For instance, the office of National statistics report in 2005 stated that SME accounted for more than 58% of all UK employment out of which small enterprises accounted for 46.8% in 2004.
Cash deterioration affects the company’s potential to finance operation, reinvest and meet up with capital requirements and payments. It implies that whenever working capital drops too low, such business may be at risk; this is why it is very necessary for company to have effective management of working capital so as to keep its economy alive.
The principal focus of this work is to investigate factors influencing working capital performance and factors responsible for inefficient working capital in small, medium and large companies and to explore means of improving the management of working capital in small and medium firms.
The relevant background of working capital management, the research question vis-à-vis the objectives, the methodological framework and layout of this research will be studied in this chapter.
1.1 BACKGROUND OF THE STUDY
The efficient management of working capital is very vital for an organisation. This is premised on the fact having too much working capital signifies inefficiency, whereas too little cash at hand signifies that the survival of business is shaky.
The concept of working capital management is all about the commercial and financial parts of credit, inventory, marketing, purchasing, royalty and investment policy. The greater the profit margin, the lesser is likely to be the level of working capital tied up in creating and selling titles.
The difference between current assets and current liabilities is known as working capital. The main current assets are stock, debtors and cash, while current liabilities are creditors and accrued expenses. The main issue in the word “Current” is that it is anticipated to change into cash, or perhaps be paid from cash, within the period of twelve calendar months. As a rule of thumb, an organisation wishes to tie up little money as much as possible in working capital. Nevertheless, there are always trade-offs. One peculiar problem for business is running out of cash, which consequently leads to failure to make employees’ payrolls, or business might be unable to offer services due to absence of essential resources.
As pointed out by Shin and Soenen (1998), a firm’s working capital results from the time lag between the expenditure for the purchase of raw materials and the collection from sale of finished goods. According to their submission, this entails various areas of company’s operational management that includes receivables, inventories management, management and use of trade credit, etc..
The aim of WCM is to sustain the optimum balance of all components of working capital; therefore, it is enormously necessary for companies to monitor overall trends so as to detect areas that necessitate closer management. In achieving this, different methods and strategies are applied to effectively control each component of working capital.
Harris (2005) submitted that for firms to minimise risk, effectively prepare for uncertainty and improve on overall performance, the core working capital drivers and the appropriate level of working capital must be understood . .
As submitted by Peel et al (1996) that for small companies to manage and control their working capital effectively; both internal and external working capital drivers must be taken into consideration, and also consideration of how sensitive such drivers are to changes in the business or market. Thus, a firm must be able to minimise inventory, control supply and apply payment pressure on customers. Due to inefficient management of working capital, many corporations lose billions annually. A good example is the study published by REL Consultancy Group on IT companies in 2002. A problem that is exacerbated when the economy worsens as it did during 2001.
REL examined operational data from 90 of the largest publicly traded IT companies in the United States, with annual minimum revenue of $450 million. It took the companies an average of 69 days to convert sales into cash in 2001, nine days longer than the average in 2000, a lag that cost $10 billion in lost cash flow, according to REL. This is to say, vendors took longer to collect on their sales.
Whenever the length of time between making a sale and receiving revenue stretches out, firms miss out on having that cash available for paying off debts, developing new products and making other investments. Decreasing working capital, the difference between a company’s assets and liabilities frees up cash, thereby making it easier for companies to respond to market changes as early as possible. REL in London, focuses on working capital reduction, examined the quarterly cash flow of major firms and advising firms such as Hewlett-Packard, IBM Corporation, and Sun Microsystems.
Due to inefficient receivables, payables, and inventory practices many corporations in the United States and Europe stuck a huge sum that could be reclaimed with relatively little investment in transit (a staggering $460 billion in the United States and some €469 million in Europe). Hackett-REL, which is part of The Hackett Group, a strategic advisory company, estimates that in the U.S. alone, getting this excess under control would reduce total net debt by 29 percent, increase net profit up to 11 percent and improve return on capital employed (ROCE) from 13.9 percent to 15.1 percent.
Liberating the billions in cash trapped on the balance sheet is easier than one may think. Dell Incorporation., as an example is extolled for overall strong corporate management and working capital performance by building a computer only when it has received payment for an order, and doesn’t pay its own suppliers for an agreed-upon period of time thereafter. As a consequence, Dell benefits from negative working capital and, the more it grows, the more its suppliers finance its growth.
Although not all companies can function like Dell, but the most working capital position can be improved by at least 20 percent over time if it is managed, controlled efficiently and effectively.
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