How Working Capital Affects Firm Profitability in UK
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Added on 2023-01-13
About This Document
This study critically investigates how working capital affects the profitability of firms in the UK, specifically in the retail sector. It examines the relationship between working capital and profitability, explores factors that affect working capital, and provides recommendations for improving working capital and firm profitability. The study focuses on Morrison's, Tesco, Sainsbury, and ASDA.
How Working Capital Affects Firm Profitability in UK
Added on 2023-01-13
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Table of Contents
CHAPTER 1....................................................................................................................................3
1.1 Introduction...........................................................................................................................3
1. 2 Background..........................................................................................................................3
1.3 Statement of the problem......................................................................................................3
1.4 Research Objectives..............................................................................................................3
1.5 Research Questions...............................................................................................................4
1.6 Significant of the study.........................................................................................................4
1.7 Limitations............................................................................................................................4
CHAPTER 2....................................................................................................................................4
Literature Review........................................................................................................................4
CHAPTER 3....................................................................................................................................8
Research Methodology....................................................................................................................8
CHAPTER 4- DATA ANALYSIS................................................................................................12
Ratio analysis............................................................................................................................12
CHPATER 5- DISCUSSION........................................................................................................25
CHAPTER 6- CONCLUSION AND RECOMMENDATION.....................................................26
Conclusion................................................................................................................................26
Recommendation......................................................................................................................26
REFLECTION:.......................................................................................................................27
REFERENCES..............................................................................................................................29
CHAPTER 1....................................................................................................................................3
1.1 Introduction...........................................................................................................................3
1. 2 Background..........................................................................................................................3
1.3 Statement of the problem......................................................................................................3
1.4 Research Objectives..............................................................................................................3
1.5 Research Questions...............................................................................................................4
1.6 Significant of the study.........................................................................................................4
1.7 Limitations............................................................................................................................4
CHAPTER 2....................................................................................................................................4
Literature Review........................................................................................................................4
CHAPTER 3....................................................................................................................................8
Research Methodology....................................................................................................................8
CHAPTER 4- DATA ANALYSIS................................................................................................12
Ratio analysis............................................................................................................................12
CHPATER 5- DISCUSSION........................................................................................................25
CHAPTER 6- CONCLUSION AND RECOMMENDATION.....................................................26
Conclusion................................................................................................................................26
Recommendation......................................................................................................................26
REFLECTION:.......................................................................................................................27
REFERENCES..............................................................................................................................29
Topic: “To critically investigate how working capital tends to affect the profitability of the firm
in UK in the context of retail sector: A study on Morrison's, Tesco, Sainsbury and ASDA.”
CHAPTER 1
1.1 Introduction
Working capital is considered to be as the difference between the current assets and
current liabilities of the company for the set accounting period (Azeez, Abubakar and Olamide,
(2016)). Working capital in turn tends to have influence on the firm's profitability and liquidity.
1. 2 Background
Working capital and profitability tends to have relationship between each other. This
study will highlight on critically investigating how working capital tends to affect the
profitability of the firm in UK in the context of retail sector (Factors influencing Working capital
Management, 2008).
Morrisons is public limited retail company which was founded in the year 1899 by
William Morrison. It deals in clothing, books, food, CD's and magazines. Tesco is one of the
leading retail company which was founded in 1919 by Jack Cohen. This mainly deals in
groceries, toys, petrol, furniture, books, clothing, petrol, financial services, etc. Sainsbury is a
retail company founded in 1869 by John James Sainsbury. It mainly deals in convenience shops,
supermarkets, forecourt shops and hypermarkets. Asda is a British retailer supermarket, founded
in 1949 by Fred Asquith and Peter Asquith. It mainly deals in general merchandise, groceries
and financial services.
1.3 Statement of the problem
“To critically investigate how working capital tends to affect the profitability of the firm
in UK in the context of retail sector: A study on Morrison's, Tesco, Sainsbury and ASDA.”
1.4 Research Objectives
To develop key understanding on the concept of working capital.
To critically explore factors which affects working capital of the company.
To determine how working capital and profitability of the firm are connected with each
other.
