A Systematic Literature Review of Working Capital Management in Business Organizations

Abstract

Working capital management is a crucial aspect of financial management that focuses on the effective management of a company's current assets and liabilities to ensure the smooth operation of day-to-day activities. A literature review on working capital management reveals a plethora of research studies highlighting the significance of optimizing working capital to enhance a firm's profitability, liquidity, and overall financial performance. Several studies have emphasized the importance of maintaining an optimal level of working capital to strike a balance between liquidity and profitability. By efficiently managing components such as cash, inventory, accounts receivable, and accounts payable, companies can minimize the risk of financial distress and improve their operational efficiency. Researchers have proposed various models and techniques to assess and improve working capital management practices, such as the cash conversion cycle, the operating cycle, the current ratio, and the quick ratio. Moreover, studies have also explored the impact of working capital management on firm value and performance. It has been widely documented that effective working capital management positively influences a company's profitability and shareholder value. By reducing the cash conversion cycle and operating cycle, firms can release trapped capital and reinvest it in value-creating activities. Conversely, inadequate working capital management can lead to financial constraints, increased costs, and reduced profitability. Furthermore, researchers have investigated the determinants and challenges of working capital management across different industries and regions. Factors such as industry characteristics, firm size, profitability, growth rate, and macroeconomic conditions have been identified as key determinants of working capital management practices. Cultural, regulatory, and technological factors also play a significant role in shaping companies' approaches to working capital management. In conclusion, the literature review on working capital management underscores the importance of adopting efficient strategies to manage current assets and liabilities effectively. By optimizing working capital levels, companies can improve their financial performance, enhance liquidity, and create long-term value for stakeholders.