The Nexus between Working Capital Management and Profitability: The Case of Listed Food and Beverage Firms in South Africa
Keywords:
working capital management, cash conversion cycle, profitability, gross operating profitAbstract
The purpose of this study was to assess the relationship between working capital management and profitability. It was based on a sample of 12 food and beverage firms listed on the Johannesburg Stock Exchange (JSE) in South Africa. Our study spanned 10 years from 2007 to 2016. Notwithstanding the existing literature on this relationship, very few notable studies have investigated this phenomena in this particular industrial sector. We used gross operating profit (GOP) to measure profitability, while inventory conversion period (ICP), average collection period (ACP) and average payment period (APP) were used to proxy working capital management. Applying the generalized method of moments (GMM) model, we established a negative relationship between ICP and profitability, as well as between ACP and profitability. However, we determined that there is a positive relationship between APP and profitability for our sampled firms. Based on these findings, we recommend that financial managers of such firms maintain optimal threshold levels of the various working capital components (inventory stock, accounts receivable, and accounts payable) through the adoption of an aggressive working capital management strategy to generate shareholder wealth, by enhancing the profitability of their firms.
References
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Mun, S. G. & Jang, S. S. (2015) Working capital, cash holding and profitability of restaurant firms in America. International Journal of Hospitality Management, 48, 1-11.
Munir, A. (2019) The working capital management and profitability analysis on the leading dairy food industries in Indonesia, Journal of Applied Accounting and Finance, 1: 1-9.
Nyeadi, J.D., Sare, Y.A. & Aawaar, G., (2018) Determinants of working capital requirement in listed firms: Empirical evidence using a dynamic system GMM. Cogent Economics & Finance, 6(1), p.1558713. DOI: https://doi.org/10.1080/23322039.2018.1558713
Omesa, N. W., Maniagi, G. M., D., Makori, G. A. (2013) Working capital management and corporate performance: Special reference to manufacturing firms on Nairobi Securities Exchange. International Journal of Innovative Research and Development, 9, 177-183.
Pais, M. A. & Gama, P. M. (2015) Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance, 11(3), 341-358.
Parrino, R., Kidwell, D. S. & Bates, T. W. (2011) Fundamentals of corporate finance, 2nd edn, John & Wiley Sons, Inc.
Paul, P & Mitra, P. (2018) Analysis of the effective of working capital management on profitability of the firm: evidence from Indian steel industry, Asia-Pacific Journals of Management Research and Innovation, 14(1-2): 32-38. DOI: https://doi.org/10.1177%2F2319510X18812142
Raheman, A., Aftza, T., Qayyum, & Bodla, M., A. (2010) Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47. 157-163.
Richards, V & Laughlin, E. (1980) A cash conversion cycle approach to liquidity analysis, Financial Management, 9(1), 32-38.
Singh, H. & Kumar, S. (2014) Working capital management: A literature review and research agenda. Qualitative Research in Financial Markets, 6(2), 173-197.
Singhaina, M., Sharma, N. & Rohit, Y. J. (2014) Working capital and profitability: evidence from Indian manufacturing companies. Indian Institute of Management Calcutta, 14(3), 313-326.
Singhania, M., & Mehta, P. (2017) Working capital management and firm’s profitability: evidence from emerging Asian countries, South Asian Journal of Business Studies, 6(1), 80-97.
Smith, K. (1980) Profitability versus liquidity tradeoffs in working capital management. In K. V. Smith (ed.), Readings on the management of working capital, 549-562, St. Paul, MN, West Publishing.
Soukhakian, I. & Khodakarami, M. (2019) Working capital management, firm performance and macroeconomic factors: evidence from Iran, Cogent Business and Management, 6: 2-25. DOI: https://doi.org/10.1080/23311975.2019.1684227
Tauringana, V. & Afrifa, G. A. (2013) The importance of working capital management and its components to SME’s profitability. Journal of Small Business and Enterprise Development, 2(3), 453-469.
Tran, H., Abbott, M. & Yap, C. (2017) How does working capital management affect the profitability of Vietnamese small and medium-sized enterprises? Journal of Small Business and Enterprise Development, 24(1), 2-11.
