IMPACT OF INFORMATION SYSTEM TECHNOLOGY ON
PROFITABILITY OF DAIRY INDUSTRIES
“A CASE STUDY OF DAIRY COMPANIES IN KSA”
Dr.Ahmad Yahya Bani Ahmad
Department of accounting
Irbid University - SAUDI ARABIA
Dr. Mahmoud Izzat Allahham
Dean of Business Management
Prince Muqruin University – K.S.A
m.allahham@bnc.ede.sa
Abstract:
The object of this research is to find out empirical impact of the
relationship between information technology system and profitability of
Dairy companies in Saudi Arabia. We hypothesize that information
technology system leads to improve profitability in this sector. Data has
been collected from Saudi Financial Market, covering the period of five
years from 2010 to 2015, for eight companies listed, using panel data
methodology .The result of the study showed that there is a negative
relationship between the profitability and cash conversion cycle. Therefore
managers can increase the profitability of this firm by shortening cash
conversion cycle, collecting period and the storage period.
Keywords : information technology system , cash conversion cycle ,
profitability, Dairy companies.
INTRODUCTION
The aim of information technology system is to manage a concern's current
assets and current liabilities in such a way that a satisfactory level of
working capital is maintained. This is so because if the concern cannot
maintain a satisfactory level of working capital. Current assets should be
large enough to cover current liabilities in order to ensure a reasonable
margin of safety. Each of the current assets must be managed efficiently in
order to maintain the liquidity of a concern while not keeping too high a
level of any one of them. Each of short-term sources of financing must be
continuously managed to ensure that they are obtained and used in the
best possible way. The interaction between current assets and current
liabilities is, therefore, the main theme of the theory of working capital
management. "Information technology system usually is considered to
involve the administration of current assets - namely, cash, marketable
securities receivables and inventories and the administration of current
liabilities." James C. Van Horne.
The profitability of a firm depends upon the turnover of working capital
which is mainly depended upon the turnover of inventory. Inventory
Management must be designed to meet the dictates of market place and
support the company's strategic Plan. Many changes in the market
demand, new opportunities due to worldwide marketing, global sourcing of
materials and new technology means many companies need to change
their Inventory Management approach and change the process for
Inventory Control. “The direct impact of information technology system on
profitability position on the refers the importance of working capital
management’ (Nobanee , Abdullatif and Al Hajjar,).”Managers can improve
companies profitability by shorting collecting period , payback period and
the storage period”.( Mansoori And Mohammad)
Literature Review:
Working capital is an important tool for growth and profitability for
corporations. If the levels of working capital are not enough, it could lead to
shortages and problems with the day-to-day operations (Horne and
Wachowicz, 2000). Working capital is also called net working capital and is
defined as current assets less current liabilities(Hillier et al., 2010).Net
working capital = Current assets
In the 1980’s and prior to that period, information technology system was
compartmentalized (Sartoris and Hill, 1983). WCM was divided in cash,
account payables and account receivables. In most firms, these
compartments were managed by different managers on various different
organizational layers (Sartorisand Hill, 1983). But Sartoris and Hill (1983)
argued that there was a need for an integrated approach, where all the
three compartments are combined. This led to the integration of the
management of inventories, account payables and account receivables,
called Information technology system (WCM), these parts will now be
discussed individually. According to Gitman (2009) the objective
of Information technology system (WCM) is to minimize the Cash
Conversion Cycle (CCC) the amount of capital tied up in the firm’s current
assets. It focuses on controlling account receivables and their collection
process, and managing the investment in inventory. WCM is vital for all
business survival, sustainability and its direct impact on performance. WCM
is an important area of financial management in every business function.
WCM deals with the administration of the liquidity components of firms’
short -term current assets and current liabilities (Baker & Powell, 2005;
Brigham & Ehrhardt, 2005; Gitman, 2009).The most important current
assets are cash, debtors or account receivables, stock or inventory and
current liabilities consisting of creditors or account payables, accrued
expenses, taxation liabilities, short-term debt such as commercial bills, and
provisions for current liabilities such as dividends declared but not yet paid
(Birt etal., 2011; Gitman, 2009; D. Sharma, 2009)
Methodology
This study consists of the financial statements of Dairy companies Industrial
listed on the Saudi Financial Market for 8 companies as shown in
Attachment No. ( 1) , and it tested the hypotheses based on the financial
statements for the Dairy industry in the last five years which located
between 2010-2015 .
