THE ASSOCIATION BETWEEN WORKING CAPITAL
MANAGEMENT AND PROFITABILITY OF NON-FINANCIAL
COMPANIES LISTED ON THE ZIMBABWE STOCK
EXCHANGE
Tendai Zawaira1; Enard Mutenheri2
1
Mcom in Economics Student at Midlands State University, Zimbabwe
Graduate School of Business Leadership, Midlands State University, Zimbabwe
Email: tendaizawaira@gmail.com 1; mutenherie@msu.ac.zw2
2
ABSTRACT
The main purpose of this study was to determine the impact of different components of working capital management
on profitability of firms listed on the Zimbabwe Stock Exchange during the dollarization era. A random effects
model was estimated using company financial data for the period 2010 -2012. These data were obtained from the
Central African Stock Exchanges Handbooks. Thirty two companies listed on the Zimbabwe Stock exchange had
usable data and therefore the random effects model was estimated using data from 32 non-financial companies
listed on the Zimbabwe Stock Exchange. The regression results show that profitability was not associated with
receivables collection period, inventory conversion period, cash conversion cycle, quick ratio, current asset to total
asset ratio, current liabilities to total asset ratio, debt ratio and age of company. However, a negative and
significant relationship between payables deferral period and profitability was found. In addition, liquidity and size
were found to enhance profitability of firms. Therefore Zimbabwean firms should pay more attention to the
management of liquidity and payables.
Key words: working capital management, profitability, non-financial companies, Zimbabwe stock exchange,
Zimbabwe
Introduction
Background
Working capital management is an important tool in
financial management such that most of the finance
managers spend a great deal of their time on working
capital management decisions (Brigham and
Houston, 2003). Proper working capital management
improves firms’ profitability and liquidity position,
and thus increasing the market value of the firm (Ali,
2011). However, liquidity and profitability are two
sides of the same coin because they work in opposite
directions. Increasing liquidity of the firm will reduce
profitability of the firm and vice versa. Therefore
finance managers need to maintain a level of working
capital that will ensure liquidity of the firm but not
reduce its profitability.
Although several studies have examined the nature of
the
relationship
between
working
capital
management and profitability of firms (for example,
Deloof 2003; Karaduman et al, 2004, Padachi 2006;
Raheman and Nasr, 2007; Mathuva, 2010; Raheman
et al 2010; Shubita, 2013, Ching et al 2011; Mehta
2014; Ncube, 2011; Zingwiro 2006,; Akoto et al,
2013), there is no consensus on the nature of this
relationship. For example, one strand of literature
suggests that cash conversion cycle (a comprehensive
measure of working capital management) is
positively related to firm profitability (Falope and
Ajilore, 2009; Gill et al, 2010; Akoto et al, 2014),
implying that longer cash conversion cycles increase
the firm’s profitability. The other strand of literature,
however, suggests that shorter cash conversion cycles
increase the firm’s profitability (see Deloof 2003;
Wang 2002; Mathuva 2010; Lazaridis and
1
Tryfonidis, 2006). This study therefore, seeks to
contribute to this empirical research gap using data
from firms operating in Zimbabwe. The Zimbabwean
case study is of great interest to the study of the
relationship between working capital management
and profitability because Zimbabwean firms are
currently facing liquidity challenges which started in
2009 when the economy was dollarized. The
persistent liquidity challenges in the Zimbabwean
economy have resulted in cash shortages. Cash forms
a significant part of current assets and is important in
that it is the most liquid form of asset. For a firm to
continue as a going concern, it requires cash to
support its day –to-day running.
Particularly
important, is that where trade credit is not available,
cash is required in purchasing inventories that feed
into production. Liquidity challenges also adversely
impact on firms’ trade credit policy which will
potentially deter the optimum performance of firms
in Zimbabwe and thus reducing the profitability of
firms.Without
adequate
capital
to
finance
investments in cash, accounts receivables and
inventories,
firm profitability becomes an
unattainable goal.
