Impact of Working Capital Management on Firm Profitability in the Retail Sector: A Comparative Case Study

Finance and Management
Research Dissertation

Abstract
The present study is based on the study of different retail sector firms where an impact of
managing the working capital on the profitability of the firm will be highlighted. Furthermore,
the report present ratio analysis of different retail firms of UK in order to make comparison and
an effect of the factors of the working capital on the profitability of the company. From the
study it has been found that with change in the working capital, the profitability of the company
is highly affected. It has been analysed that ASDA is efficiently managing its working capital as
compared to its competitors which in tun helps in gaining higher profitability.

Acknowledgement
First and most of all, I would like to thank my Principle for his expertise, guidance, who provide
me this opportunity to write dissertation. Without your help, this paper would not have been
possible.
I would like to thank my tutor who provide enough expertise and guidance to complete the
project in right direction. I would also like to thank my teacher who help me to clear my doubts
whenever I need.
I would like to extend my sincere gratitude to my parents and family members who has always
supported me morally and economically.
Lastly, I would like to thank my friends who always help me directly and indirectly and ready to
solve my doubts at any case.

Table of Contents
CHAPTER 1: INTRODUCTION....................................................................................................5
Background..................................................................................................................................5
Aims and objectives ....................................................................................................................6
Research questions.......................................................................................................................6
Rationale .....................................................................................................................................6
Significance .................................................................................................................................7
Structure.......................................................................................................................................7
CHAPTER 2: LITERATURE REVIEW.........................................................................................1
Theme 1: The concept of working capital and the factors affecting it........................................1
Theme 2: Working capital management and theories and models associated to it.....................5
Theme 3: To ascertain the impact of WCM on organizational profitability................................9
CHAPTER 3: RESEARCH METHODOLOGY...........................................................................13
Research type.............................................................................................................................13
Research Approach....................................................................................................................15
Research Philosophy..................................................................................................................16
Research design.........................................................................................................................17
Data collection...........................................................................................................................17
Data Analysis.............................................................................................................................18
Ethical Consideration.................................................................................................................19
Validity and reliability...............................................................................................................19
Research Limitation...................................................................................................................20
CHAPTER 4- Data Analysis and Findings....................................................................................21
CHAPTER 5- Conclusion and Recommendation .........................................................................39
REFERENCES................................................................................................................................1

CHAPTER 1: INTRODUCTION
Topic: To assess an impact of the working capital management on the profitability of
the company in respect of the retail sector organization: Comparative case study on Tesco,
Morrisons, Sainsbury and ASDA
Background
Working capital is mainly defined as the net working capital that reflects the difference
between current liabilities and the assets. This means by way of shortening time for collecting
the receivables, keeping minimal level of an inventory, deferring payments, an entity could
reduce its net working capital. It also encompasses with the cash management, for instance- ways
to invest an idle funds without losing out in the liquidity. Working capital management is
counted as an essential element of the corporate FM. It shows the relationship between the
current liabilities and the assets (Gill and et.al., 2019). Managing working capital is crucial in
order to carry out the routine activities of an enterprise. The main objective behind the WCM is
ensuring smooth functioning of the operations and determining that it is having adequate funds
for satisfying both short term debt and an upcoming operational disbursements. It majorly
include managing inventory, accounts payable, cash and accounts receivables. The basic role of
managing the working capital is providing an adequate support for an efficient and the smooth
functioning of routine business operations by way of striking the trade between three proportions
or parts of the working capital that are profitability, risk and liquidity.
Working capital indicates an effective way in which the company is managing its
business and act as the true indicator of the good management as the top performers of working
capital seems to be outperformed in comparison to their peers across the other indicators. Most
of the retailers in UK had embarked on development of the optimization programmes on the
working capital as it wrestle with the way fro providing an appropriate availability without an
increase in the inventory substantially. Overall this sector has resulted an improvement in its
working capital as many of the company emphasized on improving the demand forecasting and
an agility of its supply chain as the e-commerce demands are more accurately available. On the
other hand there seen a spread within the performance of the firms with respect to working
capital between the bottom and the top performers in the sector (Samiloglu and Akgün, 2016).
With across £ 84 billion of the working capital has been identifies in retail sector and still more
opportunity is available.

