Working Capital Management Assignment

IMPACT OF WORKING CAPITAL MANAGEMENT ON
BUSINESS PROFITABILITY INTHE UK
RETAILSECTOR
(A study of data covered the period 2013-2017)
1

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION....................................................................................................1
Background of the study..............................................................................................................1
Research aim and objectives........................................................................................................1
Research questions.......................................................................................................................2
Rationale of the study..................................................................................................................2
Significance of the study.............................................................................................................2
Structure of the dissertation.........................................................................................................3
CHAPTER 2: LITERATURE REVIEW.........................................................................................4
Working capital management and factors that have influence on it............................................4
Determinants of profitability in retail sector...............................................................................6
Theories of working capital.........................................................................................................7
Impact of working capital management on organizational profitability...................................11
Research gap..............................................................................................................................13
CHAPTER 3: TOPIC DESCRIPTION.........................................................................................14
UK retail sector..........................................................................................................................14
Need of working capital management in UK retail sector and factors that affect the same......14
CHAPTER 4: RESEARCH METHODOLOGY...........................................................................16
Research type.............................................................................................................................16
Research approach.....................................................................................................................16
Research philosophy..................................................................................................................17
Research problems.....................................................................................................................17
Research questions.....................................................................................................................17
Research strategies.....................................................................................................................17
Data collection...........................................................................................................................18
2

Data analysis..............................................................................................................................18
Ethical considerations................................................................................................................19
Reliability and validity..............................................................................................................19
Research limitations...................................................................................................................19
CHAPTER 5: ANALYSIS AND FINDINGS...............................................................................20
Findings.....................................................................................................................................20
CHAPTER 6: DISCUSSION........................................................................................................31
CHAPTER 7: CONCLUSION AND RECOMMENDATIONS...................................................34
7.1 Conclusion...........................................................................................................................34
7.2 Recommendations................................................................................................................36
REFERENCES..............................................................................................................................38
BIBLIOGRAPHY..........................................................................................................................42
3

CHAPTER 1: INTRODUCTION
Background of the study
Working capital management may be served as a managerial accounting strategy that lays
emphasis on ensuring efficient or smooth operations of the company. In the context of business
unit, the main motives of working capital management are to ensure high liquidity and maximise
both profitability as well as shareholders value. Hence, working capital management refers to the
ability of business unit in relation to controlling both current assets and liabilities prominently.
Effective management enables firm to generate high return from assets and facilitates reduction
in payment associated with the liabilities. Hence, effective management of working capital plays
a vital role in meeting shareholders objective regarding maximisation of value.It can be depicted
that working capital management has an impact on both liquidity as well as profitability aspect
of the company. However, companies face issue in relation to increasing profit margin at the cost
of liquidity. Thus, present study will examine the influence of working capital management on
organisational profitability.
For this dissertation, leading retail organisations of UK have been selected such as Tesco,
Sainsbury, Morrison’s and OCADO. All such business organisations offer retail products or
services to the customers at suitable prices. Further, all such companies are listed on the
recognised stock exchange of London such as FTSE 100. In this, dissertation will provide deeper
insight about the factors that affect working capital management of companies working in UK
retail sector. Such dissertation will also shed light on the level to which working capital
management practices undertaken by the firm has an influence on the profitability of retail
business units.
Research aim and objectives
Aim
The main aim or motive behind carry out present study is ‘To analyze the impact of
working capital management on business profitability in the context of UK retail sector.’
1

Objectives: Considering the above aim following objectives have been drafted by the scholar
such as:
 To investigate the factors that affect working capital management.
 To ascertain the influence of working capital management on the profitability of UK
retail sector.
 To recommend ways through which firm operating in UK retail sector can ensure
effective working capital management and thereby enhance margin.
Research questions
Q.1 What kind of factors affect working capital management?
Q.2 What is the extent to which working capital management practices influence the profitability
of UK retail sector?
Rationale of the study
In the current times, UK retail sector is filled up with the high level of competition which
in turn has direct impact on the profitability of concerned units. Business units perform or carry
out activities with the motive to attain high profit margin. Hence, the main reason behind
conducting such investigation is to ascertain the level to working capital management impacts
organizational profitability. This is recognised as an issue because some firms maintain high
working capital over the ideal standards. Hence, through the means of quantitative evaluation
such study sheds light on the manner in which working capital management affects profitability
of business units working in UK retail sector.
Significance of the study
The present study and its findings are highly important for the firms operating in UK
retail sector. Such study will help the management team of retail units in understanding the
manner in which aspects of working capital management impact profitability. Besides this,
outcome of the concerned study will also help retail business organisations in developing
appropriate framework. In addition to this, study related to working capital management and
profitability will also help other scholars who want to conduct study on such topic. Hence, by
undertaking the concerned study, other scholars would become able to develop hypothesis for
further investigation.
2

