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The Effects of Working Capital Management on Firm Profitability: A study examining the impacts of different company characteristics
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
2014 (English)Independent thesis Advanced level (professional degree), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Many argue that there is a trade off between profitability and liquidity. However, many

studies have found that the profitability can increase with an efficient Working Capital

Management. Correctly allocating cash flows to where and when it is needed increases

liquidity and simultaneously increasing profitability. The purpose of this study is to

develop the research on the relationship between Working Capital Management and

profitability by investigating how it is affected by different company characteristics.

A quantitative method was applied with philosophical stances in objectivism and

positivism and deductive theory was used to approach the subject. From the theoretical

framework, five hypotheses were established and statistically tested in order to answer

our research question. The first hypothesis was formulated to confirm previous research,

while the remaining two aimed at providing both a theoretical and practical contribution

to existing knowledge.

The thesis centers on the Cash Conversion Cycle, a metric of how fast a company turns

purchased products into profit, with Gross Profit Margin as the measure of profitability.

The data analyzed is financial information from 2012, collected from a secondary

source, Business Retriever database. In order to fulfill the purpose, hypotheses were

tested. The first centered in previous research of the subject, while two were introduced

based on research of company characteristics. This was tested in a cross-sectional study

on the Swedish wholesale industry, covering a sample of 1,485 companies. The

companies were segmented by size and whether they were listed or not. By using

correlation and regression analyses, the relationship between Working Capital

Management and profitability is compared between the different company groups.

The conclusion drawn from the study is that there is a positive relationship between the

Cash Conversion Cycle and profitability, inconsistent with previous research. However,

strong significant results indicated that smaller firms are returning a higher profit,

regardless the level of Cash Conversion Cycle. No difference was found in the

sensitivity to changes in Working Capital Management strategies. This was true also for

non-listed firms, although they were performing worse than listed firms in accordance

to the theory presented. The foremost conclusion from the analysis is the weak

explanatory power of the Cash Conversion Cycle on Gross Profit Margin. A debate is

therefore included, discussing the possibility of lurking variables influencing the results.

Keywords: Working Capital Management, Cash Conversion Cycle, Profitability, size,

public, private, trade credit, wholesale industry, Sweden

Place, publisher, year, edition, pages
2014. , 62 p.
Keyword [en]
Working Capital Management
National Category
Business Administration
Identifiers
URN: urn:nbn:se:umu:diva-92870OAI: oai:DiVA.org:umu-92870DiVA: diva2:744600
Educational program
International Business Program
Supervisors
Examiners
Available from: 2014-09-16 Created: 2014-09-08 Last updated: 2014-09-16Bibliographically approved

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