An analysis of the impact working capital management on profitability: evidence from South Africa

Chirume, Tariro
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Cash flow is one of the critical factors influencing the operational, investments and financing decisions of a firm. Since working capital management deals with shortterm cash flows, this research explores the interaction between working capital management and profitability. Utilising 110 South African industrial firms listed on the JSE and ALTX this study firstly investigates the impact of working capital management on the profitability of firms from 2001-2010. Secondly this study investigates the impact of different working capital policies on profitability of South African industrial firms. The results show that after removing the problems associated with panel data, the cash conversion cycle which is the main measure of working capital is negatively related to both measures of profitability (return on assets and return on equity). The results of the study have also revealed that profitable firms have less days in account receivables, days in inventory, days in accounts payables, leverage ratio and high sales revenue. Lastly the sectorial analysis was conducted and the results revealed heterogeneous working capital management patterns.
A research report submitted to the Faculty of Commerce,Law and Management in fulfilment of the requirements for the degree of Master of Commerce in Finance.
Working capital, Cash management, South Africa, Profitability