Impact of Working Capital Management on UK Retail Profitability

This report delves into the impact of working capital management on the profitability of businesses within the UK retail sector, covering the period from 2013 to 2017. The study begins with an introduction outlining the background, aims, objectives, research questions, rationale, and significance of the investigation, followed by a structured literature review exploring working capital management, determinants of profitability, relevant theories, and the research gap. The topic description focuses on the UK retail sector and the necessity of working capital management. The methodology chapter details the research approach, philosophy, strategies, data collection, and analysis methods. The analysis and findings are presented in chapter five, followed by a discussion of the results. The report concludes with a summary of findings, recommendations, and a list of references and bibliography. The report examines factors affecting working capital management, the extent of its influence on profitability, and suggests strategies for effective management to enhance margins within the UK retail sector, utilizing data from major UK retailers such as Tesco, Sainsbury, Morrison’s, and OCADO.

IMPACT OF WORKING CAPITAL MANAGEMENT ON
BUSINESS PROFITABILITY INTHE UK
RETAILSECTOR
(A study of data covered the period 2013-2017)
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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
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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
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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.’
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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.
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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.
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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
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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
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basis of such aspect, during boom period, flourishing market results into more demand,
production, inventory, debtors etc. It shows that high working capital is needed during
inflationary or boom period. Pais and Gama (2015) assessed technology and production cycle as
the main factor which in turn influences need of working capital. For instance: If business unit
undertakes labour intensive production technique then more working capital is required. Under
such situation, firm requires money for making payment to labours so it needs high fund to meet
daily needs. On the other side, in the case of machine intensive technique there is fixed capital
requirement which in turn resulted into less operating expenditure.
Iqbal, Ahmad and Riaz (2014) showcased operating efficiency as the main factor that
affects the need of working capital. Firms which maintain high level of efficiency have low
wastage so they need less funds for daily activities. Further, highly efficient firms can also
manage operations with lower level of inventory and bear less expense. All such aspects show
that as compared to lower, highly efficient firms need less money for carrying out daily
activities. In accordance with Yazdanfar and Öhman (2014), extent of competition may also be
served as a major factor that impacts the need of working capital. In the highly competitive
market, company is compelled to offer easy payment or credit policies to the customers. Further,
for gaining competitive edge over others, business unit needs to ensure that supply is on time. In
this, for providing customers with the product they need high stock requires to be maintained
within the firm. It presents positive relationship between level of competition and working
capital requirement. In other words, high funds are needed when competition level enhances
within the industry.
Determinants of profitability in retail sector
Ahmad, Ahmed and Samim (2018) found in their study that there are mainly four
components which in turn have significant impact on organisation’s working capital such as
cash, marketable securities, inventory and accounts receivable. Hence, for the management of
working capital, business unit needs to exert control on such aspects or variables. Afrifa and
Tingbani (2018) identified that inventory is one of the main element of working capital
management that affects profitability aspect of the firm to a great extent. The rationale behind
this, excessive inventory level places financial burden in front of firm. Moreover, excessive
inventory imposes holding cost and thereby impacts both expense level as well as margin. On the
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other side, insufficient inventory places negative impact on brand image and customer
satisfaction. Thus, effective working capital management policy needs to be undertaken for
avoiding unnecessary investments.
Titman, Keown and Martin (2017) mentioned in their study that credit policies
undertaken by business unit also have greater influence on the management of working capital
via accounts receivable. Moreover, liberal credit policies act as a barrier in fund collection and
resulted into high debt. However, on the critical note, Singh, Kumar and Colombage (2017)
entailed that in the current times for enhancing sales or turnover companies have to grant credit
for longer terms. On the basis of such aspect, if credit policies of the firm are not in line with the
competitors then it will lose customers. Further, Singh, Kumar and Colombage (2017) stated that
cash is one of the main elements that needed for carry out day to day operations prominently.
Cash is considered as one of the main variable that impacts working capital and thereby overall
operations. Maintenance of optimal cash balance within the firm is the prior requirement for the
attainment of desired level of outcome or success. Moreover, in the case of holding excessive
cash balance firm will forego interest income. On the other side, inadequate cash balance impacts
operating and day to day activities of firm. Further, Tran, Abbott and Jin Yap (2017)claimed
thatcreditors are one of the main part of effectual or prominent cash management. Company
enjoys high financial benefit in term of margin when its credit turnover ratio is low.
Theories of working capital
(Source: Wang, Yan and Yu, 2017)
Trade-off theory
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Park, Kamcev and Freeman (2017) presented in their study that financial decisions are
taken by the manager for enhancing shareholders wealth. This theory presents mainly two types
of risks which in turn associated with the aspect of working capital management namely liquidity
and opportunity loss. On the basis of risk-return trade off liquidity risk implies for the situation
regarding non-availability of cash which in turn creates difficulty in meeting short term
obligations. Further, another risk indicates company’s inability in relation to producing or selling
more units to earn profit margin. Moreover, it assumes that there were no enough funds to
support high inventory and book debt. In addition to this, Wang, Yan and Yu (2017) said that as
per trade off theory negative relationship takes place between liquidity and profitability.
According to such theory, when business unit maintains high level of liquidity or working capital
within the firm then it results into lower profitability aspect.
This theory presents that, firm should focus on maintaining liquidity in accordance with
the ideal ratio. The rationale behind this, when firm maintains high liquidity then it loses return
that can be generated through such fund. For instance: On the basis of ideal ratio business unit
needs to lay emphasis on maintaining 2 current assets in against to 1 obligation. Maintenance of
such ratio presents that liquidity position or performance of the company is good. However,
when business unit maintains excess or high liquidity within the firm as compared to industry
average or standard then it caused to decrease margin. This theory entails that business units
need to make focus on investing money in investment opportunities that contributes in the
growth and profit margin of firm (Campbell and Deffner, 2017). Moreover, in the stiff
competitive situation it is not possible for the firm to earn high margin by depending on specific
venture. Hence, for the attainment of high profitability company needs to lay emphasis on
assessing profitable deals or opportunities and invest in the same. Referring such aspects, it can
be depicted that firm should focus on managing working capital prominently because it directly
impacts organization’s margin.
Pecking order theory
This theory presents negative relationship between the level of debt and profit margin. G
Pecking order theory presents that high debt ratio places negative impact on the profit margin of
firm. Such theory of working capital suggests that firm should lay more focus on undertaking
internal financing sources for fulfilling monetary needs instead external one. On the basis of such
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theory, manager follows a hierarchy while choosing financial sources. In this, hierarchy gives
high level of importance to internal financing (Radjamin and Sudana, 2017). On the basis of such
framework, external sources are used by the managers when internal aspects recognized as not
enough. The main reason behind using internal financial sources by the company is that it has no
financial burden. In other words, it can be presented that when business undertakes internal
