An Empirical Analysis of the Working Capital Management Practices of South African Retail Firms

Authors

  • Athenia Sibindi University of South Africa
  • Garikai Mandipa University of South Africa

Keywords:

Working capital management strategies; cash conversion cycle; conservative working capital policies; retail firms; South Africa

Abstract

Working capital is considered to be the ‘lifeblood’ of businesses. Working capital strategy can best be described as a strategy made by the firm for making decisions on two important things, which are how much to invest in each component of current assets and how to finance those investments. Against this backdrop the present inquiry sought to examine the working capital management strategies employed by the South African retail firms. The study employed a panel of retail firms listed on the Johannesburg Stock Exchange (JSE) for the period 2010-2019 as the unit of analysis. Working capital management were proxied by cash conversion cycle (CCC), average age of in-ventory (AAI), average collection period (ACP), and average payment period (APP). Descriptive  and correlational analyses was employed for empirical investigation. The data was derived from the Orbis dataset and taken from the financial statements of 16 retail companies listed on the JSE. The findings of the study revealed  that South African retail firms predominantly employed the con-servative working capital policies. More specifically, the results of the study documented that ACP and AAI were higher than APP for the sample of South African retail firms. Thus, the firms were holding more current assets in the form of trade receivables and inventories relative to current liabilities which in turn increases the length of CCC.

References

(Adam et al. 2017) Adam, Anokye M., Edward Quansah and Seyram Kawor. 2017. Working capital management policies and returns of listed manufacturing firms in Ghana. Scientific Annals of Economics and Business 64: 255–69.

(Akbar et al. 2021) Akbar, Ahsan, Minhas Akbar, Marina Nazir, Petra Poulova and Samrat Ray. 2021. Does Working Capital Management Influence Operating and Market Risk of Firms? Risks 9: 201.

(Aytac et al.2020) Aytac, Beysül, Thi Hong Van Hoang, Amine Lahiani, and Laure Michel.2020. "Working capital management and profitability of wine firms in France: an empirical analysis." International Journal of Entrepreneurship and Small Business 41: 368-396.

(Tanveer et al. 2016) Tanveer Bagh, Muhammad Imran Nazir, Muhammad Asif Khan, Muhammad Atif Khan, and Sadaf Razzaq. 2016. The impact of working capital management on firms’ financial performance: Evidence from Pakistan. International Journal of Economics and Financial Issues 6: 1097–105.

(Baltagi 2008) Baltagi, Badi, Hani.2008. Econometric analysis of panel data. 4. Chichester: John Wiley & Sons, 2008.

(Besley and Brigham 2013) Besley, Scott, and Eugene. F. Brigham. 2013. Principles of Finance. Boston: Cengage Learning.

(Besley et al.2015) Besley, Scott, Eugene F. Brigham, and Athenia B. Sibindi. Corporate finance: A South African perspective. Cengage Learning EMEA.

(Bhatia and Srivastava 2016) Bhatia,Shikha, and Aman Srivastava. "Working capital management and firm performance in emerging economies: evidence from India." Management and Labour Studies 41: 71-87.

(Chen and Kieschnick 2018) Chen, Chongyang, and Robert Kieschnick.2018 "Bank credit and corporate working capital management." Journal of Corporate Finance 48: 579-596.

(Enqvist et al. 2014) Enqvist, Julius, Michael Graham, and Jussi Nikkinen. 2014. The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance 32: 36–49.

(Dhole et al. 2019) Dhole, Sandip., SagarikaMishra, and Ananda Mohan Pal. 2019. Efficient working capital management, financial constraints, and firm value: A text-based analysis. Pacific-Basin Finance Journal 58: 101–212.

(Fisher 1930) Fisher, Irving. 1930. The Theory of Interest as Determined by Impatience to Spend Income and Opportunity to Invest it. Bulletin of the American Mathematical Society 36 : 783–784.

(Garg and Gumbochuma 2015) Garg, Ajay. K., and Mr. Innocent. Gumbochuma. 2015. Relationship between working capital management and profitability in JSE listed retail sector companies. Investment Management and Financial Innovations 12: 127–135.

(Irene and Ondigo 2018) Irene, Awunya Rose, and Herick Ondigo. 2018. The effect of working capital management policies on financial performance of commercial and services sector firms listed at the Nairobi Securities Exchange. International Journal of Economics, Commerce and Management 5: 113–42.

(Kasozi 2017), Kasozi, Jason, 2017. "The effect of working capital management on profitability: A case of listed manufacturing firms in South Africa." Investment management and financial innovations 14: 336-346.

(Kwenda 2017) Kwenda, Farai. 2017. Working capital investment and firm value relationship: A non-linear perspective. Journal of Insurance and Financial Management 3: 44–65.

(Louw 2014) Louw, Elmarie, 2014. "Management of working capital by listed South African retail companies." PhD diss., University of Pretoria.

