2.

LITERATURE REVIEW
2.1 Relationship between Working Capital Management & Profitability
An enterprise requires fixed as well as working capital. Firms can minimize their investments in
fixed assets by renting or leasing plant and equipment, but they cannot avoid investment in
current assets. A firm can exist and survive without making profit but cannot survive without
working capital. Thus, working capital management is important because of its effect on the
firm's profitability and risk and consequently its value. Working capital management is the
management of current assets and current liabilities. Maintaining high inventory levels reduces
the cost of possible interruption in the production process or of loss of business due to the
scarcity of products, reduces supply costs and protects against price fluctuations among other
advantages. Granting trade credit favors the firms sales in various ways. Trade credit acts as an
effective price cut and an incentive to customers to acquire merchandise at times of low
demand.However,firms that invest heavily in inventory and account receivable can suffer low
profit. Thus greater the investment in current asset, lower in the risk and profitability obtained.
Similarly trade credit is a spontaneous source if financing that reduces the amount required to
finance the sums tied up in the inventory and accounts receivables. The trade credit can have a
very high implicit if early payment discounts are available. The corporate profitability increases
with longer cash conversion cycle and might also decrease if the cost of investment in working
capital is higher and rises faster then the benefits of holding more inventories and granting more
inventories and trade credit to customers. In Conventional production function approach for
determination of relationship between output and profit, fixed capital is taken in to account as
explanatory variable amongst others, the role of working capital is ignored. It is therefore felt
that there is the need to study the important role of working capital in profit generating process.
If a company desires to take a greater risk for bigger profits and losses, it reduces the size of its
working capital in relation to its sales. If it is interested in improving its liquidity, it increases the
level of its working capital. However, this policy is likely to result in a reduction of the sale
volume, therefore of profitability. Hence, a company should choose between liquidity and
profitability and decide about its working capital requirements.

Working capital is an important issue during financial decision making since its being a part of
investment in asset that requires appropriate financing investment. However, working capital
always being disregard in financial decision making since it involve investment and financing in
short term period. Further, also act as a restrain in financial performance, since it does not
contribute to return on equity (Sanger, 2001). Though, it should be critical for to a firm to sustain
their short term investment since it will ensure the ability of firm in longer period.
The crucial part in managing working capital is required maintaining its liquidity in day-to-day
operation to ensure its smooth running and meets its obligation (Eljelly, 2004). Yet, this is not a
simple task since managers must make sure that business operation is running in efficient and
profitable manner. There are the possibilities of mismatch of current asset and current liability
during this process. If this happens and firms manager cannot manage it properly then it will
affect firms growth and profitability. This will further lead to financial distress and finally firms
can go bankrupt. In traditional view of relationship between cash conversion cycle (as measure
of working capital management) and profitability is ceteris paribus. The shorter firm cash
conversion cycle, the better a firm profitability. This shows that less of time a dollar tied up in
current asset and less external financing. While, the longer cash conversion cycle will hurt firms
probability. The reason is that firm having low liquidity that would affect firms risk. However, if
firm has higher level of account receivable due to the generous trade credit policy it would result
to longer cash conversion cycle. In this case, the longer cash conversion cycle will increase
profitability. Thus, the traditional view cannot be applied to all circumstances.
Dilemma in working capital management is to achieve desired trade off between liquidity and
profitability (Smith, 1980; Raheman & Nasr, 2007). Referring to theory of risk and return,
investment with more risk will result to more return. Thus, firms with high liquidity of working
capital may have low risk then low profitability. Conversely, firm that has low liquidity of
working capital, facing high risk results to high profitability. The issue here is in managing
working capital, firm must take into consideration all the items in both accounts and try to
balance the risk and return.
Working capital management is a very important component of corporate finance because it
directly affects the liquidity and profitability of the company. It deals with current assets and
current liabilities. Working capital management is important due to many reasons.

