INTRODUCTION

1.1 Background of the study

Working Capital represents the amount of current assets that have not been supplied by
current, short term creditors or Working Capital is the excess of current assets that has
been supplied by the long-term creditors and the stockholders (Chandra, 2008).

Working capital refers to part of the firm’s capital, which is required for financing short
term or current assets such as cash, marketable securities, debtors and inventories. Funds
thus, invested in current assets keep revolving fast and are constantly converted into cash
and this cash flow out again in exchange for other current assets. Working capital is also
known as revolving or circulating capital or short-term capital. Working capital is the
capital available for conducting the day-to-day operations of an organization; it
represents firms’ investment in short term assets (Brigham and Houston, 2009).
Working capital management (WCM) which is also known as liquidity management is
essential in determining the success of a firm as it involves organization of current assets
and current liabilities. Hence, should the firm unable to organize its liquidity level, this
means that its current asset unable to cover its current liabilities such as short term debts.
Thus, firm may resort to external funding which has the possibility of incurring higher
cost of financing that may lead to lower profitability and possibility of becoming
insolvency and bankruptcy due to poor credit position (Uyar, 2009).
The main objective of working capital management is to reach optimal balance between
working capital management components. Large inventory and liberal trade credit policy
may lead to high sales. Large inventory also reduces the risk of a stock-out. Trade credit
may stimulate sales because it allows a firm to access product quality before paying.
Another component of working capital management is accounts payables indicated that
delaying payment of accounts payable to suppliers allows firms to access the quality of
obtaining products and can be inexpensive and flexible source of financing (Gill, 2010).
The excess or shortages of net working capital has impact on the overall performance of
the firm. The lower net working capital will lead to the higher risk of not being able to
pay short term obligation when they come due and the higher networking capital or lower
current liability and higher current asset financing also reduces profitability due to higher
cost of finance from long term financing for this reason the management of working
capital is required. Therefore working capital management is reference to administration
controlling and utilization of current asset working capital police and carries out that
police in day to day operation of the firm. It also involves decision and management of
investment on current asset.

There are two concepts regarding working capital the first one; gross working capital:- it
is refers to the firm’s investment in current asset which can be converted in to cash with
in an accounting period and includes cash, short term securities, receivables and
inventories. The seconds; net working capital: refers to the difference between current
asset and current liabilities. It can be negative or positive. A positive networking capital
can arise when current asset excess current liabilities. A negative networking capital
occurs when current liabilities are in excess of current assets.

This study would be focused on the assessment of the working capital management in the
case study of Adea-WAN food group and flour factory.