As said by Thomas and Hodges (2010), “research objectives indicate in more detail the specific research topics or issues the project plans to investigate, building on the main theme stated in the research aim” (p. 39). This reasearch study aims to analyze the impact of working capital management on profitability of European blue chips companies trading in Stoxx 100. The research aim can be attained by elaborating the underlying research objectives.
• To provide the understanding of the concepts of working capital, working capital management and profitability• To identify the relevance between working capital management and profitability of the firms• To analyze critically to which extent the components of the working capital affects a firm’s profitability • To conclude the results and come up with.1.4 Research QuestionsFollowing research questions have been answered in this study.1. Does working capital management affect the profitability of the Stoxx 100 listed companies?2. Which profitability measure reflects the influence of working capital management more clearly?1.5 Research LimitationsFirstly, this research study undertakes the analysis of 64 non-financial firms of Stoxx 100. Banks, insurance, IT and other companies having incomplete data have been excluded from this research.
Secondly, this research study attempts to find relationship between operational working capital and profitability of Stoxx 100 Companies. 1.6 Study Structure IntroductionThe following research is split into five chapters, which are represented by report chapters. The introduction is based on a background overview, research theme including a plan and research structure.Literature Review The literature review of this research is presented in the second chapter. The nucleus of literature review is to provide relevant material from various books, scholarly journals and online publication reports to understand the topic and its importance. MethodologyMethodology of the research study is elaborated in the third chapter.
The methodology highlights the approach implemented in this research and the reasons for choosing these methods. At the end, it focuses on data accumulation and analysis for achieving research objectives. ResultsResults of the proposed research study are categorised in the fourth chapter. The research results have been extracted due to the implication of quantitative methodology approach. It has been analysed and explained for depiction of useful information leading to attain research goals. ConclusionThe fifth chapter concludes the research outcomes. The conclusion is based on the material generated through literature review and application of the various statistical tests for the data analysis.
Figure 1 2. Literature ReviewThis chapter explains the basic concepts and literature review on working capital management. Working capital concepts and approaches have been described with the support of past empirical studies. Factors that can influence working capital management and regional analysis have also been explained latter in this part.
2.1 Assets”An asset is a resource which is controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entitiy”(Christian & Ludenbach, 2013, p. 6).
Assets can be categorized into two main types on the basis of their life:a) fixed assetsb) current assets2.1.1 Fixed AssetsFixed assets have long life and they are bought to generate long term benefits. Fixed assets are utilised to increase efficiency and production levels (Pandey & Jaiswal, 2011). Fixed assets can be further divided into two categories i.
e. tangible assets and intangible assets (Ross, Westerfield & Jordan, 2004). Tangible assets include building, plant and machinery etc (Ross, Westerfield & Jordan, 2004). The purpose of having these assets is production of goods or services or to generate income by renting them out (Christian & Ludenbach, 2013). Intangible assets are those who do not have physical existence but they possess a great value. Examples of intangible assets include trademarks, copyrights and patents (Ross, Westerfield & Jordan, 2004).
Figure 2: Financing of fixed & current assets (Horne & Wachowicz, 2008)As the figure 2 shows, fixed assets are generally financed with long-term financing (Allen, Myers, & Brealey, 2006). The options for long-term financing includes equity and long-term debt (Allen, Myers, & Brealey, 2006). Normally, the matching principle of maturity between long-term financing and fixed assets is hired in practice (Graham & Harvey, 2001; Allen, Myers, & Brealey, 2006). The investment in fixed assets also increases with the growth of a company (Allen, Myers, & Brealey, 2006). 2.
1.2 Current AssetsAssets having maturity life less than one year are known as current assets and they are likely to be used during the operating cycle (Christian & Ludenbach, 2013, p. 14). Current assets are normally liquid and they can be convereted into cash easily (Allen, Myers, & Brealey, 2006; Ross, Westerfield & Jordan, 2004).
Accounts receiveble, cash and cash equivalents and inventory are examples of current assets (Ross, Westerfield & Jordan, 2004). The main objective of current assets is to keep the production and sales process going (Pandey & Jaiswal, 2011). Current assets are highly significant for the success of a business (Afza & Nazir, 2009). The need to find balanced amount of current assets for corporations is essential as current assets can strongly influence the business operations and capital returns (Horne & Wachowicz, 2008).As illustrarted in the figure 2, a portion of current assets is financed with long-term financing, however, short term financing is also employed for the acquistion of current assets when long-term finances are not sufficient.
Short term financing can be done with bank loans or by delaying accounts payable (Allen, Myers, & Brealey, 2006). The blue line in figure 2 shows that the need of expansion of current assets arises due to seasonality or increase in sales that is financed with short-term borrowing (Merville & Tavis, 1973). 2.2 Liabilities”A liability is a present obligation of the entity that arises from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits” (Christian & Ludenbach, 2013, p. 6). Like assets, liabilities are also divided into two groups on the maturity basis.a.
long-term liabilitiesb. current liabilities2.2.1 Long-term LiabilitiesLong term liabilities include equity and debt. “Equity is the residual interest in the assets of the entity after deducting all its liabilities” (Christian & Ludenbach, 2013, p. 6).
Equity is issued in the form of shares and equityholders posses share certificates (Hiller et al, 2013). Shareholders are the owners of the firm and they decide important management issues such as selection of board of directors or mergers and acquisitions etc by casting vote (Hiller et al, 2013). They also share profit and loss of the firm and are entitled to receive dividend. Dividend can be defined as “distributions of profits to holders of equity investment in proportion to their holdings of a particular class of capital” (Christian & Ludenbach, 2013, p. 145). Debt is the amount tha