financing source such as retained profit, then there is no need to make payment of any financial
cost. In this way, internal financing sources help in avoiding additional expenses and thereby
enhances profit margin. However, Allini, Rakha and Caldarelli (2017) criticised pecking order
theory on the basis of the aspect that if business unit fulfil all of its need through internal source
such as retained profit, then it would not become able to offer dividend to the shareholders at
higher rate. This in turn impacts brand image and market share of firm significantly.
De and Banerjee (2017) articulated in their study that as per the hierarchical structure,
company or manager gives high priority to debt over equity. The reason behind this, when
business unit issues new equity, then investors believe that managers think firm is overvalued. In
this, managers take benefit of such over-valuation so investors lay lower level of emphasis on
equity issuance. Ataünal and Aybars (2017) entailed that by taking into account pecking order
theory, firm needs to make focus on using internal sources rather than external to finance their
operations. Moreover, it has significant impact on firm’s value and profitability. As per such
theory, profitability aspect is negatively influenced when leverage of firm increases. Moreover,
debt places negative impact on the profit margin of firm as it imposes burden in terms of interest
payment. By taking into account such aspects, it can be depicted that profitability decreases
when level of leverage enhances.
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(Source: Ataünal and Aybars, 2017)
Loughran and et.al., (2016)depicted that rational choice theory is highly associated with
the aspect of working capital management. Such theory presents that for getting benefits,
individuals need to behave rationally. Basic principle of such theoretical framework presents that
actor needs to make rational choices from the alternatives available after weighting the cost and
benefits associated with the each one. In the context of managing working capital aspects,
manager is required to gather and make evaluation of all the information available for the
purpose of decision making. Considering this, it can be said that for getting the desired level of
outcome or success manager of the business unit need to assess or calculate benefits associated
with different options. At the time of doing evaluation manager needs to consider both risk and
profitability aspect. Rational choice theory of WCM emphasises that firm should keep both
receivable and inventory conversion period as low as possible. Further, it suggests that firm
should focus on maintaining high payable conversion period (Cohen, Levy and Rechavi, 2018).
This in turn enables firm to get high margin and thereby fulfil objectives. Moreover, company
will enjoy enough liquidity if it receives funds from debtors on time. Besides this, low inventory
period decreases operating expenses of firm such as holding cost etc. significantly and thereby
increases margin.
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Impact of working capital management on organizational profitability
Aktas, Croci and Petmezas (2015) assessed that length of working capital management
has greater impact on firm’s profitability and performance. Findings of such study presents that
manager of the business unit can maximize the value of shareholder and return on assets through
the means of effective working capital management. Ukaegbu (2014) assessed that insufficient
working capital management aspect has greater disadvantage for the firm because it directly
impacts profit margin. Moreover, in the absence of having adequate funds business organization
would not become able to take advantage of new opportunities in relation to the development of
new product, alteration in the existing technique etc. This in turn negatively impacts the margin
of business unit and thereby overall performance. Along with this, insufficient working capital
also may result into loss of credit opportunity. For example: In the case of having inadequate
working capital concerned business unit would not become able to take benefits of discount
associated with early payment opportunity. This in turn places direct impact on the profit margin
of firm. Vernimmen and Quiry (2018) criticised that discounting offers prove to be beneficial
only when debtors accounted for large amount. Thus, inadequacy pertaining to working capital
has an impact on firm’s profitability in this regard but to some extent.
Afrifa and Tingbani (2018) claimed that along with the insufficient capital, excess
maintenance of the same also has negative influence on business performance. Moreover, high
working capital indicates that credit policy of the company is defective. The reason behind this
excess working capital means higher incidence of bad debt which in turn adversely affect profit
margin. Further, Lind, Pirttilä and Schupp (2018) argued that excessive working capital exhibits
managerial inefficiency regarding the management of current assets in accordance with
obligations. In addition to this, findings of the study shows that tendency in relation to the
accumulation of more inventory or stock places direct impact on dividend policy in terms of
liberality. This situation creates difficulty in front of firm regarding the generation of profit in the
near future.
Pais and Gama (2015) depicted in their study that working capital management is
essential because it has direct influence on firm’s profitability. Further, such study revealed that
liquidity and profitability of the firm is highly dependent on the level of working capital
management. In accordance with such study negative relationship takes place between cash
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conversion cycle and firm’s profitability. On the basis of such aspect, declining trend in the
profitability occur when cash conversion cycle increases.
Along with this, Bhattacharya (2014) asserted that both average collection period and
firm’s profitability is associated with each other but in negative terms. As per such aspect,
company’s margin decreases when credit is granted to the debtors for longer time frame.
Moreover, when company receives money from debtor later then it is not in position to employ
such fund in other profitable opportunities which in turn affects margin and overall performance.
Enqvist, Graham and Nikkinen (2014) claimed that high receivable period also imposes risk of
bad debt and thereby impacts overall margin. Along with this, when company’s receives money \
from debtors later then it faces difficulty in meeting daily monetary requirements. Meanwhile,
business unit focuses on taking resort of overdraft, short term loan etc. which in turn may result
into increasing expense level and decline in margin.
Vijayakumaran (2018) evaluated that net margin and inventory conversion period share
inverse relationship with each other. When stock turnover over ratio (in days), an element of
working capital, of the firm is high then profitability of the firm is affected negatively. When
business unit takes more time to covert stock into cash then it places inverse effect on margin as
it imposes cost regarding holding etc. and thereby reduces profit level. Along with this, company
also would not become able to earn or generate high return through blocking fund in stock.
Hence, instead of investing high funds in inventory, business unit needs to use or invest the same
in other options that aid in profit margin. Bian and Gayraud (2018) studied and found negative
relationship between debt and firm’s profitability. Moreover, in the case of high debt business
unit has to pay interest on a periodical basis. In this way, high debt ratio may result into decline
in profitability due to the increasing level of operating expenditure.
Along with this, Öztürk and Vergili (2018) investigated that both liquidity and
profitability is the major concern for the management team of business unit. Such study presents
that profitability aspect of the firm has greater influence on its cash conversion cycle. However,
on the critical note, Panda and Nanda (2018) mentioned that both profitability and cash
conversion cycle has significant impact on each other. Apart from this, study presented that cash
conversion cycle impacts profitability of firm from both the perspectives positive and negative.
For example: Companies with high cash conversion cycle might have higher sales due to
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providing customers with longer credit term. On the other side, high investment cost inn
working capital might decreases profitability of the corporation. Sathyamoorthi, Mapharing and
Selinkie (2018) presented in their study that usually companies with short cash conversion cycle
enjoys high profitability over others. On the basis of findings mentioned in such study that high
receivable and inventory period has greater impact on firm’s profitability.
Research gap
From assessment, it has identified that in the past time frame articles were presented by
the scholars regarding the influence of working capital management on the growth and
profitability aspect of business unit. Along with this, in the previous studies, hypotheses were
tested by the researcher to assess the extent to which WCM has an impact on profit margin of
firm. In addition to this, past studies also present several ratios calculated by the researchers to
analyze the impact of WCM on margin. Through research, studies on countries like Nigeria,
Bangladesh etc. were found. However, studies related to the UK retail sector have not fund
which in turn recognized as gap. Thus, by taking into account such aspect such issue has been
selected that helps companies operating in retail sector in understanding the manner and extent to
