The Challenge in Managing Working Capital in an Emerging Economy-Case of Bangladesh

The critical components of working capital are receivables and inventory. Various published research commonly ends up with a conclusion that firms could improve profitability by monitoring inventory and receivables closely, suggesting that firms benefit from a reduction of these assets. Whereas we see the evidence that strong large companies in developed countries have better control over their working capital management, the firms in developing countries are less successful. In this paper, we take a critical look into the management of working capital using data from Bangladesh, a frontier economy that is growing rapidly. The paper seeks to answer questions such as whether we see any indication of reining in receivables and inventory, especially when there are indications that the working capital balance is moving in the wrong direction. We found that firms have been unable to limit the amount tied up in working capital, and firms cannot offset the amount tied up in receivables with an inventory reduction. Unlike their compatriots in the developed world, the management may face significantly limited access to capital and be forced to tie up significant resources in the management of inventory and receivables