Dissertation: Working Capital Impact on Retail Sector Profitability

This dissertation explores the crucial relationship between working capital (WC) and profitability within the retail sector, focusing on Sainsbury's as a case study. The study investigates how effective WC management, encompassing elements like inventory, accounts payable, receivables, and debt, directly influences a company's financial performance. The research delves into the significance of WC structure, the procedures for administering business assets, and the impact of WC artifacts on profit margins. The dissertation includes a literature review, research methodology, data analysis, and findings, culminating in conclusions and recommendations for preventing WC overflow and improving profitability. The executive summary highlights the negative impact of ineffective WC on profits and the importance of strategic WC management for financial stability and growth. The study aims to analyze the effect of WC structure on company profitability, providing insights into improving credit profiles and solvency in the long term. The research examines the impact of WC components like inventory and debt, and its significance in the context of business, assesses the impact of WC on business profitability levels and recommends measures for preventing overflow of working capital of an enterprise.

Dissertation

Executive Summary
The present study is based on determining the impact of the WC on the profitability of
business in terms of retail sector organizations. The report presents that ineffective use of WC
leads to reduction in the profits. There are several components of WC which reflects the
performance of and position of company in the market such as inventory, accounts payables,
receivables and debt. It has been identified that the profitability performance of Sainsbury's is not
good because it has not managed its WC efficaciously.

Table of Contents
Executive Summary ........................................................................................................................2
CHAPTER 1- INTRODUCTION ...................................................................................................4
CHAPTER 2-LITERATURE REVIEW .........................................................................................8
CHAPTER 3- RESERACH METHODOLOGY ..........................................................................16
CHAPTER 4 – DATA ANALYSIS AND FINDINGS ................................................................25
CHAPTER 5- CONCLUSION AND RECOMMENDATIONS...................................................34
REFERENCES .............................................................................................................................38

CHAPTER 1- INTRODUCTION
Title – To investigate an impact of the working capital structure on company's profitability
Background
Working capital denotes an amount of the funds that are required for running the routine
operations of the business. It relates the current assets and the short term sources of the financing
and thus, deals with the both assets and the liabilities with respect to managing the working
capital. It is reflected as an excess of the current assets over the current liabilities which depicts
that the funds invested in the current assets in order to meet the current liabilities in adequate
manner (Samiloglu and Akgün, 2016). This fund is required for running the daily operations in
effective and efficient way and is circulated within the business as like the blood circulates into a
living being. It refers to current assets of an entity which changes from one form to the other in
an ordinary course of action that is from the cash-inventory- WIP- finished goods- receivables-
cash. Management of the working capital is considered as the business strategy which is
designed for ensuring that an enterprise operates efficiently through monitoring and making
optimum use of the current liabilities and assets.
Proper working capital management is necessary for the operational success and in
analysing the financial state of company (Baker and et.al., 2017). Hallmark of the good
management within an organization is an ability for utilizing working capital in order to maintain
solid balance between liquidity, profitability and the growth. Efficiency in managing working
capital could be measured through variety of the ratios and the methods. The financial analyst
mainly compares cycle of working capital and the other WC ratios against the industry
benchmarks or an entity's peers (Mbawuni, Mbawuni and Nimako, 2016). The commonly used
ratios for depicting the effect of the working capital on the business operations and profitability
of the company includes current ratios, inventory days outstanding, payable days outstanding,
sales outstanding days etc. WC act as the vital part of the business as it helps in gaining higher
returns on the capital that is invested by the stakeholder that in turn helps in maximizing wealth.
Through WC management, company could be able to improve its credit profile and the solvency
in the long term. Sufficient management of WC allows the business organization in paying off its
current or short term liabilities within the specified period (Singhania and Mehta, 2017).
Moreover, it acts as a significant driver for increasing the profitability of the company with
proper management of the accounts receivables and payables.

