Literature Review
The working capital management of “Hong Kong Aircraft engineering company limited” has been evaluated in this research proposal. The proposal has been developed on the basis of research objectives and the rationale of research and shall deal with the literature survey, methods of conducting research which helps in arriving at the expected outcomes. One of the most challenging and important aspect of overall financial management is effective and efficient management of working capital. HAECO is one of the leading independent aircraft maintenance and engineering group and the development of company is reflected in its operational excellence, technical expertise, innovation and service integrity (Haeco.com 2019). It opened new facilities across region as it began building on its response to meet the ever changing demand and building on its capabilities. HEACO intends to meet the needs of customers with the confidence of its vision, adaptability and determination and thereby ensuring bright future.
Therefore, in this paper, the impact of inventory on the working capital management is identified by computation of various ratios impacting the same. Since the sample under analysis is Hong Kong aircraft engineering company limited. Another aspect that the researcher intends to discuss is the impact of termination of airbus A 380 on the working capital management of HAECO. The model of airbus A 380 had its own issues and the decision to end the production is centered on the financial matters. This particular airbus involved higher operational cost and higher price tag. With the advancement in technology, companies manufacturing airbus shifting their focus towards developing the models that enable customers to fly at lower cost and fly farther. Therefore, it has been found that this model did not have large back orders.
The rationale of the topic is to evaluate the impact of classes of aircraft making on the working capital management of HAECO. In short, it can be said this research paper intends to account for factors on the decision making and one such factors involves working capital management that is the topic of concern. One of the most relevant decisions taken by company is the management of working capital as it influences both liquidity and profitability of organization. The empirical verification in this paper is directed towards the identification of working capital management areas which is considered relevant for maintaining adequate liquidity level. Maintenance of financial stability in organization is one of the important aspects of working capital management (semanticscholar.org 2019). In order to understand the working of aircraft, it is required to inspect into the age of aircraft and its servicing cost.
- To evaluate the financial efficiency of HAECO by evaluating the working capital management
- To examine the impact of termination of one category of aircraft on the working capital management of HAECO.
Research Design and Methodology
Research design is a conceptual structure constituting of the measurement, collection and analysis of data. It is a way that helps in systematically solving the issue by allocating the procedure. It is process of conducting research in an organized and systematic manner by allowing understanding of several types of techniques. Researcher can engage in the study using methods such as hypothesis, descriptive and exploratory. The main objective of designing research is to ensure that adequate evidences are obtained so that research problems are effectively addressed (Wasiuzzaman 2015). This particular research is a case study design that narrows down research to a few researchable examples. A variety of methodologies can be applied by research in case study design and research problem can be investigated by using variety of sources. For this study, the research design used by researcher is descriptive explanatory which institute that suggestion is required for this type of design and it is demanded by the study that questions are interpreted into recommendations. This type of research involves quantitative analysis for hypothesis testing and responding to questions by gathering large number of data. Under the descriptive research, it is suitable to perform quantitative analysis which intends to test the hypothesis by gathering large number of data and the method being more reliable and objective and not getting influenced by the opinion of researchers (McCusker and Gunaydin 2015).
The research approach employed in this particular research paper is deductive that usually begins with hypothesis and emphasizes on quantitative analysis. It is essential to dispel the nation that quantitative research is confirmatory and deductive. Deductive approach intends to develop hypothesis based on existing theory and testing the hypothesis by designing a research strategy (Cuervo et al. 2017). The approach is descriptive and explanatory because the researcher is required to give an explanation of how the inventory is impacting the movement of working capital and ultimately the profitability level of company. The sample under the study is the aircraft engineering company named HAECO.
In this research paper, the impact of the aircraft on the working capital management is evaluated by taking data from the official website of company. The group intends to expand its service offerings to new generation of aircraft with the evolving needs of customers and changes in the aviation industry (Talonpoika et al. 2016).
In the given case under analysis, aircraft are the inventory stock and the general rule says that quickly dispatching the inventory positively impacts the working capital. It has the consequence of effectively managing the working capital by moving the inventory quickly and generating the faster cash conversion cycle which significantly influences the profitability position of company. On other hand, if the inventories are moving slowly, then the entire process of working capital management would slow down. Slower moving inventory creates disruption in the whole cycle by slowing down the cash conversion cycle and thereby creating a positive impact on the level of profitability (Masudin et al. 2016).