which their working capital management or aspects affect profitability.
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CHAPTER 3: TOPIC DESCRIPTION
UK retail sector
In the current times, companies operating in UK retail sector are facing stiff competition
from each other. Moreover, after recessionary time period customers become price conscious in
nature and prefer to purchase products or services from the retailer that offers products or
services at suitable prices. Hence, majority of the companies such as Tesco, Morrison’s,
Sainsbury, Ocado, ASDA, ALDI, LIDL etc are competing with each other on the basis of pricing
aspects. Hence, for attaining success and gaining competitive edge over others retail companies
of UK need to lay focus on undertaking innovative practices. Thus, referring such aspect, it can
be depicted that company can influence customer’s decision making and enhance their loyalty by
providing them with unique products.
Need of working capital management in UK retail sector and factors that affect the same
By doing assessment, it has identified that need of working capital management is highly
significant in the context of retail sector. There are several factors which closely influence WCM
of UK retail companies. In retail sector, business units purchase product or raw materials from
suppliers. In this regard, period for which credit is granted to them closely influences the need of
working capital. Along with this, high inventory conversion period imposes cost in front of firm
in terms of holding. Further, high inventory period impacts other investment opportunities and
options to a great extent. Moreover, when receivable and inventory period is high then company
faces issue in getting cash within the less time period.
Further, it has identified that during festive or gift-giving holiday seasons retail
companies need g huge amounts of funds for purchasing stock in advance. In this, income from
such sales may be months away. Thus, business unit needs to ensure that they have funds for
expenses such as wages, electricity bills, insurance premium etc. Hence, for managing business
activities more effectually retail firms need to make focus on WCM. In this, report depicts the
manner in which working capital management impacts profitability of retail units. Hence, it
clearly presents the variables that place positive and negative impact on the profitability and
overall growth or success of UK retail units.
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CHAPTER 4: RESEARCH METHODOLOGY
Research methodology refers to the systematic and theoretical analysis of the methods or
tools that applied to a field of study. Hence, methodology presents the techniques that have been
used for solving research issue or problem systematically and logically. This chapter highlights
type, approaches and philosophies that have been employed for determining the impact of
working capital management on firm’s profitability. Besides this, such chapter also presents data
collection and analysis method that suits to the current study or investigation.
Research type
In research, nature of the study can be distinguished into two types such as qualitative
and quantitative. Selection of the research type is highly based on the issue which is going to be
investigated. Hence, qualitative investigation is undertaken by the scholar for studying uncover
trends exist in thoughts and opinions (Flick, 2015). On the other side, quantitative investigation
proves to be suitable when solution of the problem is based on numeric facts and figures.
Researcher needs to select type as per the issue because further techniques highly influence from
it. Hence, in this, for assessing the impact of working capital management practices on firm’s
profitability, quantitative research type has been selected. Moreover, such impact can be assessed
or evaluated through the means of numeric data set like profit, working capital elements etc.
Research approach
Approaches of the research imply for inductive and deductive which in turn varies
according to the type of investigation carried out. Usually, approach that is undertaken by the
qualitative researchers tends to be inductive. On the basis of such approach, emphasis is placed
on the development of new theoretical framework by making evaluation of gathered data set. In
contrast to this, under quantitative research, scholars make focus on considering deductive
approach (Mackey and Gass, 2015). Hence, such research approach focuses on proving
hypothesis considering the existing theoretical framework. In this, deductive research approach
has been selected by the researcher for meeting research objectives. The main reason behind the
selection of such approach is quantitative research type. In accordance with this, by taking into
account theories related to working capital management, hypothesis has been tested or evaluated.
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Research philosophy
Interpretivism and positivism are the main two research philosophies that can be used in
the study. However, selection of research philosophy also highly influences from the nature or
type of the study. Hence, positivism philosophy of the research is highly associated with the
quantitative evaluation (Dunlap and et.al., 2016). In this, theories and hypothesis are generated as
well as evaluated through the means of empirical research. On the other side, researchers prefer
to consider interpretivism philosophy when type of research is qualitative. Under interpretivism
philosophy, solution is determined or presented through interpreting qualitative facts. Thus, in
the current research, positivism philosophy has been employed to assess the impact of working
capital management on firm’s profitability. This philosophy is highly appropriate which in turn
helps in testing hypothesis prominently from the numeric data set considered.
Research problems
In the present study, high level of emphasis has been placed on analyzing the aspects of
working capital management. WCM is the vital part of every business unit because without it
faces difficulty in managing day to day operations. Further, from assessment, it has identified
that companies operating in UK retail sector are facing issues in assessing the ways through
which effective WCM can be ensured. Moreover, for performing daily activities and managing
business, firms require enough funds. Hence, retail business units must have information about
the practices or aspects of WCM. Thus, through the means of quantitative investigation emphasis
has been placed on analyzing the extent to which different factors affect WCM of retail
companies.
Research questions
Q.1 What factors affect working capital management and profitability?
Q.2 What working capital policies can improve profitability in UK retail sector?
Research strategies
There are several research strategies that can be employed by the scholar for conducting
evaluation more effectually. Hence, main strategies of research include experimental, case study,
survey, ethnography and grounded theory. Hence, in this, for analyzing the influence of WCM
on UK retail companies’ experimental research strategy has been selected by the scholar. On the
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basis of such aspect, by applying statistical tools on data set pertaining to 5 years time period
hypothesis has been tested by the researcher.
Data collection
Primary and secondary are the main two sources that can be used for data collection.
Hence, primary data implies for the one that researcher specifically gathers for meeting research
aim and objectives. This in turn includes survey, observation, focus group, interview etc which
helps in collecting data set as per the issue (Silverman, 2016). On the other side, secondary data
is the one that was already collected, analysed and published by someone other than the user. In
other words, data gathered through books, journals, scholarly articles and other sources known as
secondary. Hence, for studying the impact of working capital management on the profitability of
UK retail business unit’s data has been gathered through secondary sources. Hence, for the
purpose of data collection, annual reports of retail business organizations such as Tesco,
Sainsbury, Morrison and OCADO group have been evaluated. Hence, considering the financial
statements of such four organizations data have been gathered. In addition to this, books,
journals and articles related to working capital management also have been evaluated for gaining
understanding about the topic. This in turn also helps in analysing gathered data set more
effectually.
Data analysis
In the field of research, techniques of data analysis are highly significant which in turn
assist indetermining suitable solution. Techniques considered for data analysis also highly varies
as per the type of research conducted. In quantitative research or investigation, scholar
undertakes statistical tools and techniques for discovering suitable information from numeric
dataset. Hence, correlation, t, Z and chi-square test etc. are the most effectual techniques that
help in evaluating quantitative data set and assessing suitable solution. On the other side, in
qualitative research, thematic perception test technique is used by the researcher. Under thematic
analysis, researcher prepares themes and support finding with the articles evaluated in LR. In the
present study, correlation tool has been applied by the researcher to determine the extent to
which different variables such as current, assets turnover, gearing, efficiency ratio etc. has an
impact on ROE. Along with this, outcome derived through correlation analysis has also been
supported with the findings presented by other scholars in their investigation.
18

