The Accountant-Jan-Feb 2017

Finance and investment
Firm profitability and the period taken to
convert inventories to sales and the time
it takes for firms to pay creditors affect
the firm’s performance.
the changes in the levels of cash directly,
eliminating many of the weaknesses with
the traditional estimate of cash flow.
The statement divides company uses
and sources of cash into three primary
segments—operating, investing, and
financing cash flows. The operating cash
flow segment is designed to measure a
company’s ability to generate cash from
day-to-day operations as it provides goods
and services to its customers.
Business success depends heavily on
the ability of CFO’s to effectively manage
the components of working capital.
A firm may adopt an aggressive or a
conservative working capital management
policy to achieve this goal. For the last
three years several NSE listed firms had
liquidity problems and are unable to pay
their short term financial obligations
as and when they fell due, consider it in
terms of efficiency of cash, inventory and
receivables management. This has heavily
affected the firms output at the end of the
financial year, making some companies
to be put under statutory management
such Hutchings Biemer andUchumi
supermarket in 2006.
Firm profitability and the period
taken to convert inventories to sales and
the time it takes for firms to pay creditors
affect the firm’s performance. Also the
cash conversion cycle, net trade Cycle
and inventory turnover in days have a
significant effect on the performance of
the firms.
Efficient management and financing of
working capital can increase the operating
profitability of NSE listed firms. They,
therefore, assert that effective policies
must be formulated for the individual
components of working capital.
Performance of the firms improves
with adoption of an aggressive financing
policy, for example Centum have
improved their performance following
the dividends payment freezing. Similarly
the total current liabilities to total assets
ratio increases the performance improves.
Use of current liabilities to finance assets
should be preferable than using long term
debt (financial leverage), because current
liabilities are less costly than long-term
debt. Furthermore an aggressive investing
working capital management policy affects
the performance negatively.
Increasing the proportion of current
assets in relation to total assets enhances
performance as measured by both ROA
and ROE.
JANUARY - FEBRUARY 2017 33