Working capital management : theory and evidence from New Zealand listed limited liability companies

Abstract

The theory of working capital management contends that if working capital is managed according to prescriptive theory then it would be expected that businesses would invest in working capital, finance working capital, monitor factors that influence working capital, manage cash, accounts receivable, inventory, accounts payable, the cash conversion cycle (aggregative approach), and measure and analyze performance to ensure that the long term (fixed) assets are utilized effectively and efficiently. This thesis seeks to shed light on the problem, how working capital is managed by New Zealand listed limited liability companies. This is achieved by applying New Zealand data collected by means of a postal questionnaire to an empirical working capital management model. The main findings indicate that businesses in New Zealand consider working capital management an important issue, yet a large group of respondents ignored the survey. It is evident that the respondents placed greater emphasis or importance on the financing decision, with the investment decision largely taken for granted. Some effort is made prima facie to manage cash, accounts receivable, inventory and accounts payable independently of each other. However given the theory of working capital management, there may be room for improvement regarding the strategies, tactics and techniques used to manage these components. Furthermore, the findings suggest that working capital management is also strategic as it impact on the liquidity, solvency/bankruptcy, efficiency, profitability and shareholder wealth maximization of the business. In light of the findings, it was recommended that an in-depth case study research approach can enhance the survey questionnaire to further investigate the findings. Further research should focus on the levels, composition, structure, and performance of working capital and introduce financial data for this purpose. It is evident from the results of the study that the purpose and function of working capital are not clearly and sufficiently recognized, and that it is quite likely that deficiencies and insufficiencies in the management of working capital in New Zealand may be revealed by further empirical research.