Saturday, 25 May 2013

Working Capital Management in Telecommunication Sector



Case Study on Working Capital Management in Telecommunication Sector in India


How to Write Introduction Chapter on Finance Dissertation Topic



Synopsis and Research Proposal on Working Capital Management


  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 [1]. 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 [5].

RESEARCH QUESTION

A capitalist economic system all over the world relies seriously on the activities of small medium and large-scale business for its economic development. There is no economy that can develop without the activities of these companies since they contribute more to the gross domestic product, employment and innovations of the economy. It is of these reasons that it is very necessary for the managers of these companies be aware of the effect of poor working capital management. The research questions mainly laid emphasis on demand and supply risks as it affects working capital management?
The research questions are:
i) What are the consequences of working capital management for company value?
           ii) What factors influence a firm’s working capital management performance?
          iii) How efficient is the company at converting working capital to ready money?

AIMS AND OBJECTIVES

The problems and origins of the failure of the small, medium and large businesses have drawn a great deal of research. But in all, the central issue has remained finance. Meanwhile, finance as a factor has more often than not been viewed from the sourcing perspective. The issue of complexity stumbled upon by the small and medium businesses why sourcing for its medium and long term finance needs in the face of competition from the large business sector is the central focus of most researches, and thus is attracting the attention of more policy makers.
Hence, it is imperative to look at other areas of consequence to the success or failure of the small, medium and some large-scale businesses. According to Weston et al (1977), the management of working capital which represents more than half the total assets of a business is one of such areas [6]. 
The central focus of this research is to study the working capital management in the small, medium and large scale businesses, using VGC Telecoms Company as a case study, so as to establish factors influencing working capital performance, how working capital management impacts on the problem of slow development, the impacts of supply and demand risks on the management of working capital and to offer recommendations on possible ways of improving working capital management. These objectives will be achieved through:
  • The review of extant literature on working capital and its management.
  • Examination of the WCM in the small, medium and large business sector.
·         Establish how cash management, inventory management and trade credit management affect working capital management.
·         Establish how working capital management impacts on the development in the  industry.
  • The suggestion of policy recommendations to enhance WCM in the industry.
 
 RESEARCH METHODOLOGY

Literature bordering on different areas of working capital management is reviewed.
Thus, this research will employ qualitative analysis, and semi- structured questions will be drafted based on the issues raised from the review of various literatures. In addition, materials from journal articles, textbooks and working papers will be also used.
The use of internet and e-mails to send out questions will be explored where appropriate. Analysis on the company’s financial statement will be carried out in order to verify my findings. For this reason, the methodological framework is located within phenomenological paradigm.

 LAYOUT OF THE STUDY

The rest of this study is organized as follows:
Chapter 2 introduces the core issues of concern that are connected with working capital management and reviews preceding works that tackled them analytically and empirically
Chapter 3 offers the case study analysis by reviewing the background data and historical development of the company. It analyzes various concentration measures in relations with a number of competitive related variables so as to assess the efficiency and effectiveness of working capital of the company.
Chapter 4 provides the research design and methodological frameworks employed to accomplish the stated aim and objectives of the study.
Chapter 5 presents the analysis, interpretation and descriptions of the results relating to the company with reference to the aims and focus of the study.
Chapter 6 draws the conclusion from the study and formulate policy recommendations as well as further research

SUMMARY

This chapter gives fundamental insight on working capital management, its significance in small, medium and large businesses, factors influencing working capital performance, what efficient and inefficient working capital management involve. The research questions hope to explore the consequences of working capital management for company value and the factors that influence a company’s working capital management performance.

Thus, the aims and objectives of this study, the research methodology and the plan of the rest of the research are laid out in this chapter.

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