Ethical considerations
For complying with the ethical aspects reference list has been added by the researcher.
This in turn shows that study and its findings are not copied from somewhere else. In addition to
this, aspects related to biasness have completely been avoided by the researcher.
Reliability and validity
Reliability and validity are the main two elements that enhance effectiveness of the study.
Hence, for ensuring high level of reliability no modifications were done in the data set for getting
the desired level of outcomes. In addition to this, for making study more valid latest articles have
been evaluated by the scholar that published after the period of 2007. Further, articles related
tothe issue such as working capital management have been considered by the researcher while
doing LR. Hence, best possible efforts have been made by the researcher for enhancing the
reliability of study.
Research limitations
Time is one of the main limitations that affect the significance of overall study. Hence, in
this, due to having limited time frame, study has been conducted by the researcher on only 4 UK
retail units. However, to avoid the impact of such limitation, leading retail units have been
considered by the researcher which in turn helps in presenting suitable outcome according to the
issue.
19

CHAPTER 5: ANALYSIS AND FINDINGS
Data analysis may be defined as a process that is undertaken by the researcher for
discovering suitable information from the gathered facts and figures. In this chapter, statistical
and ratio analysis tool has been applied for assessing the extent to which working capital
management influences profitability of the companies operating in the retail sector such as
Tesco, Sainsbury, Morrison and Ocado Group. For presenting the fair view of study data
pertaining to 5 years, from 2013 to 2017 have been evaluated. All the findings have clearly been
supported with the brief thesis prepared in the literature review section. Further, to develop better
understanding about the findings graphs have been added. This in turn clearly exhibits the extent
to which liquidity and solvency position of the concerned retail companies are sound and how it
influences profitability aspect.
Findings
Return on equity
Year Tesco Sainsbury Morrison Ocado Group
2017 -.84% 5.49% 7.51% 4.58%
2016 1.50% 7.40% 5.91% 4.96%
2015 -81.54% -3% -21.17% 3.21%
2014 6.59% 11.92% -5.07% -6.44%
2013 .72% 10.71% 12.37% -.97%
20