Objectives of the study


To describe the different components of
working capital management of firms listed
on the Zimbabwe Stock Exchange during
the dollarization era
To determine the impact of different
components of working capital management
on profitability of firms listed on the
Zimbabwe Stock Exchange during the
dollarization era
Literature Review
Lazaridis and Tryfonidis (2006) empirically studied
the impact of components of working capital (i.e.
Inventory conversion period, receivables collection
period and payables deferral period) on profitability
of 131 firms listed on the Athens Stock Exchange for
the period 2001-2004. Their results support the
notion that shorter cash conversion cycles increase
firm profitability. Gill et al (2010) studied 88 firms
listed on the New York Stock Exchange for the
period 2005 to 2007, and their results supported the
empirical findings of Lazaridis and Tryfonidis’s
(2006) study.
Deloof (2003) examined the influence of working
capital management on profitability of firms listed on
a European Stock market and reported a negative
relationship and thus supporting the view that shorter
cash conversion cycles increase firm profitability.
Other studies that found a negative relationship are as
follows; Garcia-Teruel and Martinez-Solano (2007)
in Spain, Karaduman et al (2010), in Turkey,
Mohamad and Noriza (2010), Raheman and Nasr
(20007) and Shin and Soenen (1998) .
However several studies reported a positive
relationship between working capital management
components and profitability. For example in
Vietnam, Dong and Su (2010) found a positive and
significant relationship between payables deferral
period and firm profitability. Such findings were also
supported by Mathuva (2010) in Kenya, Falope and
Ajilore (2009) in Nigeria, Gill et al (2010,. Akoto et
al (2013) in Ghana.
Nevertheless, some studies have found that firm
profitability is independent of working capital
management. Such studies include Sharma and
Kumar (2011) and Ganesan (2007), Padachi (2006)
in Mauritius.
Theoretically, liquidity and profitability, the two
main objectives of working capital management have
a negative relationship, implying that the more
current assets the firm has, the more liquid the firm
is, but the less profitable its operations are. This
relationship has been confirmed in a number of
studies, including Eljelly (2004) in Saudi Arabia,
Garcia et al (2011) in Europe and Chartterjee (2010)
in UK. These empirical results, therefore suggest that
firms can increase their profits by reducing the time
span during which working capital is tied up within
the firm. Contrary to these findings, Akoto et al
(2013) found that the higher the liquidity, the more
profitable the firm is.
The size of the firm is theoretically predicted to be
positively associated with profitability. This is
because, it is only when a company is being more
profitable that it can expand and grow. This is
particularly true because a firm with more profits can
afford to exploit more profitable opportunities.
Various studies have confirmed these findings, for
example Lazaridids and Tryfonidis (2006), on the
Athens Stock Exchange found a significant and
positive association between firm size and
2
profitability. Karaduman et al (2010) also confirm
this positive association by analyzing companies
listed on the Instabul Stock Exchange. However,
Falope and Ajilore (2009) using data from the
Nigerian Stock Exchange found this relationship to
be insignificant. Akoto et al (2013) reinforces these
finding using data from Ghanaian firms.
In summary, although researchers generally agree
that working capital management is associated with
profitability of firms, the nature of the relationship is
not well understood. Empirical evidence seems to
suggest that the relationship between working capital
management and firm profitability can be negative or
positive depending on geographical location of the
firms. There are also some studies which conclude
that there is no relationship between working capital
management and profitability. Therefore, in order to
guide finance managers on working capital decisions,
more empirical studies are required.
Research design and Method
In order to empirically examine the association
between working capital management and
profitability of companies listed on the Zimbabwe
Stock Exchange (ZSE), the study proceeded as
follows; first descriptive statistics were used to
address the first objective, secondly, a panel data
model was estimated in order to address the second
objective. Hausman test was used to choose between
a random effects and fixed effects model. The study
employed company financial data for the period 2010
-2012 as reported in the Central African Stock
Exchanges Handbooks. Thirty two companies listed
on the Zimbabwe Stock exchange had usable data.
The choice and operational definitions as well as the
expected signs of the study variables (table 1) are
based on previous empirical studies.
