Does Working Capital Management Affect Profitability of Belgian Firms?
1. INTRODUCTION
Most firms have a large amount of cash invested in working
capital, as well as substantial amounts of short-term payables as a
source of financing. For instance, according to the National Bank
of Belgium, in 1997 accounts receivable and inventories were
respectively 17% and 10% of total assets of all Belgian non-
financial firms. Accounts payable were 13% of total assets of these
firms. It can be expected that the way in which working capital is
managed will have a significant impact on the profitability of
firms. Accordingly, for many firms working capital management
(WCM) is a very important component of their financial
management.
Firms may have an optimal level of working capital that
maximizes their value. On the one hand, large inventory and a
generous trade credit policy may lead to higher sales. Larger
inventory reduces the risk of a stock-out. Trade credit may
stimulate sales because it allows customers to assess product
quality before paying (Long, Malitz and Ravid, 1993; and
Deloof and Jegers, 1996). Because suppliers may have...
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