Working Capital Management.doc - Running Head WORKING CAPITAL MANAGEMENT The Importance of Working Capital Management to a Firms Value Maximization

Working Capital Management.doc - Running Head WORKING...

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Running Head: WORKING CAPITAL MANAGEMENT 1 The Importance of Working Capital Management to a Firm’s Value Maximization under Crisis Conditions Name: Institution:
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WORKING CAPITAL MANAGEMENT 2 The Importance of Working Capital Management to a Firm’s Value Maximization, under Crisis Conditions Literature Review Appuhami, (2008) points out that the financial crisis that engulfed the business world in the wake of 2008, triggered several researches on the topic of Working Capital Management. The global financial crisis had adverse impacts on organizations that were not properly leveraged thus firms have in the recent past decided to balance their working capital and profitability as one way of maintaining stability in their day to day operations even during crisis conditions. Generally, it is appreciated that the basic goal for which organizations are created is profit or value maximization. The prerequisite for starting a business venture is coming up with a business idea on a suitable venture after which the entrepreneur looks out for funding. Such funds are not only necessary for setting up a business but also vital to facilitate the day-to-day financing of short- term or everyday trading activities. Baltagi, (2008) adds that this type of capital is referred to as Working Capital. In order to reiterate on the impact of initial business funding and its impacts on the Working Capital, this paper seeks to present a literature review on business financing in relation to the importance of Working Capital Management to a firm’s value maximization, under crisis conditions. A financial journal by Baltagi, (2008) states that business financing is a vital necessity for every business whether a startup or a full-fledged venture. Economists and entrepreneurs support that there are two major ways in which organizations can be financed. That is debt financing and equity financing. Debt financing can be defined as the process of soliciting for long term loans from financial institutions such as banks while equity financing is the process of seeking for financial assistance from venture capitalists or investors who issue money in exchange for partial
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WORKING CAPITAL MANAGEMENT 3 ownership or shares from the business. All these forms of financing have both advantages and disadvantages. For instance, debt financing has been discredited by some people as being exorbitant especially when a business has to incur high interest rates which might not match up to the profits accrued from a startup business or the share ratios promised to other stakeholders. On the other hand, debt financing is advantageous as it gives a prospecting entrepreneur the necessary capital to start a business, acquire equipment, assets and buildings (Beranek, 2003).
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