Table I: Measurement of Variables Used and
Expected Signs
VARIAB MEASUREM
ABBREVAT
LE
ENT
ION
DEPENDENT VARIABLE
Net Profit/ total ROA
Return on assets
assets
INDEPENDENT VARIABLES
Receivabl Accounts
RCP
es
receivables/sal
collection es * 365 days
period
Inventory Inventory/cost
ITP
Conversio of sales * 365
n Period
days
Payables
Accounts
PDP
deferral
payables/cost
period
of sales *365
days
Cash
Receivables
CCC
conversio collection
n cycle
period+
inventory
conversion
periodpayables
deferrals
period
Current
Current
CRATIO
ratio
assets/current
liabilities
Quick
Current assets- QRATIO
ratio
inventories
/current
liabilities
Current
Current
CATA
assets to
assets/total
total
assets
assets
Current
Current
CLTA
liabilities
liabilities/total
to total
assets
assets
Debt ratio Short term + DEBT
long term/ total
assets
Firm size
Natural
SIZE
ogarithm
of
sales
Age
Natural
AGE
logarithm
of
the number of
years the firm
has
existed
since
its
inception
Expect
ed sign
-
+/-
+/+/-
+/-
+/+/-
+/-
+/-
+/+
+
3
Results and discussion
Descriptive statistics
The variables used in this study are described in
terms of their means, medians, standard deviations,
minimum and maximum values (table 2).
Table 2: Summary statistics
Varia
ble
Mean
Med
ian
ROA
0.0060
99
69.454
9
120.33
73
161.53
64
44.420
63
1.2810
42
0.7061
458
0.4463
542
0.4144
792
0.1622
708
4.4190
63
1.6887
5
0.02
RCP
ICP
PDP
CCC
CRA
TIO
QRA
TIO
CAT
A
CLT
A
DEB
T
SIZE
AGE
60.8
3
103.
7
118.
6
54.9
4
1.09
5
0.59
5
0.40
5
0.37
0.12
4.45
5
1.77
5
Stand
ard
Deviat
ion
0.1078
859
42.752
32
69.769
56
151.28
26
147.39
8
0.9190
126
0.5227
848
0.2404
913
0.2860
249
0.1393
938
0.3782
065
0.2467
099
Mini
mum
Maxi
mum
-0.25
0.36
11.64
204.3
4.7
294.82
20.92
139.91
719.91
0.27
534.5
0.04
3.4
0.07
1.27
0.08
2.48
0
0.6
3.18
5.07
1
2.02
6.86
The descriptive statistics show that the profitability of
firms included in the study was very low (mean =
0.6%, SD = 10.8%). On average, firms took
approximately 4 months (120 days) to convert their
inventories into sales. However, the fastest firms
roughly took 5 days to clear out stocks, whilst the
slowest took 295 days. On average firms took almost
5 and half months (162 days) to pay creditors whilst
the credit period granted by companies to their clients
stood at 69 days. The quickest firms paid up their
credits in 21 days, whilst the slowest paid up in 139
days, which is a very long period of time. The mean
cash conversion cycle was 44 days between the
payment for raw materials and the receipt from the
sale of goods. The longest cash conversion cycle was
approximately 535 days. An average size of the firm
as given by sales was US$4.4 million as measured by
the natural logarithm of sales.
On average,
Zimbabwean firms kept current assets 1.28 times
current liabilities. The liquidity (quick) ratio at 0.7
shows that current assets net of inventories are kept at
0.7:1 times the current liabilities. Generally, the
liquidity levels of firms in this study were very low;
the average current ratio (mean = 1.28, SD = 0.92)
was below the preferred rule of thumb level of 2,
whilst the quick ratio (mean =0.71, SD =0.52) was
below the rule of thumb of 1.
