Determinants of Working Capital Management Impacting on Profitability: Evidence from Agro and Food Industry in Stock Exchange of Thailand
Main Article Content
Abstract
This research is a quantitative study with an objective to 1) investigate the impacts of working capital on profitability and 2) develop and validate a structure equation model of working capital management and profitability. The main focus of this study included 43 agro and food industries in the Stock Exchange of Thailand. Secondary data for the past 3 years were analyzed using path analysis method. The results showed that 1) the model fitted the empirical data collected and 2) the company is able to increase its profitability by aiming at high liquidity in working capital management. In addition, shortening inventory conversion period and receivable collection period along with extending payable deferral period also help to gain higher profit.
Article Details
Section
Research Articles
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
References
Adeniji, A.A. (2008). Management Accounting. Nigeria. El-Toda Venture Limited: Lagos.
Ahmed, Z., Awan, M.Z., Safdar, M.Z., Hasnain, T. and Kamran, M. (2016). A nexus between working capital management and profitability : A case study of pharmaceutical Sector in Pakistan. International Journal of Economics and Financial Issues. 6(3): 153-160.
Afza, T., and Nazir, M. S. (2007). Is it Better to be Aggressive or Conservative in Managing Working Capital?. Journal of Quality and Technology Management. 3(2): 11-21.
Atseye, F.A., Ugwu, J.L. and Takon, S.M. (2015). Determinants of working capital management theoretical review. International Journal of Economics, Commerce and Management. 3(2):
Azam, M. and Haider, S.I. (2011). Impact of working capital management on firms’ performance: Evidence from non-financial institutions of KSE-30 index. Interdisciplinary Journal of Contemporary Research in Business. 3(5): 48.-492.
Bagchi, B., and Khamrui, B. (2012). Relationship between Working Capital Management and Profitability: A Study of Selected FMCG Companies in India. Business and Economics Journal. 1-11.
Benamati, J.S. and Lederer, A.L. (2008). Decision support systems unfrastructure: the root problems of the management of changing IT. Decision Support Systems. 45(4): 833–844.
Bhattacharya, H. (2014). Working capital management: strategies and techniques. Dehi, India: Prentice-Hall.
Browne, M. W. and Cudeck, R. (1993). Alternative ways of assessing model fit. [On-line]. Available: http://tggaccounting.com/2012/11/understanding-the-cash-conversion-cycle/.
Chun-On, N. (2014). Thailand Food Security [On-line]. Available: http://library.senate.go.th/document/Ext7091/7091777_0002.PDF
Dash, M. and Ravipati, R. (2009). A liquidity-profitability trade-off model for working capital Management [On-line]. Available: http://papers.ssrn.com/sol3/papers.cfm? Abstract_id=1408722.
Department of Industry Promotion. (2017). National Industrial Development Master Plan [On-line]. Available: http://www.oie.go.th/sites/default/files/attachments/industry_plan/National_Industrial_Development_Master_Plan.pdf.
Dong, H.P. and Su, J. (2010). The relationship between working capital management and profitability: a Vietnam case. International Research Journal of Finance and Economics. 49: 5-67.
Egbide, B.C., Uwuigbe, O. and Uwalomwa, U. (2013). Liquidity management and profitability of manufacturing companies in Nigeria. Journal of Business and Management. 9(1): 13-21.
Eljelly, A. (2004). Liquidity - profitability trade off: an empirical investigation in an emerging market. International Journal of Commerce and Management. 14(2): 48-61.
Eya, C.L. (2016). Effect of working capital management on the performance of food and beverage industries in Nigeria. Arabian Journal of Business and Management Review. 6(5): 1-7.
Faulkender, M. and Wang, R. (2006). Corporate financial policy and the value of cash. The Journal of Finance. 61(4): 1957-1990.
Fleuriet, M.J., Kehdy, R. and Blanc, G.A. (1978), Financial dynamics of companies Brazil. Fundação Dom Cabral: Belo Horizonte.
Grosse-Ruyken, P.T., Wagner, S.M. and Jönke, R. (2011). What is the right cash conversion cycle for your supply chain?. International Journal of Services and Operations Management. 10(1): 13-29.
Huma, Z. and Shah, F.M. (2015). Impact of working capital on the profitability a case of Pakistan state oil. International Journal of Scientific & Engineering Research. 6(10): 476-484.
Hassan, U. O. (2017). Effect of Working Capital Management on Firm Financial Performance: A Survey of Water Processing Firms in Puntland. International Journal of Economics Commerce and Management. 4(1): 479-797.
Jaiton, J. (2012). Trading strategies of retail investors in the Stock Exchange of Thailand in 2011. Thesis of Master of Business Administration, Bangkok University.
