Family business and financial performance Case Solution
However, the strategic management is a bit broader thing than financial management as it involves the decision that where the company needs to enter and in which segment is the company over or under performing, these all questions goes with the financial management.
Moreover, we are here to study the impact of family ownership on financial performance of the business and therefore, we reviewed the literature and found that many studies have been done in the past to identify this impact and to check the association among these variables and found that some studies suggested that there is a positive relation among these variables while some suggested the vice versa. Moreover, when we saw towards the impact, we also found dual results since some studies showed that there is a positive impact of family business on financial performance and vice versa.
However, some studies suggested that the performance of the family businesses in the United States as compared to the public businesses,findings suggested that whenever the economy was in good conditions those businesses which have a major family ownership faced declined profits and revenues as compared to more dispersed business. On the other hand, when the economy was facing recession or any bad conditions then those businesses, which were family owned, performed well in these conditions as compared to their peer dispersed businesses.
We have many financial management measures through which financial management can be measured such as Cash Conversion Cycle (CCC), Working capital Management (WCM), return on investment (ROI), liquidity management/ liquidity ratios and Return on Assets (ROA).In this section we will go through the importance of these financial management measures and try to find out what the literature says about their importance among different variables.
Liquidity ratios show how much liquid the company is in order to pay its short term debt, in other words the capability of the liquid assets in order to meet the short term debts when they come mature, however the liquidity ratios are a good measure of the firmsâ€™liquidity. Liquidity ratios include the Current ratio, quick ratio/ acid test ratio/ liquid ratio and cash ratio. Also these ratios are a part of the working capital management and they show a positive impact with profitability when they were measured in previous studies. (Padachi, 2006)
Cash Conversion Cycle (CCC) is the measure of firmâ€™s capacity to change its inventory into sales and later on turning these sales into cash as its being indicated by its name. However, the CCC has also been used in the past as the proxy of working capital management and it showed a positive relation with profitability and also a positive impact which means the greater the times of the CCC, the higher the profit will be for the company.(Bhagchi, 2014)
Working capital management is a major area of expertise for financial management since it involves the proper management of short term assets and short term liabilities in order to meet the future liabilities and enabling the company to overcome its future liabilities when they become due, however WCM showed a positive impact on profitability when it was measured in past and therefore, we can say that effective WCM leads the company to more profits. (Eljelly, 2004)
Return on Investments (ROI) was the measure of profitability and performance in the past in many studies as many authors studied the relation between profitability and liquidity management or any other variable.In some studies it showed a positive relation and in some studies it showed the vice versa, depending upon the variables of the studies.
Return On assets (ROA) has also been used in the past to measure the financial performance of the company and to check whether it has a strong or weak impact on the profitability or financial performance of the company.Moreover, it also showed dual nature depending upon the other variable from whom it studied. …………………..
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