Importance of Working Capital Management in the UK Food Sector

This report presents a comprehensive study on working capital management, specifically focusing on small businesses within the UK food sector. The research explores the fundamental concept of working capital, defined as the difference between current assets and current liabilities, and its critical role in ensuring a company's financial stability and operational efficiency. The report delves into the importance of effective working capital management for meeting short-term obligations and avoiding reliance on expensive external financing. It examines the factors that affect working capital, such as payment terms with vendors and debtors, and their impact on business performance. The methodology involves a combination of primary and secondary data analysis to identify issues leading to negative working capital, assess the impact of working capital management, and propose measures to enhance its effectiveness. The study also addresses research questions related to the issues of working capital management, factors affecting management practices, impact on organizational performance, and measures to enhance its effectiveness. The report's structure includes an introduction, literature review, research methodology, data analysis, results, and conclusions with recommendations for the food industry in the UK. The study aims to provide insights into the importance of working capital management for small businesses in the UK food sector, offering practical recommendations for improving financial performance and sustainability.

A STUDY ON WORKING
CAPITAL MANAGEMENT
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ACKNOWLEDGEMENT
For the present study related to importance of working capital within food industry I would like
to extend my gratitude towards my cute drop for selecting me for the present dissertation. in
addition to this I would also like to extend my thanks and gratitude towards my parents who
allowed me to complete the dissertation without any problem or issues. Along with this I would
also like to thanks all my friends and peers who have supported me throughout the research in in
order to complete it successfully.
Thank you
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ABSTRACT
The present study is based on a working capital which is being defined as the difference between
the current asset and current liabilities. For the success of the company is very essential that there
are effective current assets in order to pay off all the current liabilities. The presentation reflected
factor setting of an objective is essential as it provides direction to the researcher that where they
have to research. From the literature review section it was analysed to there are different factors
which affect the working capital like payment to the vendors of payment received from the
debtors. Along with this the research methodology chapter identify that a combination of primary
and secondary data is very essential and helpful for making the research successful. Moreover
with the data analysis section it was identified that working capital effects and impact the
business to a great extent both and positive or a negative manner. In case the working capital is
positive then it will affect the business in profitable manner and if it is negative then it will
negatively impact the business.
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TABLE OF CONTENTS
CHAPTER 1 — INTRODUCTION 6
Overview of the topic 6
Research Background 7
Research aims and objectives 8
CHAPTER- 2 : LITERATURE REVIEW 11
Concept of working capital management 11
Issues causing negative working capital in a company 13
Factors affecting working capital management practices of the company 15
Impact of working capital management on organizational performance 17
Literature Gap 19
Literature summary 19
CHAPTER-3 RESEARCH METHODOLOGY 20
3.1 Research design 20
3.2 Research type 21
3.3 Research approach 21
3.4 Research philosophy 22
3.5 Data collection 23
3.6 Data analysis 25
3.7 Research limitation 26
3.8 Sampling 26
3.9 Research instrument 27
3.10 Research ethics 28
CHAPTER -4 DATA ANAYLSIS 30
Theme 1: Both of the above options has been selected by maximum number of respondent 30
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Theme 2: Yes the manager need to give importance to working capital management for
growth and success of small business 32
Theme 3: The respondent has selected all of the above option. 33
Theme 4: Delay in payment to vendor and Ineffective management of current assets and
liability are two different issue related to working capital management that lead in negative
working capital for organisation. 35
Theme 5: Nature of business and Credit allowed are two major factors that affect practice of
manager related to working capital management 36
Theme 6: Yes, the working capital management impact on business operation 38
Theme 7: Increase company profit margin and company have sufficient cash to meet short
term liabilities and obligations are two impact of working capital management on company. 39
Theme 8: Limited access to information and lack of formal structure are challenges that are
faced by manager in working capital management. 41
Theme 9: Most of the respondents have selected Agree options which means effective
working capital lead in achievements of company objective. 42
Theme 10: Both 1 and 3 has been selected by the maximum number of respondents. 44
CHAPTER 5- RESULTS 46
CHAPTER 6- CONCLUSION, LIMITATION AND RECOMMENDATION 50
Conclusion 50
Research limitation 51
Recommendation 52
REFERENCES 54
APPENDIX 58
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CHAPTER 1 — INTRODUCTION
Research topic – A study on importance of working capital for small businesses with reference
to food sector of UK.
.
Overview of the topic
Working capital is a very important concept that every financial management team of an
organization has to give enough concern for it. If there is no efficient management of working
capital in place, then it could be problematic for firms to finance their day to day financial
requirements, and they need to rely on external sources of finance which would be quite
expensive for an organization. So, efficiency in working capital management is very much
important to lower down the reliance on external funding and if there is any excess of cash
available with the firm then it must be invested timely in a profitable investment to make a
concern more financially sound and flexible (Afrifa and Tingbani, 2018). The requirement of
working capital for a specific firm can be determined through studying it cash conversion cycles.
