Working Capital Management And Profitability: A Case Of Alba County Companies

Abstract

The purpose of this study is to analyze the efficiency of working capital management of companies from Alba County. The relation between the efficiency of the working capital management and profitability is examined using Pearson correlation analyses and using a sample of 20 annual financial statements of companies covering period 2004-2008. The conclusion to our study is that there is a weak negative liniar correlation between working capital management indicators and profitability rates. Introduction The management of operating cycle is the most important section of the company's financial management. The objective of operating cycle's management is that of any capital investment: the most efficient allocation of capital in terms of risk decrease. The amortization of risk-profitability relation is mostly achieved within the balance between the need of circulating assets and sources mobilized for its funding. To meet the need for profitability, the management of circulating assets aims at achieving the operating cycle with a minimum level of circulating assets, and the management of circulating liabilities aims at the lowest cost of procuring the necessary capital. In order to meet the need for risk decrease, the management of circulating assets aims at eliminating the stock rupture, the lack of liquidities; a concern accompanied by higher operating costs and reduced profitability. With respect to circulating liabilities, the financing sources constant, the financial autonomy of the operating cycle, preoccupations accompanied by increases in the cost of purchasing the necessary capital, are explored. Given these requirements to specifically optimize the risk-profitability relation, the management of the operating cycle consists of two complementary fields of activity:-determining the required circulating assets (stocks, debts and liquidities);-determining how to finance the required circulating assets (working capital, operating liabilities: suppliers, creditors etc.; banking competitions etc.). The main feature of circulating assets is their high liquidity and hence the possibility of operational covering the debts from returns, of making investments and keeping a liquid reserve in the account and in the safe. There is a report specific for each company between sales (turnover) and the assets necessary to achieve them. Starting from the ratio of sales (turnover) and the assets necessary to achieve them, but also from the analysis of working capital indexes, necessary working capital and net treasury, one can identify three politics of management operating cycle with different effects on profitability and risk: 1. Offensive/aggressive/attack policy (WC WCN) 3. Balanced/ optimal policy (WC = WCN)