Introduction:
Working capital is the single best method of determining the position of a company, or how well that company may be doing. The more working capital a company has the better that company is doing, financially. Many potential investors and others in the public sphere will scrutinize a balance sheet to find the working capital calculation of a company. The working capital calculation is the simplest to perform. Simply subtract the short-term liabilities of a company from the current assets. It is not always so easy, though. All short-term liabilities must be accounted for, as well as all current assets. This is not as simple as just counting the available cash on hand. The working capital of a company is requires a vast working capital calculation to find the exact amount of working capital. The company's working capital constitutes the monies used for purchasing new equipment, new stock lines and much more. Working capital is the single most important aspect of a company, whether you are judging performance or speculating on expanding the company. Without the required working capital and knowledge of how to perform a working capital calculation, it may be impossible for a business to grow and prosper.
Finance textbooks typically begin their working capital sections with a discussion of the risk and return tradeoffs inherent in alternative working capital policies. High risk, high returns working capital investment and financing strategies are referred to as aggressive; lower risk and return strategies are called moderate or matching; still lower risk and return is called conservative. According to Denzil Watson and Antony Head (2007) working capital is so important; a company will need to formulate clear policies concerning the various components of working capital. Key policies areas relate to the level of investment in working capital for a given level of operations and the extent to which working capital is financed from short term funds such as bank overdraft. Besley S & Brigham E, (2000) has stated in their book that under the conditions of certainty, when sales, cost, lead times, payment periods, and so on are known for sure, all firms would hold only minimal levels of current assets. Any larger amounts would increase the need of external funding without a corresponding increase in profits, while any smaller holding s would involve late payments to labour and suppliers and lost sales due to inventory shortages and an overly restrictive credit policy. However, the situation changes when uncertainty occurs. Here the firm requires some minimum amount of cash and inventories based on expected payments, expected sales, expected order lead times, and so on, plus additional amounts, or safety stocks, which enable it to deal with departures from the expected values.
According to McLaney, E and Atrill, P. 2005, when managing cash, it is important to be aware of the cash conversion cycle of the business. For retailer, for e.g. this may be defined as the time period between the outlay of cash necessary for the purchase of stocks and the ultimate receipt of cash from the sale of the goods. In the case of a business, for e.g. a wholesaler, that purchases goods on credit for subsequent resale on credit. According to Farris, M.T and Hutchison, P. 2002, the cash to cash metric or cash operating cycle is an important measure as a bridges across inbound material activities with suppliers, through manufacturing operations, and the outbound sales activities with customers. describes cash to cash cycle as ``the cash conversion cycle, which mirrors the operating cycle, measures the interval between the time cash expenditures are made to purchase inventory for use in the production process and the time that funds are received from the sale of the finished product. This time interval is measured in days and is equal to the net of the average age of the inventory plus the average collection period minus the average age of accounts payable'' (Schilling, 1996). This is the most commonly accepted definition currently found in the literature. Further extending the variables involved in the process, Soenen states ``the length of a firm's cash conversion cycle depends on the number of days' credit it gets from its suppliers, the length of the production process and the number of days finished products remain in inventory before they are sold, and finally, the average collection period from the company's customers'' (Soenen, 1993).
Reason for study:
As discussed above about working capital policies and cash conversion cycle it is clear that the main components of working capital policies and cash conversion cycle are same i.e. stock debtors and cash. Therefore it could be possible that behaviour of cash conversion cycle may affect behaviour of working capital policies. Arguably it can be said that there should be some relation between working capital policies and cash conversion cycle but there is not exact evidence that can prove this relation. This is the main reason for conducting this study. The reason behind this study is to gain understanding about the relationship between working capital policies and cash conversion cycle which can help in further working capital management and short term financial management.
Context of research:
This study will be undertaking on Fast Moving Consumer Goods (FAST MOVING CONSUMER GOODS) retail industry of the UNITED KINGDOM. It is not possible to consider population, FAST MOVING CONSUMER GOODS industry as a whole, sample (Morison and Marks and Spencer) will be selected randomly from the population (FAST MOVING CONSUMER GOODS retail industry).
The aim and objectives of this study are given below:
Aim:
To find out relation between working capital polices and cash conversion cycle.
Objectives:
To analysis working capital policies of FAST MOVING CONSUMER GOODS retail industry of the UNITED KINGDOM.
To analysis cash conversion cycle of FAST MOVING CONSUMER GOODS retail industry of the UNITED KINGDOM.
To find out factors causing relation between working capital policies and cash conversion cycle, and
To evaluate the effect of relation on each other’s behaviour.
Research Methodology:
Researchers have to decide what type of approach they want to use to collect and to analyze their data. This study is a qualitative research. Quantitative research is nothing but methodical scientific examination of quantitative properties. As the main aim of this research is to find out relation between working capital polices and cash conversion cycle the final conclusion of this study may help in future studies of evaluation of working capital management. The fast moving consumer goods retailers consider for this study is Morrison and Marks and Spencer. The research design chosen for our research is exploratory research design. The aim of an exploratory research design is to discover new ideas. A request had been sent to finance director of Morison and M&S for 15 minutes face to face interview but it has been rejected by M&S and Morison did not replied. Still it is possible to complete this research with the data available in annual report and other internet source. For this study only secondary source been used. Secondary data is data, which already exist.