There is rule of thumb in determining working capital requirement of an organization that is, if
an organization have longer cycle of cash conversion then it will need more of working capital as
against those organizations which have shorter cycle of cash conversion. A firm that
compromises on its liquidity management for maximizing profits may end up in becoming
insolvent and bankrupt. Therefore, it is necessary for a firm to determine a point of equilibrium
among its liquidity and profitability by utilizing the factors of cash conversion cycle such as
Average collection period, average payment period and inventory days. This helps in getting the
best level at which a firm should maintain its liquidity as per their industrial specifications.
So in this dissertation, researcher will focus on studying working capital requirement for
small businesses usually into food sector. Like here, different companies in food industry have
been chosen to understand the concept of working capital management, its importance and
requirements pertaining to the companies in food sector. Food sector is specifically a matter of
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concern here due to its shorter cash conversion cycle among other companies of different
industry (Wang, Akbar and Akbar, 2020). Cash conversion cycle is the indicator of quickness
with which a firm can convert its available cash balance in the beginning into more cash at the
end of the cycle. Therefore, due to its ability to collect cash at a quicker rate their working capital
requirement is comparatively low. But they can't ignore it completely as they need to invest in its
inventory much quickly as and when required, failing which may lead to destructive operations
of the firm and their customer demand would not be fulfilled accordingly.
Research Background
There are many researches conducted on the issue of working capital management for
different industries and markets highlighting the importance of efficiency in working capital
management towards maximizing profitability of a company and improving their performance as
well. In this study, the various issues related to working capital that could be arisen in small
businesses and more specifically a food manufacturing concern will be discussed. This study
aims to highlight importance of working capital with reference to small food manufacturing
businesses in UK. The study is unique from various studies that has been conducted in the past in
the sense that it is performed on food sector. Food sector or fast food industry is a very crucial
industry, where working capital requirement must be identified in advance and accordingly
provided for as and when need arises, because it is not possible for them to move forward
without sufficient working capital available with them at a particular point of time.
Working capital in the simplest way can be defined as that proportion of a total capital of
the firm which is utilized for financing day to day operations of a business without which the
business can't perform their basic activities and pay their short term liabilities on time (Lefebvre
2020). It is quite a common issue of modern businesses where they are facing difficulties in
managing their working capital. The effect of such difficulties can be seen from company's
inability to provide better quality of products and services and accordingly, this leads to
unsatisfied customers of the company.
Research aims and objectives
The aim of this research is to assess the extent to which working capital management plays
a crucial role in small food manufacturing businesses of UK. It also aims to identify different
practices to be followed in order to manage working capital of a company, so that it could be
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proposed accordingly to the companies in food sector of UK with the motive of relieving them
from unnecessary liquidity costs. The research aims to encompass various tools and techniques
in order to recognise important elements of working capital in a firm. The more specific aims
and objectives of this study are mentioned as follows:
Aim: The aim of this study is to highlight the importance of working capital management with
regards to food companies of UK.
Objectives
 To identify issues related to working capital management which leads to negative
working capital in a concern.
 To ascertain factors that affects the practices of working capital management.
 To analyse the impact of working capital management on the performance of UK
organization both as a measure of success and failure.
 To propose measures in order to enhance the effectiveness of working capital
management in a company.
Research questions
1. What are issues related to working capital management that causes negative working
capital in a company?
2. What are the factors affecting working capital management practices in an organisation?
3. How working capital management acts both as a success and failure factors while
measuring organisational performance?
4. What are the measures that can enhance effectiveness in a company's working capital
management?
Significance of the study
The study is important particularly for food companies which would be helpful for the
management of a company in making decision related to the working capital management by
adopting and utilizing various available and proposed practices towards effectively managing
working capital in an organisation. The study along with food companies is helpful for similar or
related companies in terms of size and operations in adopting those practices of working capital
management as identified by the researcher from this study. In other words, this study has a
significance for a whole industry from which food companies is related to. The other
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organizations within the same industry as food companies would be benefited in the same way in
terms of incorporating effective measures and practices of working capital management within
their business operations. Also, at last the study will benefit other researchers and scholars who
are researching in the same areas in supporting their ideas and research, so that they can conduct
in depth research over the related issues of working capital management.
Research rationale
The reason behind conducting this research is to address the issues associated with the
working capital management in small businesses. The study aims to identify those practices that
could be recommended to firms in UK's food sector in order to make them free from the stress of
working capital related issues along with advising them on how they can grow from the negative
working capital.
Structure of the Thesis
This thesis will be divided into five different chapters for studying the working capital
management concept, issues and practices and measures to address the same. Following is the
brief description of five chapters of this thesis.