The debt to equity ratio for Zimbabwean firms was
quite modest (mean = 16.2%, SD = 13.9%), with a
minimum debt used by a company at 0% of equity,
maximum at 60%. Out of all its assets, a typical firm
analyzed in the sample, held on average 44% of its
assets in their current form. The current assets to total
assets ratio is a measure of the firms’ degree of
conservativeness in working capital investment
policy. Low amounts of investments in current assets
imply that the firm is conservative in working capital
investment. On the other hand, the current liabilities
to total assets ratio is a measure of working capital
financing policy (Mohammed, 2011). It also
measures the firms’ degree of conservativeness in
financing their working capital requirements. In this
study, the results show that the firms included in this
study were moderately conservative in both their
working capital investment policies (mean = 0.45 ,
SD = 0.24 ) and in financing their working capital
requirements (mean = 0.41, SD = 0.29).
REGRESSION ANALYSIS
The relationship between profitability and
components of working capital management was
tested using a panel data regression model. The initial
model (model 1), with 11 independent variables, was
estimated first. However, six independent variables in
the general model were found to be statistically
insignificant and therefore, backward elimination
procedure was used to eliminate the insignificant
variables. The Hausman test was used to test the null
hypothesis that the random effects were not
correlated with the independent variables at the 5%
level of significance. The Hausman test (𝜒 2 (6) =
12.31, 𝑝 > 0.05) showed that there was no evidence
to reject the null hypothesis; therefore the random
4
effects model was estimated in order to test the
relationship between components of working capital
management and profitability. The regression results
for the two models are presented in table .3.
Table 3- Regression results.
Dependent Variable (ROA)
Method: GLS
Sample 2010-2012
MODEL 1
-9.27e-06
RCP
(0.977)
-0.0000135
ICP
(0.952)
-0.001106
PDP
(0.297)
0.0000624
CCC
(0.385)
0.0255056
CRATIO
(0.569)
0.0000124
QRATIO
(1.000)
0.903936
CATA
(0.237)
0.0239653
CLTA
(0.583)
-0.1244577
DEBT
(0.184)
0.0837321
SIZE
(0.015)**
0.0283406
AGE
(0.626)
-0.4571706
CONSTANT
(0.005)
Wald chi 2(11)
33.19
Probchi 2
0.0005
MODEL 2
-0.0002**
(0.031)
0.0254 **
(0.022)
0.0817
(0.115)
-
0.0799 **
(0.012)
-0.3886 ***
(0.006)
Wald chi 2(4)
30.63
Probchi 2
0.0000
In parentheses are p-values; * significant at
10%; ** significant at 5%; *** significant at 1%
The regression results show that profitability is not
associated with receivables collection period,
inventory conversion period, cash conversion cycle,
quick ratio, current asset to total asset ratio, current
liabilities to total asset ratio, debt ratio and age of
company. However, the relationship between
payables deferral period and profitability is negative
and significant, although it is very small. According
to Brigham and Houston (2003), this relationship is
expected to be positive since accounts payables are a
source of short-term working capital financing and as
such firms that delay paying their dues to suppliers
put those funds into other uses and thus increasing
firm profitability. However, Deloof (2003) justified
the negative association between payables deferral
period and profitability, arguing that it is profitability
that influences payables deferral period such that the
more profitable the firms are, the smaller should their
payables deferral period and not the other way round.
Nevertheless, the empirical results from this study are
consistent with the findings of Lazaridis and
Tryfonidis (2006) and Raheman and Nasr (2007)
among others. As such, Zimbabwean firms should
reduce the number of days they take to pay up their
creditors. This may likely benefit them in the form of
cash discounts for early settlements of bills.
Contrary to the theoretical predictions and empirical
findings of Raheman and Nasr (2007) and Eljelly
(2004), this study found a positive and significant
relationship between current ratio and profitability.
However, these results are consistent with the
findings of Akoto et al (2013). This positive
relationship is expected to hold in the majority of
developing countries where money markets are not
well developed (Akoto et al, 2013).
The size of the company is the only control variable
which was found to have a significant influence on
firm profitability. The results show that large firms
are more profitable than small firms. This is
consistent with the findings of Javid and Zita (2014)
who found a positive relationship, but the results are
inconsistent with the findings of Ali and Hassan
(2010) who found a negative relationship and Amarjit
(2010) who did not find a relationship between firm
size and profitability .