To provide appropriate recommendation to improve the working capital and firm's
portability.
in UK in the context of retail sector: A study on Morrison's, Tesco, Sainsbury and ASDA.”
CHAPTER 1
1.1 Introduction
Working capital is considered to be as the difference between the current assets and
current liabilities of the company for the set accounting period (Azeez, Abubakar and Olamide,
(2016)). Working capital in turn tends to have influence on the firm's profitability and liquidity.
1. 2 Background
Working capital and profitability tends to have relationship between each other. This
study will highlight on critically investigating how working capital tends to affect the
profitability of the firm in UK in the context of retail sector (Factors influencing Working capital
Management, 2008).
Morrisons is public limited retail company which was founded in the year 1899 by
William Morrison. It deals in clothing, books, food, CD's and magazines. Tesco is one of the
leading retail company which was founded in 1919 by Jack Cohen. This mainly deals in
groceries, toys, petrol, furniture, books, clothing, petrol, financial services, etc. Sainsbury is a
retail company founded in 1869 by John James Sainsbury. It mainly deals in convenience shops,
supermarkets, forecourt shops and hypermarkets. Asda is a British retailer supermarket, founded
in 1949 by Fred Asquith and Peter Asquith. It mainly deals in general merchandise, groceries
and financial services.
1.3 Statement of the problem
“To critically investigate how working capital tends to affect the profitability of the firm
in UK in the context of retail sector: A study on Morrison's, Tesco, Sainsbury and ASDA.”
1.4 Research Objectives
To develop key understanding on the concept of working capital.
To critically explore factors which affects working capital of the company.
To determine how working capital and profitability of the firm are connected with each
other.
To provide appropriate recommendation to improve the working capital and firm's
portability.
1.5 Research Questions
What are the key understanding on the concept of working capital?
What are the factors which affects working capital of the company?
How working capital and profitability of the firm are connected with each other?
What are appropriate recommendation to improve the working capital and firm's
portability?
1.6 Significant of the study
The key significance of the study is to critically gain higher knowledge related with how
working capital tends to affect the profitability of the firm in UK in the context of retail sector.
This study is going to be very beneficial for the retail company in UK in order to effectively
carry out business operations (Mbawuni, Mbawuni, and Nimako, (2016)). This study is
beneficial for the researcher to gain wider set of knowledge related to the subject matter.
1.7 Limitations.
The key limitation to carry out the study is linked with time constraints. Lack of time in
turn largely affects the reliability of the study to gather valid and useful information.
Unavailability of the resources in turn is also considered to be as the major limitation to carry out
the study.
CHAPTER 2
Literature Review
Literature review is referred to as the survey linked with the scholarly articles related
with books, thesis and journal articles in order to gain wider knowledge on the research
questions. It helps in gaining viewpoints of several authors to bridge the gaps on research topic.
To develop key understanding on the concept of working capital.
Afrifa and Padachi, (2016) sought to determine the fact that, working capital is referred to
as the difference between the current assets and current liabilities of the company for the set
accounting period. Current assets of the company mainly includes account receivables, cash and
inventories. On the other hand, current liabilities of the company mainly includes accounts
payable. On the contrary, Afrifa, (2016) argued that, working capital is considered to be as the
measure of operational efficiency and liquidity of the firm. It helps firms in determining the short
term liability of the firm. Positive working capital in turn demonstrates that, the company has the
ability to grow and invest there business. Positive working capital in turn is considered to be as
What are the key understanding on the concept of working capital?
What are the factors which affects working capital of the company?
How working capital and profitability of the firm are connected with each other?
What are appropriate recommendation to improve the working capital and firm's
portability?
1.6 Significant of the study
The key significance of the study is to critically gain higher knowledge related with how
working capital tends to affect the profitability of the firm in UK in the context of retail sector.
This study is going to be very beneficial for the retail company in UK in order to effectively
carry out business operations (Mbawuni, Mbawuni, and Nimako, (2016)). This study is
beneficial for the researcher to gain wider set of knowledge related to the subject matter.
1.7 Limitations.
The key limitation to carry out the study is linked with time constraints. Lack of time in
turn largely affects the reliability of the study to gather valid and useful information.