Walker, E. W. (1964) Toward a theory of working capital. Engineering Economist, 9, 21-35
Alipour, M. (2011) Working capital management and corporate profitability: evidence from Iran, World Applied Sciences Journal, 12(7), 1093-1099.
Almazari, A. A. (2014) The relationship between working capital management and profitability: evidence from Saudi cement companies. British Journal of Economics, Management and Trade, 4(1), 147-157.
Arellano, M & Bond, S. (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment questions. Review of Economic Studies, 58(2), 277-297.
Atrill, P. (2006) Financial management for decision-makers, 4th edition. Prentice-Hall.
Baltagi, B. (2008) Econometric analysis of panel data. Hoboken, NJ: Wiley.
Banos-Caballer, S, Garcia - Teruel, P., J & Martinez, Solano, P. (2011) How does working capital management affect the profitability of Spanish Small medium enterprises (SME’s); Small Bus Econ, pp. 517-529.
Banos-Caballer, S, Garcia-Teruel, P., J & Martinez-Solano, P. (2019) Net operating working capital and firm value: a cross-country analysis, BRQ Business Research Quarterly, 1-17.
Brooks, C. (2008) Introductory econometrics for finance, 2nd edn, United States of America, Cambridge University Press, New York.
Deloof, M. (2003) Does working capital management affect the profitability of Belgian firms? Journal of Business Finance and Accounting. 30(3-4), 573-587.
Garcia-Teruel, P., & Martine-Solano, P. (2007) Effects of working capital management on SME profitability, International Journal of Managerial Finance, 3(2), 164-177.
Gitman, L. J., Smith, M. B., Hall, J., Lowies, B., Marx, J., Strydom, B. & Van der Merwe, A. (2010) Principles of managerial finance; global and Southern African perspectives, 12th edn, Cape Town, Pearson Education.
Godswill, O, Ailemen, I., O, Osabohien, R, Chisom & Pascal, N. (2018) Working capital management and bank performance: empirical research of ten deposit money banks in Nigeria, Journal of Banks and Bank Systems, 49-61.
Gujarati, D. N. & Porter, D. (2009) Basic econometrics, USA, McGraw-Hill International Edition.
Hassan, N.U., Imran, M.M., Amjad, M. & Hussain, M., (2014) Effects of working capital management on firm performance: An empirical study of non-financial listed firms in Pakistan. International Journal of Academic Research in Business and Social Sciences, 4(6), pp.114-132. DOI: http://dx.doi.org/10.6007/IJARBSS/v4-i6/931
Hausman, J. A. (1978) Specification tests in econometrics. Econometrics: Journal of Econometrics Society, 46(6), 1251-1271.
Jana, D. (2018) Impact of Working capital management on profitability of selected listed FMCG companies in India, International Research Journal of Business Studies, 11(1), 1-10.
Jensen, M.C. & Meckling, W.H., (1979) Theory of the firm: Managerial behavior, agency costs, and ownership structure. In Economics social institutions (pp. 163-231). Springer, Dordrecht.
Kabuye, F., Kato, J, Akugizibwe, I & Bugambiro, N. (2019) Internal control system, working capital management and financial performance of supermarkets in Uganda, Cogent Business and Management, 6(1), 1-19. DOI: https://doi.org/10.1080/23311975.2019.1573524
Kaddumi, T. A. & Ramadan, I. Z. (2012) Profitability and working capital management: the Jordanian case. International Journal of Economics and Finance, 4, 217-226.
Karaduman, H.A., Akbas, H.E., Caliskan, A.O. & Durer, S. (2011) The relationship between working capital management and profitability: evidence from an emerging market, International Research Journal of Finance and Economics, No. 62, pp. 61-67.
Kiviet, J. F. (1995). On bias, inconsistency, & efficiency of various estimators in dynamic panel data models. Journal of econometrics, 68(1), 53-78.
Korent, D & Orsag, S. (2018) The impact of working capital management and profitability of Croatian Software Companies, Zagreb International Review of Economics and Business, 21(1), 47-65.
Kumaraswamy, S. (2016) Impact of working capital on the financial performance of Gulf cooperation council firms. International Journal of Economics and Financial Issues, 6(3), 1136-1142.
