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INTERNAL FACTORS INFLUENCING MANAGEMENT OF CURRENT ASSETS

INTERNAL FACTORS INFLUENCING MANAGEMENT OF CURRENT ASSETS
Iluta Arbidane, dean, candidate of economics, associate professor

Jelena Volkova, lecturer, candidate of economics, doctoral candidate

Rezekne Higher School, Latvia

Championship participant: the National Research Analytics Championship - "Latvia";

The aim of the study is to determine, classify and assess the factors that influence current asset management.The study involved application of generally accepted methods of economic and statistical analysis:logical-constructive method, monographic method and method content analysis of theliterature.  Through the study of current asset role in the development of business development, the authors in their research examined influence of individual internalfactors on the company's assets. The authors provedthat working capital management is focused on the company's ability to build, maintain and control the elements of current assets and their funding sources to ensure the most efficient use of resources and to gain profit.

Keywords current assets, working capital management, internal and external environmental factors.

 

In current globalrecessionary economic environment, the sustainable development of a company depends on the ability to exercise effective financial management functions. From the perspective of   profitability and liquidity, the management of working capital plays an important role in corporate financial management.  Study of the literature allowed the authors to draw the conclusionsthat a number of scientists carrying out research on the current asset management in an enterprise pay great attention to external and internal factors, which influence current assets and their management. Recognition of these factors and evaluation of their impact is a key issue in the management of current assets.

The aim of the this study is to determine, classify and assess the factors that influence current asset management. In the other studies the authors had proved that the economic processes in the world, as well as national economic growth affect business activity indicators and the dynamics of current assets, in particular.  The terms of references are make the analisis of literature,to provide classification of Internal Factorsthat influence current asset management and to make conclusions and suggestions.

The impact of the external environment is frequently cannot be controlled and influenced therefore more serious attention is paid to the internal environment and the factors influencing it.

The internal factors,which influence current asset management, can be described from different perspectives: factors of production; financial management factors; accounting and financial management accounting and organization; organizational factors and other.

Internalfactors can be classified in the group of up to hundred of different factors that are unique to a particular enterprise. The studies of Russian scientist L. Giljarovskoj (Л.Т.Гиляровскa, 2003) show that in 90% of the financial failure cases in enterprises are based/due to managerial factors that are most often manifested as a lack of experience, inadequate level of competence, and unjustified management decisions.[1]

Table 1. provides theauthors’ summary of the internal factors which can be influenced the company itself, and which theyhave an impact on current assets and their management opportunities.

Table 1.   Internal Factors that Influence Current Asset Management

FACTORS

                          SCOPE OF FACTOR APPLICATION                        

Type of activity

  • Industry;
  • Sub-sector;

Strategic aims

  • Philosophy of enterprise;
  • Enterpriseculture;
  • Experience;
  • Future plans;
  • Policies of aim implementation;

Business organization

  • Length of production cycle;
  • Phase of enterprise development;
  • Seasonality;

Management organization

  • Management system;
  • Management team’s common understanding of goals;
  • Management of human resources;
  • Qualification of human resources;
  • Quality management system;

Implementation of technologies

  • Application of Information Technologies;
  • Acquisition and implementation of new technologies;

Accounting policy

  • Depreciationcalculation methods;
  • Stockassessment method;
  • Methodology for assessment and accounting  of the accounts receivable;
  • Level of information detalization;
  • inventoryof assets andliabilities;
  • The accountingdiscipline;

Financial management

  • Concept of financial development;
  • Financial planning;
  • Financial analysis;
  • Management interest in the financial assessment process;
  • Investment decisions;
  • Assessment of alternative ways (methods) of financial management;
  • Lack of control over costs;
  • Control of accounts receivable;
  • Payment discipline of accounts payable;
  • Control of money flow;

Marketing

  • Research of demand;
  • Selection of cooperation partners;
  • Pricing policy;
  • Assortment of products (goods, services);
  • Advertising;
  • Markets;

Source:  The Authors

 

   

Identification of the factorsaffecting the performance is based on complex research of the company’s activity, while the results of the analysis serve for future development strategy and management decision-making (Averina, 2009).[2]

As it is pointed out byBocharov (Бочаров, 2000), business sector is one of the key factorswhich determine formation of current assets. The structure of current assets and their proportion in total assets is dependent on the company's activity, strategic aims and internal policies. The first and foremost condition for the development of current asset management policy  is its consistency with the overall business strategy  which must include the standards of current assets,  intended use of the current assets and other requirements set out for the current assets.[3]