2017 2016 2015 2014 2013
-100.00%
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
ROE
Tesco
Sainsbury
Morrison
Ocado Group
Figure 1: Return on equity
(Source: Author’s work)
Interpretation: Tabular presentation shows that ROE of all the companies were
decreased over the time frame except Morrison’s. In the accounting year 2017, ROE of Tesco,
Sainsbury and Ocado group accounted for -.84%, 5.49% and 4.58%. On the other side, in 2017,
ROE of Morrison’s increased from 5.91% to 7.51% respectively. It shows that during such
period enough margin or return was generated by Morrison’s from shareholders funds. In
comparison to all the firms, it can be presented that strategies and policies employed by
Morrison’s were sound.
Current ratio
Year Tesco Sainsbury Morrison Ocado Group
2017 .80 .74 .41 .52
2016 .75 .66 .48 .70
2015 .60 .65 .54 .88
2014 .77 .65 .50 1.13
2013 .70 .61 .57 1.17
21

2017 2016 2015 2014 2013
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Tesco
Sainsbury
Morrison
Ocado Group
Figure 2: Current ratio
(Source: Author’s work)
Interpretation Ratio analysis result shows that current ratio of retail companies namely
Tesco and Sainsbury inclined in 2017 as compared to the past years. Moreover, in 2013, current
ratio of Tesco and Sainsbury accounted for .80 & .74 significantly. On the contrary to this, in
2017, outcome of current ratio imply for .80:1 & .74:1 respectively. Hence, it presents that
capability of both the companies have increased in relation to meeting current obligations.
Further, decreasing trend has assessed in the current ratio of Morrison’s and Ocado Group. In the
FY 2017, current ratio of Morrison and Ocado Group was .41 & .52:1.Thus, referring overall
assessment it can be depicted that all such concerned companies need to lay focus on
maintaining
Assets turnover ratio
Year Tesco Sainsbury Morrison Ocado Group
2017 1.22 1.33 1.76 1.81
2016 1.24 1.38 1.73 1.87
2015 1.41 1.44 1.83 1.76
2014 1.27 1.45 1.65 1.59
2013 1.29 1.84 1.72 1.52
22

2017 2016 2015 2014 2013
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Assets turnover ratio
Tesco
Sainsbury
Morrison
Ocado Group
Axis Title
in times
Figure 3: Assets turnover ratio
(Source: Author’s work)
Interpretation: Financial statement analysis presents that assets turnover ratio of Tesco
declined from 1.29 to 1.22 at the end of FY 2017. Besides this, graphical trend also presents that
net assets turnover ratio of retail companies such as Sainsbury, Morrison’s and Ocado Group
decreased over the time period. Hence, referring decreasing pattern it can be stated that during
the period of 5 years considered for the investigation purpose all such concerned retail
companies failed to generate enough margin from total assets. This in turn also places negative
impact on profit margin and organizational success. Moreover, in the competitive business
environment firm can attain success only when it makes optimum use of both financial and non-
financial resources. Thus, for the generation of high profit margin firm needs to make effectual
use of both fixed and current assets.
Gearing ratio
Year Tesco Sainsbury Morrison Ocado Group
2017 .86 .65 .56 .62
2016 .80 .62 .60 .59
2015 .84 .67 .61 .59
2014 .68 .64 .56 .59
23

2013 .66 .55 .50 .54
2017 2016 2015 2014 2013
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Gearing ratio
Tesco Sainsbury Morrison Ocado Group
Figure 4: Gearing ratio
(Source: Author’s work)
Interpretation: From solvency analysis or evaluation, it has assessed that Tesco’s debt
level exceeded standards such as .5:1 in the FY’s 2015, 2016 & 2017. Such higher debt equity
position is not good for the companies because it places adverse impact on the organizational
profitability. In the case of debt, firm bound with the fixed periodic obligations in terms of
interest payment. On the other side, in equities, there is the absence of fixed monetary payment
because company provides shareholders with dividend when it earns enough profit margins.
Thus, excess or high debt level increases the level of indirect expenses and negatively impacts
profitability aspects. Along with this, it has found from the evaluation that in 2017, gearing ratio
of Sainsbury, Morrison’s and Ocado Group accounted for .65, .56 & .62 significantly. Solvency
of all such retail units was good in 2017 as debt-equity ratio near to the ideal standards. Thus, to
strengthen debt-equity position and working capital management companies should keep in mind
ideal standards while taking decision in relation to raising funds.
Inventory turnover ratio
Year Tesco Sainsbury Morrison Ocado Group
24

2017 15.02 24.71 13.73 11.20
2016 16.29 15.03 13.95 9.88
2015 17.33 15.31 14.28 10.77
2014 20.54 15.32 17.59 11.06
2013 21.08 15.46 15.74 9.68
2017 2016 2015 2014 2013
0
5
10
15
20
25
30
Inventory turnover ratio
Tesco Sainsbury Morrison Ocado Group
Figure 5: Inventory turnover ratio
(Source: Author’s work)
Interpretation: Graphical presentation entails that inventory conversion period of Tesco,
Morrison’s and Ocado Group declined over the years. In 2017, stock conversion period of such
companies accounted for 15.02, 13.73 and 11.20 days. This is considered as good indicator
which in turn presents that all stock was converted by all the retail companies into cash in 2017
as compared to past years and over Sainsbury. Hence, such retail companies should design
policies in such a manner that makes contribution in lowering or reducing cash conversion cycle.
Debtor’s turnover ratio
Year Tesco Sainsbury Morrison Ocado Group
2017 64.45 18.93 11.34 40.15
2016 25.45 18.69 10.30 47.62
2015 29.46 17.14 12.29 39.19
2014 29.81 15.64 15.46 49.15
2013 33.69 11.36 13.89 39.49
25