Summary and conclusion
The main objective of this study was to determine
whether components of working capital management
affect profitability of Zimbabwean firms. This was
driven by the fact that companies are struggling to
secure funds from the traditional sources of finance
such as banks and other lending institutions given
that there already is not much capital in circulation.
Therefore in order to survive, firms have to look
inward for solutions leading to working capital as an
inward option for source of financing. Employing
regression analysis to a sample of 32 non-financial
firms listed on the Zimbabwe Stock Exchange, the
results show that the following components of
5
working capital management; receivables collection
period, inventory conversion period, cash conversion
cycle, quick ratio, current asset to total asset ratio,
current liabilities to total asset ratio and debt ratio do
not influence profitability of firms in Zimbabwe.
However, payables deferral period and current ratio
are related to profitability of Zimbabwean firms.
Following the findings of this study, Zimbabwean
firms can enhance their profits by shortening the
amount of time they take to pay their suppliers. This
will allow firms to take advantage of trade credit
policies offered by their suppliers, which can help
reduce costs and enhance returns. There is also need
for firms in Zimbabwe to pay close attention to their
current assets investments. This is because the results
above have shown that liquidity as measured by the
current ratio is important in enhancing profitability.
References
Ali, S., 2011, ‘Working Capital Management and the
Profitability of the Manufacturing Sector: A Case
Study of Pakistan’s Textile Industry’, The Lahore
Journal of Economics 16: 2 (Winter 2011): pp. 141–
178.
Akoto, R. K., Awunyo-Vitor, D. Angmor, P.L., 2013,
‘Working capital management and profitability:
Evidence from Ghanaian listed manufacturing firms’,
Journal of Economics and International Finance, Vol
5(9), pp. 373-379.
Amarjit, G., et.al. 2010. The relationship between
working capital management and profitability:
Evidence from
the United States. Business and Economics Journal,
Vol 2010: BEJ-10
Brigham, E. F., Houston, J. F., 2003, ‘Fundamentals
of Financial Management’, 10th Edition.
Chary, T.S., Kasturi, R., Kumar, K.S., 2011,
‘Relationship between Working Capital and
Profitability - A Statistical Approach’, International
Journal of Research in Finance and Marketing,
Volume 1, Issue 7.
Deloof, M., 2003, ‘Does Working Capital
Management Affect Profitability of Belgian Firms?’
Journal of Business Finance and Accounting,
Volume 30, Issue 3-4, pages 573- 588.
Dong, H.P., Su. J.T., 2010, ‘The Relationship
Between Working Capital Management and
Profitability: A Vietnam Case’, International
Research Journal Of Finance and Economics, Issue
49, PP 59-67.
Eljelly, A., 2004, ‘Liquidity-Profitability Tradeoff:
An empirical Investigation in An Emerging Market’,
International
Journal
of
Commerce
and
Management, Vol. 14(2), pp 48-61.
Falope, O. I., Ajilore, O. T., 2009, ‘Working Capital
Management and Corporate Profitability: Evidence
from Panel Data methodology of selected Quoted
Companies in Nigeria’, Research Journal Of
Business Management, Vol. 3, No. 3, pp 73-84.
Ganesan, V., 2007, ‘An analysis of Working Capital
Management Efficiency in Telecommunication
Equipment Industry’, Riviera Academic Journal,
Volume 3, Number 2.
Garcia-Teruel, P. J., Martinez-Solano, P., 2007,
‘Effects of Working Capital Management on SME
Profitability’, International Journal of Managerial
Finance, Vol. 3, No. 2, pp 164-177. 8
Garcia, J. F. L., Martins, F. V., Brandão, E. F. M.,
2011, ‘The Impact of Working Capital Management
upon Companies’ Profitability: Evidence from
European Companies’, FEP Working Papers,
Universidade do Porto, Faculdade de Economia do
Porto,
(Online)http://www.fep.up.pt/investigacao/workingpa
pers/11.11.07_wp438.pdf
Gill, A., Nahum, B., Mathur, N., 2010, ‘The
Relationship Between Working Capital Management
And Profitability: Evidence From The United States’,
Business and Economics Journal, Volume 2010:
BEJ-10, pp: 1-9.
