The primary objective of any corporation should be shareholder wealth
maximisation. A firm's working capital policies have an effect on the firm's
expected future returns and the risk associated with the returns, which ultimately
have an impact on shareholder wealth. Efficient working capital management is
a fundamental portion of the overall corporate strategy to create shareholder
value.
In this study the relationship of corporate profitability and working capital
management was investigated. This relationship is examined using regression
analysis. A sample of 118 firms listed on the Johannesburg Securities Exchange
(JSE) for the period 2003 to 2007 was used. The purpose of this study is to
establish whether a relationship exists between working capital management
efficiency and profitability, considering the cash conversion cycle and operating
profitability of the firm.
The results of the regression analysis indicated that a statistical significance
exists for three of the five years (2003 - 2005) analysed between profitability,
measured with the gross operating profit, and the cash conversion cycle. It is
observed (2003-2005 regression results) that a lower gross operating profit is
associated with an increase in number of days accounts payable. The negative
relationship between accounts receivable and firms' profitability (for 2003-2005)
suggests that less profitable firms will pursue a decrease of accounts receivables
in the attempt to reduce cash gap in the respective cash conversion cycles. The
negative relationship between the number of days inventory and corporate
profitability (for 2003-2005) suggests that a sudden decrease in sales
accompanied by mismanagement of inventory, will lead to tying up excess capital
at the expense of profitable operations. Managers or owners of firms can improve profits for firms by handling correctly
the cash conversion cycle and keeping each individual component (accounts
receivable, accounts payable and inventory) to an optimum level. These results
(for 2003-2005) suggest that managers can create value for shareholders by
reducing the cash conversion cycle and its individual components. / Thesis (M.B.A.)--North-West University, Potchefstroom Campus, 2009.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:nwu/oai:dspace.nwu.ac.za:10394/4026 |
| Date | January 2008 |
| Creators | Le Roux, Marthinus Theunis Steyn |
| Publisher | North-West University |
| Source Sets | South African National ETD Portal |
| Detected Language | English |
| Type | Thesis |
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