Importance of Working Capital Management

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To Assess the Importanceof Working CapitalManagement to theLiquidity of a Small andMedium Sized Enterprise:A case study on OakmanInn & Restaurants
EXECUTIVE SUMMARYIt is mainly in context to a contemporary era of operating the business with numeroustactful measures. It also requires certain leading implications by the entities in order to outlooktheir fiscal propositions. A rising state of globalisation is constantly leading to provide suchconsiderable outlooks to almost all business establishments where it has made a major impact onthe small to medium size enterprises. These SME organisations are largely affected by anychanging factor of their marketplaces. It is mainly in association to their implicated means ofmanaging the financial resources with a simultaneous management of working capital. It is incontext to the carried research work with a major aim of ascertaining the beneficial features ofworking capital in amending the liquidity positioning of organisations operating in SMEindustries. It is based upon a designated venture named Oakman Inns & Restaurants which is awell-established cooperation that is working in the hospitality sector of UK.The designed aim of this investigation is substantiated by three leading objectives for asystematic accomplishment of its proposed goals. It is further supported by some valid set ofcommendation on the basis of its preceding conclusive points that are being framed by somehelpful tools of research methodology. In which, both primary and secondary means of datacollection has been implicated by the investigator with some authenticated sources ofaggregation. Primary sources have hereby depicted a direct approach of the researcher to laydown the suspected findings in context to the defined aims and objectives of the study. Thesecondary sources of data assemblage have provisioned another section of literature review tocritique distinct viewpoints of authors in terms of concluding the study in a rationalised formatwith an eventual section of recommendation in it. It is to lay down some more potentialdimensions of managing working capital in order to amend the state of liquidity in SME's.
TABLE OF CONTENTCHAPTER 1: INTRODUCTION....................................................................................................51.1 Background.......................................................................................................................51.2 Rationale of Study............................................................................................................61.3 Research aims and objectives...........................................................................................81.5 Structure of the dissertation............................................................................................10CHAPTER 2 – LITERATURE REVIEW.....................................................................................122.1 Introduction....................................................................................................................122.2 The concept of working capital management and its impact on the business activities122.3 The ways through which business can enhance its liquidity position............................152.4 The key challenges faced by while managing working capital within the business......18Research Platform................................................................................................................20CHAPTER- 3.................................................................................................................................21RESEARCH METHODOLOGY...................................................................................................213.1 Introduction....................................................................................................................213.2 Research approach..........................................................................................................213.3 Research philosophy.......................................................................................................223.4 Research design..............................................................................................................233.7 Sampling.........................................................................................................................263.10 Ethical consideration....................................................................................................28CHAPTER-4..................................................................................................................................31DATA ANALYSIS AND FINDINGS..........................................................................................314.1 Introduction....................................................................................................................314.2 Thematic Analysis..........................................................................................................31CHAPTER 5: DISCUSSION OF FINDINGS IN RELATION TO LITERATURE.....................425.1 Introduction....................................................................................................................425.2 Discussion of the findings in relation to literature review.............................................42CHAPTER- 6.................................................................................................................................44CONCLUSION AND RECOMMENDATION.............................................................................446.1 Introduction....................................................................................................................44
6.2 Conclusion......................................................................................................................446.3 Recommendation............................................................................................................46SELF REFLECTION.....................................................................................................................47REFERENCES..............................................................................................................................48APPENDIX....................................................................................................................................53INTERVIEW TRANSCRIPT’S....................................................................................................55
CHAPTER 1: INTRODUCTION1.1 BackgroundIn the modern era of globalisation, a business has to be specific and clear towards theirpurpose and objectives so that they can place effective set of operations and functions. Theirmain aim is to be crucial in satisfying their customers and gaining appropriate forms of results. Itis highly significant that the company should be productive and profitable in the marketplace togain sustainability for longer time period. For this, they must have required resources which helpthe organization in building ways to overcome the proposed business plan. In that context, theaspects of business are mostly responsible to allocate and utilise the resources in a systematicmanner so that the company can gain desired set of objectives (Kieschnick, Laplante andMoussawi, 2013). They need to ascertain in-depth information about the working capital and therelated areas that are significant for business in executing their business activities. The team hasto manage all the dealings and transactions that are based on liquidity and monetary valuesystem. In addition to this, they have to direct effective ways which are helpful in identifying thebest method and technique to utilise the resources.At present stage of development, various companies are getting immense forms ofsources that support them to gain a position in their concerned sector. It is highly beneficial forthe firms in gaining effective ways that assist them to generate revenues and better organizationalgoals. It has been determined that company (small or medium sized) should allocate strategicmethods for optimum utilisation of the monetary resources (Gill, Biger and Mathur, 2010). Thisis vital for them to attain higher level of benefits and gain better performance. Managing workingcapital is a represented as a set of activities which supports the business in developing structurefor using the resources effectively. It includes the areas like defining the level of working capital,current assets and liabilities to be gained by the company in a particular accounting period. Theutilization of monetary funds and capital held with the business concern needs to be divided intotwo section namely long-term and short-term funds. Both the stated aspects are quite differentfrom each other on the basis of various topics (Priester and Wang, 2010). The long-terminvestments are evaluated as ‘fixed investment’ and the short-term investment are stated as'current investment'. Long term funds are generally invested on fixed assets to gain benefits andutilise them for longer period of time. Such investments over fixed assets are maintained in the5
