Is Working Capital Management Important in business

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Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is essential to maintain the smooth running of a business. Adequate working capital and working capital management is critical in the survival and success of small and medium-sized enterprise (SMEs). Working capital management is of prime importance in the short-term as it ensures going concern and the fulfillment of any business long-term objectives such as wealth maximization. Above all, the day-to day operations of any business depends heavily on its flow of working capital.

Many organizations that are profitable on paper are forced to cease trading due to the inability to meet its short-debts when they fall due. In order to remain in business, it is vital that an organization successfully manages its working capital. Successful working capital management is thus a balancing act between having sufficient short-term liabilities to fund current assets without the risk of solvency, and the desire to maximize returns on assets and unprofitable cash holdings.

There is no universally accepted definition of small, medium and large business. Each organisation has derived their own definition of small, medium and large enterprise for convenience in their work. In Mauritius, there is a benchmark in determining the size of an enterprise. And it is determined by the SEHDA (Small Enterprises & Handicraft Development Authority) which was created following the merger of the Small and Medium Industries Development Organisations (SMIDO) and the National Handicraft Promotion Agency (NHPA), and by the Industrial Expansion Act.

Accordingly, In Mauritius the size of enterprises has been redefined, taking into account the market share of the business, the level of sales turnover, the number of employees, the value of the business and the capital employed. Thus, according to the Company Act 1985, a small enterprise would be one with not more than 50 employees and annual sales turnover less than 1.4 million and aggregate investment in production equipment of one million rupees. The medium enterprise, on the other hand, should be employing from 50 to 250 with annual turnover ranging from 1.4million to 5.75 million and aggregate investment in production equipment of 10 million rupees. Eventually, all those exceeding these 3 measurements would be considered as large business.

Working Capital Management is one of these management concepts emerging to industrial competitive advantage. Across time, irrespective of the size of the business, poor working capital management has been the heart disease of corporate organism. Insidious damage built up quietly over time, and only after serious harm has been inflicted do financial managers finally recognize the true extent of the problem. Despite the increased attention paid by financial managers, we know comparatively little about the process of working capital management and decision making about the entrepreneur process. The development of strategy within SMEs and by financial managers has been portrayed as limited, operations managed on a day-to-day fire fighting basis. This traditional and "black box" view does not allow for the learning process that leads to entrepreneurs to modify Behaviour and develop strategy. The process usually goes as follows: entrepreneurs learn to adjust, take decisions and develop a strategy that may not match pre conceived notions of working capital management and business planning. By making working capital management a priority, companies can recapture significant sums of money that can be put to better use elsewhere for other purposes. Soon, they can find themselves generating more cash flow with less working capital- the surest and often the quickest way for most companies to create wealth.

1.2 Motivation behind the study

Every year, there are a number of firms that closed down mainly due to working capital problems. However, the problem is that it is every stakeholder that is bearing the burden of these bankruptcy costs. For instance, lenders and investors are incurring high costs in trying to get their interest can capital repayment from those bankrupt firms while it is costly to management when they are trying to say, merge with other firms before it is too late.

Another major problem is that there are many workers that are laid off. Consider the case of Corotex where its closure led to 1000 workers to become jobless. Again Noblesse got rid of some 40 employees when it closed its branch at Coromandel in 2001. Lord Jym and New Island Clothing both in the same year dismissed 35 and 33 respectively. In the year 2000, 380 employees lost their jobs in Floreal Knitwear while 400 employees lost their jobs in 2002. And quite recently, largely dependent on the world economy, Mauritius has been severely hit by the financial crisis that has taken away several jobs in 2008/2009 of workers from the manufacturing and agricultural sectors, lowly paid employees, and above all, the poor and the vulnerable suffered the most. Many people want to wind up their business but government is not acceding to their demand. Minister of employment Francois Chaumière is reported to be confronted daily with demands from textile to close down their business.

Since the beginning of the year 2009, the threat to job losses is very much present in the textile sector. Some 125 employees are still waiting for the final decision of the Independent Spinning Mill, while Shibani Inwear has created uproar with its sudden closure, sending home 430 employees. January 2009 started with the Apavou group laying off 80 employees. In February, Shibani came on top of the list. The main reason is there is less orders and that export has taken a dip. On the other has, the Mauritius Exporters Association, announced in 2008 and the beginning of this year 4,000 to 5,000 persons have lost their jobs in the textile sector and "more is to come," Georges Chung says. The Domino effect of such a situation affects the SMEs. More than 3,000 have already lost their jobs in this sector.

Hence, due to these problems, there was a need to acquire the ability to predict bankruptcy and to find appropriate way to manage the working capital in an effectual manner. As not only the textile industry but also the SMEs of Mauritius is nowadays in serious difficulties, there is a need to give an attention towards the management of working capital. In Mauritius, up to now, very few ones have really paid much attention to the working capital management.


The major objective of the study is to examine and evaluate working capital management, that is, how to manage the components of working capital. The specific objectives of the study are as under:

To examine the management pattern of inventory.

To analyze and evaluate receivables management along with its impact on working capital management.

To analyze cash position and the efficiency with which the same is managed.

To assess the current liability positions and the efficiency with which the overall working capital is managed.

To suggest some measures for improvement in working capital management.


This project proceeds as follows:

Chapter 2: Overview of the SMEs in Mauritius

At first instance, there is a general overview of the EPZ sector. Then, there is a more detailed discussion of the Mauritian SMEs. The discussion focuses on the historical background of the industry, the number of SMEs in the industry, the number of employment and finally, the problems faced by these firms.

Chapter 3: Literature Review

This Chapter is based on theoretical review, empirical review and case study. This deals with the theoretical aspects found in various textbooks. It focuses on the broad terms of working capital management. It provides the definition of working capital, importance of working capital, the components of working capital, and other important issues. In addition, it shows the various research articles of working capital management of working capital and problems faced by firms in practice.

Chapter 4: Proposed Research Methodology

This Chapter gives a clear explanation of how the project will be tackled. It first starts with the translation of objectives that is the formulation of hypothesis, and then the different procedures and techniques that are used for gathering data are being discussed. The methods to be used for the analysis will also be stated. Finally there is a brief discussion of the possible limitations of the research which may be encountered during the project and the expected.

Chapter 5: Analysis

This Chapter deals with the analysis to know the effectiveness of working capital management in the Mauritian SMEs and also to situate where the SMEs stand as regard to working capital management. This analysis is undertaken through ratio analysis (activity and liquidity ratios) and also through the analysis of questionnaires.

Chapter 6: Recommendations and conclusions

It provides the possible recommendations so that the SMEs can improve its management of working capital and finally, it gives a general conclusion on the subject under investigation.