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Working Capital Management and its Impact on Profitability: Evidence from ASX listed Construction Firms

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Added on  2020-09-27

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This research paper examine the relationship between working capital management and profitability in ASX listed construction companies in Australia. Working capital management has been measured using cash conversion cycle (CCC) and along with it the other components such as Average Collection Period, Average Payable Period and Inventory Turnover in days are analysed. The return on total assets (ROTA) is used as a measure of profitability and is considered as a dependent variable.

Working Capital Management and its Impact on Profitability: Evidence from ASX listed Construction Firms

   Added on 2020-09-27

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Assignment 2BUSN20019: Professional ProjectTerm 2, 2018A Project Report OnWorking Capital Management and its Impact on Profitability: Evidence from ASX listed Construction Firms
Working Capital Management and its Impact on Profitability: Evidence from ASX listed Construction Firms_1
Executive SummaryThis research paper examine the relationship between working capital management and profitability in ASX listed construction companies in Australia. Working capital managementhas been measured using cash conversion cycle (CCC) and along with it the other components such as Average Collection Period, Average Payable Period and Inventory Turnover in days are analysed. The return on total assets (ROTA) is used as a measure of profitability and is considered as a dependent variable. To examine the statistical significance between dependent and independent variables, Pearson’s Correlation and Linear Regression analysis were performed on secondary data collected from sample of 4 ASX listed construction companies. The results indicate that working capital and profitability has no statistical significance however both have negative relationship. The research shows that average collection period is statistically negatively significance to the profitability. So, in order to increase the profitability, the firms should focus more on reducing the average collection period.1 | Page
Working Capital Management and its Impact on Profitability: Evidence from ASX listed Construction Firms_2
Contents1.0Introduction.....................................................................................................................31.1Problem Statement.......................................................................................................31.2Research Aim, Objectives and Research Questions....................................................42. Conceptual Framework..........................................................................................................42.1 Working Capital Management.........................................................................................42,2 Profitability.......................................................................................................................53.0Literature Review............................................................................................................54.0 Methodology........................................................................................................................84.1 Data Collection.................................................................................................................84.2Data Analysis...............................................................................................................85.0 Findings and analysis...........................................................................................................95.1 Descriptive Statistics........................................................................................................95.2 Bivariate Correlations Results........................................................................................105.3 Regression Analysis Results...........................................................................................116.0 Discussion..........................................................................................................................127.0 Conclusion..........................................................................................................................138.0 Limitations.........................................................................................................................139.0 Future research...................................................................................................................14References................................................................................................................................152 | Page
Working Capital Management and its Impact on Profitability: Evidence from ASX listed Construction Firms_3
1.0IntroductionWorking Capital Management is a part of everyday life of business managers, accountants and company directors. It is very crucial for carrying out the daily operations of the organization as it falls under short term finance of the firm. The failure of business can result due to inefficiency of working capital management (Zhao, 2011). Being an accounting student, the study in this topic will definitely uplift my knowledge regarding whether effective working capital management results in increasing profitability or not in terms of ASX listed Australian Construction firms as construction industry has the lowest survival rateamong all other industry in Australia. The report starts with the background of the project along with research aim, objectives and research questions. The second part is the literature review which is followed by methodology of the study, findings and analysis then discussion and conclusion.1.1Problem StatementAccording to Australian Bureau of Statistics (ABS,2016), the construction industry is the third largest industry in Australia and second largest employer providing jobs opportunities topeople of Australia. However, from the recent survey of Australian Bureau of statistics (ABS,2016-17), it has been revealed that the survival of Construction Industry in Australia is low interms of other industry as the survival rate is rapidly decreasing from 85.7% in 2014 to 60.7%in 2017. This shows that the number of exits in this industry is very high. It has been studied that the undercapitalized firms i.e. the firms which are financially weak is one of the main reasons behind the failure or insolvency of Construction industry (Coggins, J.et al., 2016). Construction companies have to run various projects at the same time which may result in the requirement for appropriate level of working capital. And if the project doesn’t complete on projected time then it leads to increased requirement for capital. So, the management of the working capital i.e. the short-term capital is very crucial for business survival, solvency and profitability (Mukhopadhyay, 2004). The development of working capital optimisation which would suit the construction industry has not been developed yet asthe management of working capital goes far beyond the financial sphere (Meszek, W., & Polewski, M.,2006).For a business to survive in a long run, the business must be profitable. As the Australian construction industry is the third largest industry to provide employment, its survival matters a lot to the whole industry. No study has been done to know whether effective working 3 | Page
Working Capital Management and its Impact on Profitability: Evidence from ASX listed Construction Firms_4

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