The recent global financial crisis has resulted in a change in many of the traditional measures used to gauge the performance of the executive management of the company. The focus of academia has shifted from revenue and cost based studies to the importance of ensuring the survival of firms during a financial crisis. The study regarding the determinants of working capital management and the impact of working capital management on firm profitability have gained significance over the past few years.
A substantial amount of research has identified determinants of working capital management that can be used for further studies on the subject; these include industry averages, the proportion of long-term assets held by the firm, the current assets, market share, type of business activity and the business environment prevailing at a particular time (Nwankwo and Osho, 2010). There is a scarcity of literature concerning the impact of working capital management on profitability for the listed companies in the United Kingdom.
It is also seen that much of the literature has focused on macro-level studies without giving ample consideration to the differences that exist between different sectors in terms of working capital management. This research aims to conduct a most recent analysis of the working capital policies adopted by three different sectors in the UK. “The working capital management policies of firms in the retail, fashion and the pharmaceuticals sectors are unique to each other and the working capital management influences firm profitability in these sectors. The statement of the problem highlights the focus of this research and provides the basis for the formulation of the appropriate research objectives. The study involves the selection of three unique sectors that are well represented on the FTSE 100 index and may exhibit unique working capital policies (Filbeck et al. , 2007). The aims and objectives of this research involve an analysis of the working capital management policies prevalent in the retail, fashion and pharmaceuticals sector by conducting a thorough analysis of the working capital policies unique to these industries.
The goal is to determine if the working capital management in these industries directly impact on the firm profitability. Mini literature review Karaduman et al. (2010) study the impact of working capital management in the context of the listed companies on the Istanbul Stock Exchange in Turkey indicating a positive and significant relationship between profitability and efficient working capital management by firms.
The study uses a panel data to conduct an econometrics analysis for determining the impact of working capital management on profitability using the period ranging from 2005 to 2008. Therefore, it is suggested that firms should maintain a balance between profitability and the level of risk inherent in the business operations. This study has provided an out-of-sample result for the results suggested in the context of Belgian firms (Deloof, 2003).
The existence of recent and out-of-sample studies suggest that the relationship is significant and not just a matter of chance. Data collection The data for this research is collected from various important sources including the published accounts of the selected corporations for the most recent five years, the data bases including the Yahoo! Finance, MSN Money and the Bloomberg. The performance related information in terms of the share price movement for the companies is specifically obtained through Yahoo!
Finance to maintain consistency in the research. The financial ratios pertinent to the estimation of the coefficients for the regression equation are particularly estimated from the raw data obtained through the annual financial accounts for these companies. Limitation: This study utilises the financial ratios for firms to proxy for the quality of working capital management of the firm in each sector; however, the true gauge for quality should not only include financial variables and instead it should also be evaluated using non-financial measures.
The financial ratios also tend to have their specific limitations in the form of their ability to predict a certain measure and are not always accurate to proxy for certain functions within a firm. The use of financial ratios as a gauge of working capital management is common in the case of prior literature and is assumed to be the best method to proxy the business function (Daly, 2011). Conclusion:
The study tests that the working capital management policies of firms’ in the retail, energy and the pharmaceuticals sectors are unique to each other and the working capital management influences firm profitability in these sectors. This research aims to add to the existing pool of literature on the subject of working capital management. The prior research is scarce in relation to the importance of working capital management in the UK, especially in the context of specific sectors.