The present study is based on Sainsbury's, the largest supermarket of UK standing as a
major food retail chain. The brand is built on the heritage of facilitating the customers with safe,
healthy, fresh and the tasty food. Furthermore, the report presents a detailed review in context of
the effect of WC on the profitability of the company. Moreover, it also highlights ratio analysis
of the company for showing the WC impact on the business operations and the profits.
Aim and objectives
Aim
To analyse effect which the operative capital structure has on the company profitability. A study
on Tesco, Morrisons and Sainsbury.
Objectives
 To analyse significance of working capital structure in context of business.
 To understand concept of administration of business assets and its procedures for
betterment of business growth
 To assess impact as made by artefact of working capital on business profitability level.
 To recommend measures for preventing overflow of working capital of an enterprise.
Rationale
The main reason behind formulating this study is to assess an influence of WC on the
profitability aspects of an organization. In today's dynamic environment this has seen as the
current issue which is faced by most of the companies. Therefore, it becomes important for the
scholar to the make an analysis on the WCM and investigating the relationship between WC and
profits. As WC plays a vital role in running the business operations in smooth way, so it is
counted as the most essential aspect or issue for an investigator to find out the associated impact
of WC on the functioning and returns of the firm.
Scope
It has been represented that this research problem has wide scope as includes various
aspects of an entity that is production process, finished goods, raw material, cash cycle,
inventory, return on asset, return on capital employed etc. WC also includes relations, analysis
and the focus on payments for the trade, investment and financing. It also highlights the relations
with the financing institution and the trading partners that need to be maintained for ensuring that
transaction works effectively within the work environment or the workplace.
Significance

This study would help the other scholars and the readers in understanding the effect of
the working capital on firm's profitability. The study would also help the other retail sector
companies in determining the factors or components of WC which directly impacts the
profitability or performance of an entity. This study enables the professors and the students in
getting a deeper insights with respect to the WC and in gaining deep knowledge regarding the
management of the WC and its associated impacts on earnings of an enterprise in appropriate or
adequate way who are conducting or looking for preparing the thesis on this particulars research
issue. s
Research Questions
 What is the significance of effective WC within the business ?
 What do mean by administration of the WC and how it impacts profitability of an
organization ?
 In what way the artifact of the WC affects profit margin level of the business ?
 What are remedial measures through which an entity could bring improvement within its
WC?
Structure
Chapter 1- Introduction
In the first chapter, an overview of the research topic is been presented by stating its
significance and the reason behind preparing the study on a particular research issue or problem.
Further, the aim and objective are been framed for making deep analysis of the topic along with
appropriate research questions relating to the study.
Chapter 2- Literatures review
In the next chapter, an in -depth review of the problem is been made by indicating the
importance of the particular topic for an entity along with an understanding of the process and its
impact on the business. The review is made by using different secondary sources that is articles,
books, internet etc.
Chapter 3- Research methodology
Under this section, different methodologies and approaches are used for gaining the
validity and reliability within the study. It also includes the ethical considerations and the
measures that the researcher uses for overcoming the limitation with regard to selection of the
sample size, financial and resource constraints.

Chapter 4- Data analysis and findings
In this the researcher structured a questionnaire for evaluating the responses of the
participants with respect to the research issue. Thereafter, the responses are assessed by using the
charts, table and percentage. Moreover, a brief discussion in relation to the participants responses
is also been stated for generating appropriate findings.
Chapter 5- Conclusion and Recommendations
Under this segment, an overall summary of the report is presented based on analysis of
the data and literature sources. Furthermore, recommendations are been provided relating to the
way in which company could improve the flow of its working capital for attaining larger profits.

CHAPTER 2-LITERATURE REVIEW
Theme 1: Importance of WC structure in the business
Erdogan (2016), reviewed that majority of organizations emphasize on the numbers that
is presented in their balance sheet rather paying attention on their need for cash flows. Working
capital of the firm is reflected as the money which is been used for financing its day to day
operations. Greater the availability of the working capital, more stable the firm is in meeting its
short term obligations. Managing the structure of WC effectively helps the firm in making
payment of its current expenses that involves material, payroll and the other operating costs of
the business. However, Running low on the working capital puts an entire company at the risk
because the failure in paying expenses could be catastrophic .
Afrifa and Padachi (2016), stated that funds released through the sound or effective WC
management practices acts as the cheap source of the finance which could be used for an
expansion of the existing projects for an investment in the new spheres of an investment. On the
other, in case if the fir does not manage its WC structure adequately then it might face difficulty
in working its operations appropriately and thus the sales and profitability of the firm results to
decline with greater value. Moreover, increasing the profits is counted as one of the major
purpose of engaging in the management of WC. The method for enhancing profitability through
an adequate WC management is saving the financial cost which would have incurred for the
purpose of managing current assets and short term liabilities. Through management of the stock
which is counted as essential element of the working capital, the company could be able to
ensure that adequate proportion of the resources is available all the time. By maintaining optimal
level of the stock in context of managing the WC results to increase in the earning and the sales
of an enterprise.
In view of Nazar and Abeysinghe (2017), WC structure leads to solidifying going
concern state of an enterprise in running its business. In the business it seems as very common
that the profitable organization goes out of the business in case it fails in meeting with its current
obligations or financial requirement of an enterprise. Companies are required to satisfy their
medium term and the short term liabilities for the purpose of remaining in the business by
attaining a competitive edge. Moreover, it improves an overall efficiency of an enterprise which
would be greatly influenced by an effective management of WC. With this system, finances
could be managed in such manner that it does not pose any kind of obstacle or hindrance in