For one thing, the current assets of a typical manufacturing firm accounts for over half of its total
assets. For a distribution company, they account for even more. Excessive levels of current assets
can easily result in a firms realizing a substandard return on investment. However firms with too
few current assets may incur shortages and difficulties in maintaining smooth operations (Horne
and Wachowicz, 2000). Efficient working capital management involves planning and controlling
current assets and current liabilities in a manner that eliminates the risk of inability to meet due
short term obligations on the one hand and avoid excessive investment in these assets on the
other hand (Eljelly, 2004). Many surveys have indicated that managers spend considerable time
on day-to-day problems that involve working capital decisions. One reason for this is that current
assets are short-lived investments that are continually being converted into other asset types (Rao
1989).
With regard to current liabilities, the firm is responsible for paying these obligations on a timely
basis. Liquidity for the on going firm is not reliant on the liquidation value of its assets, but
rather on the operating cash flows generated by those assets (Soenen, 1993). Taken together,
decisions on the level of different working capital components become frequent, repetitive, and
time consuming. Working Capital Management is a very sensitive area in the field of financial
management (Joshi, 1994). It involves the decision of the amount and composition of current
assets and the financing of these assets. Current assets include all those assets that in the normal
course of business return to the form of cash within a short period of time, ordinarily within a
year and such temporary investment as may be readily converted into cash upon need.
The Working Capital Management of a firm in part affects its profitability. The ultimate
objective of any firm is to maximize the profit. But, preserving liquidity of the firm is an
important objective too. The problem is that increasing profits at the cost of liquidity can bring
serious problems to the firm. Therefore, there must be a trade off between these two objectives of
the firms. One objective should not be at cost of the other because both have their importance. If
we do not care about profit, we can not survive for a longer period.
On the other hand, if we do not care about liquidity, we may face the problem of insolvency or
bankruptcy. For these reasons working capital management should be given proper consideration
and will ultimately affect the profitability of the firm. Firms may have an optimal level of
working capital that maximizes their value. Large inventory and a generous trade credit policy
may lead to high 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, Maltiz and Ravid, 1993, and
Deloof and Jegers, 1996). Another component of working capital is accounts payable. Delaying
payments to suppliers allows a firm to assess the quality of bought products, and can be an
inexpensive and flexible source of financing for the firm. On the other hand, late payment of
invoices can be very costly if the firm is offered a discount for early payment.
A popular measure of Working Capital Management (WCM) is the cash conversion cycle, i.e. the
time lag between the expenditure for the purchases of raw materials and the collection of sales of
finished goods. The longer this time lag, the larger the investment in working capital (Deloof
2003). A longer cash conversion cycle might increase profitability because it leads to higher
sales. However, corporate profitability might also decrease with the cash conversion cycle, if the
costs of higher investment in working capital rise faster than the benefits of holding more
inventories and/or granting more trade credit to customers..
The purpose of this study is hopefully to contribute towards a crucial element in financial
management which working capital management.. Working capital management and its effects
on profitability is focused in this study. Specific objectives are to examine a relationship between
working capital management and profitability over a 11 years period, to establish a relationship
between the two objectives of liquidity and profitability of the firms and to investigate the
relationship between debt used by the a firm and its profitability

2.2 Studies in the Indian Context

Jafar and Sur (2006) studied the efficiency of the working capital management in the National
Thermal Power Corporation (NTPC), and showed that the company achieved a higher level of
efficiency in managing its working capital during the post-liberalization era by adapting itself to
the new environment which had emanated from liberalization, globalization and competitiveness.
They pointed out that, while many of the public enterprises are learning to survive and grow by
adapting themselves to the new situation, a large group of public sector undertakings, significant
both in number and investment, have been beset with serious problems like slow growth, low
productivity, inadequate emphasis on research and development, inefficient working capital
management, and so on. Rafuse (1996) argued that attempts to improve working capital by
delaying payment to creditors are counter-productive, and that altering debtor and creditor levels
for individual tiers within a value system will rarely produce any net benefit. He proposed that
stock reduction generates system-wide financial improvements and other important benefits, and
suggested that, to achieve this, companies should focus on stock management strategies based on
lean supplychain techniques.
In intention to discover the relationship between efficient working capital management and
firms profitability(Shin & Soenen, 1998) used net-trade cycle (NTC) as a measure of working
capital management. NTC is basically equal to the CCC whereby all three components are
expressed as a percentage of sales. The reason by using NTC because it can be an easy device to
estimate for additional financing needs with regard to working capital expressed as a function of
the projected sales growth. This relationship is examined using correlation and regression
analysis, by industry and working capital intensity. Using a Compustat sample of Hindalco years
covering the period 1999-2009, in all cases, they found, a strong negative relation between the
length of the firm's net-trade cycle and its profitability. In addition, shorter NTC are associated
with higher risk-adjusted stock returns. In other word, (Shin & Soenen, 1998) suggest that one
possible way the firm to create shareholder value is by reducing firms NTC.