Unavailability of the resources in turn is also considered to be as the major limitation to carry out
the study.
CHAPTER 2
Literature Review
Literature review is referred to as the survey linked with the scholarly articles related
with books, thesis and journal articles in order to gain wider knowledge on the research
questions. It helps in gaining viewpoints of several authors to bridge the gaps on research topic.
To develop key understanding on the concept of working capital.
Afrifa and Padachi, (2016) sought to determine the fact that, working capital is referred to
as the difference between the current assets and current liabilities of the company for the set
accounting period. Current assets of the company mainly includes account receivables, cash and
inventories. On the other hand, current liabilities of the company mainly includes accounts
payable. On the contrary, Afrifa, (2016) argued that, working capital is considered to be as the
measure of operational efficiency and liquidity of the firm. It helps firms in determining the short
term liability of the firm. Positive working capital in turn demonstrates that, the company has the
ability to grow and invest there business. Positive working capital in turn is considered to be as
the sign of high degree of financial strength. Negative working capital in turn is considered to be
as a situation where the liability of the company tends to exceed the current asset of the firm.
This in turn states that, there seems to be more short term debt within the company which in turn
eventually affects the business operations negatively. Moreover, Azeez, Abubakar and Olamide,
(2016.) investigated that, high degree of working capital in turn indicates that, the company in
turn has not been managing the cash and asset of the company effectively. This means excessive
amount of fund has been available which is more than what in turn is required to carry out the
operations of the business. The working capital in turn is considered to be very crucial for the
creditors because it tends to determine the liquidity of the organization. Working capital is
referred to as the important metric for all the bushiness because it helps in determining the
liquidity of the organization. The company must be able to pay to all the short term liabilities and
expenses. Charitou, Elfani and Lois, (2016) examined the fact that, the key main components
associated with the working capital is mainly linked with the receivable management, cash
management, accounts payable and inventory management. The formula to measure net working
capital is to subtract total current asset with the total current liability. A working capital ratio
which is less than 1 tends to strongly indicate that, the company is going to face liquidity
problems in the mere future. On the other hand John, (2017) examined the fact that, working
capital ratio of 2.0 tends to represent good short term liquidity. Working capital tends to
demonstrate the ability of the company to pay off the short term debts within the stipulated time
frame. Working capital management is referred to as a necessary measure which in turn is
required for financing the day to day operations of the business. This in turn helps in maximizing
the operational efficiency and in turn focus on managing its short term assets and liabilities of the
firm. This helps in mitigating the risk of under- utilization ad over- utilization of the firm.
Effective working capital management in turn helps in investing in various range of products and
services and helps in expanding the business.
To critically explore factors which affects working capital of the company.
Masri and Abdulla, (2018) established the fact that, it is very crucial for any organization
to effectively and accurately measure the capital required to carry out day to day operations of
the business. Shortage of working capital in turn largely affects the smooth flow of the operating
cycle of the business. The length of the operating cycle in turn is considered to be one of the
major factor which helps in determining the time period which in involved at the time of
as a situation where the liability of the company tends to exceed the current asset of the firm.
This in turn states that, there seems to be more short term debt within the company which in turn
eventually affects the business operations negatively. Moreover, Azeez, Abubakar and Olamide,
(2016.) investigated that, high degree of working capital in turn indicates that, the company in
turn has not been managing the cash and asset of the company effectively. This means excessive
amount of fund has been available which is more than what in turn is required to carry out the
operations of the business. The working capital in turn is considered to be very crucial for the
creditors because it tends to determine the liquidity of the organization. Working capital is
referred to as the important metric for all the bushiness because it helps in determining the
liquidity of the organization. The company must be able to pay to all the short term liabilities and
expenses. Charitou, Elfani and Lois, (2016) examined the fact that, the key main components
associated with the working capital is mainly linked with the receivable management, cash
management, accounts payable and inventory management. The formula to measure net working
capital is to subtract total current asset with the total current liability. A working capital ratio
which is less than 1 tends to strongly indicate that, the company is going to face liquidity
problems in the mere future. On the other hand John, (2017) examined the fact that, working
capital ratio of 2.0 tends to represent good short term liquidity. Working capital tends to
demonstrate the ability of the company to pay off the short term debts within the stipulated time
frame. Working capital management is referred to as a necessary measure which in turn is
required for financing the day to day operations of the business. This in turn helps in maximizing
the operational efficiency and in turn focus on managing its short term assets and liabilities of the
firm. This helps in mitigating the risk of under- utilization ad over- utilization of the firm.