(Louw et al. 2016) Louw, Elmarie, John Hall, and Leon Brummer. 2016. Working capital management of South African retail firms. Journal of Economic and Financial Sciences 9: 545–60.

(Mabandla 2018) Mabandla, Ndonwabile, Zimasa. 2018. The Relationship between Working Capital Management and the Financial Performance of Listed Food and Beverage Companies in South Africa. Master’s dissertation, University of South Africa, Pretoria, South Africa.

(Makori and Jagongo 2013) Makori, Daniel Mogaka., and Ambrose Jagongo. 2013. Working capital management and firm profitability: Empirical evidence from manufacturing and construction firms listed on Nairobi securities exchange, Kenya. International Journal of Accounting and Taxation 1: 1–14.

(Mengesha 2014) Mengesha, Wobshet. 2014. Impact of Working Capital Management on Firms’ Performance: The Case of Selected Metal Manufacturing Companies in Addis Ababa, Ethiopia. Doctoral dissertation, Jimma University, Addis Ababa, Ethiopia.

(Mohamad et al. 2017) Mohamad, Nor Edi Azhar Binti, Noor Raida Binti Abd Rahman, and Noriza Binti Mohd Saad. "Linking working capital policy towards financial performance of small medium enterprise (SME) in Malaysia." In SHS Web of Conferences, 36: 00021.

(Nandom et al. 2017) Yakubu, Ibrahim Nandom, Mohammed Mubarik Alhassan, and Abdul-Aziz Fuseini. "The impact of working capital management on corporate performance: Evidence from listed non-financial firms in Ghana." 68-75.

(Ngwenya 2010) Ngwenya, Sam. "Working capital management and corporate profitability of listed companies in South Africa."

(Ngwenya 2012) Ngwenya, Sam. "The relationship between working capital management and profitability of companies listed on the Johannesburg Stock Exchange." Journal of modern Accounting and Auditing 8: 1204.

(Niresh and Thirunavukkarasu 2014) Niresh, Aloy and Thirunavukkarasu, Velnampy 2014. Firm Size and Profitability: A Study of Listed Manufacturing Firms in Sri Lanka. International Journal of Business and Management 9,

(Nyabuti and Alala 2014) Nyabuti, Winnie Mokeira, and Ondiek Benedict Alala. 2014. The relationship between working capital Management policy and financial performance of companies quoted at the Nairobi Securities Exchange, Kenya. International Journal of Economics, Finance and Management Sciences 2: 212–19.

(Pais and Gama 2015) Pais, Maria Amélia, and Paulo Miguel Gama. "Working capital management and SMEs profitability: Portuguese evidence." International journal of managerial finance.

(Rakočević et al. 2014) Rakočević, Slađana Barjaktarović, Milica Latinović, and Miloš Milosavljević. "Working Capital Management Practices and Financial Performance: Evidence from Serbia." In Innovative Management and Firm Performance: 254-275. Palgrave Macmillan, London, 2014.

(Rehn 2012) Rehn, Erick. 2012. Effects of Working Capital Management on Company Profitability: An Industry-Wise Study of Finnish and Swedish Public Companies. Master’s thesis, Department of Accounting, Hanken School of Economics, Helsinki, Finland.

(Sathyamoorthi et al. 2018) Sathyamoorthi, Christian. J., Mogotsinyana Mapharing, and Popo Selinkie. 2018. The impact of working capital management on profitability: Evidence from the listed retail in Botswana. Applied Finance and Accounting 4: 82–94.

(Sohail et al. 2016) Sohail, Sundas, Farhat Rasul, and Ummara Fatima. "Effect of aggressive & conservative working capital management policy on performance of scheduled commercial banks of Pakistan." European Journal of Business and Management 8: 40-48.

(Teuteberg 2020) Teuteberg, D,Salome. 2020., Retail in Africa.

(Van Horne and Wachowicz 2004) Van Horne, James C and Wachowicz, John, M (2004). Fundamentals of Financial Management, 12th Edition, Prentice Hall Publishers, New York.

(Virkala 2015) Virkala, Ville. 2015. The Effect of Working Capital on Profitability in Computer and Electrical Industry. Master’s thesis, Aalto School of Business, Espoo, Finland.

(Weinraub and Visscher 1998) Weinraub and Visscher (1998) Weinraub, Herbert J., and Sue Visscher. "Industry practice relating to aggressive conservative working capital policies." Journal of Financial and Strategic Decision 11: 11-18.

(Zimon 2020) Zimon, Grzegorz 2020. Management strategies of working capital in polish services providing companies. WSEAS Transactions on Business and Economics 17: 225–30.

Zimon, G. and Tarighi, H., 2021. Effects of the COVID-19 global crisis on the working capital management policy: Evidence from Poland. Journal of Risk and Financial Management, 14(4), p.169

Downloads

Published

2022-07-06

Issue

Section

Business Administration and Business Economics