business to earn profits and returns during the life cycle of the fixed assets. However, short–termassets are also required in the business to execute operations that are developed for a shortinterval of time. It is ascertained that short-term investment is mostly retained within a financialyear. Thus, it is significant for the business aspects to develop and implement a structure whichcould help the organization in attaining better and effective results (Corelli, 2016).Company overviewOakman Inns & restaurants were established in 2005 by Mr. Peter Borg-Neal with an aimto provide new experiences and satisfaction to the person who visits their place. Peter's visionwas to create and develop an environment where like-minded people and groups could come,gather and enjoy some great varieties of food and drinks whilst catching up with friends, family,neighbours and colleagues. This becomes a visionary approach for them and their team thatdevelops a unique image for their business. After the successful launch of the restaurant, Peterfound their very first pub in 2007. They are mainly aimed on serving quality services and rangeof food products to their customers so that they can lead the business to greater heights andenable the managerial team to assess benefits. They use local ingredients for preparing all thestuff and food items that are offered in their restaurants. Oakman Inn & Restaurants are famousfor the pub chain in their home countries. They are having attractive interior and exterior designof the pub which directs the attention of customers towards itself. Their first outlet 'The Akeman'has won the award of Best UK Pub Design in 2009 at The Publican Awards. Along with this,they also won the 'Eat out Award' among the Best Pub Companies in the year 2013. Being amedium sized company, it is essential for them to maintain the balance and utilisation offinancial resources available for the company.1.2 Rationale of StudyThe main reason for conducting the research and gaining information is “To assess thesignificance of working capital in enhancing liquidity position of small and medium size firm: Astudy on Oakman Inns & Restaurants UK”. Oakman Inn's approaches are direct and focused onproviding a range of quality services and facilities to their customers to gain better results fromthe market activities and functions. Their aim is to get appropriate form of return and responsefrom the investment made by them. It is the responsibility of their marketing and business teamto develop and implement effective ways to allocate and utilise resources for gaining appropriateform of results (Preve and Sarria-Allende, 2010). This helps them to identify areas and aspects6
which are productive and profitable for their business. For this, they have to assess theimportance of handling funds and capital of the business so that the company can gainappropriate position in the marketplace. As financial resources are one of the most effectiveassets for the company in maintaining their sustainability and continuity in the concerned sector.The process of managing the working capital of the business helps the organization inascertaining values that are to be retained by them.The process of working capital management is stated as an accounting strategy which hasits focus on maintaining an adequate and sufficient amount of balance between a company’scurrent assets and liabilities. This helps them to place strategical and tactical actions in order togain better return from the business investment. Working capital management system is stated asan effective technique of building up ways that utilise the funds for the company and allows thebusiness aspects to overcome their financial obligations. This helps the companies and theirmanagement team to boost up their working and earnings so that better results could be gained.Moreover, the efficiency of managing working capital is determined as handling inventories,cash and accounts like the reports that show the amount payable and receivable for the business(Vural, Sökmen and Çetenak, 2012). An economic and innovative working capital managementsystem generally adopts and uses key performance ratios for identify and allocate the areas thatrequire proper attention and knowledge in order to generate help for the business operations andrelated activities. They are stated as working capital ratio, inventory turnover ratio and collectionratio which helps the management team to maintain liquidity and profitability for the business.Moreover, the need of identifying effective and crucial structure of dividing financialresources for the organization helps them in maintaining a certain level of balance in theirinvestments and return they receive from the business activities. An organization requires havinga definite amount and level of financial resources for performing the regular day-to-day activitieswhich includes making routine payments, covering unexpected costs and purchasing basicmaterial for producing the finished goods. Working capital is a vital and eases to understandconcept as it is connected with an individual’s cost of living and their business operations. Thus,it can be understood that the business operations and activities need to be productive andprofitable. The business has to maintain their financial resources by collecting all the funds fromthe sources they owed and hold up a certain amount of available ratio on a daily basis to coverday-to-day expenses, bills and other regular expenditures (Charitou, Elfani and Lois, 2010). For7
this, it is crucial for the business to adopt innovative and advance system of managing workingcapital. This will help them in addressing critical factors that supports the business overcomingthe present and future issues related with the monetary values and functions. In order to reducethe impact and influence of such procedures the company has to assess some effective ways andmeasures that could generate a direction of success and achieving the targets.1.3 Research aims and objectivesThe purpose of conducting the whole research is “To assess the significance of workingcapital in enhancing liquidity position of small and medium size firm: A study on Oakman Inns& Restaurants UK”. Accordingly, the below stated points are their objectives which would helpthe researcher in getting appropriate information about the relevant areas and aspects that arecrucial for summarising the research:To understand the concept of working capital management and its impact on the businessactivities.To identify the ways through which business can enhance its liquidity position.To assess the key challenges faced by Oakman Inns & Restaurants while managingworking capital within the business.To recommend the effective ways for Oakman Inns & Restaurants through which theirbusiness can enhance its liquidity position in the market.Moreover, following are the research questions that are to be addressed by the researcherto gain actual and real information regarding the topic:What is the concept of working capital management and its impact on business activities?Evaluate the ways through which business can enhance its liquidity position?What are the key challenges faced by Oakman Inns & Restaurants while managingworking capital within business?By addressing the questions and objectives, the researcher would be able to gainappropriate form of result that would give immense sources of information to understand theresearch topics and aims. However, it is necessary that the information attained by them needs tobe accurate and real so that it could be considered by the organizational team whileimplementing action plan.Themes8
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