Analysis of Working Capital and Its Effect on Business Performance

This report evaluates the impact of working capital management on business performance, using Tesco as a case study. It explores key aspects such as inventory management, cash conversion cycles, and the roles of accounts receivable and payable. The research methodology employed a descriptive design, utilizing secondary data from financial statements and online resources. Findings reveal the significance of working capital in maintaining operational liquidity and its direct correlation with profitability. The analysis covers working capital management, including inventory control, cash flow optimization, and the impact of receivable and payable turnover ratios. The report highlights the importance of skilled personnel, effective inventory tools, and attractive policies for managing receivables and payables. The conclusion emphasizes the need for effective working capital strategies to ensure long-term market positioning and business success.

Evaluation of Working capital on the
overall performance of the business
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INTRODUCTION...........................................................................................................................3
CHAPTER-3:...................................................................................................................................3
RESEARCH METHODOLOGY................................................................................................3
CHAPTER- 4:..................................................................................................................................4
FINDINGS AND DATA ANALYSIS........................................................................................4
CHAPTER-5....................................................................................................................................7
RECOMMENDATIONS.............................................................................................................7
CONCLUSION................................................................................................................................7
REFRENCES...................................................................................................................................8
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INTRODUCTION
Working capital is type of capital through which business corporations cover up the payment
of liabilities aeries of day to day business operations. This report is prepared on the basis of brief
study of requirement of working capital and effect of working capital management that the
organization. In this report Tesco has been taken which is one of the biggest retailer
organizations of Europe and run business cycle in providing market facilities within the whole
world. It also includes use of inventory management and cash converting cycle to enhance the
performance of business entity. And the role of account receivable and account payable ratio in
business organization.
CHAPTER-3:
RESEARCH METHODOLOGY
Research methodology plays important part during the research project. With the use of
methodology techniques, investigator collects the information of primary and secondary data.
Research design can be define as those sets through which investigators collect, analysis and
measure variables to identify problem of research. It is used to find specific answers of research
question. In this report descriptive design of research is used for finding out relevant answers.
They use data collection method; these methods are help in collection of information in
systematic way. Investigator collects data from secondary sources of research, which includes,
internet, books and financial statement of organization (Faden, 2014). For the inquiry of effect
of working capital Tesco’s finance statement has been used the year ending book of all the
journals and essential statements are proved in the book is use full. On this book all the relevant
data regarding he research has been found and these are reliable data. There will be 2 types of
data are available for the research process, primary data and secondary data. Primary data are
original documents and these collected from original source. On the other side secondary data
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works that synthesize summarized and interpret primary sources. These are collected from prior
research observations or data already established for the research criteria. They show the
working capital statement and effect of its higher and lower position on the organizations defines
in brief manner. Data from internet also useful as various sites show the effect and diagrams
which help in understand the effect of the working capital on the retail sector o the country.
These data are help in make the research processes and also useful for future research.
Investigator analysis the data and on the basis of this they identify the value of these data and
limitation o the methodology used during the process of research (Bendavid, Herer and
Yücesan, 2017).
Limitations of the research method
 It is hard to implement the data model during the investigation process.
 Sample size is depending on the size of the research in this report correct sample size are
not found for research.
 The researcher not able to collect data from large area.
 Data collection from secondary data is not reliable as it is depend on the server
information and there will be no rate of accuracy of the report.
 The research is impractical.
 The research process could pose ethical challenges.
 Not as readily accessible.
CHAPTER- 4:
FINDINGS AND DATA ANALYSIS
Working capital: This term is defined as financial metric, mangers use this term to
represent their operation liquidity. Working capital is essential part of the organization which
mangers use is their data to data business operation to fulfil the needs to operating activities.
With h use of working capital they can collect their liquidity assets which help in fulfil the debt
liability of organization. It is the different of current assets and correct liabilities. If the values of
current assets are higher than current liabilities then organization is in good position and if the
value of current assets is lower than its current liabilities then it shows hat organization is facing
from financial issue and they are able to fulfil current liabilities of the organization. Working
capital incurs all the short term relevant asset and liabilities.
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Working capital management: The process of managing all the short term financiering assets
and liabilities are known as working capital management. It considers all the activities which
help in managing relation between organizations assets and liabilities of short term nature. The
main purpose of applying management of working capital is to determining that business entity
is able to fulfil responsibility of paying debt and able to generate effect rate of cash inflows. It is
focus on the policy that with the use of working capital management technique organization will
be able to maintain their factors of working capital. The management process ensuring that
business entities have sufficient resource to fulfil the need of operated business activities.
Working capital management play major role in increasing of the profits of the Tesco. There will
be positive connection of the relation between working capital management and profitability
rate. Management department of Tesco has made separate policy of managing the working
capital order to achieve growth. As they knew that if they mange the working capital in effective
way then they are able to control their outflow and management of current assets include,
management of inventory, cash and debtors. It will useful in cutting wastage activity which
generate cash outflow . Tesco is wider retail organization and it required effective strategies to
manage the entire asset in a way which proved them competitive advantage (Angamuthu, 2014).
Inventory management is part of management accounting and working capital management also.