2017 2016 2015 2014 2013
0
10
20
30
40
50
60
70
Tesco
Sainsbury
Morrison
Ocado Group
Year
in days
Figure 6: Debtor’s receivable period
(Source: Author’s work)
Interpretation: The above depicted table entails that debtor’s turnover ratio of Tesco,
Sainsbury and Morrison’s inclined in the year of 2017 as compared to last 4 years. Out of such 4
companies, Tesco’s receivable period inclined from 25 to 64 days respectively at the end of
2017. This aspect shows that Tesco received money from the debtors after high time period.
Hence, for enhancing the level of working capital Tesco should focus on making modifications
in the existing strategic and policy framework. Further, debtors collection period presents that, in
2017, receivables were collected by Ocado Group earlier as compared to the before time frames.
Creditor’s turnover ratio
Year Tesco Sainsbury Morrison Ocado Group
2017 125.55 119.32 64.07 83.57
2016 132.19 104.35 62.19 64.57
2015 116.06 106.28 49.34 64.62
2014 116.04 103.10 59.31 73.28
2013 105.31 48.79 47.03 63.43
26

2017 2016 2015 2014 2013
0
20
40
60
80
100
120
140
Tesco
Sainsbury
Morrison
Ocado Group
Figure 7: Creditor’s payment period
(Source: Author’s work)
Interpretation: By analyzing financial data set, it has assessed that selected UK retail
companies such as Tesco, Sainsbury, Morrison and Ocado Group made payment to the creditors
after more time. In other words, in 2013, creditor’s payment period was 105.31 days, whereas the
same reached on 125.55 days at the end of 2017. However, in comparison to 2016, decreasing
trend has assessed in the creditors payment period. Further, in 2017. CPP of Sainsbury,
Morrison’s and Ocado Group accounted for 119, 65 and 83 days respectively. This was higher
over the past years from 2013 to 2016. By doing secondary evaluation, it has identified that
companies should focus on enhancing creditor’s payment period to the possible extent. Hence,
by doing this, such retail firms can invest such fund in other business activities and thereby
would become able to generate more profit margin.
Correlation analysis
Hypothesis 1
H0 (Null hypothesis): There is no signification correlation takes place between ROE and
current ratio.
27

H1 (Alternative hypothesis): There is a signification correlation takes place between ROE and
current ratio.
Correlation 0.03 < .44, Hence, null hypothesis is true.
Hypothesis 2
H0: There is no signification correlation between ROE and assets turnover ratio.
H1: There is a signification correlation between ROE and assets turnover ratio.
Correlation 0.12 < .44, Hence, H1 rejected.
Hypothesis 3
H0: There is no statistical signification relationship between ROE and gearing ratio.
H1: There is a statistical signification relationship between ROE and gearing ratio.
Correlation -0.50 > .44, Hence, H1 accepted.
Hypothesis 4
H0: There is no statistical signification relationship between ROE and gross margin.
H1: There is a statistical signification relationship between ROE and gross margin.
Hypothesis 5
H0: There is no statistical signification relationship between ROE and inventory conversion,
receivable & creditors payment period.
H1: There is a statistical signification relationship between ROE and inventory conversion,
receivable & creditors payment period.
Values assessed < .44, so H0 accepted.
28

ROE Gearing
Main Model
Size ATO
CR
DD
SD
CD
Side Models
Figure 8: Model of Relationships
Source: Author’s own work
ROE CR LNS ATO gear SD DD CD
ROE 1
CR
0.03154
6 1
LNS
-
0.17425
-
0.47053 1
ATO
0.12422
1
-
0.32262
-
0.57288 1
gear
-
0.50628
0.06179
1
0.51508
9
-
0.7017
3 1
SD
-
0.07366
-
0.24852
0.77941
3
-
0.5922
2 0.31422 1
DD
-
0.09189
0.62610
2
-
0.40885
-
0.2213
7 0.39
-
0.34162 1
CD
-
0.19203
0.14927
2
0.52687
8
-
0.8983
1
0.84006
8
0.52279
3
0.27050
7 1
29

Interpretation: Outcome of correlation analysis shows that positive as well as lower
correlation takes place between ROE and current ratio such as 0.03 respectively. In addition this,
profitability or ROE of the concerned retail companies of UK is positively associated with gross
margin but to the lower extent. On the other side, it has assessed from the evaluation that
moderate and positive relationship exists between ROE and efficiency ratio which in turn
accounted for .54 significantly. Referring such outcome, it can be presented that ROE will
neither increase more nor too low if changes take place in the efficiency ratio or outcome. Along
with this, measures such as current ratio presents that liquidity level of the business unit does not
have significant influence on the profit margin generated by such concerned retail companies
namely Tesco, Sainsbury, Morrison’s and Ocado group.
Results of statistical evaluation exhibit that, ROE and gearing ratio having moderate &
negative relationship. Thus, when gearing ratio increases then profit margin will decrease or
influence significantly but to the middle extent. Through applying correlation test, it has assessed
all the elements of working capital management such as inventory conversion, receivable and
payment period is negatively correlated with ROE. Correlation between ROE and inventory
conversion period implies for -.07. Further, negative -0.09 correlation found between receivable
period and ROE measure. By taking into account such aspect, it can be stated that profitability of
the concerned business units such as Tesco, Sainsbury, Morrison and Ocado group will decline
to lower extent when receivable as well as inventory conversion period increases. In addition to
this, creditor’s payment period and profitability of such four retail units are negatively associated
with each other. On the basis of overall correlation analysis, it can be entailed that significant
relationship takes place between debt ratio and profitability of the concerned firms but
negatively.
Thus, it can be presented that only in the case of gearing ratio, alternative hypothesis is
accepted and other one is rejected. On the other side, in the case of remaining elements, null
hypothesis is true and H1 recognized as false. Hence, debt-equity ratio maintained by such retail
firms during the period of five years had significant and negative impact on their profitability
aspect. Further, in accordance with the research aim or issue hypothesis 5 has been evaluated and
found that no signification relationship takes place between profitability and working capital
components in the context of UK retail sector.
30

