Evaluating the Impact of Working Capital Management on Profitability

This research proposal investigates the impact of working capital management (WCM) on the profitability of organizations, with a specific focus on HSBC Holdings. The study begins with an introduction that defines working capital and its importance in financial management, followed by the rationa...Read More

RESEARCH PROPOSAL

TABLE OF CONTENTS
TITLE..............................................................................................................................................3
INTRODUCTION...........................................................................................................................3
Background..................................................................................................................................3
Rationale......................................................................................................................................3
Aim..............................................................................................................................................4
Objectives....................................................................................................................................4
Research question........................................................................................................................4
Originality....................................................................................................................................5
LITERATURE REVIEW................................................................................................................5
Concept of working capital..........................................................................................................5
Theoretical models related to working capital management.......................................................6
Challenges faced in WCM and its impact on profitability..........................................................6
RESEARCH METHODOLOGY....................................................................................................7
Research Methodology................................................................................................................7
TIMETABLE PLAN.....................................................................................................................11
Gantt Chart.................................................................................................................................11
Problems encountered................................................................................................................12
REFERENCES..............................................................................................................................13

TITLE
To evaluate the impact of working capital management on profitability in organisations.
INTRODUCTION
Background
Working capital can be broadly defined as the difference between the net assets and the net
liabilities of an organisation. This is done in order to manage the receivables and payables of an
organisation and in order to ensure adequate working capital maintenance in the organisations to
meet short term requirements. Working capital management is a crucial aspect in the overall
management of the business i.e. financial management. It helps in identifying ways to keep the
inventory costs minimum, includes cash management, reduces receivables time and ensures that
there is no ideal cash in the organisation in excess thus reducing the opportunity cost of earning
that interest over some other investment (Ramiah and et.al., 2016). The recent trends in the
stability of the financial organisations show that the importance of ensuring proper working
capital management has become necessary in the organisations because they need to ensure that
the short term liabilities of the company can be met and the cash does not remain idle in the
organisation. Further, working capital is the most effective manner in which the business of an
organisation can be maintained and therefore evaluation and study of this concept is necessary.
In the proposed research, the impact of working capital management particularly on the
profitability aspect of the organisations will be evaluated with special reference to the HSBC
Holdings specifically. This will help in evaluating how the different factors of working capital
will affect the working capital which in turn will affect the profitability of the organisation.
Rationale
The reason that the topic of working capital has been taken into consideration as the
potential topic of research because this is a major contributor in ascertaining the profitability of
the organisation and further the effect on the revenue generation as well (Ma, Hu and Boye,
2020). There have been rising cases of companies going bankrupt due to poor management or
getting involved in scandals. The rising number of issues highlights the need to conduct study on
a comprehensive part of managing finances in an organisation which is working capital
management. It is evident that the companies can evaluate their stability and profitability by
simply evaluating the working capital of organisation and therefore, it is necessary to further
research in that prospect. This research will help in identifying that how working capital directly
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affects the profitability of an organisation despite being a small part of the entire financial system
of the organisation. The necessity of adequate cash and stronger liquidity position in the
organisations is evident because of the effect that it has n the profitability sector as well as the
overall management in an organisation is significant. There have been several claims that if the
working capital management of an organisation is comprehensive then the strategies formulated
by them to effectively manage the current assets and liabilities are also robust (Habersang and
Reihlen, 2018). Additionally, the financial sector of UK is facing several threats due to the
slowdown in the economy which has further affected the overall profitability of the organisation.
This makes the research on working capital more necessary in the current trends so that
companies can take better decisions in their overall management. Therefore, there is a need to
evaluate these factors regarding the working capital management and identify that how much it
actually affects the financial stability and profitability of an organisation altogether. This will
help in ensuring the financial stability in an organisation and maintenance of an optimum
working capital balance in an organisation. These classify as the broad reasons behind selection
of the working capital management topic as the proposed research topic as it will help in analysis
of a variety of factors.
Aim
To identify the impact of working capital management on the profitability of finance sector
organizations. A case study on HSBC Holdings.
Objectives
 To evaluate the concept of working capital management in organizations.
 To identify the theoretical models and their effect on working capital management in the
organizations.
 To identify the challenges that arises in working capital management and its effect on
profitability.
 To recommend appropriate strategies in order to minimize the challenges identified.
Research question
 What is the meaning of working capital management in the organisations?
 What are the different theories and tools that can be used for working capital
management?
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 How does the profitability of organisations get affected by the working capital
management?
