Working capital management in Srilanka

Abstract

The study provides an empirical evidence of working capital management policy and practices of the private sector manufacturing companies in Sri Lanka. The information and data for the study were gathered through questionnaires and interviews with chief financial officers of a sample of manufacturing companies listed on the Colombo Stock Exchange. The main conclusions of the study are summarised below: 1. Most companies in Sri Lanka have informal working capital policy. The managing director plays a major role in formulating formal or informal policy. Company size has an influence on the overall working capital policy (formal or informal) and approach (conservative, moderate or aggressive) and review period. 2. Finance manager is the responsible for managing working capital components. Stretching of credit payment and ageing schedule are the primary tools of managing disbursement float and controlling debtors respectively. Material requirement planning (MRP) and perpetual inventory control (PIC) system are key techniques of inventory management. Company profitability and working capital policy influence the payable management and working capital finance respectively. Most of the companies take cash discounts, but their annual cost of working capital funds is high that ranges between 15-20%. 3. Current and cash budget are major techniques of working capital, planning and control. Company profitability has an influence on the methods of working capital planning and control. Companies sometimes consider working capital changes when they evaluate capital budgeting. Most of the companies in this study use bank interest rate as a hurdle rate for evaluating the working capital changes. 4. A comparison of the working capital practices of the Sri Lankan companies with the USA companies reveals a lot for similarities. The basic difference is in terms of the use of computerised system and the opportunity to invest surplus cash in the money market instruments.