functioning of an en entity. It also helps in avoiding the over trading which is considered as the
biggest business failure. The main feature of over-trading is the mismatch between the finances
and assets. The business goes as beyond the set of the financial goals and the objectives and in
long run it helps the company in dealing with the uncertainties. Some trends that signals over-
trading would include an uncontrolled, out of the business expansion area.
Parmar (2017), analysed that WC management enables in maintaining good relations
with the creditors and the other suppliers where the business engages in adequate management of
working capital and the other related financial indices, non-trade creditors and the trade creditors
are been poised for doing the business along with it. Their respective knowledge of an existence
in this system goes long way in boosting their confidence in business and the associated dealings.
It assists in avoiding under-utilization of the resources as with proper use of the working capital,
company could ensure that there doe not present any idle resources. Further, it facilitates better
insights into true analysis regarding the financial health of an organization. Through evaluation
of working capital ratios, financial experts could have a deep knowledge or understanding of the
business. Management of the WC affords business with an opportunity in taking a close look at
all its financial indices.
Sathyamoorthi and et.al. (2018), viewed that managing WC is very essential in allocating
the resources and it helps the business management in allocation right proportion of the resources
so that larger returns could be generated. Application of the ratios revealed on use of the
management system and other important assessment areas with the surplus and shortage of
resources are been followed and identified swiftly with a appropriate distribution of the resources
for overall enterprise. Thus, WC management is synonymously efficient for managing other
resources within the business. The other types of financial indices are been counted like turnover
ratio, collection ratio, key performance ratio. All of such ratio could be achieved in effective way
by efficient, standard and the state of art management relating to working capital.
In accordance to Joshi (2020), working capital is found as significant and as daily
necessity for the company as it needs regular cash amount for making routine payments,
covering an unexpected costs and purchasing the basic materials that are used in process or
production of the goods. Efficient WC management helps in maintaining the smooth operations
and also enables in improving profitability and earning capacity of an enterprise. WC
management involves managing of inventory, accounts receivable management and the accounts

payables. The main purpose of WCM includes maintaining WC operating cycle with ensuring
ordered operation, minimizing cost of capital spend on WC and maximizing return on investment
of CA. It is considered as easily understandable concept as it linked to cost of living of an
individual and therefore could be understood in personal way. Individuals required to gather
money which they owed & maintain specific amount on routine basis for covering daily
expenses, bills and the other routine expenditures.
Thus, WC his considered as the prevalent metric for managing efficiency, liquidity and
entire health of the firm. It is reflection of results of several activities of the company involving
collection of revenue, managing debt, inventory and making timely payments to the suppliers.
Due to this it involves accounts payable, inventory, receivable, cash portions of the debt which
gets due within one year period and the other short term accounts. WC management is mainly an
accounting strategy with emphasizing on maintaining adequate balance between CA and the
liabilities. Effective system of managing WC assist the businesses in not only covering their
financial related obligations but also increases their earnings. An efficient system of WC
management often make use of the key performance ratios like working capital ratio, debtor
turnover ratio, inventory turnover ratio and payable days which helps in identifying the areas in
which the firm needs to focus for maintaining profitability and liquidity.
Theme 2: Concept of assets management and its process for betterment of the business
growth
Silviana (2019) indicated that the concept of administration of the business assets is
considered as measure of total assets for which financial institution facilitates an administration
services and charges fees in doing it. Asset management refers to the practice of developing,
maintaining, operating and selling the assets in cost effective way. It is very important for the
company to keep a track of its total assets. The assets that is owned by the business divided into
two categories that is fixed and the current assets. Non-current assets are acquired for long term
purpose, however the current assets are those which could be converted into the cash within a
short time frame. Management of current assets managing the WC of the business as CA are
seen as the most critical part of the cyclical business operations and consist of the assets of
several natures. An asset of the financial character includes securities, cash, accounts receivable
and the prepaid expenses. Moreover, the elements of the tangible current assets need incurring
the cost of their storage & purchase and at same time they freeze the capital. In addition to this