 What recommendations can be made for the organisations in accordance with the
challenges identified?
Originality
The originality of the research would be maximum because of the primary data analysis that
will be conducted by the researcher on their own and wherever secondary research will be done,
appropriate references will be cited for those relevant references. Therefore, the original analysis
and interpretation will ensure that the originality of the research is ensured.
LITERATURE REVIEW
Literature review helps in evaluating the previously published articles, books, journals; case
studies etc. so that wherever found relevant, adequate references can be drawn. These help in
developing a more comprehensive research and drawing more evasive conclusions for the
research that will be undertaken.
Concept of working capital
Authors, Garud, Berends and Tuertscher (2018), have illustrated in their research paper
that working capital is a comprehensive financial management tool that helps in ensuring
smoother capital circulation and flow in the organisation. The authors have stated that working
capital can be broadly identified as the difference between the current assets and the current
liabilities of an organisation. Further, the paper illustrates that different types of businesses use
different techniques of capital management based on the different activities that are performed in
a business. The positive and negative working capital have been further discussed where authors
conclude that in case the liabilities of the company is more than the assets of company, then it is
termed as the situation of negative working capital which is an adverse situation for the
organisation. The authors further state that the scenario of negative working capital needs to be
avoided in all cases as the risk exposure increases significantly and the perception of the
organisation also becomes negative.
However, contradicting the point above, the authors, Baran and Jones (2020), have stated
that negative working capital does not always signifies a negative scenario for the organisations
as it can be beneficial situation for certain organisations. When the organisations buy majority of
their goods on credit then this can lead to a negative working cycle but in essence it is a
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profitable situation for the organisation. Therefore, the authors conclude that the working capital
mainly depends on the type of business activities that are being performed by the organisations.
The authors further illustrate that there are a variety of factors that affect the working capital
such as operating cycle, fluctuation in the operating cycle, technology etc. are the major factors
that affect the working capital in the organisation. Elucidating on the point of factors, authors
have also stated that these are not the conclusive factors because uncertainty in the economical
market and its trends is one of the major impactful body on the working capital and the risk
associated is also ambiguous.
Theoretical models related to working capital management
The research paper published by authors, O'Cathain (2020), states that the trade off model
is the most comprehensive model that can be used for working capital management in the
organisations. This model helps in ascertaining that what should be the optimal level of cash that
should be maintained in the organisations and how this can be help in benefitting the overall
position of the cash and liquidity in an organisation. Authors state that maintaining the liquidity
of the company along with performing in accordance with the profit maximisation are two most
critical objectives that should be complied with in the case of organisation. However, the authors
also state that compromise on any one objective is not beneficial for the organisation as it leads
to a loss making situation for the company in the overall context.
Another research paper presented by Alarussi and Alhaderi (2018), states that aggressive
theory is also a key working capital management theory that can be used by the organisations.
When the risk is higher in the organisations and the funds are maintained for short term then this
approach is extremely necessary in maintaining the liquidity in an organisation. When the
aggressive policy is adopted, this helps in minimising the credit period of the companies and the
cash flows are also affected thus which increases the profitability. This can further assist in
minimising inventory holding period and ensures availability of cash in hand at all times in the
organisation. Therefore, this is also a major technique that can be used for better capital
management in the organisation.
Challenges faced in WCM and its impact on profitability
As per the views of Whysall,Owtram and Brittain, (2019) working capital management faces
various challenges and difficulties to enable company in maintaining proper work records and
financial ethics in frame where often there is limited access to needed information in an accurate
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and confined manner which affects evaluation parameters vividly in company. There is lack of
formal structure to deliver high quality services to all stakeholders, keeping their perspectives
aligned with the regulations of company business goals. Author explains working capital
efficiency is also negatively impacted with time constraints, limited viability to reach
benchmarks in given timeframes where regulations complicate the structure. Moreover the
challenges of working capital management can be accessed on ground of various technology
models where investment is highly needed to improve overall liquidity within operations.
Financial metrics and the various analytical tools implementation plays an effective role in
organizing various business goals and mostly it becomes a new investment by company top
management to embrace new innovative technology frameworks. Author explains it is an
integral aspect to train all employees working in company towards gaining large working
efficiency towards using financial metrics and productive development by which further liquidity
of budgets evolve. The working capital management should be understood as one of the most
important business management rule as large efficiency enables company leaders to analyze
resources utilization, and the various factors also positively impacts goodwill of brand. The
resources which are allocated towards company forces are optimistically invested if the working
capital management is strong, clarity within levels is restored through which high ethical
business goals are set. Author explains Working capital challenges need to be improved with
new creative business models where functioning is leveraged through high optimistic efficiency
and overall management is working with clarity of vision, business goals and the flexibility
principle along time management shall be integrated within company functional operations to
reach new arenas of working capital management. There shall be high importance given to
working capital management to gain internal strength within company and clarity of business
goals along with integration of research factors by which the resources are vitally used for long
term cost effective production targets.