The present report shows the comparison of different retail segment firms that are Tesco,
Morrisons, Sainsbury and ASDA. Furthermore, the study reflects the relationship between the
management of the working capital with that of the profitability of the company. Moreover, it
highlights the different factors of the working capital that has a direct and a great impact on the
profitability of an enterprise.
Aims and objectives
Aim
The aim behind conducting present study is to analyse the impact of working capital
management on firm’s profit with regards to Tesco, Sainsbury, Morrison’s and ASDA.
Objectives
 To develop understanding about the concept of working capital and factors affecting it.
 To identify theories and models associated with working capital management (WCM).
 To assess the extent to which WCM has an impact on organizational profitability.
 To recommend prominent WCM strategies to the firms operating in UK retail sector.
Research questions
Q.1 What is the meaning of the working capital management and its components ?
Q.2 What are the main models and theories associated with WCM ?
Q.3 To what extent WCM influences or impact operating profit margins of the retail sector
company ?
Rationale
The reason behind conducting this study is to identify impact of managing the working
capital towards the profitability and the revenue of the companies. It is seen as the most
important and the current issue in the retail sector firms as without managing the working capital
in an effective way, firm cannot survive or cannot function its routine operations adequately.
This in turn directly affects the production cycle, sales and the profitability of the company as
negative working capital shows that current liabilities of the company is higher than current
assets and this signifies a need of additional capital in the business for running the daily
operations efficiently (Obradovich, 2019). Therefore, it is very critical for the firm to maintain
optimum and balanced working capital in the business as too high and too low working capital
impacts the profit margins of the corporation to a larger extent. It is stated as the major issue as
there are several factors attached to the WCM which directly affects the profitability of an

enterprise adversely. In addition to this, retail firms in UK does not adopted for appropriate
strategies for maintaining their liquidity and short term cash position (Boisjoly and et.al., 2020).
The study has been made for recommending effective strategies that needs to be adopted by the
firm for the purpose of improving its working capital by the increasing the current assets over the
current liabilities. Researcher has used quantitative method in assessing the effect of the working
capital on net profit of the company.
Significance
The findings generated from this study could redound to benefits society by considering
the research problem relating to the working capital management. This study is counted as
meaningful for all the readers, other scholars who are looking for the similar research problem
and topic. Through this study, universities and colleges can take a detailed knowledge about the
WCM and its effect on the firm's performance (Ramiah and et.al., 2016). This study also act as
useful for all the retail sector organizations that is Tesco, ASDA, Sainsbury and Morrisons in
knowing their working capital performance and can make an effective comparison of their
performance with the other competitors so that necessary steps could be taken for achieving
competitive edge in the overall industry.
Structure
Chapter 1- Introduction
In the first chapter the study highlights the research problem and the topic in accordance
to the problem. Further, it includes framing of the appropriate research aims and objectives in
accordance to the research topic. Moreover, this chapter reflects the research questions in
relation to the working capital and also throws a deeper insights towards the rationale that is the
reason for conducting the study and the significance that involves the usefulness of the study that
means the other people or an investigators who can make use of this study.
Chapter 2- Literature review
In the next chapter, the study has made a detailed review of the research problem that
relates to an impact of WCM on profitability of the corporations. The review is made on the
basis of the objectives framed that means first it focuses on understanding the concept of the
working capital and its importance in the business. Thereafter it depicts the appropriate theories
and the models that shows the ways in which working capital needs to managed. Along with this
the report has also reviewed an extent to which working capital affects the profitability

performance and also provides for recommendation of the strategies that the company needs to
adopt for improving its working capital.
Chapter 3- Research methodology
In this section, several methods are been highlighted that has been adopted by the
researcher for conducting the study more accurately and reliably. An investigator has used
quantitative research technique by collecting the numerical facts through secondary research that
is by reviewing the articles, journals, books and the data from the official website of the firm.
Moreover, the researcher has make use of deductive approach and positivism philosophy as it
best suits to the quantitative elements of the research report. Scholar has also made use of SPSS
for analysing the data in terms of the data analysis technique.
Chapter 4- Data analysis and findings
After application of the research methods, the researcher has made use of the statistical
techniques that correlation and SPSS in order to generate the findings. Theses statistical tool will
be used for studying the relationship between the working capital and the profitability of an
organization. Through this it has been analysed that with the change in one variable that is
working capital, up-to what extent the other variable changes that is profitability.
Chapter 5- Conclusion and Recommendation
In the last chapter, the summary of overall study has been made where the findings
attained from the application of the tools and reviewing of the secondary sources are been
presented. It represents the analysis of the findings that are been inferred with respect to the
influence of the working capital on the profit margins of the firm. Moreover, this chapter also
provides for the appropriate recommendations to the company which is having a low working
capital and lower profitability so that it could follow and create the strategies and the plan
accordingly. By this way the firm can improve its performance within the overall market or
industry and this in turn helps the company in attaining growing success.