The authorsbelieve that the current asset management policies can vary not only within the industry, but they can also be affected by the sub-sector. According to the NACE classification, within a sector, there exists a more detailed breakdown in sub-sectors, which differ from each other by investments in current assets structure, size, etc.[4]

Historical experiencesand the culture implemented at the company, which are essential factors in the asset management, in general, also play an important in the management of current assets. As it is indicated in E. F. Brigham’s (1999) studies, the companies which use the best practices for current assets management, also tend to form working capital when the economy is strong, while during the downturn, they selloff stocks and develop a strict debtor management policy.[5] As it is rather difficult to predict duration and the direction of business cycle, then, according to M. J. Peel and N. Wilson (1996) and F. C. Scherr (1989), working capital management is an on-going challenge, and must be managed with great care.[6;7]

In the literature, management of individual current asset types is considered to be one of the keymanagement aspects.  M. S. Nazir and T. Afza (2008) explain that companies can reduce the risk of current asset management and improve the overall working capital levels by properly understanding the role of this category in business. [8] Therefore it is important to understand the components of working capital in order to maintain its optimal amount. The optimal working capital levels play a crucial role in achieving the balance between risk and efficiency. However, maintenance of the optimum working capital level requires constant supervision of various components, such as accounts receivable and payable balances, inventory, money, etc. Scientists indicate that it is one of the key issues which have to be addressed by the company's management.

The effect of the company’s sizeon the level of current assets and liabilities were studied by scientists R. Pass and C. Pike (1984). [9] The study concluded that the working capital accounts for a substantial part of the company's assets and liabilities, where small and medium-sized companies tend to create a relatively larger level of current assets and current liabilities than their larger counterparts. A similar study was conducted by Spanish scientists P. J.Garcia-Teruel and P. Martinez-Solano (2007), who found out that in Spanish SME sector current assets constitute 69% of total assets, while short-term obligations form more than 52% of total assets.[10]

M.K.Kolay(1991) notes that an effective working capital management is frequently recognized only at a later stage, when the company experiencesfinancial difficulties. Kolay’s study describes the crisis in current asset management as an exponential way in which problems in the past exacerbate due to the distress of the crisis and chaotic management practices.[11]

The authorsbelieve that the current asset management is to a great extent influenced also by  senior and middle management  understanding of the organization, its technological processes, as well as management attitudes towards financial control and discipline; corporate culture and corporate thinking, as well as employees who play the key role in the implementation of management development. The Chief Executive Officer is the one who provides implementation of meaningful changes, communication with managers, banks and customers, who evaluates risks, takes steps to increase the value.  The researches in personnel management carried out by the authors, as well as their practical experience allow drawing conclusions that, from the perspective of current asset management, the executives have a crucial role.

Working capitalmanagement is focused on the company's ability to build, maintain and control the elements of current assets and their funding sources to ensure the most efficient use of resources and to gain profit. According to A.Shatunov (Шатунов А.Н., 2010), the internal factors may be changing and constantly in their nature therefore they affect the working capital in time.[12] The management can yield both positive and negative results. The study emphasizes that working capital management policies should be effective and based on experience and analysis, and in no case it may be the result of chaotic decisions. The authors agree with the scientist’s view that the assessment of factors and problems in time, when one of the factors may become more influential or lose the influence, is a vital step in the process of asset management in a company. Despite the fact that at any given moment one of the management issues is or may become more important than others, the current asset management must be carried out as a complex set of measures.

The main task of the company management is to find and implement the most appropriate methods of working capital management. A.Hariss (2006), in his study, concludes that the concept of working capital management has been developed in order to ensure the company’s capacity to finance the difference between short-term asset management and to meet short-term business goals.[13]  The author believes that the paying capacity/solvency of a company is mostly based on the working capital, while the liquidity is the main goal of working capital management concept and strategy. The findings of scientific studies suggest that the management of working capital is a complex of company's daily activitiesand occupies an important place in the financial management processes, where it is essential to be aware of and apply financial management methods appropriately.

Based on the results of the analysis,the authors conclude that working capital management is focused on the company's ability to build, maintain and control the elements of current assets and their funding sources to ensure the most efficient use of resources and to gain profit. In differentcompanies, the structure and volume of current assets are determined by the business sector, organizational structure, manufacturing process and the level of its modernization, debtor and creditor ratio, accounting policies and other factors.

