The influence of working capital components and policies on the profitability of South African clothing retailers

Gugulethu Potwana, Marise Mouton, Prof Ilse Botha

Vol 18 | Issue 1 pp. 42-58


The management of working capital is a key critical consideration that all entities need to make given its strong influence on firm profitability. The working capital decision finds further importance given that it ultimately contributes to firm value and shareholder wealth maximisation. Using both a descriptive and inferential approach the study investigates the interaction between profitability of the working capital components, and the policy structures of the five JSE listed South African clothing retailers, over a seventeen-year period (i.e. 2003 – 2019). When looking at the working capital management (WCM) components, the study finds a significantly negative relationship between firm profitability with inventory turnover, payables repayment and the cash conversion cycle. However, a significantly positive association is found between outstanding receivables collection and profitability. Thus, in an attempt to increase profitability, the clothing entities in the South African market should target an increase in inventory turnover and an extended payables management-based strategy, while in tandem, effectively managing the investment in accounts receivable to allow for increased sales and profits. The study finds, in respect to WCM policies, a negative and strong association between aggressive working capital policy and profitability. An aggressive working capital financing policy will have a negative impact on profits, eroding firm value. Conversely a positive and strong association is found between a conservative WCM policy and profitability growth. South African clothing entities are incentivised to increase their investment in current assets in aiming to achieve more profitability.

Keywords: South African clothing retailers, working capital management, cash conversion cycle, efficient inventory management, working capital policy, liquidity, profitability-liquidity trade off.

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