Impact of Working Capital on Firm Profitability

This assignment delves into the crucial relationship between working capital management and a firm's profitability. It analyzes various research papers and studies that explore how effective management of current assets and liabilities can influence a company's bottom line. The provided resources offer insights from diverse industries and economic contexts, highlighting the significance of optimizing working capital for sustainable growth and profitability.

Research Proposal

TABLE OF CONTENTS
Background of the study........................................................................................................3
Research aim and objectives..................................................................................................3
Research questions.................................................................................................................3
Literature review....................................................................................................................4
Research methodology...........................................................................................................6
Conclusion..............................................................................................................................6
REFERENCES...........................................................................................................................7

Research topic: To assess the impact of working capital management on the profitability of
UK retail sector: A study on Morrison’s, Sainsbury and Tesco Plc
Background of the study
In the context of business unit, working capital management (WCM) may be served
as a strategy which helps in ensuring smooth functioning of operations in monetary terms.
Effectual WCM provides high level of assistance to the firm in meeting daily expenditure.
However, higher working capital also imposes cost in front of the corporation (Working
capital management, 2018). For this proposal, UK retail units have been selected such as
Tesco, Morrison’s and Sainsbury’s Plc. These firms offer wide range of retail products or
service to customers at effectual prices. In this, proposal will provide deeper insight about the
extent to which WCM aspects influence profit margin of retail organizations.
Research aim and objectives
Aim: The main behind initiating current study is to ascertain the influence of working
capital management aspects on profitability of firms like Morrison, Sainsbury and Tesco Plc
Objectives:
 To develop understanding about the theories and models of working capital
management.
 To assess factors that affect working capital management within UK retail sector.
 To ascertain relationship between working capital and profitability of UK retail
sector.
 To recommend ways that contributes in effectual working capital management and
thereby enhances profitability of firms.
Research questions
For conducting study in an appropriate manner research questions have been framed
as per the objectives drafted above such as:
Q.1 What is the significance of working capital management in the context of UK retail
firms?
Q.2 Does working capital management impact profitability of UK retail firms?
Literature review
Theme 1: Theories and models of working capital management

According to the views of Pais and Gama (2015) working capital implies for the funds
that firm needed for managing daily operations. It presents difference which in turn takes
place between current assets and liabilities. Tran, Abbott and Jin Yap (2017) presented
working capital management as a framework in their study which highly associated with the
maintenance of current assets & liabilities. In other words, business units lay more focus on
maintaining both current assets as well as obligations in a satisfactory manner with the
motive to maintain enough working capital. Anwar (2018) assessed that company must
maintain enough current assets in accordance with the level of liabilities. The main objective
of company behind the adoption of such strategy is to ensure enough margin of safety.
However, Aktas, Croci and Petmezas (2015) criticized that higher working capital place
direct and negative impact on the profitability of firm. Thus, in the case of ineffective
working capital management company’s operations are affected negatively. Thus, company
needs to keep and maintain working capital within the firm as per requirements.
Le and et.al., (2018) stated that business unit should make focus on maintaining the
ratio of 2:1 which in turn ensures better WCM. On the basis of such aspect, firms need to
maintain 2 current assets in against to the one obligation. However, on the critical note,
Mazlan and Leng (2018) said that requirement of working capital (WC) varies as per the
firm’s size and sector. Hence, at the time of managing WC emphasis needs to be laid on
developing trade-off between profitability and risk level. Hence, company should consider
level of both current assets as well as liabilities while developing strategies pertaining to WC.
Theme 2: Factors which affect working capital management within the firm
In accordance Moussa (2018), need of WC highly depends on the nature and business
size. As compared to others, labor intensive and manufacturing companies need more capital
over others. Hence, retail sector firms require less working capital because there are no
aspects pertaining to continuous production. Referring this, it can be presented that retail
firms needed less working for managing day to day operations as compared to others. On the
critical note, Gonçalves, Gaio and Robles (2018) stated that conditions of supply place direct
impact on working capital management. Moreover, when company offers credit to debtors for
longer duration then it may result into reduction in working capital. Thus, trade policies
developed by the company have significant impact on the maintenance of current assets.
Shah, Gujar and Sohu (2018) argued on the basis of aspects related to business cycle and
market conditions. As per market condition factor, competition is one of the main aspects

