the years, poor management of working capital has been one of the major reasons
for business insolvency, bankruptcy and the ultimate failure. Working capital
refers to the funds needed to pay for the daily operations of the business,
which are the short-term drivers of an organization (Harris, 2005). Gross
working capital consists of cash, inventory, account receivables and account
payables. Atrill (2006) defines net working capital as a net of the short-term
assets and liabilities that continuously flow into and out of the business that
are important for daily operations.
Mukhopadhyay (2004) terms working capital as
the life-giving force of any business venture and states that for continued
business 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. Performance
revolves around an organization’s output in respect to its objectives and is
expressed in terms of profitability and expected behavioral output. Financial
performance is regarded the only worthy measure of organizational performance
due to its value to the shareholders, management and the market (Fwaya, 2006).
This is because it indicates an organization’s success and sustainability
through its ability to operate above its costs.
the working capital at an optimum is the main concern of working capital
managers as a firm loses money in the form of interest on the blocked funds in
case of holding excess working capital when there are inadequate opportunities.
During periods of economic turbulence, the firms with reliable and efficient
working capital management practices are able to survive (Reason, 2008). During
periods of economic boom also, efficient management of working capital is
important as it involves the management of both current assets and current
liabilities (Emery, Finnerty & Stowe, 2004). According to Darun (2011),
working capital management is not only important in cases of financial distress
but can be managed in the most efficient way to increase a firm’s profitability
and a competitive edge over the others.
processes of managing working capital involve significant decisions on various
aspects- investment of available cash, managing accounts receivable,
maintaining an absolute level of inventories and the management of accounts
payables (Darun, 2011). Gitman (2009) notes the main goal of working capital
management as striving to reach and maintain an optimized balance between the
various components of working capital, as the success of a business.
number of studies on working capital have been carried out around the world but
mostly in the developed western countries, with very little on firms in the
developing countries (Quayyum, 2012).
1.1.2 Working capital management regional perspective
operating in African, face unique challenges in their operations given their
high political instability, insufficient financing and little or slow
technological advancement (World Economic Forum, 2011). Numerous theories have
also been developed on working capital management including the Baumol cash
management model (1952), Miller- Orr cash management model (1966) and the
inventory management model. However, practitioners find these financial
decision-making techniques difficult to put into actual application due to
their unrealistic assumptions including the ignorance of uncertainty in
business operations and their complexity in explaining to decision makers
(Trahan & Gitman, 1995).
on working capital management on Kenyan firms especially in the service sector
and in particular, the supermarket industry that is core to the Kenyan economy,
are not explicit. It is therefore, important to study the working capital
management in the business industry in these developing economies given their
uncertain business environment.
1.1.3 Working capital management in Kenya
is a developing country where economic growth and development are key issues.
Economic growth is an increase in the capacity of an economy to produce goods
and services, compared from one period of time to another.
businesses have been set and economy is rising however, there are factors that
affect the existence of these businesses. These factors can be internal or
external environment of the businesses. The internal business environment
includes those factors within the organization that influence the operations of
the whole organization; they are often studied in a SWOT analysis. The
strengths and weaknesses of a project or business are internal factors.
Opportunities and threats are external elements. Some of the external factors
include customers, government, public opinion, competition and economy.
are the components associated with working capital management:
components are the key elements for a company’s cash flow and management of
1.1.4 Working capital management of supermarkets
distinctive feature that can be used to distinguish a good business management
from a poor business management is the ability to manage working capital to
maintain a stable balance between growth, profitability and liquidity.
Management of working capital is essential to a supermarket financial and
operational success as a business.
of supermarkets should have in mind that their working capital plays a very
vital role in success of their businesses. Ignoring WC is like closing your
eyes while walking, there is no guaranteed success in a business that does not
consider WCM.A business that reviews its working capital regularly is likely to
be able to meet its daily expenses
a supermarket does not have enough working capital to cover its obligations,
financial insolvency can result and lead to, liquidation of assets and