Chapter 1: Introduction: The first chapter of this thesis is the representation of the overview of
the research topic where background information of both research topic and organization will be
discussed. Also, aims, objectives and questions that this research will address will be mentioned.
Along with this significance and rationale of the research will be mentioned.
Chapter 2: Literature review: In this chapter viewpoints of different authors will be critically
analysed with respect to working capital management. The various already published journals,
books and articles will be used for collecting secondary information in order to answer research
questions.
Chapter 3: Research Methodology: Here in this chapter, various tools and techniques for
conducting this research along with gathering and analysing data of the research will be
discussed.
Chapter 4: Analysis of 30 companies: Here sample of 30 companies belonging from food
manufacturing sector will be analysed in terms of its working capital management through the
components of cash conversion cycle.
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Chapter 5: Result: The results of analysis so performed on 30 food manufacturing companies of
UK in the previous chapter would be presented in this chapter.
Chapter 6: Conclusion and Recommendations: Here the conclusion so derived from analysis
and results will be presented along with recommendations for how to improvise the worst
conditions and performance can be improved.
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CHAPTER- 2 : LITERATURE REVIEW
INTRODUCTION
The chapter headed “literature review” will be concerned about the analysis of various
perceptions of authors and experts in the field of accounting and finance regarding working
capital management in an organization. Here the perceptions of various authors will be presented
in thematic way where the concept of working capital management will be critically evaluated.
The purpose of this chapter is to gain an in depth knowledge of the topic of the research,
whereby stating different views of experts and well-known authors of the field, the quality,
reliability and effectiveness of the research work can be enhanced along with giving credit to
other researchers. Therefore, in this chapter all the information obtain from secondary published
sources are included about the research topic and clarity and focus on the research problem can
be established. Here in this researcher four themes has been prepared and will be discussed in
this report where the first theme is about the “concept of working capital management”, second
theme is regarding “issues related to working capital management”, third theme is about “factors
affecting working capital management” and in the last theme discussion related to the “impact of
working capital management on organizational performance” will be done.
Concept of working capital management
According to Le (2019), Working capital refers to that proportion of overall capital of the firm
help for the short period and can be liquidized into cash without many efforts and is generally
held for the purpose of obligations that are going to arise in a short period. Examples of working
capital are cash, account receivables, marketable securities and inventory. Many authors have
referred working capital as circulating capital. So a considerable amount of time must be devoted
towards managing working capital of the company as done by most of the executives. As per the
views of Dhole, Mishra and Pal (2019), working capital management refers to the management
of current assets and current liabilities in a concern in order to ensure that there must be always
adequate level of working capital can be maintained. The interrelationships among current assets
and liabilities are the main concern of working capital management.
Working capital can be understood in two different ways, gross and net working capital.
Gross working capital is the sum total of current assets held by the company whereas net
working capital again can be explained in two different ways that is, excess of current assets over
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current liabilities and the proportion of current assets that has been financed through long term
funds. The policies and procedures includes in the management of working capital is referred to
as working capital management.
Nastiti, Atahau and Supramono (2019), has identified three policies that can be adopted
by the management in managing its working capital that is, moderate, aggressive and
conservative working capital policy. These policies explain the relationship exists between
current assets level and sales level. Companies in order to ensure effective operations strives
hard for maintaining sufficient level of working capital at any point of time. Pakdel and Ashrafi
(2019), stated that, working capital financing is a costly affair and leads to additional costs for
the company in terms of operating costs such as warehousing costs for inventories and losses due
to credit provided to account receivables. Also, adequacy must be maintained in holding working
capital as both excess and inadequacy in the level of working capital leads to some form of costs
for the company. An excessive working capital results in loosing profits due to holding idle
funds and accordingly leads to an overall inefficiency of the company. Alternatively, inadequate
working capital leads to failure in meeting short term obligations and also it becomes difficult to
maintain effective and efficient operations of the company on a day to day basis.
Sawarni, Narayanasamy and Ayyalusamy (2020), has found out that those concerns who
are successfully able to manage its working capital can ensure short term solvency of the
business, their goodwill can be established and enhanced, they can be able to arrange loans on
easy terms and can make necessary and important payments on a regular and timely basis
without getting fail. Chen and Kieschnick (2018), has suggested that working capital plays an
important role in attracting investors as it is considered to be a safety cushion for creditors and
indicates the ability of a company in meeting contingencies that could arise during the life of the
business such as uncertainties in cash flows and fluctuating sales revenue.
Lefebvre (2020), has described a good deal of importance with reference to managing
working capital in an organization. It has been seen that managing company's working capital is
not a one time task or cannot be performed in one go rather it is a day to day activity performed
to ensure adequate resources to enable smooth operations of a company without any costly
interruptions. Also, there are essential implications of working capital as it accounts for half or
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