Working Capital Management and UK Listed Companies Profitability - Dissertation Example

?Research Proposal: Influence of Working Capital Management on Profitability of Listed Manufacturing Companies of UK Table of Contents Research Question 3 2.Aim and Objectives of the Research 3 3.Literature Review 4 3.1.Theoretical Background of Research 4 3.2.Review of Similar Studies 5 4.Proposed Research Method 6 4.1.Research Methodology 6 4.2.Data Collection and Data Analysis 8 4.3.Limitation of Research Method 8 Reference 9 1. Research Question How do the working capital management affect the profitability of manufacturing companies of UK? 2. Aim and Objectives of the Research The research paper will strive to deal with the relationship of companies’ working capital management and their profitability. Working capital management is vital area for the growth and sustainability of companies and hence, it plays very significant role in determining the level of profitability. However, the corporate environment of different countries varies and hence, management of specific region have their different priorities for achieving growth and success. This is the reason correlation between the two or more variables of different regions vary. The primary aim of this paper is to examine the relationship of working capital management with profitability level of the listed manufacturing companies in UK. Working capital management includes number components that determine the efficiency of the management. Considering these facts, the research will also focus on certain specific objective as follows. To determine the efficacy of management in managing working capital of manufacturing listed companies of UK. To present and understand theoretical background relating to efficiency of working capital management and company growth. To determine the relationship between different components of working capital management and components of profitability. To determine influence of efficient working capital management on level of profitability and growth in listed manufacturing companies of UK. 3. Literature Review 3.1. Theoretical Background of Research This section will attempt to a theoretical background relation to the working capital management and profitability. Working capital management has always been a very critical area for companies’ growth and sustainability. Working capital mainly includes two basic components i.e. current liabilities and current asset. The efficient management of these two types of capital is known working capital management (Siddiqui, 2006, p.279). In order to present a detail background of working capital management, this section will explicitly present need of working capital and its importance for the growth of a company. Next, it will also analyse the different objectives of working capital management. Efficient working capital management is also highly required for managing risks within a company. A company is always exposed to number of risks and the working capital management is directly related to certain risks like operational risks, liquidity risks, credit risks, and information reporting risks. An efficient management of working must assure a lower level of risks. Therefore, working capital management can also be termed as a tool to overcome the stated risks that may create threat to sustainability of a company (Sagner, 2010, p.201). Another major role of working capital management is that it strives to create a trade off between risk and profitability. In this regard, the risk is technically insolvency which is measure by net working capital (NWC). It has been found that many firms can operate in spite of facing technically insolvency. However, in such case, the company suffered from ‘slow poisoned’ as technically insolvency negatively affect growth, profitability and operational efficacy. If the management is unable to overcome this technically insolvency position, it may lead to business collapse (Khan, 2004, p.26.4). Using the financial techniques like ratio analyses, efficacy level of the working capital can be determined and it also reflect the managements’ performance in managing operational activities which has a direct impact on a company’s operating profit. Various components if working capital management are inventory, cash, receivable, payable, short term loans or investments etc. These components are measured using multiple ratios like current ratio, quick ratio, absolute liquid ratio, inventory, payable and receivable turnover ratio, sales to cash ratio etc. Besides cash conversion cycle is another major evaluation technique that include three major components of working capital i.e. inventory, account payable and account receivable (Brigham, and Houston, 2008, p.479). 3.2. Review of Similar Studies Due to the growing importance of working capital management for trading off between the profitability and risk level, its role has been evolving. Hence, it has become of the major areas in financial management. Moreover, it is also an interesting academic area of study and hence, many scholars have done their research work on working capital management and its influence of the level of profitability. This section will present a detailed review of past research papers on relationship between working capital management and profitability. Most of the research papers on working capital management and profitability have been conducted on companies of different countries. In this regard, Lazaridis and Tryfonidis have studied the companies in the Athens stock exchange and they found a negative relationship between cash conversion cycle and gross operating profit and they observed that “operational profitability dictates how managers or owners will act in terms of managing the working capital of the firm” (Lazaridis and Tryfonidis, 2007, p.11). In the similar way, Dong and Su have studied the relation between working capital management and profitability and they have also reached at the similar conclusion of negative relation of cash conversion cycle and corporate profitability in case of companies in Vietnam (Dong and Su, 2010, p.8). In the same way a large number of more relevant and valid research papers will be evaluated in order to