(Ghosh and Maji, 2003) in this paper made an attempt to examine the efficiency of working
capital management of the Indian cement companies during 1992 1993 to 2001 2002. For
measuring the efficiency of working capital management, performance, utilization, and overall

efficiency indices were calculated instead of using some common working capital management
ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also
tested the speed of achieving that target level of efficiency by an individual firm during the
period of study. Findings of the study indicated that the Indian Cement Industry as a whole did
not perform remarkably well during this period. (Shin and Soenen, 1998) highlighted that
efficient Working Capital Management (WCM) was very important for creating value for the
shareholders. The way working capital was managed had a significant impact on both
profitability and liquidity. The relationship between the length of Net Trading Cycle, corporate
profitability and risk adjusted stock return was examined using correlation and regression
analysis, by industry and capital intensity. They found a strong negative relationship between
lengths of the firms nettrading Cycle and its profitability. In addition, shorter net trade cycles
were associated with higher risk adjusted stock returns.
Chakraborty and Bandopadhyay (2007) studied strategic working capital management, and its
role in corporate strategy development, ultimately ensuring the survival of the firm. They also
highlight how strategic current asset decisions and strategic current liabilities decisions had multi
dimensional impact on the performance of a company. Singh (2008) found that the size of
inventory directly affects working capital and its management. He suggested that inventory was
the major component of working capital, and needed to be carefully controlled. Singh and
Pandey (2008) suggested that, for the successful working of any business organization, fixed and
current assets play a vital role, and that the management of working capital is essential as it has a
direct impact on profitability and liquidity. They studied the working capital components and
found an significant impact of working capital management on profitability for Hindalco
Industries Limited.
Agarwal (1988) formulated the working capital decision as a goal programming problem, giving
primary importance to liquidity, by targeting the current ratio and quick ratio. The model
included three liquidity goals/constraints, two profitability goals/constraints, and, at a lower
priority level, four current asset sub goals and a current liability sub-goal (for each component of
working capital). In particular, the profitability constraints were designed to capture the
opportunity cost of excess liquidity (in terms of reduced profitability). The literature of goal
programming in operational/financial decisions is quite extensive, though only a few studies
have directly focused on working capital decisions. Agarwals (1988) study was a step forward,

but no further refinements to his model have been proposed. This paper proposes certain
modifications in Agarwals (1988) model.
This discussion of the importance of working capital management, its different components and
its effects on profitability leads us to the problem statement which we will be analyzing for a
sample of Hindalco.
The main objectives are:
To establish a relationship between Working Capital Management and Profitability over a
period of eleven years.
To find out the effects of different components of working capital management on
profitability
To establish a relationship between the two objectives of liquidity and profitability of the
Hindalco industries.
To find out the relationship between profitability and size of Hindalco
To find out the relationship between debt used by Hindalco and its profitability
To draw conclusion about relationship of working capital management and profitability
of Hindalco.
The study of (Shishir Pandey) consistent with later study on the same objective that done by
(Deloof, 2003) for the period of 1992-1996. However, (Deloof, 2003) used trade credit policy
and inventory policy are measured by number of days accounts receivable, accounts payable and
inventories, and the cash conversion cycle as a comprehensive measure of working capital
management. He founds a significant negative relation between gross operating income and the
number of days accounts receivable, inventories and accounts payable. Thus, he suggests that
managers can create value for their shareholders by reducing the number of days accounts
receivable and inventories to a reasonable minimum. He also suggests that less profitable firms
wait longer to pay their bills.
Most previous study focus on develop market (Peel & Wilson, 1996; Shin & Soenon, 1998 and
Deloof, 2003). Thus investigating this issue could provide additional insights and perhaps
different evidence on the working capital management in emerging capital market. This will
surely enrich the finance literature on this issue. Additionally, the results of this study would