It is frequently impossible to control the influence of external environment and therefore greater attention should be paidto the internal environment and the factors influencing it.

Studies have proven that:

  • The policy of current assetmanagement can vary not only within the industry, but it can also be affected the sub-sector;
  • The management of working capitalis a complex of the company's daily activities and occupies an important place in the financial management processes, where it is essential tobe aware of and apply financial management methods appropriately.

 

References:

  1. Экономичкский анализ под ред.Л.Т.Гиляровской 2003.. ЮНИТИ, Москва, c.270- 273
  2. Averina J., 2009Uz??muma v?rt?bas saglab??anu un palielin??anu ietekm?jo?ie faktori Latvijas Universit?tes raksti, 744.s?jums ,,Ekonomika un vad?bas zin?tne: LU, 7-19.LPP
  3. Бочаров, В. В. 2000. Финансовое моделирование. - СПб. : Питер, - 208 с.
  4. NACE klasifikators pieejas veids: http://www.lursoft.lv/nace/
  5. Brigham, E.F., Gapenski, L.c., Ehrhardt, M.C. 1999. Financial Management: Theory And Practice. (Nineth Edition). Japan: The Dryden Press, 791-896.
  6. Peel, M.J., Wilson N. 1996. Working Capital And Financial Management Practices In The Small Firm Sector. International Journal Of Small Business, 14 (2), March,52-68.
  7. Scherr, F.C. 1989. Modem Working Capital Management: Text And Cases. Englewood Cliffs: Prentice Hall, 469p
  8. Nazir, M.S. & Afza, T. 2009. Working Capital Requirements and the Determining Factors in Pakistan. IUP Journal of Applied Finance, 15(4), 28-38.
  9. ass, R. & Pike, C. 1987. Management of Working Capital: A Neglected Subject. Management Decision. Vol. 25 (1), pp. 18-24.
  10. Garcia-Teruel, P.J. & Martinez-Solano, P. 2007. Effects of Working Capital Management on SME Profitability. International Journal of Managerial Finance. Vol. 3 (2), pp.164-177.
  11. Kolay, M.K. 1991. Managing Working Capital Crises: A System Dynamics Approach. Management Decision. Vol. 29 (5), pp.46-52.
  12. Шатунов А.Н. , 2010.Система управления оборотным капиталом предпринимательских структур. Экономика предпринимательства. Вестник Орел ГИЭТ, , №3(13), 77-83
  13. Harris, A. 2006, “Keys to Successful Working Capital Management”, Towards Better Working Capital Management.
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Your rating: None Average: 5.1 (14 votes)
Comments: 13

Eigazaryan Margarita

Статья очень актуальная, заслуживает внимания. Дальнейших успехов

Романович Людмила Геннадьевна

Представлен интересный обзор литературы. На наш взгляд, авторам недостает убедительных формулировок новизны, практических рекомендаций.

Sayapin Alexey

Вопрос к автору: Интересно, как в процессе управления оборотными активами решается противоречие между ликвидностью и рентабельностью? Находит ли данный аспект в теории и практике менеджмента?

Iluta Arbidane

Eto po preznemu konkurirujuscije celi. V razrobotke disertaciji, provodja issledovanija po pokozatelam firm v Latvii, a imenno otnosenija rentabelnosti i likvidnosti,vzaimosvjaz jest. A imenno, v firmah, gde likvidnost 1-2, jest ocen visokaja verojatnost prognozirovanija rentabelnosti ispolzuja koeficenti oboracivajemosti oborotnih aktivov i vlijaja na nih. No v issledovanijah v EU, a tak?e Ameriki i Aziji, eto popreznemu otkritij vopros i odnoznacnogo otveta netu

Stepanova Vera Vladimirovna

The author succeeded to summarize the existed theoretical approaches of internal factors influencing on current asset management. It would be more interesting to see how we can use this factor to manage current assets. But of cause, the limits article volume could not give the chance to the author to present all achievements in this sphere. V.Stepanova

Andrey Marenkov

хорошая, интересная статья, актуальная тема.

ALONA ZHAROVA

Довольно интересный материал по актуальной проблематике. Авторы достигли поставленную цель исследования. С пожеланием творческих успехов, Жарова Алёна.

Asanova Natalia Aleksandrovna

Спасибо автору за статью. В статье огромное внимание уделяется внутренним факторам, такое сложилось впечатление, что внешние факторы влияющие на текущее управление активами просто отсутствуют, также не понятно как ваше исследование применять на практике. Хотя в целом статья заслуживает положительной оценки. С уважением Асанова Н.А.