Javid, S and V. P. M. Zita, 2014, ‘Impact of working
capital policy on firm’s profitability; A case of
Pakistan cement industry’; Research Journal of
Finance and Accounting, Vol 5, No. 5, pp 182 – 191
Karaduman, H. A., Akbas, H. E., Ozsozgun, A.,
Durer, S., 2010, ‘Effects of Working Capital
Management on Profitability: The Case for Selected
Companies in the Istanbul Stock Exchange (20052008)’, International Journal of Economics and
Finance Studies, Vol. 2, No. 2, pp 47-54.
6
Lazaridis, I., Tryfonidis, D., 2006, ‘Relationship
Between Working Capital Management and
Profitability Of Listed Companies In The Athens
Stock Exchange’, Journal of Financial Management
and Analysis, Vol. 19, No. 1, pp 26-35.
Mathuva, D. M., 2010, ‘The Influence of Working
Capital Management Components on Corporate
Profitability: A Survey on Kenyan Listed Firms’,
Research Journal of Business Management, 4, pp. 111.
Mehta, A., 2014, ‘Capital Management and
Profitability Relationship-Evidences from Emerging
Markets of UAE’, International Journal of
Management Excellence, Volume 2 No. 3
Mohammed, N.M., 2011, ‘The Effect of Working
Capital Policies Management on Firms’ Profitability:
Evidence from Manufacturing Private Limited
Companies in Addis Ababa, Ethiopia’, Addis Ababa
Universit , School of Business and Public
Administration
Nazir, M. S., Afza, T., 2009, Impact of Aggressive
Working Capital Management Policy on Firms’
Profitability, The IUP Journal of Applied Finance,
Vol. 15, No. 8, pp.19-30.
Evidence from India’, Global Business Review, Vol.
12 (1), pp. 159-173
Shin, H., Soenen, L., 1998, ‘Efficiency of Working
Capital Management and Corporate
Profitability’, Financial Practice and Education, pp
37-45.
Shubita, M. F., 2013, ‘Working Capital Management
and Profitability: A Case of Industrial Jordanian
Companies’, International Journal of Business and
Social Science Vol. 4 No. 8
Wang, Y.J., 2002, ‘Liquidity Management, Operating
Performance, and Corporate Value: Evidence from
Japan and Taiwan’, Journal of Multinational
Financial Management, Vol 12, 159-169.
Wignaraja, G., O’Neil, S., 1999, ‘A Study of Small
Firm Exports, Policies and Support Institutions in
Mauritius’, Export and Industrial Development
Division: Commonwealth Secretariat 22.
Zingwiro, P. T.S., 2006, ‘Working Capital
Management in Hyper-inflationary Economies: A
case of Zimbabwe’, Graduate School of Business,
Faculty of Management, University of Kwa-Zulu
Natal.
Ncube, M., 2011, ‘Impact of Working Capital on the
Profitability of South African Firms Listed on the
Johannesburg Stock Exchange’,
Faculty of
Commerce, Law and Management WITS BUSINESS
SCHOOL
Padachi, K., 2006, ‘Trend in Working Capital
Management and its Impact on Firms' Performance:
An Analysis of Mauritian Small Manufacturing
Firms’, International Review Of
Business Research Papers, Vol. 2, No. 2, pp 45-58.
12
Raheman, A., Nasr, M., 2007, ‘Working Capital
Management and Profitability – Case Of
Pakistani Firms’, International Review of Business
Research Papers, Vol. 3, No. 1, pp 279-300
Raheman, A., Afza, T., Qayyum, A., Bodla, M. A.,
2010, ‘Working Capital Management and Corporate
Performance of Manufacturing Sector in Pakistan’,
International Research Journal of Finance and
Economics - Issue 47
Sharma, A.K., Kumar, S., 2011, ‘Effect of Working
Capital Management on Firm Profitability: Empirical
7