Abstract
The management of working capital is a key critical consideration all entities need to make given its strong influence on firm profitability. The working capital decision finds further importance given that it ultimately determines firm value and shareholder wealth maximisation. Working capital management essentially involves the managing of entity current assets and liabilities in an optimal manner to positively influence profitability. This management of short-term operational assets and liabilities needs to be contrasted with the liquidity risk introduced by the manner an entity decides to structure its working capital. There is a strong relation and interdependence between corporate profitability, liquidity and working capital and how this relationship pans out within the South African clothing retail context was of key and primary interest for this study. The South African clothing retail sector is a key industry and plays a vital role to the health of the South African economy given that it contributes to over R200 billion of the GDP, both directly and indirectly. Moreover, this sector is responsible for the employment of over 2% people in South Africa. Thus, clothing retailers are critical and need to be managed appropriately. Given the importance of the sector, the factors that influence its profitability and ultimately success need to be given attention. This study thus focuses on unpacking the introduced interdependence and trade-off between working capital with liquidity and how this influences profitability of South African clothing retailers. To do this, the research probes the working capital components and policy structures of the JSE listed South African clothing retailers over a seventeen-year period (i.e. 2003 – 2019). Particularly, the working capital management (WCM) components and policies are investigated to ascertain how the way in which they have been structured has impacted profitability. The WCM components are delineated as Inventory Days on Hand (IDH), accounts receivable days (ARD), account payable days (APD) which make up the cash conversion cycle (CCC), a measure of how long an entity’s cash flow is tied up in operational activity. The WCM policy perspective is framed through the lens of the working capital investment and financing policies which speak to how the operational assets have been financed or invested in. Profitability for this research is defined as the operating profit margin and return on operational assets, giving the robust perspective of both an income statement and balance sheet approach. To ensure control from extraneous factors impacting the findings, firm size and firm leverage are employed as control variables...
M.Com. (Finance)