provide firm managers better insights on how to create efficient working capital management
that have ability to maximize firms value. As a result, it will build up confidence in investor to
invest in that firm. Further, the confidence of investors to invest in Malaysia will influence the
growth of economic. The results of this study would also assist policy-makers to implement new
sets of policies regarding the working capital market in Malaysia to ensure continuous economic
growth.
The literature of finance traditionally focused on long term financial decisions. There has been a
concerted effort by theoretical economists to analyze financial decisions of business firms within
the context of the equilibrium models of financial markets. While these models have been
employed to analyze the long term corporate investment and financial decisions, virtually no
research has been conducted in an attempt to apply them to working capital decisions (Cohn and
Pringle, 1975).
The literature of finance has neglected the short term financial decisions, which is working
capital management. Shortage of funds for working capital as well as the uncontrolled overexpansion of working capital has caused many businesses to fail and in less severe cases has
stunted their growth (Grass, 1972). Especially, in small firms, working capital management may
be the factor that decides success or failure; in larger firms, efficient working capital
management can significantly affect the firm risk, return and share (Gitman, 1982). Researchers
have particularly offered studies analyzing investments, capital structure, dividends and company
valuation. However, the investment that firms make in current assets and the resources used with
maturities one year represent the main share of items on a firm's balance sheet which appears to
have been relatively neglected in research.
(Blinder and Manccini, 1991) Granting trade credit favors the firms sales in various ways. Trade
credit can act as an effective price cut (Brennan et al., 1988; and Petersen and Rajan, 1997) and
an incentive to customers to acquire merchandise at times of low demand (Emery, 1987).
However, firms that invest heavily in inventory and account receivable can suffer low profit.
Thus, greater the investment in current assets, lower is the risk, and profitability obtained.
Similarly, trade credit is a spontaneous source of financing that reduces the amount required to
finance the sums tied up in the inventory and account receivables. The trade credit can have a
very high implicit if early payment discounts are available. In fact, the opportunity cost may
exceed 20 percentage depending on the discount percentage and the discount period granted (Ng

et al., 1999; and Wilner, 2000). Profitability and liquidity comprise the salient and all too often
conflicting goals of working capital management. The conflict arises because the maximization
of the firm's returns could seriously threaten liquidity, and on the other hand, the pursuit of
liquidity has a tendency to dilute returns. Over the years, analysts have employed traditional ratio
analysis as a primary instrument in the measurement of corporate liquidity in the firm, of well
established ratios such as the current and quick ratios (Smith, 1997).
More recently, a popular measure of working capital management is the cash conversion cycle,
i.e., the time lag between the expenditure for the purchase of raw materials and the collection of
sales of finished goods. As the time passes, the need for working capital increases. The corporate
profitability increases with longer cash conversion cycle and might also decrease if the cost of
investment in working capital is higher and rises faster than the benefits of holding more
inventories and granting more inventories and trade credit to customers.
Chakraborty (2008) evaluated the relationship between working capital and profitability of
Indian pharmaceutical companies. He pointed out that there were two distinct schools of thought
on this issue: according to one school of thought, working capital is not a factor of improving
profitability and there may be a negative relationship between them, while according to the other
school of thought, investment in working capital plays a vital role to improve corporate
profitability, and unless there is a minimum level of investment of working capital, output and
sales cannot be maintained - in fact, the inadequacy of working capital would keep fixed asset
inoperative.

2.3 Studies in Other Countries

Many researchers have studied working capital from different views and in different
environments. The following ones were very interesting and useful for our research: (Eljelly,
2004) elucidated that efficient liquidity management involves planning and controlling current

