Abstract
The way a firm manages its working capital can have a decisive influence on the firm’s profitability and liquidity. In view of the prominent role that the retail industry plays in the South African economy, the purpose of this study was to investigate the effect of working capital management on the profitability of South African retail firms. Eighteen retail firms that were listed on the Johannesburg Securities Exchange for a period of nine years (2004-2012) were analysed. The findings show that a strategy of reducing investment in inventory and trade receivables, while increasing trade payables, appears to improve the profitability of South African retail firms. Inventory management seems to have the strongest statistically significant impact on a firm’s profitability. Hence, it is recommended that retail firms implement advanced inventory management systems in order to optimise inventory levels and enhance profitability.
Highlights
The effect of working capital on a firm’s liquidity and profitability is well known and formed the subject of many past research papers
This study’s objective was to investigate the relationship between working capital management and the profitability of South African retail firms. The effect of such a reduction on profitability was tested with regard to net working capital and the three components of the conversion cycle (CCC), namely inventory, trade receivables and trade payables
The results reveal that reducing inventory levels has the highest statistically significant impact on a firm’s profitability and appears to be a useful strategy
Summary
The effect of working capital on a firm’s liquidity and profitability is well known and formed the subject of many past research papers. A study by Erasmus (2010) as well as Smith and Fletcher (2009) have explored the effect of working capital management on the profitability of South African industrial firms. Their findings suggest that if such firms can reduce their investment in working capital, their profitability tends to increase. A few studies, including those of Choudhary and Tripathi (2012) (on Indian firms) and Gosman and Kelly (2003) (on US data) have focused on working capital management in the retail industry These studies confirm that working capital management may have an effect on a firm’s liquidity and profitability. To the researchers’ knowledge, no prior studies have examined this aspect in the retail industry in South Africa
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