Analysis and Results
Termination of airbus A 380 would create a positive impact on the working capital management of HAECO by making it smaller. This is so because the demand of airbus A 380 has reduced dramatically with its largest costumer reducing their order to 14 compared to 50 aircrafts. The type of aircrafts that is manufactured is being altered by the consumer behavior. This airbus would have been perfect for those operating between major hubs such as Dubai, London and New York. Changing preference of customers as they want to fly to their own final destinations is the factor leading to terminate the production of A 380 (Simple Flying .com 2019). Except the major hubs, small airports are not able to support such airbus. Furthermore, with the advancement of technology, companies are able to manufacture smaller plane at cheaper cost.
Therefore, from the analysis of the facts associated with the termination of A 380, it can be inferred that working capital of HAECO would be positively impacted. This is so because had such airbus not been terminated would have increased the working capital as it would be difficult for company to clear the stocks due to declining demand. This would lower the cash conversion cycle and reduce the inventory turnover ratio. Reduction in such figures would cause cash to get blocked in the cycle and increase the working capital and thereby lowering the level of profitability.
In the present study, secondary data is used by researcher and the collection of secondary data is done from the website of the company under analysis. Researcher obtains the data and numerical variables from the annual report of HAECO published on its website. Therefore, the only source of gathering data and the information needed for conducting research is collecting data by referring to the annual report. Nevertheless, the only source of information is the annual reported obtained from the website of company.
Data required for research should be appropriately ascertained and there are two types of data which the researcher can use in the research paper. In this paper, researcher is making use of secondary data from one source as the research design is case study on one company based which narrows down the source of data collection.
The research proposes to use data using the annual report of the company under analysis. These are the numerical figures that have already been published by the company and hence, research makes use of secondary data (Wasiuzzaman 2015). Full compilation of secondary data provides the proof of the fact that there is no involvement of human behavior. However, all the relevant and necessary financial information is not disclosed by the financial statements.
Conclusion
In this paper, researcher is relying on analysis of quantitative data and the type of data chosen for analysis is dependent upon the research topic. Analysis of data depicted in the financial statements would help in obtaining relevant information for ascertaining the impact of inventory on the working capital management. Some of the financial tools that help in analyzing the data determining the impact of inventory on working capital are ratio analysis. Ratio analysis would help in measuring the efficiency of working capital management and liquidity. Some of the ratios that would be computed to analyze the impact of inventory on the working capital management include current ratio, acid test ratio, inventory turnover ratio, cash ratio, accounts receivable ratio, net working capital turnover and return on assets (Singhania and Mehta 2017). For evaluating the effectiveness of working capital management, a table is framed for comparing the figures of the calculated data.
This section deals with the research problems by covering on the information related to the topic of research. The purpose of literature review is to describe the concept of working capital by identifying, analyzing and testing several drivers. The concept of working capital management is no longer seen as discipline with the principal aim of maintains sufficient liquidity in event of liquidation (Marzo and Scarpino 2016). Rather, the objective of such managing working capital is to underpinning operating cycle of company. Working capital management has been highlighted as the major factor of success of profitability of firm with the increased focus on the operating cycle. Literature provides for the suggestions on how the working capital decisions are adjusted to the technology, nature of business, credit conditions, demand and other factors. The objective of the optimum working capital management is to shorten the cash conversion cycle as it helps in increasing the profitability of company (Li and Wu 2017).
Working capital management is the important concept of the financial management with a number of researches work has been done on evaluating the several components of the same. It is the management of current liabilities, current assets and total level of debts to generate profits. It is suggested by the empirical evidence relating to profitability and working capital management that profitability in organization is enhanced by the aggressive policies of working capital (Kasiran et al. 2016). Working capital management found to have vitally impact the financial health of company. The main focus of the management of working capital is on investment and short term financing decisions of firms and it involves the decision on the composition and financing of the amount of current assets. Organization having effective working capital management ensures that the company has adequate access to the funds required for meeting the daily operating expenses (Ghadge et al. 2016). Most of the literature indicated a significant negative relationship between the profitability of the firm and profitability of the firms.
Most of the research papers have conducted the analysis of measuring the dependant variable that is working capital and its behavior which is impacted by the way inventory managed. As it is known that working capital influences the profitability level of firms, hence, the impact of inventory can be used to measure the dependant variable by using proxy to measure the profitability of firms such as gross operating profit, stock returns and return on assets (Inkinen 2016).
