1.0 Introduction
In the today’s dynamic business environment, survival of the organization is uncertain even though the companies are earning profit. For continuous existence of the firm, decision making, plays a critical role. Three decisions are key-capital structure decisions, capital budgeting decisions, and working capital management decisions. Among these, working capital management is vital. It is an integral component of corporate finance since it affects the profitability and liquidity of a company and finally to its value.
Working Capital Management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet short term obligations on one hand and avoids excessive investment ( Afza and Nazir, 2007; Howorth and Westhead, Deloof, 2003). The success of organizations depends on achieving the objectives of the planned company and mastering the control.Since working capital management plays an important role in the determination of profitability, liquidity, risk as well as the ultimate objective of firm’s value, it therefore needs careful devotion.
1.1The problem the study will solve
The goal of maximizing profits and reducing losses remains one of the biggest challenges facing companies and companies are trying to overcome them.Coping in the present day operating business environment therefore is a serious concern and so the question of how do firm survive in the face of uncertainty becomes critical. Proper management of working capital seems to be a way out. Many managers are struggling to identify the basic working capital drivers and an appropriate level of working capital that will facilitate the firm’s ability to meet its short term obligations when they fall due, maintain firm’s liquidity in day-today operation to ensure its smooth running and to meet its obligation (Eljelly, 2004).
Several studies have been developed on capital financing policies for companies in different sectors of the economy in commercial and non-profit companies.Yet many firms continue to grapple with insolvency. Managers must ensure that business operation is running in efficient and profitable manner while current asset and current liability during this process properly balanced. Failure of this means stifle growth and retarding profitability leading to financial distress and finally bankruptcy. Therefore, companies can minimize risk and improve the overall performance by understanding the role and drivers of working capital management. To this end, this study will seek to answer the following questions. Is there a relationship between working capital management and profitability of food industry in Saudi Arabia? Does working capital management policy affect the food industry profitability?
1.3 The objective the study will achieve
1)The general objective of the study will be, to assess the impact of working capital management policy on the profitability of food industry in Saudi Arabia.
2)Specifically, the study will establish a relationship between working capital management policy and the food industry profitability in Saudi Arabia.
1.4 Justification of this study
Though working capital management policies on profitability are highly important, studies on the subject for the Saudi Arabian terrain and specifically the food industryare few. The dearth in empirical study on working capital management with regards the food industry creates a gap between policy makers and practitioners that warrants attention. The present study is expected to contribute to better understanding of these policies and their impact on profitability of the Saudi Arabia food industry. This is the thrust of this study.