RESEARCH METHODOLOGY
Research Methodology
Research Design
It is framework of research methods and tools which are chosen by researcher. In other
word, the overall strategy or tactics which are selected to integrate the numerous but different
components of the research study in a logical way and addresses the research problem as well. It
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is important for the research because it gives smooth controlling on various research operations
which makes research more effective and efficient as resultant maximal information, declines
expenditure of efforts, time and money (Avella, 2016). It is basically dependent on the
reliabilityof the result which are obtained. Research design is further divided into three type i.e.
causal, exploratory and descriptive which are described below:
Causal
It is concerned with understanding the interconnection between the cause and the effect.
The research often executes by many controlled experiments for allowing the testing of cause
and effects as well. It is also known as explanatory research design which investigate
relationship of causal and effect. There are two methods i.e. experimentation and statistics
methods applies for exploring cause and effect relationship between several variables.
Experiments is a research method which is more popular for primary data collection methods.
Exploratory
It refers as a research is used to analyse aproblem which is not exactly defined. Most of
the researchers are used to this method to determine issues which can help to access for the
future research.It is considered as informal and unstructured research design. It is preliminary
research which provides hypothetical information or theoretical estimation of the research issue.
The research design supports researcher to establish understanding about the research cause and
purpose but doesn’t give any type of conclusion (Cieslewski, Kaufmann and Scaramuzza, 2017).
The research design is also known as primary research for qualitative research but used for
potential quantitative research.
Descriptive
It defines research method which describes the characteristic and traits of population. In
simple word, it is primarily focused on explaining the nature of demographic segment instead of
focusing on phenomenaoccurrence. Descriptive method has three types i.e. observation method,
case-study method and survey method. The method is applicable for qualitative method and has
main goal to validate objectiveswhich coms from group of people.
Descriptive research design will choose for the research because it helps to collect
reliable data based on the survey method. This research design is required for qualitative method
and cost effective as well. So, this research design will apply for selecting accurate research
method.
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Research method
There are two research methods i.e. qualitative and quantitative which are described
below:
Qualitative method
Qualitative method is an observation method which can understand but unable to measure
i.e. language, feeling. It gives non-numerical data or in other word, hypothetical and theoretical
data which supports in the brief study of research topic to under human psychology,
characteristics etc. based on the observation (Creswell and Poth, 2016). It is simple method
which can easy to understand for anyone. The method doesn’t need any type of expertise while
collecting data or information. The core value of the qualitative method is to give high quality in
collected information. To interpret data uses charts, graphs which influence intertest of reader to
read and gain knowledge from the hypothetical figure.
Quantitative
It is another method of data collection which gives information in mathematical figure
and numerical form. The accuracy of information can be interpreted by chart and outcomes
which is represented in percentage form. Most of the researcher uses quantitative method for
gathering numerical based data. The method is bit complexed so requires expertise for collecting
information. It is not easy method for understanding mathematical figure for everyone.
Qualitative research method will use for the research because it leads quality for
collecting data and become easy to evaluate objectives such as the concept of working capital
management and impact of working on the organization profit. In addition, it required for
sampling for gathering data.
Sample selection
Sampling is the procedure of selecting a group or individual from the large population. It
is crucial method for the research because it helps to select specific population as sample size. It
is classified into two forms i.e. probability sampling and non-probability sampling.
Probability
The group and individuals are selected randomly as sample from large large population
without worrying about outcomes or results. It is considered as random sampling which is
applied to give equal opportunity.
Non-probability sampling
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The group of people are selected on the basis of their potential and capabilities. The main
purpose is to achieve desirable outcomes (Dowling, Lloyd and Suchet-Pearson, 2016). so, it is
also known as non-random sampling method.
Random sampling method will choose for the selecting people because it is required for
qualitative research method. To collect information will choose 10 people of working capital
management as sample size through random sampling method.
Data collection
There are two method which are used for data collection i.e. primary method ad
secondary method.
Primary method
It is used to collect data from observation and questionnaires. It is effective method
which helps to gather realistic information that can give accurate data.