Effective working capital management in turn helps in investing in various range of products and
services and helps in expanding the business.
To critically explore factors which affects working capital of the company.
Masri and Abdulla, (2018) established the fact that, it is very crucial for any organization
to effectively and accurately measure the capital required to carry out day to day operations of
the business. Shortage of working capital in turn largely affects the smooth flow of the operating
cycle of the business. The length of the operating cycle in turn is considered to be one of the
major factor which helps in determining the time period which in involved at the time of
production. It mainly starts with the acquisition of the raw material to finished goods in order to
carry out day to day business operations. Shortage related with the supply of the raw material
which helps in increasing the requirement of the working capital. A liberal credit policy in turn is
another factor which results in high level of the working capital. On the other hand, stringent
credit policy in turn reduces the working capital. Masud, (2017) examined the fact that,
competition in turn is considered to be one of the major factor which in turn largely affects
working capital of the business. High competition in turn requires high degree of working
capital. Another major factor which in turn affects the working capital of the business includes
production policy and seasonality of the industry. The company which in turn produces
frequently aids fluctuation within the requirement of the working capital within the company.
The management of the working capital in turn varies from industry to industry. In retail
industry, inventory is required to be maintained which in turn affects the working capital of the
business. Moreover, Mbawuni, Mbawuni, and Nimako, (2016) investigated that, the magnitude
to which each working capital is affected is different for the company. The market conditions in
turn plays a prominent role which in turn tends to have crucial bearing on the needs and
requirements of the working capital. The size of the company is considered to be one of the most
prominent factor which in turn helps in effectively determining the amount of working capital
which in turn is required to carry out business operations. Hence, large companies in turn
requires more working capital when compared with the smaller companies. On the contrary,
Shabbir, Iftikhar and Raja, (2018) argued that, long and complicated manufacturing process in
turn requires more working capital and vice versa in case of short and simple manufacturing
process. In case company wish to expand its business operations, then it will require high degree
of working capital in order to maintain optimum level of growth. In case, the company focuses
on selling goods on cash bases and purchasing goods on credit, them it requires more working
capital. Another major factor which affects the business working capital is linked with the
condition of supply. It means, when there is regular supply of the raw material, then the company
can keep lower inventory which results in lower requirement of working capital. At the time of
the boom of the period the sales of the company in turn gets high. During this time, large amount
of capital is invested in raw material. Hence, it requires more working capital to the business. A
long operating cycle in turn is one of the key factor which affects the working capital of the
business. There are various other factors such as transport facilities, credit standing, change in
carry out day to day business operations. Shortage related with the supply of the raw material
which helps in increasing the requirement of the working capital. A liberal credit policy in turn is
another factor which results in high level of the working capital. On the other hand, stringent
credit policy in turn reduces the working capital. Masud, (2017) examined the fact that,
competition in turn is considered to be one of the major factor which in turn largely affects
working capital of the business. High competition in turn requires high degree of working
capital. Another major factor which in turn affects the working capital of the business includes
production policy and seasonality of the industry. The company which in turn produces
frequently aids fluctuation within the requirement of the working capital within the company.