maintenance of the inventory includes higher level of risk gas compared to maintenance of
financial related elements, as before getting converted into the cash, it still requires going by
particular transitory phases.
Protalinsky, Khanova and Shcherbatov (2019) reviewed that cash management focuses
on minimizing the cash position but also ensure adequate level of inventory for maintaining the
current financial related liquidity. This counted as the fundamental significance for evaluation of
the credit rating of company by the different partners in the business turnover. The most crucial
aspect of the cash management within the company is an acceleration of payment availability
through reducing their realization time. IT includes being constant with collection of the
receivables and efficient process for issuing an invoice & also reduction in cycle of cash in
transit that is in the case where the receivables are paid in form of cheque. Permanent surplus of
cash must be deposited in long term instruments or the investment projects while temporary
surplus of cash must be deposited in short term money market instruments which seen as the
deposits of the various weeks or days that result to the notable profits. The crucial thing is that
the temporary cash shortage must be financed by inexpensive sources of finance. The foremost
tool for cash management is the firm must be cash budget that would forecast the cash outflows
and inflows.
Receivable management consist of 3 major elements that id defining the credit policy
relating to clients, debt collection and receivable controlling. Credit policy of company relating
to its recipient comprises with defining the credit period, receivable policy, credit standards and
discount on prompt payment. By using the trade credit results with increase in the turnover but at
same time it could cause an increase in the cost attached with an additional and short term
outside financing. Thus, scope of the credit policy within an organization must be preceded by
detailed computation of its profits on the basis of sales forecast rises as the result of making use
of the certain credit policy and forecast of increase in non-collectable receivables.
Falson (2019) represented that along with the credit policy, system of debt monitoring
plays a crucial role in the receivable management. It mainly prevents built up of the receivables,
fall in the cash flow & decline in the sales profits because of the bad debts. In debt monitoring,
receivable rotation ratio must be used for indicating an average length of time required for the
receivable collection and assessment of the receivable age related structure. Risk in relation to
extending collection period could be reduced by way of acceleration of its availability. For the

purpose of reducing receivable period, company must use several instruments like discounts,
facilitating credit in form of invoice or bills of exchange and factoring. Inventory management
deals with controlling the size of particular items so that over and under flow of inventory does
not result at the premises. From financial point of view, inventory management aims at
minimizing its maintenance cost, whereas maintaining adequate level of production process
consistency and the present payment capacity. Proper management of an inventory within the
company enhances effectiveness of their operations that could be seen in financial liquidity and
increased profits of the firm. It is been analysed by using ratio of inventory rotation which
reflects the no. of inventory turnover cycle in a specified time frame.
Martí (2017) stated that implementing the process of asset management enables the
companies in managing and monitoring their asset by using systematized approach. With the
solid process, an entity could improve the efficiency and productivity of asset and thus enhances
return on the improvement. The key elements of effective process of managing asset includes the
preparation of asset register in which an inventory list of the available assets is maintained which
helps in maintaining optimum flow of inventory at the workplace. Thereafter, in the next step
condition of assets is been identified along with its rating system. In the third step, depreciation
on the asset must be tracked accurately at the timely interval so that proper evaluation of an asset
can be made. In fourth step, value of the asset and its replacement cost must be determined in
order to maintain accurate record of the asset liquidity and raising the fund accordingly. In fifth
stage, the asset is been move away from the reactive to the predictive maintenance of asset. The
fifth step emphasize more on the change management for ensuring integrity of the database. In
last stage of the process paperwork is been eliminated and the tasks are automated such as
collection of data, reporting of asset etc.
Thus, managing the assets helps the firms in keeping a tab on all its assets and helps in
guaranteeing accuracy of the depreciation rates. It also helps in determining and managing the
risk and removes the ghost assets within an entity's inventory. It allows the business organization
in achieving a growth in the market and leads the firm towards success and better growth across
the globe with effective functioning of the business operations and strong cash flow for meeting
uncertain conditions in the future.
Theme 3: Impact of WC on profitability level of the firm