A Review of Anatomy of Working Capital Management Theories and the Relevant Linkages to Working Capital Components: A Theoretical Building Approach

Abstract

This study examines the importance of working capital management concepts and components, notably the receivable management, inventory management and payable management through their respective proxies as average collection period, inventory conversion period and average payment period. Due to its importance, working capital management could best be explained philosophically when theories are employed. These theories are instruments and not answer to enigmas, but their relevance and aid in explaining concepts is enormous and cannot be overlooked. Therefore, this study attempts to explain those working capital management components and concepts and establish a link with some of the suitable theories perceived to be relevant in explaining them. These theories include agency/stakeholder, risk and return, cash conversion cycle, operating cycle and the resource-based theory. The study is found necessary in view of the dearth of literature of its kind and especially in the area of working capital management. The paper therefore employed a conceptual research design approach in addressing this phenomenon. The necessary link was finally established between the theories and working capital concepts and components.

Keywords: Working Capital Management, Average Collection Period, Inventory Conversion Period, Average Payment Period.