It is indicated by one of the study that companies are significantly impacted by the working capital management and the result was based on companies of UK. This has been done by increasing the market value of firms by creating a balance between cost and revenue. Another study conducted evaluated the data of 134 companies ranging from year 2005 to year 2011. It is stated by the study that there exist meaningful relationship between business performance and working capital management along with evaluating the aggressive policy of working capital contributing to business development (Bianchi Martini et al. 2016).
Furthermore, it is analyzed that the risk of inability to meet the current obligations is eliminated by management of liquidity that involves controlling and planning of current liabilities and assets. It has been found in the study that the utmost important measure of liquidity is cash conversion cycle compared to current ratio. An adverse gap was witnessed between liquidity position and indicators of profits position of firms (Hailu and Venkateswarlu 2016).
Study on the management of working capital as a whole requires discussing about the individual components of working capital. However, there were few studies on the individual working capital components. The prior literature work had some issues such as lack of systematic development study and survey based approach. It has been concluded by major research paper that the corporate profitability is dependent upon the working capital management of organization (Aviation.itu.edu.tr 2019).
The study conducted in the manufacturing sector of Turkish where the companies listed on Istanbul stock exchange were examined by analyzing the impact of working capital on the performance of business. It was identified that the profitability of the firms are reduced due to lower cash conversion cycle. It has been expressed by the author that company should lessen the cash conversion period for increasing the profitability (Amachree et al. 2017).
In one of the study conducted on textile companies traded in the stock exchange of Pakistan realized that there exist negative correlation between liabilities and profitability and positive correlation exist between accounts receivable and profitability. In addition to this, the profitability of company increased due to an increase in the receivables, cash and inventories. Therefore, it was identified that the profitability of company can increase because of effective management of working capital. As a consequence of this study, it was found that the working capital should be high enough to maintain profitability without any issues and low enough not to reduce the profitability (Afrifa and Padachi 2016).
Since working capital is considered as one of the indicator of liquidity of firm, it is considered essential to identify the relationship between liquidity and profitability. In one of the paper, the liquidity of firms in the sample is measured by cash conversion cycle and current ratio. The two significant results were found and the liquidity level of firm is negatively related with the profitability as indicated by current ratio (Ijltemas.in 2019). Furthermore, it was found that the profitability is affected by cash conversion cycle as against current ratio. Management of working capital is affected by holding cash at reasonable level.
In a research conducted on the companies of UK, it was found that company is significantly impacted by the working capital policy. This is so because if the inventories are cleared in a short period of time, then it would lower the cash conversion cycle and shorten the working capital which would help in clearing stocks and generating cash by selling the inventories (Hoang 2015). Hence, it can be said that the faster clearing of inventories would lessen the working capital and generates cash and ultimately has a positive impact on the profitability level.
While in most of the cases, it has been found that there exist positive relations between fast movement of inventories and working capital management and ultimately profitability. The size of inventory has a direct impact on working capital management. It is demonstrated from the findings of the literature review that inventories of company considerably impacts the working capital management and thereby influencing the profitability levels (Aminu and Zainudin 2015).
The research paper comes with the objective of analyzing the impact of inventory on the movement of working capital of HAECO and its management which directly influences the profitability position of company. It has been found that the management of working capital plays a significant role in sustaining the activities of company. Effective management of working capital positively impacts the cash conversion cycle and thereby profitability position of company (Nobanee and Abraham 2015). Evaluation of the working capital would be done by the computation of several financial ratios. Many of the prior research paper demonstrate that the movement of inventory significantly influences the management of working capital. It is also concluded by the review of literature that the profitability of firm is impacted by several components of working capital. Evaluating the relationship between these variables would help in identifying the areas of improvement in the performance of firm.
From the reviews generated by the literature, it can be concluded that the aircraft considerably impacts the working capital management. If the aircraft fleets are not moving quickly, this would expand the working capital because of slower cash conversion cycle and ultimately reducing the level of profitability. On other hand, if the movement of inventory that is aircraft as in the given case is faster, and then working capital would be shortened due to faster cash cycle conversion and creating a positive impact on profitability. Furthermore, the termination of airbus A 380 would create a positive impact on the working capital management of HAECO because such aircraft fleet would be blocked in the inventory due to its falling demand, lack of market and cost issue. This would make the management of working capital inefficient and thereby reducing the level of profitability.
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