31

CHAPTER 6: DISCUSSION
By applying statistical tool such as correlation on data set, it has assessed that significant
negative relationship exist between ROE and gearing margin of the retail companies considered
for the investigation. Hence, referring such aspect, it can be presented that debt is one of the
main aspects that adversely impacts profit margin of the companies operating in UK retail sector.
Moreover, in the case of long and short liabilities business units are obliged to make interest
payment irrespective of the aspect that profit earned during the accounting year. Hence, such
fixed financial burden in terms of interest payment reduces the level of profit margin. Findings
derived through statistical evaluation can clearly be supported with the aspects of pecking order
theory mentioned in the literature review section. In accordance with the pecking order theory
for maintaining and enhancing the level of profit margin firms should lay focus on undertaking
internal financial sources such as retained profit etc. The rationale behind this, internal monetary
sources do not impose high monetary burden in front of the company. Hence, internal financial
sources enable firm to exert control over indirect expenses and thereby enhances or maximizes
the level of profit margin.
Findings of LR present that while taking decision in relation to financial sources for the
fulfilment of monetary requirements companies should give priority to the internal modes.
Further, it has identified from secondary data evaluation that companies operating in the retail
sector need to follow hierarchical capital structure for ensuring effective working capital
management. On the basis of this theoretical framework, debt source offers benefit to the
organization under tax brackets. Hence, after internal sources priority should be given by
companies to debt over equity. However, it has also found from the critical evaluation that, in
equity sources firm offers dividend to the shareholders only when enough margins are generated.
Considering this, it can be presented that equity source of finance does not imposes fixed
financial obligations or indirect expenditure. Thus, as per findings and pecking order theory,
profitability of the UK retail companies negatively influences when leverage or the level of long
& short term obligations incline.
Output derived through correlation analysis shows that assets turnover and organizational
profitability is related to the lower extent such as .12. The main objectives of the firm are to
32

attain high margin by making optimal use of resources. Hence, assets turnover ratio presents
company’s efficiency in relation to generating sales from fixed and current resources. Further,
sales level increases when business unit allocates fixed and current assets in an optimal way.
However, on the critical note, author entailed that such ratio helps in developing suitable
strategic framework only when lower level of competition exists. Along with the strategic
framework, employee’s skills and abilities may be served as another major factor that closely
impacts the outcome of net assets turnover ratio. Thus, for the generation of high margin
company requires sound strategic framework and skilled workforce. By taking into account such
aspects it can be depicted that net assets turnover impacts profit margin of firms but to the lower
level.
In addition to this, no statically significant relationship has found between the Tesco,
Sainsbury, Morrison’s & Ocado group’s profitability and current ratio. Moreover, currently, all
the concerned firms are maintaining suitable liquidity ratio which in turn places less adverse
impact on the profit margin. From literature review section, this aspect can clearly be supported
that for meeting obligations on time business unit must maintain 2 current assets in against to 1
liability. Along with this, through evaluating books, journals and scholarly articles it haws
assessed that both profitability and liquidity aspect is inversely related. Such theoretical
framework presents that when cash conversion cycle, collection and inventory conversion period
increases then profitability influences negatively. The rationale behind this, when company
receives fund after more time period then it inversely affects the expansion or other investment
plans of company and thereby profit margin. Hence, it can be mentioned that effective
management of working capital is highly required for the attainment of goals such as profit
margin.
Further, current findings can also be supported with the rationale choice theory
mentioned in literature review section. Such theoretical framework is also highly related with the
effectual working capital management aspects. This theory entails that for getting the desired
level of outcome or success company needs to make focus on weighting the cost and benefits
related to each alternative option available. Author suggested that effective WCM can be ensured
by the firm only when policies of the company contribute in reducing receivable and inventory
conversion period. Further, for the purpose of WCM companies also need to make focus on
33

increasing payable period. Such theoretical framework is highly in line with the findings which
show negative relationship between debtor’s payment as well as inventory conversion period and
ROE or profitability aspect. On the basis of such aspect, profitability decreases when inventory
conversion and debtors collection period is higher.
In the context of Tesco, Morrison’s, Sainsbury and Ocado Group all the business units
have maintained low inventory conversion as well as receivable period and high creditors
payment times during the period of 5 years. Data analysis pertaining to five year periods shows
that from the period of 2014 to 2017, creditor’s payment period of Tesco and Sainsbury was
more than 100 days. In addition to this, creditor’s payment period of Morrison’s and Ocado
group was greater than debtors receivable and inventory turnover period. Thus, all the companies
have already maintained suitable policies that place positive impact on the profitability aspect.
Hence, it is recognized as one of the main reasons due to which null hypothesis proved true in
the current research. Thus, it can be presented from the evaluation that, in the context of Tesco,
Sainsbury, Morrison’s as well as Ocado group, liquidity and profitability is not correlated.
By taking into account both trade off and rationale choice theory it can be mentioned that
as all the four companies have manage their working capital prominently so no significant
relationship found between liquidity and profitability aspect. Moreover, maintenance of both
high and lower liquidity level closely impacts profit margin of an organization. In the case of
high liquidity company incurs opportunity cost. The reason behind this, when company
maintains more liquid funds then it loses profit margin associated with other investment options
or alternatives. On the other side, in the case of lower liquidity position business unit faces issue
in fulfilling obligations on time. Thus, for the attainment of high margin and getting the desired
level of outcome or success business units operating in retail sector need to comply with standard
or ideal liquidity measure.
34