The study has been tested hypotheses using T test for a sample of
individual , and compare the values of the dependent variables with the
center of the test calculated, which represents the arithmetic mean of the
standard industrial sector companies for both variables of the study (
collection period , the payback period , the storage period, and Conversion
Cycle Cash ) then divided the difference into three groups.
If these values increase from the middle of the test ( The Industry
Standard ) and the difference is statistically significant , These companies
are classified within the strategic conservatory.
If these values are close to the middle test ( the industry standard ) , In
other words there is between them and the arithmetic mean of the
difference with significance, classified within Strategic medium (the
industry standard ) .
If these values are less than the middle of the test (the industry standard)
and the difference is statistically significant, it has been classified within the
hardline strategy in the management of working capital.
To judge the strategy followed by the company if the hardline , medium or
soft in the end , there has been relying on a variable of Cash Conversion
Cycle because it takes both of the payback period , the collection period
and storage period in the concern, Therefore, the companies classified as
they follow the Strict Capital Requirements or lenient strategy or medium
strategy.
The study has been calculated the medium rate of return on assets as an
indicator of profitability and compared with the rate of return on assets
which have been achieved by these companies during the periods of this
study , and enterprises have been classified into high- profitability
companies and medium profitability and low profitability, in the case of a
difference with significance for the arithmetic mean ( Testing Center) , thus
profitability compared to companies with high , medium and low with the
strategy followed by information technology system , to determined the
impact of the information technology system strategy on profitability.
To find the relationship between the companies according to the
information technology system strategies, and between classified corporate
with high, medium and low profitability, and to determined if there was a
statistically significant relationship using the Pearson correlation
coefficient. Data analysis and testing hypothesis of the study:
Statistical hypothesis testing
With the using of the financial statements for the Dairy companies,
arithmetic mean was calculated for variables , and using the T test sample
for the individual , the study found the following results which can be
illustrated in Table ( 1) , as follows
T testing a sample of the individual variables
1
2
3
4
5
6
AAP
Test
value=61.3
T
SIG
-3.49 0.025
-0.95
0.93
1.28
0.27
1.29
0.27
-1.97
0.11
7.68 0.002
7
-2.91
0.02
1.45
0.35
1.34
0.42
2.03
0.22
-1.41 0.1.1
8
1.31
0.28
-2.31
0,076
7.15
0.012
-1,98
0.12
-0.53
comp
any
AAR
Test value=86.32
T
2.49
-6.09
-6.22
-2.24
-2.094
-9.33
SIG
0.067
0.004
0.003
0.089
0.104
0.001
AAI
Test
value=56.28
T
SIG
-0.055 0.966
1.585 0.188
-3.69 0.021
1.63
0.179
-1.92 0.128
1.28
0.27
CCC
Test
value=81.31
T
SIG
1.792 0.148
-2.12
0.10
-11.9
0.00
-.816
0.46
-.413
0.70
-7.22
.002
ROA
Test value=
9%
T
SIG
1.09 0.34
-1.90 0.13
2.95 0.04
1.82 0.14
1.26 0.28
4.39 0.01
Using the test sample T for the individual and as described above has been
classified in accordance with the corporate strategies used in the
management of working capital as shown in Table (2 )
Classification variables of the study according to the strategies of working
capital management
Table (2 )
Company
AAP
AAR
AAI
CCC
1
aggressive
moderate
moderate
moderate
moderate
2
moderate
aggressive
moderate
moderate
moderate
3
moderate
aggressive
aggressive
aggressive
High
4
moderate
moderate
moderate
moderate
moderate
5
moderate
moderate
moderate
moderate
moderate
conservative aggressive
moderate
aggressive
High
6
ROA
7
aggressive
moderate
moderate
moderate
moderate
8
moderate
moderate
conservative
moderate
moderate
0.63
From the analysis of the study data , and as shown in Table (2 ) there are
companies follow the strategy of militant repayment period creditors
contrast Track strategy lenient or medium in the collection of accounts
receivable in the period of storage, especially as the repayment period to
be determined and imposed on the company by third parties , and the
sense that the company may follow the strategy of militant aspect of
tracking a medium in the other hand , because the interest of the company
may require it , including increased sales , or that there is a rise in the cost
of storage , whereupon Acharkhbalchdd to keep in inventory , but that does
not stop her that Medium -term credit granted to customers.