assets and current liabilities in such a manner that eliminates the risk of inability to meet due
short-term obligations and avoids excessive investment in these assets. The relation between
profitability and liquidity was examined, as measured by current ratio and cash gap (cash
conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and
regression analysis. The study found that the cash conversion cycle was of more importance as a
measure of liquidity than the current ratio that affects profitability. The size variable was found to
have significant effect on profitability at the industry level. The results were stable and had
important implications for liquidity management in various Saudi companies. First, it was clear
that there was a negative relationship between profitability and liquidity indicators such as
current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that
there was great variation among industries with respect to the significant measure of liquidity.
(Deloof, 2003) discussed that most firms had a large amount of cash invested in working capital.
It can therefore be expected that the way in which working capital is managed will have a
significant impact on profitability of those firms. Using correlation and regression tests he found
a significant negative relationship between gross operating income and the number of days
accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results
he suggested that managers could create value for their shareholders by reducing the number of
days accounts receivable and inventories to a reasonable minimum. The negative relationship
between accounts payable and profitability is consistent with the view that less profitable firms
wait longer to pay their bills.
(Smith and Begemann 1997) emphasized that those who promoted working capital theory shared
that profitability and liquidity comprised the salient goals of working capital management. The
problem arose because the maximization of the firm's returns could seriously threaten its
liquidity, and the pursuit of liquidity had a tendency to dilute returns. This article evaluated the
association between traditional and alternative working capital measures and return on
investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange
(JSE). The problem under investigation was to establish whether the more recently developed
alternative working capital concepts showed improved association with return on investment to
that of traditional working capital ratios or not. Results indicated that there were no significant
differences amongst the years with respect to the independent variables. The results of their
stepwise regression corroborated that total current liabilities divided by funds flow accounted for

most of the variability in Return on Investment (ROI). The statistical test results showed that a
traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the
greatest associations with return on investment. Well-known liquidity concepts such as the
current and quick ratios registered insignificant associations whilst only one of the newer
working capital concepts, the comprehensive liquidity index, indicated significant associations
with return on investment. All the above studies provide us a solid base and give us idea
regarding working capital management and its components. They also give us the results and
conclusions of those researches already conducted on the same area for different countries and
environment from different aspects. On basis of these researches done in different countries, we
have developed our own methodology for research Working Capital Management has its effect
on liquidity as well on profitability of the firm.A sample of 94 Pakistani firms listed on Karachi
Stock Exchange for a period of 6 years from 1999 2004 is selected they studied the effect of
different variables of working capital management including the Average collection period,
Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on
the Net operating profitability of Pakistani firms. Debt ratio, size of the firm (measured in terms
of natural logarithm of sales) and financial assets to total assets ratio have been used as control
variables. Pearsons correlation, and regression analysis (Pooled least square and general least
square with cross section weight models) are used for analysis. The results show that there is a
strong negative relationship between variables of the working capital management and
profitability of the firm. It means that as the cash conversion cycle increases it will lead to
decreasing profitability of the firm, and managers can create a positive value for the shareholders
by reducing the cash conversion cycle to a possible minimum level. We find that there is a
significant negative relationship between liquidity and profitability. We also find that there is a
positive relationship between size of the firm and its profitability. There is also a significant
negative relationship between debt used by the firm and its profitability.
In other study, (Lyroudi & Lazaridis, 2000) use food industry Greek to examined the cash
conversion cycle (CCC) as a liquidity indicator of the firms and tries to determine its relationship
with the current and the quick ratios, with its component variables, and investigates the
implications of the CCC in terms of profitability, indebtness and firm size. The results of their
study indicate that there is a significant positive relationship between the cash conversion cycle
and the traditional liquidity measures of current and quick ratios. The cash conversion cycle also

positively related to the return on assets and the net profit margin but had no linear relationship
with the leverage ratios.
Conversely, the current and quick ratios had negative relationship with the debt to equity ratio,
and a positive one with the times interest earned ratio. Finally, there is no difference between the
liquidity ratios of large and small firms.
Working capital management is a very important component of corporate finance since it affects
the profitability and liquidity of a company. It deals with current assets and current liabilities.
Working capital management is recognized as an important concern of the financial manager due
to many reasons. For one thing, a typical manufacturing firm's current assets account for over
half of its total assets. For a distribution company, they account for even more. The maintenance
of excessive levels of current assets can easily result in a substandard return on a firm's
investment. However, firms with inadequate levels of current assets may incur shortages and
have difficulties in smoothly maintaining day-to-day operations (Horne and Wachowicz, 2000).
Efficient working capital management involves planning and controlling current assets and
current liabilities in a manner that eliminates the risk of inability to meet due short term
obligations on one hand and avoids excessive investment in these assets on the other hand
(Eljelly, 2004). Many exiting research papers have found that managers spend a considerable
time on day-today working of capital decisions since current assets are short-lived investments
that are continually being converted into other asset types (Rao, 1989). In the case of current
liabilities, the firm is responsible for paying obligations mentioned under current liabilities on a
timely basis. Liquidity for the on-going firm is reliant, rather, on the operating cash flows
generated by the firm's assets (Soenen, 1993). As a result, working capital management of a
company is a very sensitive area in the field of financial management (Joshi, 1994). It involves
the decisions about the amount and composition of current assets and the financing of these
assets.
The decision-making process on the level of different working capital components has become
frequent, repetitive, and time-consuming. Corporations are looking for new ways to stimulate
growth, improve financial performance, and reduce risk in today's challenging economic climate.
Funds tied up in working capital can be seen as hidden reserves that can be used to fund growth
strategies, such as capital expansion. Cash flows locked in stock and receivables can be freed up
by understanding the determinants of working capital. Many organizations that have earned