Jayarathne, T. (2014). Impact of working capital management on profitability: Evidence from listed companies in Sri Lanka. International Conference on Management and Economics. 3: 269-274.
Kumaraswamy, S. (2016). Impact of working capital on financial performance of gulf cooperation council firms. International Journal of Economics and Financial Issues. 6(3): 1136-1142.
Lyngstadaas, H. and Berg, T. (2016). Working capital management: evidence from Norway. International Journal of Managerial Finance. 12(3): 295-313.
Kytonen, E. (1993). The Cash Management Behavior of Firms and Its Structural Change in an Emerging Money Market. Proceedings of the University of Oulu, Finland.
Mansoori, E. and Muhammad, J. (2012). The effect of working capital management and firm’s profitability: Evidence from Singapore. Interdisciplinary Journal of Contemporary Research in Business. 4.
Marsh, H.W. and Hocevar, D. (1985). Application of confirmatory factor analysis to the study of self-concept: First- and higher-order factor models and their invariance across groups. Psychological Bulletin. 97: 562-582.
Mathuva, D.M. (2010). Influence of working capital management components on corporate profitability: A survey on Kenyan listed firms. Research Journal of Business Management. 3(1): 1-11.
Moss, J. and Stine, B. (1993). Cash conversion cycle and firm size: A study of retail firms. International Journal of Business and Management. 19(8): 25-35.
Mullins, J.W. (2009). Capital is king!. Business Strategy Review. 20(4): 4-8.
Naser, K.A.M., Nuseibeh, R.A.N. and Al-Hadeya, A. (2013). Factors influencing corporate working capital management: Evidence from an emerging economy. Journal of Contemporary Issues in Business Research. 2(1): 11-30.
Nia, N. M., Alouj, H. A., Gezelbash, A., and Amiri S. M. S. (2012). An Analytical Review of the Effect of Working Capital Development on Financial Performance Measures. American Journal of Scientific Research. 77: 110-122.
Padachi, K. (2006). Trends in working capital management and its impacts on firm’s performance: An analysis of mauritanian small manufacturing firm. International Review of Business Research Papers. 2(2): 45-58.
Pais, M.A. and Gama, P.M. (2015). Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance. 11(3): 341-358.
Paramasivan, C. and Subramanian, T. (2012). Financial Management. India: New Age International (P) Limited. Pass, R., and Pike, C. (1984). An Overview of Working Capital Management and Corporate Financing. Managerial Finance. 10(3): 1-10.
Raheman, A., Talat, A., Qayyum, A. and Mohmood, A.B. (2010). Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics. 47: 151-163.
Richards, V.D. and Laughlin, E.J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management. 9(1): 32-38.
Sagner, J.S. (2014). Working capital management: applications and case studies. New Jersey, United States of America: Wiley.
Schumacker, R. E., and Lomax, R. G. (2010). A beginner’s guide to structural equation modeling. (3rd ed). New Jersey: Lawrence Erlbaum Associates
Siddiquee, M. M., and Khan, S. M. (2008). Analyzing Working Capital Performance: Evidence from Dhaka Stock Exchange (DSE) Ltd. The Journal of Nepalese Business Studies 3(1).
Shin, H. H., and Soenen, L. (1998). Efficiency of Working Capital Management and Corporate Profitability. Financial Practice and Education. 8(2): 37-45.
Smith, K (1987). Trade Credit and Informational Asymmetry. Journal of Finance. 42: 863-872.
Smith, M.B. and Begemann, E. (1997). Measuring associations between working capital and return on investment. South African Journal of Business Management. 28(1): 73-84.
Stock Exchange of Thailand. (2017). Sector Quotation [On-line]. Available: http://marketdata.set.or.th/kt/sectorquotation. do?language=th&country=TH§or=AGRO.
Talonpoika, A.M. (2016). Financial working capital management and measurement. Thesis for Doctor of Science (Technology). School of business and management Lappeenranta university of technology, Finland.
Tauringana, V. and Afrifa, G.A. (2013). The relative importance of working capital management and its components to SME’s profitability. Journal of Small Business and Enterprise Development. 20(3): 453-469.
Tondee, O. (2014). Factors Affecting the Stock Price of Thai - Listed in Agricultural Industry and the Food Industry. Thesis of Master of Accountancy, Rajamangala University of Technology Isan.
Tran, H., Abbott, M. and Jin-Yap, C. (2017). How does working capital management affect the profitability of Vietnamese small- and medium-sized enterprises. Journal of Small Business and Enterprise Development. 24(1): 2-11.
Tuffour, J. K., and Boateng, J. A. (2017). Is Working Capital Management Important? Empirical Evidence from Manufacturing Companies in Ghana. Review of Innovation and Competitiveness. 3(1): 5-20.
Wanguu, K.C. and Kipkirui, S.E. (2015). The effect of working capital management on profitability of cement manufacturing companies in Kenya. Journal of Economics and Finance. 6(6): 53-61.
