Effect of working capital management and profitability of construction firms. Essay
Effect of working capital management and profitability of construction firms., 460 words essay example
Therefore, in this study analyses the effect of working capital management and profitability of construction firms. The components of working capital management consists of current ratio and inventory turnover. Current ratio will focus in managing the liquidity of the construction in day-to-day operations. While inventory turnover will focus in managing the assets of the firms.
1.3 Problem Statement
The main role in the success of major national policies and strategies today is the construction industry. The construction industry has been criticized and associated due to abandoned projects and careless work (Ab Halim, Mat Junoh, Haniff, & Osman, 2014). Construction sector play an important role in economy development. It shown when construction industry involve in Economy Transformation Programme (ETP) which majority is under construction industry. Example of ETP projects under construction sector is greater Kuala Lumpur and Klang Valley.
There are many company in construction sector which can be categorized in 9 registration grades
G1 RM 0 RM 200.000
G2 RM 200.000 RM 500.000
G3 RM 500.000 RM 1.500.000
G4 RM 1.500.000 RM 3.000.000
G5 RM 3.000.000 RM 5.000.000
G6 RM 5.000.000 RM 10.000.000
G7 RM 10.000.000 RM 30.000.000
G8 RM 30.000.000 RM 100.000.000
G9 RM 130.000.000 No limit
In Malaysia, there is high number of failed construction firms. According to (S. A. Rahman, 2014), about 10 percent of all construction companies in the country fail or stop operation every year. There are a few reasons the failure of the construction company include a contractor faces shortage of cash to fund which is in managing the liquidity for their construction projects. Second, a contractor enjoys a small profit or loss from projects. Third, the contractor firm has high debt burden. Fourth, firms insufficiently manage their assets which means their inventory turnover. This gap has encouraged the researcher to perform in depth studies to analyse the financial difficulties faced by contractors in the domestic construction industry.
Working capital management efficiency is vital for profit and strength of the firms especially in the developed countries like USA, UK, Canada and Australia (Grablowsky, 1984 McMahon & Holmes, 1991). The main reason for the failure of the small businesses is the poor and careless "financial management" (Berryman, 1983 Nejad, Bandarian, & Ghatebi, 2013). Following to (Naser, Nuseibeh, & Al-Hadeya, 2013 Raheman & Nasr, 2007), working capital is an important part of financial management, it contributes significantly to a firm's wealth creation and effect the profitability and liquidity of organizational. The most serious issue in working capital management is to maintain the liquidity in the day-to-day operations of the firms. The importance of working capital management including for the financial health of all businesses, irrespective of type and size. Besides, working capital management will ensure the organization have the ability to meet their short-term liabilities effectively and punctual (Padachi, 2006).
In this study, we would like to analyse the effect of working capital management in terms of current ratio and inventory turnover towards profitability of the construction industry.