The management of the working capital in turn varies from industry to industry. In retail
industry, inventory is required to be maintained which in turn affects the working capital of the
business. Moreover, Mbawuni, Mbawuni, and Nimako, (2016) investigated that, the magnitude
to which each working capital is affected is different for the company. The market conditions in
turn plays a prominent role which in turn tends to have crucial bearing on the needs and
requirements of the working capital. The size of the company is considered to be one of the most
prominent factor which in turn helps in effectively determining the amount of working capital
which in turn is required to carry out business operations. Hence, large companies in turn
requires more working capital when compared with the smaller companies. On the contrary,
Shabbir, Iftikhar and Raja, (2018) argued that, long and complicated manufacturing process in
turn requires more working capital and vice versa in case of short and simple manufacturing
process. In case company wish to expand its business operations, then it will require high degree
of working capital in order to maintain optimum level of growth. In case, the company focuses
on selling goods on cash bases and purchasing goods on credit, them it requires more working
capital. Another major factor which affects the business working capital is linked with the
condition of supply. It means, when there is regular supply of the raw material, then the company
can keep lower inventory which results in lower requirement of working capital. At the time of
the boom of the period the sales of the company in turn gets high. During this time, large amount
of capital is invested in raw material. Hence, it requires more working capital to the business. A
long operating cycle in turn is one of the key factor which affects the working capital of the
business. There are various other factors such as transport facilities, credit standing, change in
the price levels, etc. are key factors which in turn affects the working capital requirements of the
company. The rate of turnover in turn also largely influence the requirement of the working
capital. In case the sales are fast the low amount of working capital is required. Hence, these
factors largely affect the working capital of the business.
To determine how working capital and profitability of the firm are connected with each other.
Shah, Gujar, and Sohu, (2018) established the fact that, working capital in turn tends to
have influence on the firm's profitability and liquidity. Working capital refers to the money
available to the company for meeting its daily operations. This could also be referred as the
difference between its current assets and the current liabilities of a business. Working capital is
very important for the business enterprise to run its operations successfully as stated by Shah,
Gujar, and Sohu, (2018). It is also defined as the measure of liquidity, financial health and
operational efficiency company. Company with positive working capitals have the more
potential of growing and getting success in the market as compared with those who are not
having the required working capital for their business enterprise. Changes in working capital has
a direct effect over the cash flows of company. A company requires working capital project or
expansion plan it is wishing to adopt for the business. As not business or project could be carried
out without the cash. Singh, Kumar and Colombage, (2017) established the fact that, The
working capital requirements are to be decided by the company in advance by effectively
forecasting and assessing the previous business trends. On assessing the cash requirements for
meeting the daily operations of business. On the basis of these companies decide the sources of
working capital, it ensures whether it is having enough funds for carrying out the operations of
business or not. In case of scarce funds it takes short term loans from banks or other financial
institutions for meeting the cash requirements. It is also affected by the cash operating cycle of
business. This defines the efficiency of management in utilising its resources and generating the
cash on time. Company with shorter cash cycle tend to have greater cash requirements, therefore
the companies strive for having adequate cash conversion cycle. On the other hand higher
working capital refers to funds blocked in the company. There is a direct link between the
profitability of the business and working capital. If the company is having enough working
capital for meeting its operational requirement it is considered profitable as compared with ones
that face problems in managing their working capital. As per Mishra, (2019) it could be
interpreted that businesses for raising the capital borrows funds short term loans from banks that
company. The rate of turnover in turn also largely influence the requirement of the working
capital. In case the sales are fast the low amount of working capital is required. Hence, these
factors largely affect the working capital of the business.
To determine how working capital and profitability of the firm are connected with each other.