Reference to the conversion cycle cash to classify companies according to
management strategies working capital ( militant , medium and soft ) ,
found that the drug companies Saudi Arabian follow strategies of medium
and militant in information technology system , did not appear t-test of the
sample single- use drug companies Saudi Arabia Astregih Aaltfezh in capital
management factor .
Calculates the center- industrial rate of return on assets , an indicator of
profitability , adopted in the study of Dairy companies Industrial and
compared with the rate of return on assets achieved by these companies
during periods of study and using a t-test per sample , were rated
companies to companies of high profitability and moderate profitability and
low profitability, according to a significance Analost arithmetic ( the center
of the test ) .
Compare rankings Acharkatovq strategies used in the management of
working capital , showing that companies that follow Astregih average
achieved profits of medium and that the companies that follow the strategy
of militant achieved profits are high, underscoring the inability to accept
the premise of nihilism that there is no trace of the strategy of the radical in
the management of working capital on profitability of the company , as well
as the inability to accept the premise of nihilism that there is no trace of
the strategic medium in information technology system on the profitability
of the company , did not follow the drug companies Saudi Arabia analyzed
strategic conservative in the management of working capital and therefore
not be judged on this strategy in effect on the profitability of company.
T tests were a good indication of the test began in the preparation of the
relationship between the strategies of information technology system that
have been Tsnifaaovq cash and cash conversion cycle between the
profitability of the company and the results came as shown in Table ( 3) and
as following:
Pearson correlation coefficient between the strategy of information
technology system and profitability of the company
Table ( 3)
CCC
1
ROA
0.613
Sig
ROA Pearson Correlation
0.732
0.042
1
Sig
0.022
CCC Pearson Correlation
Test the relationship between conversion cycle cash for companies that
follow the hard-line strategy and the profitability League correlation
coefficient 0.61 and reached a significance level of 0.042 , an indicator of
the existence of a relationship of significance , when the level of
significance of 5% , and reached the correlation coefficient for companies
that follow the strategy of medium with profitability 0.73 and reached
significance level of 0.022 , an indicator of the presence of a statistically
significant relationship at the level of significance of 5% .
Results and recommendations
An analysis of the study data from several findings and recommendations
was the most prominent :
1 - Trace Dairy companies Saudi Arabia industrial strategies at a variety of
management components of working capital , just follow a conservative
strategy , including in respect of the repayment period and soft or medium ,
including in relation to the period of collection or storage period .
2 - Trace Dairy companies Saudi Arabia militant strategy in the medium and
information technology system .
3 - There is a relationship between the companies that follow the strategy
of militant and moderate , and the profitability of these companies have
emerged a stronger relationship with the companies follow the strategy
follows the middle compared with companies that follow the hard-line
strategy .
4 - follow the corporate strategy of the medium in information technology
system emphasizes the importance swap between risk and profitability in
the management of working capital , and the sense that the companies that
maintain the conversion cycle critique medium able to achieve steady
profits over the long Aabaad , and maintain the value of the company and
the rights of shareholders .
REFERENCES
1- J.C.Van Horne (198), Financial Management and Policy (Prentice Hall
of India : New Delhi), , p. 702
2- Nobanee , Abdullatif , Al Hajjar,2011. “Information technology
system and firm’s profitability :An optimal cash conversion cycle
”home page : http://www.uniassignment.com/essaysamples/finance/working-capital-management-and-profitabilityfinance-essay.php.
3- Mansoori and Mohammad,2012)The effect of information
technology system on firm’s profitability: evidence from
Singapore. Interdisciplinary journal of contemporary research in
business, Vo l 4. No 5, 472-487.