which in turn impact management of WC. For instance: Business units operating in UK retail
sector requires more working capital due to the existence of intense competition level.
Moreover, for coping up with competitive situation business units require more fund for
placing advertisements. It clearly exhibits that level of competition has significant impact on
firm’s working capital management.
In retail sector, companies namely Tesco, Morrison etc are facing stiff competition
with each other. All such firms are offering similar kind of products or services to the
customers at discounted prices. Hence, due to this, retail firms have to spend lots of money in
running advertisements and doing promotional campaign. Hence, for this purpose business
unit needs money which in turn closely influences the requirement for working capital.
Along with this, Sharif and Islam (2018) entailed in their study that business cycles such as
boom, recession etc also has greater impact on organization’s profitability. At the time of
boom, need regarding raw material, labor etc increases significantly and vice versa.
Moreover, at the time of boom, demand of customers regarding products or services offered
increases to a great extent. In this way, economic period such as recession, inflation etc
affect requirement pertaining to working capital significantly. Jana (2018) discussed in their
study that rate of sales or turnover also influences the need of working capital. During peak
time or season firm requires more working capital for managing activities. For example: In
UK, retail business units provide customers with heavy discounts. This in turn highly
influences need for working capital to a great extent. Hence, at the time of determining
working capital business unit should consider all the above mentioned factors. This in turn
helps in managing business activities and managing finance in a proper way.
Theme 3: Relationship between working capital management and firm’s profitability
Le and et.al., (2018) presented in the study that working capital management and
profitability is linked with each other. As per this, elements pertaining to working capital
such as stock, debtor’s turnover ratio etc closely impacts profit margin of firm. The rationale
behind this, high stock turnover ratio imposes holding and ordering cost in front of the
company. Further, when business unit receives fund from debtors after long duration then it
also impacts profitability level. Moussa (2018) argued that maintenance of high liquidity
within the firm is not good from the perspective of profitability aspects. Moreover, more
working capital imposes opportunity cost in front of corporation. In the case of high working
capital, enterprise loses profit which can be earned through making investment in other

profitable opportunities. However, Axiotis, Hyz and Kalantonis (2018) critically evaluated in
their study that less working capital negatively impacts profitability, operations and brand
image of the company. Moreover, less working capital inhibits business activities and thereby
profit margin.
Pais and Gama (2015) declared high level of negative relationship between working
capital and profitability. In other words, high cash conversion cycle places negative impact
on the profit margin of retail firms. Moreover, when firm takes more time in converting
current assets into cash then other activities are getting affected to a great extent. Anwar
(2018) depicted in their study that high level of association takes place between utilization of
current assets and operating profitability. On the basis of finding revealed by Tran, Abbott
and Jin Yap (2017) ideal or net current ratio places positive impact on the profitability of
business unit. In accordance with this, creditor’s turnover ratio must be higher. In addition to
this, focus needs to be placed on maintaining high stock turnover ratio and less receivable
period. Thus, policies pertaining to WCM needs to be drafted by keeping all such aspects in
mind.
Literature gap: From secondary analysis, it has assessed that several studies or
research were conducted by the firm to determine relationship between working capital
management and profitability. However, no specific research were found which in turn
associated with UK’s leading retail firms. Hence, considering such gap this issue has been
selected which in turn reflects the extent to which working capital management impacts
firm’s profitability. For presenting the clear view of study and testing hypothesis statistical
tools have been applied.

REFERENCES
Books and Journals
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-
enhancing? Evidence from firm performance and investments. Journal of Corporate
Finance. 30. pp.98-113.
Anwar, J., 2018. The Effect of Working Capital Management on Profitability in
Manufacturing Company Listed in Indonesia Stock Exchange. The Accounting Journal of
Binaniaga. 3(01).
Axiotis, D., Hyz, A. and Kalantonis, P., 2018. Working Capital Management and Firms'
Profitability in the Midst of an Economic Crisis. International Journal of Applied
Management Sciences and Engineering (IJAMSE). 5(2). pp.66-80.
Gonçalves, T., Gaio, C. and Robles, F., 2018. The impact of Working Capital Management
on firm profitability in different economic cycles: Evidence from the United
Kingdom. Economics and Business Letters. 7(2). pp.70-75.
Jana, D., 2018. Impact of Working Capital Management on Profitability of the Selected
Listed FMCG Companies in India. INTERNATIONAL RESEARCH JOURNAL OF
BUSINESS STUDIES. 11(1). pp.21-30.
Le, H. L. and et.al., 2018. Impact of working capital management on financial performance:
The case of Vietnam. International Journal of Applied Economics, Finance and
Accounting. 3(1). pp.15-20.
Le, H. L. and et.al., 2018. Impact of working capital management on financial performance:
The case of Vietnam. International Journal of Applied Economics, Finance and
Accounting. 3(1). pp.15-20.
Mazlan, A. R. and Leng, C.Y., 2018. The moderating effect of working capital management
on the relationship between working capital determinants and firm performance. Indian-
Pacific Journal of Accounting and Finance. 2(1). pp.38-48.
Moussa, A. A., 2018. The impact of working capital management on firms’ performance and
value: evidence from Egypt. Journal of Asset Management. pp.1-15.

Pais, M. A. and Gama, P. M., 2015. Working capital management and SMEs profitability:
Portuguese evidence. International Journal of Managerial Finance. 11(3). pp.341-358.
Shah, B., Gujar, M. A. and Sohu, N. U., 2018. The impact of working capital management on
profitability: case study of pharmaceutical and chemical firms listed on Karachi stock
exchange. International Journal of Economics, Commerce and Management. 6(3). pp.200-
220.
Sharif, M. A. and Islam, M. R., 2018. Working Capital Management a Measurement Tool for
Profitability: A Study on Pharmaceutical Industry in Bangladesh. Journal of Finance and
Accounting. 6(1). p.1.
Tran, H., Abbott, M. and Jin Yap, C., 2017. How does working capital management affect the
profitability of Vietnamese small-and medium-sized enterprises?. Journal of Small
Business and Enterprise Development. 24(1). pp.2-11.
Online
Working capital management. 2018. [Online]. Available through: <
https://www.bajajfinserv.in/what-is-working-capital-management>.