Influence of Working Capital Management and Policy to Profitability of Retail Trading Sector in Indonesia

Eric Tjandra

doi:10.47191/ijcsrr/v4-i12-22

Abstract

Working Capital (WC) is an important aspect of any firms because of its correlation to risk (liquidity) and return (profitability). This research examines the influence of WC Management and Policy (WCMP) to profitability of 21 listed retail trading sector firms in Indonesia from 2011-2020 using panel data regression. In this research, WC Management (WCM) is measured by Cash Conversion Cycle (CCC) and its components which are Days Sales Outstanding (DSO), Days Inventory Outstanding, and Days Payable Outstanding (DPO); WC Policy is measured current assets divided by total assets or referred to as WC Investment Policy (WCIP) and current liabilities divided by total assets or referred to as WC Financing Policy (WCFP); and profitability is measured by Earnings Before Interest, Tax, Depreciation, and Amortization Margin (EBITDAM). The results show that firms can increase EBITDAM by shortening CCC, primarily through shortening DIO and lengthening DPO. Further, firms may improve EBITDAM by adopting a conservative WC Policy instead of an aggressive one, which means having higher current assets and lower current liabilities with respect to total assets.

Highlights

Corporate finance involves financial decision making which traditionally encompasses investment, capital structure, and dividend to maximize firm value which is often associated with shareholders value
Working Capital (WC) Management (WCM) is measured by Cash Conversion Cycle (CCC) and its components which are Days Sales Outstanding (DSO), Days Inventory Outstanding, and Days Payable Outstanding (DPO); WC Policy is measured current assets divided by total assets or referred to as WC Investment Policy (WCIP) and current liabilities divided by total assets or referred to as WC Financing Policy (WCFP); and profitability is measured by Earnings Before Interest, Tax, Depreciation, and Amortization Margin (EBITDAM)
The objective of this study is to understand the influence of WC Management and Policy (WCMP) to profitability of retail trading sector firms listed in Indonesia from 2011-2020

Summary

Introduction

Corporate finance involves financial decision making which traditionally encompasses investment, capital structure, and dividend to maximize firm value which is often associated with shareholders value. The short-term aspect which involves Working Capital (WC) Management and Policy (WCMP) is essential as firms need to survive in the short-term to thrive in the long-term (Pouraghajan & Emamgholipourarchi, 2012). Efficient WCMP is an integral part of financial management to increase shareholders’ value (Enqvist, Graham, & Nikkinen, 2014). Main subjects of WCMP are cash, Accounts Receivable (AR), Accounts Payable (AP), and inventory. WCMP could be more impactful in certain sectors, such as the retail trading sector. Retail trading sector is a WC-intensive sector where AR, AP, and inventory make up a significant portion of the statement of financial position

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Conclusion