Secondary collection
Secondary method is applied to gather information by the primary resources i.e. books,
magazine and internet. It is basically dependent on the primary method.
Primary and secondary method will choose for the research because it is required for
collecting primary data from questionnaires. While secondary data is used for interpreting
primary data. so, both primary and secondary data collection method will choose for the
research.
Model specification
It can be defined as the identification of independent variables which must be included
and excluded from a regression equation. It is classified into three forms independent, dependent
and control variable (Howitt, 2016).
The study is qualitative so we will not use any specific variable, however we will only
determine the extend up to which profitability depends on working capital.
Research limitation
Quantitative method doesn’t choose for collecting data which is major limitation of the
research project. It is time-consuming process so it requires more time for collecting data.
Resources are limited for the research which causes can’t gather efficient information. It is costly
research so can possibly need more funds for collecting information.
Research quality
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To main research quality will use available resources effectively so that can get high
quality in the collecting data. for example, descriptive research design is used to select specified
research method as result get qualitative method (Manemann and et.al., 2018). As same this
method keeps specialization is that it gives quality while gathering information. There are several
methods are used for data collection which helps to main quality of research.
TIMETABLE PLAN
Gantt Chart
Gantt chart helps in correctly categorising the activities that are required to be performed in
the completion of research and also helps in identification of the time that will be required to
complete those activities (Baker and et.al., 2017). These can be presented in the appropriate
manner as follows:
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Problems encountered
The samples can be collected through various online and online mechanisms and since this
is an qualitative research, it is not expected that there will be any major problems. However, the
problem of time management can arise due t the wide area that is to be covered in the research
but proper schedule can be used to avoid such problems.
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REFERENCES
Books and Journals
Alarussi, A.S. and Alhaderi, S.M., 2018. Factors affecting profitability in Malaysia. Journal of
Economic Studies.
Avella, J.R., 2016. Delphi panels: Research design, procedures, advantages, and
challenges. International Journal of Doctoral Studies. 11(1). pp.305-321.
Baker, H.K., and et.al., 2017. Working capital management practices in India: survey
evidence. Managerial Finance.
Baran, M. L. and Jones, J. E., 2020. Developing the Research Study: A Step-by-Step Approach.
In Applied Social Science Approaches to Mixed Methods Research(pp. 262-274). IGI
Global.
Cieslewski, T., Kaufmann, E. and Scaramuzza, D., 2017, September. Rapid exploration with
multi-rotors: A frontier selection method for high speed flight. In 2017 Ieee/rsj
International Conference on Intelligent Robots and Systems (iros) (pp. 2135-2142).
IEEE.
Creswell, J.W. and Poth, C.N., 2016. Qualitative inquiry and research design: Choosing among
five approaches. Sage publications.
Dowling, R., Lloyd, K. and Suchet-Pearson, S., 2016. Qualitative methods 1: Enriching the
interview. Progress in human geography. 40(5). pp.679-686.
Garud, R., Berends, H. and Tuertscher, P., 2018. Qualitative approaches for studying innovation
as process. The Routledge Companion to Qualitative Research in Organization Studies.
London: Routledge, pp.226-247.
Habersang, S. and Reihlen, M., 2018, July. Advancing qualitative meta-analyses: A realist and a
constructivist approach. In Academy of Management Proceedings (Vol. 2018, No. 1, p.
14206). Briarcliff Manor, NY 10510: Academy of Management.
Howitt, D., 2016. Introduction to qualitative research methods in psychology. Pearson UK.
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Ma, Z., Hu, X. and Boye, J. I., 2020. Research advances on the formation mechanism of resistant
starch type III: A review. Critical reviews in food science and nutrition.60(2). pp.276-
297.
Manemann, S.M and et.al., 2018. Multimorbidity and functional limitation in individuals with
heart failure: a prospective community study. Journal of the American Geriatrics
Society. 66(6). pp.1101-1107.
O'Cathain, A., 2020. Mixed Methods Research. Qualitative Research in Health Care, pp.169-
180.
Putnam, M. and et.al., 2016. Measures of aging with disability in US secondary data sets: Results
of a scoping review. Disability and health journal.9(1). pp.5-10.
Ramiah, V. and et.al., 2016. A behavioural finance approach to working capital
management. The European Journal of Finance. 22(8-9). pp.662-687
Whysall, Z., Owtram, M. and Brittain, S., 2019. The new talent management challenges of
Industry 4.0. Journal of Management Development.
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