Structure of the dissertation
Chapter 1: Introduction
In the first chapter of dissertation, background as well as aims and objectives have been
included by the researcher. Further, researcher has also mentioned motives or rationale behind
conducting present investigation. Under introductory chapter, structure of the whole dissertation
has also been included.
Chapter 2: Literature review
Under second chapter, brief thesis has been prepared by making evaluation of books,
journals and scholarly articles pertaining to working capital management. Hence, through
evaluating scholarly articles, aim such as ‘influence of working capital management on firm’s
profitability’ has been achieved briefly.
Chapter 3: Research methodology
This chapter of dissertation presents methods, tools and techniques that have been
employed for addressing research questions. Hence, in the 3rd chapter, research type and
approach as well as technique pertaining to data collection along with analysis has been
included.
Chapter 4: Data analysis and findings
Fourth chapter of dissertation is highly significant which reflects or presents the solution
of concerned issue. In this, all the findings have clearly been supported with the articles
evaluated in the literature review section.
Chapter 5: Conclusion & recommendations
Final chapter of dissertation presents overall findings or outcome in a conclusive
formatas per research aim and objectives. Along with this, it also includes recommendations or
suggestions that can be undertaken by retail units for making improvement in working capital
management and thereby profitability.
3

CHAPTER 2: LITERATURE REVIEW
Literature review may be served as a scholarly paper that contains findings of different
articles related to the issue. In literature review section, varied books, journals and scholarly
articles are evaluated for the development of brief thesis. Under this, contradictory views are
recorded which in turn presented by different scholars. This chapter of dissertation is highly
important which develops understanding about topic and provides assistance in analysing data
set appropriately. In this, several books and scholarly articles have been analysed by the scholar
related to working capital management.
Working capital management and factors that have influence on it
Bhattacharya (2014) stated working capital as a fund that is required to meet day to day
financial needs for business concern. It includes payment to creditors, payment of salary to
workers, raw material purchase etc. According to the views of Pais and Gama (2015), working
capital management implies for the accounting strategy that helps in maintaining both the
components associated with it such as current assets and liabilities. It ensures or renders
information about the extent to which business unit has enough funds for meeting its short term
debt obligations and operating expenses. In the business unit, effectual implementation of
working capital management is highly required within the company for enhancing earnings.
Further, Aktas, Croci and Petmezas (2015) defined working capital management as a decision
and strategic framework employed by the business unit to deal with the obligation more
effectually. In the context of large sized business unit, prominent working capital management is
required because it not only reduces profitability but also impacts leverage position.
Baños-Caballero García-Teruel and Martínez-Solano (2014) assessed in the study that
both excessive and inadequate working capital is harmful for the business unit. The reason
behind this, in the case of excessive working capital firm would not be in position to generate
income from scare funds in the form of interest etc. In contrast to this, in the case of having
inadequate funds business unit would not be in position to carry out activities smoothly. Sagner
(2014) said that working capital management is highly associated with the planning and
controlling current assets as well as liabilities which in turn avoids inability in relation to
meeting debt or obligations. Hence, effectual working capital management can be ensured by
4

business unit through understanding the factors which in turn have influence on it. Barth and
et.al., (2017)exhibited in their study that efficient or effective working capital management is
needed to create and enhance shareholder’s value. The main motives of the company behind
undertaking working capital management practices are to maximize profit margin. Thus,
effective management of working capital is highly required to fulfil organizational goals and
objectives.
Vernimmen and Quiry (2018) depicted in their study there is no specific set of rules that
can be used to determine working capital. However, there are several factors which in turn have
high level of influence on it. In the context of business unit, need of working capital is highly
significant for financing day to day activities of firm. On the other side, Afrifa and Tingbani
(2018) said that need regarding working capital of different business units vary significantly.
Moreover, when business unit grows then level of both output and current assets enhances
significantly. Apart from this, level of working capital is also highly dependent on the policies
employed by the firm to manage current assets. Companies with no inventory, debtors, creditors
and little investment generate low or no margin.
In their study, Lind, Pirttilä and Schupp (2018) revealed that nature of business is the
main factor that affects working capital requirement. For instance: In the case of retail business
manager does not require to maintain high working capital. Moreover, due to having small
operating cycle retail business owners do not require to maintain high working capital. Retail
business organizations usually sell products or services on cash terms or basis due to which their
operating cycle is less over others. However, it is to be critically evaluated by Enqvist, Graham
and Nikkinen (2014), who stated that not all kind of retail unit’s have small operating cycle. In
the current times, large sized retail units are involved in manufacturing of products with the
motive to enhance brand image. This aspect shows that not all retail business units require less
working capital. Large retail units, involve in manufacturing activities, have to convert raw
material into finished goods as well as need to maintain enough stock of the same.
Ukaegbu (2014) shared their views that scale of operations has significant impact on the
requirement of working capital. Firms which are operating at large level need to maintain enough
stock, cash, debtors etc and vice versa. In contrast to this, Agha (2014) suggested that at the time
of working capital determination manager needs to consider business cycle fluctuations. On the
5