Makori, D. M. & Jagongo, A. (2013) Working capital management and firms’ profitability: empirical evidence from manufacturing and construction firms listed on Nairobi securities exchange in Kenya. International Journal of Accounting and Taxation, 1, 1-14.
Mbithi, S., Muiri, J. & Kingi, W. (2015) Effects of working management practices on the financial performance of tourist hotels in Mombasa country, Kenya. International Journal of Management and Commerce Innovations, 3(1), 488-494.
Megginson, W. L., Smart, S. B., & Graham, J. R. (2010) Financial Management, 3rd edition. Mason, Ohio, South-Western, Cengage Learning.
Mosa, A, Iraj, S., A., & Maryam, G. (2012) Studying the relationship between working capital management and profitability at Tehran Stock Exchange: a case study of Food industry, Research Journal of Applied Sciences, Engineering and Technology, (4), 13, 1868-1874.
Mun, S. G. & Jang, S. S. (2015) Working capital, cash holding and profitability of restaurant firms in America. International Journal of Hospitality Management, 48, 1-11.
Munir, A. (2019) The working capital management and profitability analysis on the leading dairy food industries in Indonesia, Journal of Applied Accounting and Finance, 1: 1-9.
Nyeadi, J.D., Sare, Y.A. & Aawaar, G., (2018) Determinants of working capital requirement in listed firms: Empirical evidence using a dynamic system GMM. Cogent Economics & Finance, 6(1), p.1558713. DOI: https://doi.org/10.1080/23322039.2018.1558713
Omesa, N. W., Maniagi, G. M., D., Makori, G. A. (2013) Working capital management and corporate performance: Special reference to manufacturing firms on Nairobi Securities Exchange. International Journal of Innovative Research and Development, 9, 177-183.
Pais, M. A. & Gama, P. M. (2015) Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance, 11(3), 341-358.
Parrino, R., Kidwell, D. S. & Bates, T. W. (2011) Fundamentals of corporate finance, 2nd edn, John & Wiley Sons, Inc.
Paul, P & Mitra, P. (2018) Analysis of the effective of working capital management on profitability of the firm: evidence from Indian steel industry, Asia-Pacific Journals of Management Research and Innovation, 14(1-2): 32-38. DOI: https://doi.org/10.1177%2F2319510X18812142
Raheman, A., Aftza, T., Qayyum, & Bodla, M., A. (2010) Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47. 157-163.
Richards, V & Laughlin, E. (1980) A cash conversion cycle approach to liquidity analysis, Financial Management, 9(1), 32-38.
Singh, H. & Kumar, S. (2014) Working capital management: A literature review and research agenda. Qualitative Research in Financial Markets, 6(2), 173-197.
Singhaina, M., Sharma, N. & Rohit, Y. J. (2014) Working capital and profitability: evidence from Indian manufacturing companies. Indian Institute of Management Calcutta, 14(3), 313-326.
Singhania, M., & Mehta, P. (2017) Working capital management and firm’s profitability: evidence from emerging Asian countries, South Asian Journal of Business Studies, 6(1), 80-97.
Smith, K. (1980) Profitability versus liquidity tradeoffs in working capital management. In K. V. Smith (ed.), Readings on the management of working capital, 549-562, St. Paul, MN, West Publishing.
Soukhakian, I. & Khodakarami, M. (2019) Working capital management, firm performance and macroeconomic factors: evidence from Iran, Cogent Business and Management, 6: 2-25. DOI: https://doi.org/10.1080/23311975.2019.1684227
Tauringana, V. & Afrifa, G. A. (2013) The importance of working capital management and its components to SME’s profitability. Journal of Small Business and Enterprise Development, 2(3), 453-469.
Tran, H., Abbott, M. & Yap, C. (2017) How does working capital management affect the profitability of Vietnamese small and medium-sized enterprises? Journal of Small Business and Enterprise Development, 24(1), 2-11.
Walker, E. W. (1964) Toward a theory of working capital. Engineering Economist, 9, 21-35
Published
2020-08-19
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Makoni, P., & Ndonwabile, M. (2020). The Nexus between Working Capital Management and Profitability: The Case of Listed Food and Beverage Firms in South Africa: Array. The Journal of Accounting and Management, 10(2). Retrieved from https://dj.univ-danubius.ro/index.php/JAM/article/view/466
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