Overthe years, poor management of working capital has been one of the major reasonsfor business insolvency, bankruptcy and the ultimate failure. Working capitalrefers to the funds needed to pay for the daily operations of the business,which are the short-term drivers of an organization (Harris, 2005). Grossworking capital consists of cash, inventory, account receivables and accountpayables.
Atrill (2006) defines net working capital as a net of the short-termassets and liabilities that continuously flow into and out of the business thatare important for daily operations. Mukhopadhyay (2004) terms working capital asthe life-giving force of any business venture and states that for continuedbusiness operations then the current assets (bank, cash, marketable securities,payment of advance taxes, debtors and inventories) and current liabilities(short-term loans, creditors and advances) should be well managed. Performancerevolves around an organization’s output in respect to its objectives and isexpressed in terms of profitability and expected behavioral output. Financialperformance is regarded the only worthy measure of organizational performancedue to its value to the shareholders, management and the market (Fwaya, 2006).This is because it indicates an organization’s success and sustainabilitythrough its ability to operate above its costs.Maintainingthe working capital at an optimum is the main concern of working capitalmanagers as a firm loses money in the form of interest on the blocked funds incase of holding excess working capital when there are inadequate opportunities.
During periods of economic turbulence, the firms with reliable and efficientworking capital management practices are able to survive (Reason, 2008). Duringperiods of economic boom also, efficient management of working capital isimportant as it involves the management of both current assets and currentliabilities (Emery, Finnerty & Stowe, 2004). According to Darun (2011),working capital management is not only important in cases of financial distressbut can be managed in the most efficient way to increase a firm’s profitabilityand a competitive edge over the others.Theprocesses of managing working capital involve significant decisions on variousaspects- investment of available cash, managing accounts receivable,maintaining an absolute level of inventories and the management of accountspayables (Darun, 2011). Gitman (2009) notes the main goal of working capitalmanagement as striving to reach and maintain an optimized balance between thevarious components of working capital, as the success of a business.
Anumber of studies on working capital have been carried out around the world butmostly in the developed western countries, with very little on firms in thedeveloping countries (Quayyum, 2012).1.1.
2 Working capital management regional perspectiveBusinessesoperating in African, face unique challenges in their operations given theirhigh political instability, insufficient financing and little or slowtechnological advancement (World Economic Forum, 2011). Numerous theories havealso been developed on working capital management including the Baumol cashmanagement model (1952), Miller- Orr cash management model (1966) and theinventory management model. However, practitioners find these financialdecision-making techniques difficult to put into actual application due totheir unrealistic assumptions including the ignorance of uncertainty inbusiness operations and their complexity in explaining to decision makers(Trahan & Gitman, 1995).Studieson working capital management on Kenyan firms especially in the service sectorand in particular, the supermarket industry that is core to the Kenyan economy,are not explicit. It is therefore, important to study the working capitalmanagement in the business industry in these developing economies given theiruncertain business environment.
1.1.3 Working capital management in KenyaKenyais a developing country where economic growth and development are key issues.Economic growth is an increase in the capacity of an economy to produce goodsand services, compared from one period of time to another. Manybusinesses have been set and economy is rising however, there are factors thataffect the existence of these businesses. These factors can be internal orexternal environment of the businesses.
The internal business environmentincludes those factors within the organization that influence the operations ofthe whole organization; they are often studied in a SWOT analysis. Thestrengths and weaknesses of a project or business are internal factors.Opportunities and threats are external elements. Some of the external factorsinclude customers, government, public opinion, competition and economy.
Theseare the components associated with working capital management:· accounts receivable,· cash, · accounts payable,· Inventory.Thesecomponents are the key elements for a company’s cash flow and management ofinventory.1.1.4 Working capital management of supermarketsAdistinctive feature that can be used to distinguish a good business managementfrom a poor business management is the ability to manage working capital tomaintain a stable balance between growth, profitability and liquidity.
Management of working capital is essential to a supermarket financial andoperational success as a business.Managersof supermarkets should have in mind that their working capital plays a veryvital role in success of their businesses. Ignoring WC is like closing youreyes while walking, there is no guaranteed success in a business that does notconsider WCM.A business that reviews its working capital regularly is likely tobe able to meet its daily expensesWhena supermarket does not have enough working capital to cover its obligations,financial insolvency can result and lead to, liquidation of assets andpotential bankruptcy.