Evaluating how the management of working capital policies affects liquidity in non-profit welfare organisations in South Africa

Abstract

South Africa has over 250 000 registered non-profit organisations, with over 60% facing financial liquidity challenges. This study examines the impact of working capital policies on liquidity within the countrys welfare organisations. A strata sampling design model was used to survey the sample population from all nine provinces of South Africa. The survey focused on working capital policies, liquidity status and management of the various components of working capital. Quantitative analysis, including descriptive statistics and correlation of working capital components, was used to analyse the survey results, revealing a poor relationship between liquidity, and working capital policy. The study was made up of two hypotheses and three research questions which were evaluated with chi-square, phi and Cramer’s V statistical tests which were complemented by crosstabulations. The study explored the impact of different working capital approaches, including aggressive, moderate and conservative, on liquidity levels. The majority of the sample population followed a conservative approach with low policy review frequency, resulting in a liquidity level of less than or equal to one. Future analysis suggests that organisations following an aggressive to moderate working capital approach achieve a liquidity level greater than one and adopt a higher policy frequency review management approach. The study conclusion on the need for accounts receivable, inventory management and accounts payable improvements, including speedy collection, early payment incentives, debtor follow-up, better planning tools, better payment terms and settlement incentives. It also provides a working capital framework welfare NPOs should use in applying the correct working capital approach based on internal and external factors. Finally, policy recommendation are provided for each component of working capital. Further research should look at the whole NPO environment and working capital policy application within Soth Africa.