profits over the years have shown the efficient management of working capital (WCM). The
successful management of working capital is essential for short-run corporate solvency or the
survival of any organization. Especially, efficient WCM will lead a firm to react quickly and
appropriately to unanticipated changes in market variables, such as interest rates and raw
material prices, and gain competitive advantages over its rivals. Too often, however, this is an
area that many organizations have ignored. The way of managing working capital efficiently
varies from firm to firm since it depends on industry, the nature of the business, business policy,
strategy, etc. Thus, it is very important for an organization to understand the way to manage
working capital efficiently. Most researchers have attempted to understand the factors that
determine the working capital of an organization.
Horrigan (1965), Luo (1984), Liu (1985), Zhou (1995), and Su (2001) also did the same analysis
of impact of working capital management in profitability in China found that growth of the firm,
size, and leverage etc. affect the working capital of a company. Broadly, industry characteristics,
firm-specific characteristics, and the financial environment are recognized as determining factors
of working capital. However, still, there are firms that are struggling to manage working capital
since they don't have a sufficient understanding of the determining factors of working capital. In
addition to the growth, leverage, and the size of a company, type, and size of expenditures, such
as finance and operating and capital expenditures, have different impacts on working capital.
This paper proposes a goal programming model for working capital management. Goal
programming is necessary to model the working capital decision, as a balance has to be achieved
between the conflicting objectives of liquidity and profitability. The model determines, for given
working capital turnover and fixed assets turnover ratios, how funds should be maintained
between working capital/current assets and fixed assets to achieve targeted levels of liquidity and
profitability, whilst minimizing the opportunity cost/loss of excess liquidity. Proper planning is
necessary for the efficient working of any organization. This can be in terms of marketing,
production/operations, human resource, and financial plans. There should be proper flow of
funds for running any business. This fund is called working capital. If at any point of time the
organization does not have sufficient funds to meet its short-term debts such as creditors and
salaries as well as day-to-day expenses it may become technically insolvent. On the other hand,
if it is very conservative it will have a surplus of working capital, which will adversely affect
profits. The trade-off between profitability and risk is the key to working capital management.

Too little working capital increases profit but reduces liquidity, as current assets are more
expensive than fixed assets. For instance if a management feels that worker training is a cost they
will apportion less funds for it. If on the other hand a management sees it as an investment in
manpower, the funds allocated would increase substantially. It is applicable in any case either for
procurement, inventory, storage, processing, distribution and human capital and other investment
decisions. Businesses must continuously innovate and transform themselves to stay ahead of
competition in this fast growing world. An efficient working capital management system has to
be designed to run the business and make profits in the long run. As costs are ever-increasing,
companies have to make efficient use of funds in managing the procurement, inventory,
processing and distribution of finished product to the existing customers, and it is common in
many business decision-making situations that certain goals or objectives of the firm can only be
met at the expense of other goals. If it is not possible to quantify the exact cost-benefit trade-offs
among these goals, it may be necessary for decision makers to rank order the various goals so
that the less important goals are pursued only after the more important goals are achieved or
when no further progress toward goal achievement is possible. This paper formulates the
working capital decision as a goal programming model, balancing the conflicting objectives of
liquidity and profitability. The model determines, for given working capital turnover and fixed
assets turnover ratios, how funds should be maintained between working capital/current assets
and fixed assets to achieve targeted levels of liquidity and profitability, whilst minimizing the
opportunity cost/loss of excess liquidity.
Goal programming techniques have been widely used in many diverse fields, including
operations, marketing, human resources, and finance.
Aksoy (1990) presented a bibliography of multiple objective decision-making models applied in
various disciplines. He proposed that there was a trend towards utilizing interactive techniques
for solving the multiple objective decision making problem, allowing the involvement of the
decision-maker throughout the decision process. A variety of goal programming models have
been applied in the operations contexts, usually interlinking operations, marketing, human
resource, and financial decisions.