develop a strong concept over the research area. 4. Proposed Research Method 4.1. Research Methodology This section the most prominent for the research as it determines the validity of the study result. Research methodology should be designed as the nature of the study. Generally, there are two types of research i.e. qualitative and quantitative. The qualitative research does not include any numerical analyses and results. On the other hand, in case of quantitative research, analyses are based on the statistical tools and techniques consisting of numeric data analyses. The final conclusion is determined on the basis of numeric results. The both types of research require data which is the most core criterion for conducting a research analyses. There are mainly two types of data i.e. primary data and secondary data. A research can include primary and/or secondary data. The primary data are collected from direct sources using certain techniques (interviews, group discussion) through instruments like questionnaire. Secondary data are readymade which are collected from various authenticated sources. In this regard, the source of data must be valid, authenticated and reliable and it may include government sources, news article, authenticated websites of any listed companies, organisations like World Bank, IMF, WTO etc (Malhotra, 2008, p.140-145). This research will aim to determine the relationship between working capital management and profitability. In this process, the statistical tools and techniques must be used. Working capital management includes a number of components like inventory, cash conversion, account payable, account revivable, current ratio etc and besides the profitability components are the gross operating profit, EPS, ROE etc. These components will be used as variable to run the statistical calculation. The primary aim for using these statistical tools is to define relationship between the variable of working capital management and variables of profitability. In this regard, the descriptive statistics (mean, median, SD) will be used to understand the basic feature of the variables. Next, multivariate correlation will be conducted to determine the specific relationship between the variables of working capital management and profitability. It will be helpful in measuring the degree of connection between multiple variable. However, correlation analysis will not be sufficient for the reaching at the final conclusion as it suffers from the shortcomings for focusing cause and consequence factor. Our primary aim of this research paper is to find the influence of working management on the profitability. Multivariate regression will be very useful in this regard as it can determine the influence of the independent variable on dependent variable. In this regard, the dependent variable will be the gross operating profit and independent variables will the components of working capital management. The number of the listed companies of UK manufacturing industries will be 50 and financial data will collected for the last three years i.e. from the year 2006 to 2010. 4.2. Data Collection and Data Analysis The data collected for this study will be the secondary data which will include the financial data of the 50 listed companies from UK’s manufacturing industries. The companies selected from this research will be listed in the London Stock Exchange. The sources of data will be the financial reports of the 50 companies that can be easily obtained from the companies’ corporate website. In case financial data will not be available in the website, the other authenticated sources like Bloomberg, Reuters, Yahoo Finance, and MSN Finance etc can also be used to obtain the readymade ratios of working capital and profitability. Therefore, the number of the samples i.e. the companies will be 50 with three years of financial data for each. Therefore total number of observations will be 150. 4.3. Limitation of Research Method Conducting a research is quite challenging task as a number of aspect have to be taken into consideration for the validity of the research outcome. However, due to certain barriers, the research method will be expected to suffer from certain limitations. Firstly, due to time constraints, number of observation will remain 50, and on the other hand, the higher number of observations strives to offer more valid results. Secondly, this research will only include quantitative analyses, and therefore entire research will be mechanical and will depend on effect use of statistical tools. However, the entire picture may be different from the practical point of view and only mangers of that company can provide clearer views. Finally, the authentication of data is also a major issue. The data will be collected from the secondary source i.e. companies’ corporate websites. Many have claimed that due to managerial biasness, financial reports are tampered in order to look more attracted. Reference Brigham, E. F. and Houston, J. F. (2008). Fundamentals of financial management. Cengage Learning. Dong, H. P. and Su, J. T. (2010). The Relationship between Working Capital Management and Profitability: A Vietnam Case. International Research Journal of Finance and Economics. ISSN 1450-2887 Issue 49 (2010). EuroJournals Publishing, Inc. [Pdf]. Available at: http://www.eurojournals.com/irjfe_49_05.pdf. [Accessed July 14, 2011]. Khan, M. Y. (2004). Financial Management: Text, Problems and Cases. 2nd ed. Tata McGraw-Hill Education. Lazaridis and Tryfonidis, (May 04, 2007). The relationship between working capital management and profitability of listed companies in the Athens Stock Exchange. [Pdf]. Available at: http://poseidon01.ssrn.com/delivery.php?ID=282093115122110084125118098000094069019088031054017090087070094000084097066002069103023026019052022005116122119082106077117005055078023010071096088120116090098022018064089098127065098009006081120087&EXT=pdf. [Accessed July 14, 2011]. Malhotra, N. (2008). Marketing Research: An Applied Orientation. 5th ed. India: Pearson Education India. Sagner, J. (2010). Essentials of Working Capital Management. John Wiley and Sons. Siddiqui, S.A. (2006). Managerial Economics and Financial Analysis. New Age International. Read More