CHAPTER 7: CONCLUSION AND RECOMMENDATIONS
7.1 Conclusion
In the conclusion section of dissertation, it can be depicted that effective working capital
management is the main requirement of business unit for ensuring smooth functioning of
operations. Moreover, for performing day to day activities company requires enough funds
which in turn also help in maintaining solvency. In this, emphasis has been placed on analyzing
the influence of working capital management aspects on the profitability of companies operating
in the retail sector. For the purpose of evaluation and determining the suitable solution of issue
several tools and techniques have been employed. Hence, for analyzing the impact of WCM on
organizational profitability quantitative research design has been selected by the researcher.
Further, deductive approach and positivism philosophy has been employed. Hence, by making
evaluation of the five years annual report pertaining to the companies such as Tesco, Morrison’s,
Ocado Group and Sainsbury data has been gathered. In this, through undertaking correlation
model, impact of WCM in the context of UK retail sector has assessed.
From the literature review section, it can be summarized that elements of working capital
such as cash, short-term investment, inventory, receivable and payment period has greater
influence on the \daily functioning and profit margin of firm. The reason behind this, in the case
of having high inventory and receivable period business unit has to wait for long time period in
relation to cash generation. This in turn places direct and adverse impact on liquidity position
and other profitable business opportunities available. It can be seen in the report that negative
relationship takes place between liquidity and profitability aspects in accordance with the trade-
off theoretical framework. Moreover, in the case of high liquidity maintenance firm will lose
profit margin associated with other investment opportunities. Hence, cost of maintaining more
current assets within the firm can said to be high in comparison to fixed assets. Thus, trade off
framework exhibits that focus needs to be placed on maintaining liquidity, within the firm, in
line with the industry averages.
Further, it has been articulated, as per pecking order and rational choice theory, that debt
and profitability aspect shares negative relationship with each other. Moreover, high debt level
35

creates financial burden in front of firm in terms of expenses and thereby impacts profit
margin .Referring this, pecking order theory lays high level of emphasis on undertaking internal
financial sources rather than external. Besides this, rationale choice theory presents that for
ensuring WCM, company should focus on making receivable and inventory period as low as
possible. Moreover, in the case of high inventory period business unit has to incur more expenses
in terms of holding etc. Along with this, when company takes more time in relation to converting
its assets into cash then it loses other profitable business opportunities. In addition to this, in the
case of high stock conversion and receivable period business organization also faces difficulty in
managing day to day operations. Hence, it can be depicted from the evaluation that working
capital elements such as high stock and debtor as well as less payment period places negative
impact on organizational profitability.
As per data analysis section, it can be inferred that profitability of Tesco was highly
lower during the concerned five years undertaken for investigation purpose. This shows that
Tesco failed to generate enough from the funds invested by the shareholders. Further, by
applying the tool of ratio analysis on financial data set it has assessed that in comparison to
Tesco, Sainsbury and Ocado group lower liquidity has maintained by Morrison’s. Hence, such
findings can clearly be supported with the high profitability margin. Thus, it can be stated that
rather than keeping funds with itself, focus was placed by Morrison’s on investing money in the
opportunities that provide business unit with suitable margin. Hence, it can be presented that
strategic policies undertaken by Morrison’s were good over others.
In addition to this, it has concluded from financial analysis that during the period of 5
years higher sales was generated by Morrison’s and Ocado Group during the period of 5 years
from 2013 to 2017 as compared to Tesco & Sainsbury. It can be presented from evaluation that
debt-equity position of Morrison’s was in line with the standard such as .5:1. In accordance with
the financial theoretical framework, debt imposes burden in terms of interest expense and
thereby places negative impact on profit margin. Out of such 4 retail units, debt level of Tesco
was higher, from the period of 2013 to 2017, which may be served as major cause behind
decreasing profitability aspects. Outcome of ratio analysis clearly presents that Sainsbury faced
difficulty in selling or converting its stock into cash over other rival firms. Further, 5 years time
period evaluation, pertaining to the major retailing companies of UK shows that Morrison’s was
36

receiving money from debtors within the less time period as compared to the other rival firms.
Hence, it can be depicted that debtor’s turnover ratio or receivable strategies undertaken by
Morrison’s was highly good. Further, creditor’s payment period entails that Tesco and Sainsbury
had contracted and maintained relationship with the supplier who grants credit for long time
period. On the other side, evaluation entailed that Morrison’s made payment to suppliers earlier,
during the concerned 5 years time span, over the rival firm such as Tesco, Sainsbury and Ocado
Group.
By taking into account the results of statistical evaluation, it can be stated that high
liquidity has positive impact on the profitability of concerned retail companies but to the lower
level. Result of correlation model presents that current ratio and ROE is correlated with the
figure of .03. This in turn presents that high liquidity position or level places negative impact on
the profitability of business unit. Data analysis results present that significant and statistical
relationship takes place between profitability and debt-equity position but negatively. Hence, it
can be entailed that along with the WCM elements, debt-equity position of the company has
significant impact on the profitability of UK retail companies such as Tesco, Morrison’s,
Sainsbury and Ocado group.
7.2 Recommendations
By taking into account the outcome of statistical evaluation, following strategies and
policy framework are suggested to UK retail companies such as:
 It is recommended to the business units that, operating in UK retail sector, lay focus on
maintaining liquidity in line with the industry average and requirements. Moreover, high
liquidity imposes opportunity cost in front of firm in terms of loosing potential
investment options or plans. Hence, as per short-term obligations and need of cash
pertaining to daily activities plan should be prepared for liquidity management.
 Along with this, high debt-equity ratio is assessed as major factor that closely impacts
profit margin of the firm. Hence, while raising funds, UK retail companies should keep
in mind ideal measure such as .5:1. On the basis of such aspect, business organizations
should issue 2 equities in against to 1 debt. Hence, through developing optimal capital
structure business unit would become able to control indirect expense such as interest
payment and thereby enhances profitability.
37

 Further, retail companies should also focus on the development of competent strategic
framework and employing budgetary control system. This in turn place control over
expenses and maximizes the level of profit margin.
38

REFERENCES
Books and Journals:
Afrifa, G. A. and Tingbani, I., 2018. Working capital management, cash flow and SMEs'
performance. International Journal of Banking, Accounting and Finance. 9(1). pp.19-43.
Agha, H., 2014. Impact of working capital management on profitability. European Scientific
Journal, ESJ. 10(1).
Ahmad, B., Ahmed, I. and Samim, M. M., 2018. Working Capital Management Efficiency and
Corporate Governance in Manufacturing Sector of Pakistan. European Online Journal of
Natural and Social Sciences, 7(1), pp.pp-67.
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-
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