optimization of working capital in construction project


[attachment=17797]
1.1 GENERAL
A firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. Liquidity is a precondition to ensure that firms are able to meet its short-term obligations and its continued flow can be guaranteed from a profitable venture. The importance of cash is an indicator of continuing financial health. This requires that business must be run both efficiently and profitably. In the process, an asset-liability mismatch may occur which may increase firm’s profitability in the short run but at a risk of its insolvency. On the other hand, too much focus on liquidity will be at the expense of profitability and it is common to find finance textbooks begin their working capital sections with a discussion of the risk and return tradeoffs inherent in alternative working capital policies. Thus, the manager of a business entity is in a dilemma of achieving desired tradeoff between liquidity and profitability in order to maximize the value of a firm.



1.2 NEED AND IMPORTANCE
Russell (1991) 24 pointed out that more than 60% of construction contractor failures are mainly due to economic factors. Cash is the most important of a construction company’s resources. A large number of construction companies fail due to lack of liquidity for supporting their daily activities than because of inadequate management of other resources (Singh and Lakanathan 1992; Navon 1994) 25. It is important that the company should have sufficient working capital or access to funds to meet its short-term obligations. Too little may result in cash flow problems, failing to pay suppliers, labor, subcontractors etc on time. Ultimately a business with insufficient working capital may be forced to cease trading even if it continues to report profit.



1.2.1 WHAT IS WORKING CAPITAL
The working capital meets the short-term financial requirements of a business enterprise. It is a trading capital, not retained in the business in a particular form for longer than a year. The money invested in it changes form and substance during the normal course of business operations. The need for maintaining an adequate working capital can hardly be questioned. Just as circulation of blood is very necessary in the human body to maintain life, the flow of funds is very necessary to maintain business. If it becomes weak, the business can hardly prosper and survive. Working capital starvation is generally credited as a major cause if not the major cause of small business failure in many developed and developing countries.



1.4 RESEARCH METHODOLOGY
Methodology to achieve the above objectives is given below:
Step1: Literature survey was carried out from the relevant journal papers, conference proceedings. Literature review helped in getting updated knowledge on the subject besides helping in identification of the factors; influencing the working capital requirements.