Watson, D., and Head, A. (2012). Corporate Finance Principles & Practice (4th ed.). Spain: Pearson Education Limited.
Yazdanfar, D. and Öhman, P. (2014). The impact of cash conversion cycle on firm profitability Anempirical study based on Swedish data. International Journal of Managerial Finance. 10(4): 442-452.
Ahmed, Z., Awan, M.Z., Safdar, M.Z., Hasnain, T. and Kamran, M. (2016). A nexus between working capital management and profitability : A case study of pharmaceutical Sector in Pakistan. International Journal of Economics and Financial Issues. 6(3): 153-160.
Afza, T., and Nazir, M. S. (2007). Is it Better to be Aggressive or Conservative in Managing Working Capital?. Journal of Quality and Technology Management. 3(2): 11-21.
Atseye, F.A., Ugwu, J.L. and Takon, S.M. (2015). Determinants of working capital management theoretical review. International Journal of Economics, Commerce and Management. 3(2):
Azam, M. and Haider, S.I. (2011). Impact of working capital management on firms’ performance: Evidence from non-financial institutions of KSE-30 index. Interdisciplinary Journal of Contemporary Research in Business. 3(5): 48.-492.
Bagchi, B., and Khamrui, B. (2012). Relationship between Working Capital Management and Profitability: A Study of Selected FMCG Companies in India. Business and Economics Journal. 1-11.
Benamati, J.S. and Lederer, A.L. (2008). Decision support systems unfrastructure: the root problems of the management of changing IT. Decision Support Systems. 45(4): 833–844.
Bhattacharya, H. (2014). Working capital management: strategies and techniques. Dehi, India: Prentice-Hall.
Browne, M. W. and Cudeck, R. (1993). Alternative ways of assessing model fit. [On-line]. Available: http://tggaccounting.com/2012/11/understanding-the-cash-conversion-cycle/.
Chun-On, N. (2014). Thailand Food Security [On-line]. Available: http://library.senate.go.th/document/Ext7091/7091777_0002.PDF
Dash, M. and Ravipati, R. (2009). A liquidity-profitability trade-off model for working capital Management [On-line]. Available: http://papers.ssrn.com/sol3/papers.cfm? Abstract_id=1408722.
Department of Industry Promotion. (2017). National Industrial Development Master Plan [On-line]. Available: http://www.oie.go.th/sites/default/files/attachments/industry_plan/National_Industrial_Development_Master_Plan.pdf.
Dong, H.P. and Su, J. (2010). The relationship between working capital management and profitability: a Vietnam case. International Research Journal of Finance and Economics. 49: 5-67.
Egbide, B.C., Uwuigbe, O. and Uwalomwa, U. (2013). Liquidity management and profitability of manufacturing companies in Nigeria. Journal of Business and Management. 9(1): 13-21.
Eljelly, A. (2004). Liquidity - profitability trade off: an empirical investigation in an emerging market. International Journal of Commerce and Management. 14(2): 48-61.
Eya, C.L. (2016). Effect of working capital management on the performance of food and beverage industries in Nigeria. Arabian Journal of Business and Management Review. 6(5): 1-7.
Faulkender, M. and Wang, R. (2006). Corporate financial policy and the value of cash. The Journal of Finance. 61(4): 1957-1990.
Fleuriet, M.J., Kehdy, R. and Blanc, G.A. (1978), Financial dynamics of companies Brazil. Fundação Dom Cabral: Belo Horizonte.
Grosse-Ruyken, P.T., Wagner, S.M. and Jönke, R. (2011). What is the right cash conversion cycle for your supply chain?. International Journal of Services and Operations Management. 10(1): 13-29.
Huma, Z. and Shah, F.M. (2015). Impact of working capital on the profitability a case of Pakistan state oil. International Journal of Scientific & Engineering Research. 6(10): 476-484.
Hassan, U. O. (2017). Effect of Working Capital Management on Firm Financial Performance: A Survey of Water Processing Firms in Puntland. International Journal of Economics Commerce and Management. 4(1): 479-797.
Jaiton, J. (2012). Trading strategies of retail investors in the Stock Exchange of Thailand in 2011. Thesis of Master of Business Administration, Bangkok University.
Jayarathne, T. (2014). Impact of working capital management on profitability: Evidence from listed companies in Sri Lanka. International Conference on Management and Economics. 3: 269-274.
Kumaraswamy, S. (2016). Impact of working capital on financial performance of gulf cooperation council firms. International Journal of Economics and Financial Issues. 6(3): 1136-1142.
Lyngstadaas, H. and Berg, T. (2016). Working capital management: evidence from Norway. International Journal of Managerial Finance. 12(3): 295-313.
