Critical evaluation of working capital management in Maltese large supermarkets

Abstract

Purpose: The primary goal of this study is to identify the existing WCM situation in large Maltese supermarkets. It aims to identify the degree of importance given to WCM and critically evaluate the techniques used in ensuring good management of the four WC components. It will also attempt to identify trends among local supermarkets in fulfilling such critical financial management function. Design: First, existing literature was examined to obtain a better understanding of WCM. Then, primary data was obtained through qualitative research by conducting 18 semistructured interviews with various directors, managers, accountants, financial controllers and stores managers of 15 large Maltese supermarkets. Findings: Despite the fact that the overall theoretical knowledge of WCM is not high, all supermarkets showed that they give it high or medium importance. Although none prioritise liquidity over profitability, all have vital controls for cash in hand present, and finance options are matched with the underlying use of funds. The popularity of cash budgets is still not very high, though. However, all observe FIFO, conduct stocktakes, base predetermined inventory levels on demand, and use barcodes. Still, POs and expiry dates are not prepared and recorded by all. Debtors are minimal but credit periods and monitoring are always in place, unlike credit limits and creditworthiness assessments. Credit periods are nearly always adhered to and the preparation of payments is of high quality. Yet, the popularity and use of financial ratios is still very weak. The popular WCM techniques are: preparation of management accounts and cash budgets, continuous liquidity checks, prioritising business interests, ensuring that CSRs are updated, continuous feedback to employees and conducting meetings with management and accountants. Conclusion: Maltese supermarkets are using appropriate controls and techniques in managing WC components and monitoring the overall WC of the business. However, if they were all to employ a full-time accountant or financial controller, WCM would be in more experienced hands with some of the first actions to be implemented including: various financial ratios worked out periodically and cash budgets prepared to forecast future cash needs. Moreover, any deficiencies in managing the WC components could be addressed better, including: issuing POs for all orders, authorising of POs, recording stock expiry dates, establishing a credit limit for debtors and assessing creditworthiness. Value: Through this study, greater awareness was created among those supermarkets interviewed on the importance that they should be giving to WCM. This dissertation will also provide relevant information to both existing and prospective businesses in establishing good WCM both at inception and subsequently.