Reeset al (1984) analyzed the multi-period, multi-commodity network flow problem. They
contended that cost minimization is not the sole or even the most important objective of the firm;
other objectives often exist related to preferred customer demand, inventory conditions, and
shipping arrangements end contracts, necessitating a goal programming approach. Several
commodities are distributed through a network of distribution points (i.e., stores, outlets,
terminals, etc.) in order to meet supply end demand constraints at these distribution points at the
minimum shipping cost, and the model is further complicated by the fact that shipments occur
over several periods.
Tabucanon and Estraza (1989) developed a goal programming model based on several
conflicting objectives of companies, including minimization of lead time/delay, maximization of
revenue, minimization of production cost, and minimization of overtime. Their model was
applied to real data from a company, and sensitivity analysis was performed to give insights to
the decision-makers regarding trade-offs between the conflicting objectives.
Kim and Schniederjans (1993) formulated a linear goal programming model for JIT production
systems. They showed how the post optimality analysis of the goal programming model enables
a decision maker to examine the effects of production scheduling in a JIT mixedmodel
production environment.
Khorram et al (1994) proposed a unique solution to resource allocation problems by combining
goal programming with a qualitative forecasting model (e.g. the Delphi method) and a
quantitative forecasting technique (e.g. the Poisson gravity model). In their model, the Delphi
method is used initially to elicit the experts' talents to derive the objectives to be considered in
resource allocation, and subsequently a quantitative forecasting technique is used to predict the
future values for these objectives. This information is then was used to construct a goal
programming model. Rifai (1996) discussed the limitations of linear programming in decisionmaking, and suggested the use of goal to handle problems with multiple objectives. He
advocated caution in using the goal programming, since an improper structure of a goal
programming model can induce misleading results.
Schniederjans and Hoffman (1999) proposed a goal programming model for downsizing in order
to cut operation costs, based on a thorough analysis of the firms prioritized opportunities and
their limited economic resources to achieve them. They provided a new methodological approach
that can be used to determine previously hidden goals in a manufacturing linear programming

model of the downsizing problem. Their model illustrated how an optimal allocation of
production resources can be achieved while providing useful information in which to ensure
other prioritized goals and their economic tradeoffs.
Coskun et al (2008) studied integrative methods for improving business processes. Their
approach involved determining and analyzing the weak points and reducing the weakness
degrees. They suggested a four-phase business process improvement framework: start-up, self
analysis, defining improvement strategy for making changes, feedback, and continuous
improvement. They found that decision problems in process improvement could be structured to
provide input data suitable for multi-criteria decision making techniques. Lee and Kang (2008)
developed a model for inventory management for multiple periods, considering not only the
usual parameters, but also price/ quantity discounts, and storage and batch size constraints. The
model is formulated as a mixed binary integer programming problem minimizing the total cost of
materials in the system, and the optimal solution determines an appropriate inventory level for
each period and the optimal purchase amount in each period. Several studies have addressed the
problem of working capital, and have developed a variety of models to assess the efficiency of
working capital management.
Coteet al (1999) explored the limitations of the traditional measures of working capital
management and presented alternative measures based on earlier work in the finance literature.
They also proposed a new ratio, the merchandising ratio, which measured the net effect of an
firm's working capital management strategy.

Garcia-Teruel and Martinez-Solano (2007) studied the effects of working capital

management on the profitability of a sample of small and medium-sized Spanish
firms. They found that managers can create value by reducing their inventories and the number
of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle
also improves the firm's profitability.
Filbeck and Krueger (2005) suggested that firms should be able to reduce financing costs and/or
increase the funds available for expansion by minimizing the amount of funds tied up in current

assets. They found significant differences in working capital measures between industries across
time, and significant changes in these working capital measures within industries across time.