Kytonen, E. (1993). The Cash Management Behavior of Firms and Its Structural Change in an Emerging Money Market. Proceedings of the University of Oulu, Finland.
Mansoori, E. and Muhammad, J. (2012). The effect of working capital management and firm’s profitability: Evidence from Singapore. Interdisciplinary Journal of Contemporary Research in Business. 4.
Marsh, H.W. and Hocevar, D. (1985). Application of confirmatory factor analysis to the study of self-concept: First- and higher-order factor models and their invariance across groups. Psychological Bulletin. 97: 562-582.
Mathuva, D.M. (2010). Influence of working capital management components on corporate profitability: A survey on Kenyan listed firms. Research Journal of Business Management. 3(1): 1-11.
Moss, J. and Stine, B. (1993). Cash conversion cycle and firm size: A study of retail firms. International Journal of Business and Management. 19(8): 25-35.
Mullins, J.W. (2009). Capital is king!. Business Strategy Review. 20(4): 4-8.
Naser, K.A.M., Nuseibeh, R.A.N. and Al-Hadeya, A. (2013). Factors influencing corporate working capital management: Evidence from an emerging economy. Journal of Contemporary Issues in Business Research. 2(1): 11-30.
Nia, N. M., Alouj, H. A., Gezelbash, A., and Amiri S. M. S. (2012). An Analytical Review of the Effect of Working Capital Development on Financial Performance Measures. American Journal of Scientific Research. 77: 110-122.
Padachi, K. (2006). Trends in working capital management and its impacts on firm’s performance: An analysis of mauritanian small manufacturing firm. International Review of Business Research Papers. 2(2): 45-58.
Pais, M.A. and Gama, P.M. (2015). Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance. 11(3): 341-358.
Paramasivan, C. and Subramanian, T. (2012). Financial Management. India: New Age International (P) Limited. Pass, R., and Pike, C. (1984). An Overview of Working Capital Management and Corporate Financing. Managerial Finance. 10(3): 1-10.
Raheman, A., Talat, A., Qayyum, A. and Mohmood, A.B. (2010). Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics. 47: 151-163.
Richards, V.D. and Laughlin, E.J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management. 9(1): 32-38.
Sagner, J.S. (2014). Working capital management: applications and case studies. New Jersey, United States of America: Wiley.
Schumacker, R. E., and Lomax, R. G. (2010). A beginner’s guide to structural equation modeling. (3rd ed). New Jersey: Lawrence Erlbaum Associates
Siddiquee, M. M., and Khan, S. M. (2008). Analyzing Working Capital Performance: Evidence from Dhaka Stock Exchange (DSE) Ltd. The Journal of Nepalese Business Studies 3(1).
Shin, H. H., and Soenen, L. (1998). Efficiency of Working Capital Management and Corporate Profitability. Financial Practice and Education. 8(2): 37-45.
Smith, K (1987). Trade Credit and Informational Asymmetry. Journal of Finance. 42: 863-872.
Smith, M.B. and Begemann, E. (1997). Measuring associations between working capital and return on investment. South African Journal of Business Management. 28(1): 73-84.
Stock Exchange of Thailand. (2017). Sector Quotation [On-line]. Available: http://marketdata.set.or.th/kt/sectorquotation. do?language=th&country=TH§or=AGRO.
Talonpoika, A.M. (2016). Financial working capital management and measurement. Thesis for Doctor of Science (Technology). School of business and management Lappeenranta university of technology, Finland.
Tauringana, V. and Afrifa, G.A. (2013). The relative importance of working capital management and its components to SME’s profitability. Journal of Small Business and Enterprise Development. 20(3): 453-469.
Tondee, O. (2014). Factors Affecting the Stock Price of Thai - Listed in Agricultural Industry and the Food Industry. Thesis of Master of Accountancy, Rajamangala University of Technology Isan.
Tran, H., Abbott, M. and Jin-Yap, C. (2017). How does working capital management affect the profitability of Vietnamese small- and medium-sized enterprises. Journal of Small Business and Enterprise Development. 24(1): 2-11.
Tuffour, J. K., and Boateng, J. A. (2017). Is Working Capital Management Important? Empirical Evidence from Manufacturing Companies in Ghana. Review of Innovation and Competitiveness. 3(1): 5-20.
Wanguu, K.C. and Kipkirui, S.E. (2015). The effect of working capital management on profitability of cement manufacturing companies in Kenya. Journal of Economics and Finance. 6(6): 53-61.
Watson, D., and Head, A. (2012). Corporate Finance Principles & Practice (4th ed.). Spain: Pearson Education Limited.
Yazdanfar, D. and Öhman, P. (2014). The impact of cash conversion cycle on firm profitability Anempirical study based on Swedish data. International Journal of Managerial Finance. 10(4): 442-452.