Shah, Gujar, and Sohu, (2018) established the fact that, working capital in turn tends to
have influence on the firm's profitability and liquidity. Working capital refers to the money
available to the company for meeting its daily operations. This could also be referred as the
difference between its current assets and the current liabilities of a business. Working capital is
very important for the business enterprise to run its operations successfully as stated by Shah,
Gujar, and Sohu, (2018). It is also defined as the measure of liquidity, financial health and
operational efficiency company. Company with positive working capitals have the more
potential of growing and getting success in the market as compared with those who are not
having the required working capital for their business enterprise. Changes in working capital has
a direct effect over the cash flows of company. A company requires working capital project or
expansion plan it is wishing to adopt for the business. As not business or project could be carried
out without the cash. Singh, Kumar and Colombage, (2017) established the fact that, The
working capital requirements are to be decided by the company in advance by effectively
forecasting and assessing the previous business trends. On assessing the cash requirements for
meeting the daily operations of business. On the basis of these companies decide the sources of
working capital, it ensures whether it is having enough funds for carrying out the operations of
business or not. In case of scarce funds it takes short term loans from banks or other financial
institutions for meeting the cash requirements. It is also affected by the cash operating cycle of
business. This defines the efficiency of management in utilising its resources and generating the
cash on time. Company with shorter cash cycle tend to have greater cash requirements, therefore
the companies strive for having adequate cash conversion cycle. On the other hand higher
working capital refers to funds blocked in the company. There is a direct link between the
profitability of the business and working capital. If the company is having enough working
capital for meeting its operational requirement it is considered profitable as compared with ones
that face problems in managing their working capital. As per Mishra, (2019) it could be
interpreted that businesses for raising the capital borrows funds short term loans from banks that
are available at higher interests rates. The finance cost decreases the profit margins of the
company. This also affects the liquidity position of company. There are situations where
company seems to be profitable but is not having funds for carrying out day to day business
activities. This also affects the production activities of the business which leads to delay in
production increasing the carrying cost and labour of company. This is a significant factor
affecting the company's survival. Those firms investing more in current assets tends to have
higher liquidity than the firms not investing. This reduces the liquidity risks decreasing the rate
of return. It is stated that low investments in working capital is termed as having aggressive
policy related to working capital that tends to have higher risks and higher returns. There should
be significant flow of cash in the business so that working capital do not affect the profitability
of business.
Singh, Kumar and Colombage, (2017) viewed that working capital reflects the reputation of
the business and in case of dealing in buying and selling of good or services, it results in
examining the growth of the company. For e.g. In case of Sainsbury, the company carrying the
renowned brand image and also dealing in wider range of products. In respect of planning to
expand the business, it is necessary that company must carry enough resources to manage their
operation and thus by this manner the profitability is determined through getting higher sales. On
the other hand Shabbir, Iftikhar and Raja (2018) stipulated that there must be constant cash flow
in the business and thus through this manner, they can manage the profits by dealing with
authentic companies to expand the business in the form of licensing or franchising. But
sometimes the cries occurs in respect of blockages of money in context of investing in particular
projects. This also affects the profitability of the business regarding not getting good return on
the invested money (Kumar, 2019). As company usually plans their financial budgets for the
entire period and if any such period, such issues raised, than it results in causing direct impact
upon the profitability which also affects the integrity of the business.
CHAPTER 3
Research Methodology
It refers to the specific or particular procedures that is used for identifying, processing,
analysing and selecting an information regarding the research topic or problem. This section
company. This also affects the liquidity position of company. There are situations where
company seems to be profitable but is not having funds for carrying out day to day business
activities. This also affects the production activities of the business which leads to delay in
production increasing the carrying cost and labour of company. This is a significant factor
affecting the company's survival. Those firms investing more in current assets tends to have
higher liquidity than the firms not investing. This reduces the liquidity risks decreasing the rate
of return. It is stated that low investments in working capital is termed as having aggressive
policy related to working capital that tends to have higher risks and higher returns. There should
be significant flow of cash in the business so that working capital do not affect the profitability
of business.
Singh, Kumar and Colombage, (2017) viewed that working capital reflects the reputation of
the business and in case of dealing in buying and selling of good or services, it results in
examining the growth of the company. For e.g. In case of Sainsbury, the company carrying the
renowned brand image and also dealing in wider range of products. In respect of planning to
expand the business, it is necessary that company must carry enough resources to manage their
operation and thus by this manner the profitability is determined through getting higher sales. On
the other hand Shabbir, Iftikhar and Raja (2018) stipulated that there must be constant cash flow
in the business and thus through this manner, they can manage the profits by dealing with
authentic companies to expand the business in the form of licensing or franchising. But
sometimes the cries occurs in respect of blockages of money in context of investing in particular
projects. This also affects the profitability of the business regarding not getting good return on
the invested money (Kumar, 2019). As company usually plans their financial budgets for the
entire period and if any such period, such issues raised, than it results in causing direct impact
upon the profitability which also affects the integrity of the business.
CHAPTER 3
Research Methodology
It refers to the specific or particular procedures that is used for identifying, processing,
analysing and selecting an information regarding the research topic or problem. This section
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