Khachpanov Giya Viacheslavovich

Из названия статьи видно, что статья посвящена внутренним факторам. Хотя согласен с предыдущим комментарием в части того, что нужны практические примеры.

Gegamyan Mariam Araikovna

Большое внимаение уделяется внутренним факторам, влияющим на текущее управление активами, но что с внешними? Много теоретичской информации и нет хороших практических примеров. Не совсем разбираюсь в данном вопросе, поэтому хотелось бы более полно узнать о проблеме.

Iluta Arbidane

Spasibo za komentariji! Eto nemnogo iz teoreticeskoi casti doktorskoi. Izza malogo objoma vozmo?nosti publikovat netu praktiki. Poznakomitsa, v kakuju storonu idet prakticeskaja cast temi mozno skacat na: http://ssrn.com/abstract=2128447

Zarytska Nataliia Petrivna

Rather good article. The internal factors that influence on current asset management are described and considered.

Korolev Evgenie Sergeevich

Хорошая статья, заслуживающая должного внимания со стороны научного сообщества. Аспекты, приводимые автором, позволяют по-новому взглянуть на выбранную автором проблему.
Comments: 13

Eigazaryan Margarita

Статья очень актуальная, заслуживает внимания. Дальнейших успехов

Романович Людмила Геннадьевна

Представлен интересный обзор литературы. На наш взгляд, авторам недостает убедительных формулировок новизны, практических рекомендаций.

Sayapin Alexey

Вопрос к автору: Интересно, как в процессе управления оборотными активами решается противоречие между ликвидностью и рентабельностью? Находит ли данный аспект в теории и практике менеджмента?

Iluta Arbidane

Eto po preznemu konkurirujuscije celi. V razrobotke disertaciji, provodja issledovanija po pokozatelam firm v Latvii, a imenno otnosenija rentabelnosti i likvidnosti,vzaimosvjaz jest. A imenno, v firmah, gde likvidnost 1-2, jest ocen visokaja verojatnost prognozirovanija rentabelnosti ispolzuja koeficenti oboracivajemosti oborotnih aktivov i vlijaja na nih. No v issledovanijah v EU, a tak?e Ameriki i Aziji, eto popreznemu otkritij vopros i odnoznacnogo otveta netu

Stepanova Vera Vladimirovna

The author succeeded to summarize the existed theoretical approaches of internal factors influencing on current asset management. It would be more interesting to see how we can use this factor to manage current assets. But of cause, the limits article volume could not give the chance to the author to present all achievements in this sphere. V.Stepanova

Andrey Marenkov

хорошая, интересная статья, актуальная тема.

ALONA ZHAROVA

Довольно интересный материал по актуальной проблематике. Авторы достигли поставленную цель исследования. С пожеланием творческих успехов, Жарова Алёна.

Asanova Natalia Aleksandrovna

Спасибо автору за статью. В статье огромное внимание уделяется внутренним факторам, такое сложилось впечатление, что внешние факторы влияющие на текущее управление активами просто отсутствуют, также не понятно как ваше исследование применять на практике. Хотя в целом статья заслуживает положительной оценки. С уважением Асанова Н.А.

Khachpanov Giya Viacheslavovich

Из названия статьи видно, что статья посвящена внутренним факторам. Хотя согласен с предыдущим комментарием в части того, что нужны практические примеры.

Gegamyan Mariam Araikovna

Большое внимаение уделяется внутренним факторам, влияющим на текущее управление активами, но что с внешними? Много теоретичской информации и нет хороших практических примеров. Не совсем разбираюсь в данном вопросе, поэтому хотелось бы более полно узнать о проблеме.

Iluta Arbidane

Spasibo za komentariji! Eto nemnogo iz teoreticeskoi casti doktorskoi. Izza malogo objoma vozmo?nosti publikovat netu praktiki. Poznakomitsa, v kakuju storonu idet prakticeskaja cast temi mozno skacat na: http://ssrn.com/abstract=2128447

Zarytska Nataliia Petrivna

Rather good article. The internal factors that influence on current asset management are described and considered.

Korolev Evgenie Sergeevich

Хорошая статья, заслуживающая должного внимания со стороны научного сообщества. Аспекты, приводимые автором, позволяют по-новому взглянуть на выбранную автором проблему.
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