An investigation of the impact of working capital management on the bottom line of an organisation

Abstract

This study examines the influence of working capital management components on the profitability of South African firms listed on the Johannesburg Stock Exchange (JSE). The study uses secondary data from annual financial statements obtained from both ShareData Online and Nasdaq for 156 organisations across 14 different sectors from 2011 to 2017. The Analysis of Variance (ANOVA) method was used to determine if any relationship exists between the profitability variable and the independent variables in the study. Furthermore, descriptive statistics and correlation matrices were used to determine if there is a negative relationship between profitability and various components of working capital. The current ratios for the organisation's tests was all found to be in the healthy range of 1 to 2, with trends being visible across certain industries. Oil and Gas have shown to have the lowest current ratio while Capital Goods have shown to have the highest current ratio. This may be related to the fact that organisations in the capital goods industry tend to keep very little (if any) stock on hand, due to the high value thereof thus maintaining a very favourable current ratio. Oil and Gas companies on the other side need first to find the natural resources to produce and sell their related products, thus tying up larger amounts of capital in work-in-progress and stock. A negative relationship is evident between the time a firm incurs costs for the purchase of products and/or services and the ultimate recovery of cash receipts from sales to customers (cash conversion cycle) and profitability. A significant negative relationship was visible between days sales outstanding (DSO) and profitability, across all of the industries reviewed. Though, trends per industry were not visible with regards to days inventory outstanding (DIO) and days payables outstanding (DPO). The cash conversion cycle (CCC) may differ from sector to sector but sound working capital principles can be applied across all sectors and management can add shareholder value by efficiently managing working capital.