The effect of working capital management on the profitability of small retail businesses within the Emfuleni local municipality

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Koloko, Mapolo Belina
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Vaal University of Technology
Managing cash flow and cash conversion cycle is a crucial component of the overall financial management within businesses, particularly small businesses. A business is required to maintain a balance between its liquidity and profitability while conducting its day-to-day operations. Monitoring of cash as an indicator of financial health is important in the view of its crucial role within businesses. This requires a business to run an effective working capital management efficiently and profitably. Hence, efficient working capital management includes decisions on how much to invest in customers, inventory and accounts receivable, and the extent of credit to accept from suppliers. The purpose of the study was to examine the effect of working capital management on the profitability of small retail business with the Emfuleni Local Municipality. Three variables were used as a measure of working capital management, namely the number of days inventory on hand, number of days accounts payable, number of days account receivable. The return on assets was used to measure profitability. The study adopted the quantitative research approach using a structured questionnaire. A non-probability purposive sampling method was followed, where a total of 222 questionnaires were analysed. Spearman’s correlation analysis was conducted to examine the linear relationship between working capital management and the rate of return on assets. The results indicated that the period it takes the business to collect money from its customers impacts on the period it takes to pay the suppliers. A weak correlation was also reported between the number of days accounts are payable and the cash conversion cycle. Strong correlations also exist between day’s accounts receivable and the cash conversion cycle and days inventory on hand with the cash conversion cycle. Regression analysis results show that days account receivables have made the largest impact on return on assets. Small businesses may have to decrease the cash conversion cycle in order to help maintain value within the business. The number of days for accounts receivable should be reduced to a reasonable period (shorter than the creditor’s payment period). Small businesses may consider shortening the number of days inventory is held within the business, as this also will decrease the cost of obsolete stock.
Working capital management, profitability, small retail business, cash conversion cycle, SMMEs