A critical appraisal of working capital management in a local franchise

Abstract

Purpose: This study seeks to assess the working capital policies undertaken by a local franchise and to establish their effect upon the firm’s liquidity, efficiency and profitability, over a five-year period. This study also attempts to provide recommendations to improve the firm’s performance. Design: The objectives were achieved through semi-structured interviews and continuous follow-up emails with the firm’s Financial Controller, to enable the researcher gain in-depth working capital information for the period between 2013 to 2017. Findings : The findings demonstrated that the firm focuses deliberately more on profitability rather than liquidity, since the latter was never a major concern to the firm given that sales are almost all cashbased. Nevertheless, a bank overdraft is used as an external source of finance, to settle short-term and long-term obligations. This study established that the most-risky working capital component is inventory, where the firm faces overstocking situations, even though a substantial level of controllability is present upon inventory. The common use of credit payments to the main suppliers were portrayed, unlike trade receivables, which are considered immaterial to the firm. Finding’s results also outlined an inverse correlation between inventory and profitability as opposed to trade payables and profitability. Moreover, no significant correlation was present in terms of trade receivables to profitability, due to the former’s immateriality level. Conclusion: It can be concluded that the firm’s daily cash generated, enables it to empower its operational performance whilst acting as a pillar to its related firms. Nonetheless, improvements may be implemented to improve the weaknesses identified throughout this study, mainly by prioritising liquidity and reducing the extent of use of bank overdraft. Value: This study created awareness of how working capital is managed within a local franchise, where implementation of recommendations may improve the firm’s performance.