It is directly affect the performance of the organization. With the se of effect stock management
technique , manger able to identify the level of stock required to fulfil demand of customers,
days require to run the operating cycle tell and maximum level, minimum and dangers level of
stock . All these information help in taking decision regarding maintain of stock and control the
wastage of strong raw material .It will also useful for cutting extra curriculum business activities
which are the reason in high cost. In context with Tesco they use stock management policy as
this will help them to control all the cost of maintaining stock and reduce the risk of threat of
stock. It is essential for the management department of Tesco to movement EOQ, JIT tools to
manage the inventory because the target area of the organization is wider and them area in
different regions thus every region need to make different inventory management policy due to
changes of environments. The days on inventory of Tesco are 14. 90 in 2019 and in 2020 it was
15.312 which means that due to various economic issue and changes of government policies it
will directly affect the profitability rate and working capital management policy of the business
organization.
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Cash Conversion Cycle: It is a procedure where the organization purchase, sells the inventory
on credit as an account receivable and then collects the account receivables. It has 3 phases, Days
required of inventory outstanding, days of sales outstanding and days of payable outstanding.
This tool of working capital management used by business organizations to measure the time
period organization deprived of cash it is used in enhancing the level of investment in stock in
order to increasing customers sales .. It can be define as the measurement tool which is help flu
in measuring the risk. The overall performance of the business observation is directly linked with
their cash conversion cycle as with the use of this cycle mange able to identify the time or days
inventory require converting into cash. If the days value of the cash conversion cycle is high then
it will adversely effect of the organization profitability and cash flow rate as it is represent that
business need take more time to generate cash inflow, it show lack of financial resource policy
as well as lack of working capital managing. On the other side if the cash conversion cycle time
period is lower than it shows that firm is in good position and they effectively use their working
capital asset and build strong working capital management policy in order to run business cycle.
Working capital management help in increasing performance of the organization with the use of
these technique manger will be able to generate gain an increases their sales rate. This will help
in aching goal of the business organization at the time they require and it is the proved base for
long term success and collection of long term fund and by encouraging and motivating employ to
work toward achieve goal of the organization (Vemic, 2015).
Working capital includes assets and liability of current nature. The value of working
capital affect with changes of receivable turn over partition and changes of payable turnover
ratio. The recoverable turnover ratio represents the time required by organization to collect their
payment of credit sales value from customers. It is calculated by dividing value of net sales with
average account receivables. It directly concern with the ongoing success of Tesco because
higher ratio of debtor turn over show case that organization take more time to collect many from
their debtor tit will decrease cash inflow which would be the result of facial cerise of the
business entity. The turnover ratio of Tesco receivable ratio in 2019 was 40. 94 days and in 2020
it is increase by 2 % which means that in as compare to 2019 organization take more time to take
money from their relevant and potential customers.
Payable turnover ratio showcase the time require by organization to fulfil their debt liability.
It is calculated by dividing net credit purchase with average of creditors. The value of account
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payable turnover in 2020si 55.42 and in 2019 it was 56.03. This mean that even Tesco not able to
gerante their money from customers still the organization have sufficient payment and working
capital stock to pay their debt liabilities within short period of time (Kamaja, Ruohonen and
Ingalsuo, 2015).
CHAPTER-5
RECOMMENDATIONS
 Working capital play essential part but it require skilled personal which has the
capabilities and knowledge of accounting standard to calculate value of working capital.
 Managing current asset and current liabilities is high risk work.
 For inventory management Tesco need to use effective tools and polices to control the
cost of inventory and management it in effective way.
The value of account receivable and payable ratio is not in good position as compare to 2019
thus the manger need to apply effect and attract policies.
Cash converting cycle is not provides relevant information as it is changes with the time.
CONCLUSION
Every business organization aim to build their position in market for long term time period it
is only possible when they use working capital in effective way. It is most essential factor of
organization. Working capital is that part of capital which is used to fulfil the current liabilities
of the organization. With the use of working capital management, organizations manage their
current asset and current liabilities thorough which they can able to cut cost by effective
inventory, debtor and creditor management and earn profits by cutting cost. Working capital help
in enhances in performance a profitability rate of the business organization by using management
tools on inventory.
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REFRENCES
Books and journals
Faden, C., 2014. Driving firm performance based on an integrated operations approach
consisting of manufacturing, supply chain management, working capital management and
supply chain risk steering. In Optimizing Firm Performance (pp. 78-110). Springer
Gabler, Wiesbaden.
Bendavid, I., Herer, Y.T. and Yücesan, E., 2017. Inventory management under working capital
constraints. Journal of Simulation, 11(1), pp.62-74.
Angamuthu, R., 2014. An Evaluation of Working Capital Management of Select Cement
Industrial Units in Tamilnadu. International Journal of Engineering and Management
Research (IJEMR), 4(6), pp.104-108.
Vemic, M.B., 2015. Strategic Data-Based Optimization of Working Capital Management in
Medium-Sized Firms: A Real-World Case Study. In Strategic Data-Based Wisdom in the
Big Data Era (pp. 15-50). IGI Global.
Kamaja, P., Ruohonen, M. and Ingalsuo, T., 2015, April. Challenges in the Intellectual Capital
Evaluation for Dynamic Distributed Software Development Teams-DD-SCALE Program
in Progress. In European Conference on Intellectual Capital (p. 173). Academic
Conferences International Limited.
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