Independent thesis Advanced level (professional degree), 20 credits / 30 HE credits
Many argue that there is a trade off between profitability and liquidity. However, many
studies have found that the profitability can increase with an efficient Working Capital
Management. Correctly allocating cash flows to where and when it is needed increases
liquidity and simultaneously increasing profitability. The purpose of this study is to
develop the research on the relationship between Working Capital Management and
profitability by investigating how it is affected by different company characteristics.
A quantitative method was applied with philosophical stances in objectivism and
positivism and deductive theory was used to approach the subject. From the theoretical
framework, five hypotheses were established and statistically tested in order to answer
our research question. The first hypothesis was formulated to confirm previous research,
while the remaining two aimed at providing both a theoretical and practical contribution
to existing knowledge.
The thesis centers on the Cash Conversion Cycle, a metric of how fast a company turns
purchased products into profit, with Gross Profit Margin as the measure of profitability.
The data analyzed is financial information from 2012, collected from a secondary
source, Business Retriever database. In order to fulfill the purpose, hypotheses were
tested. The first centered in previous research of the subject, while two were introduced
based on research of company characteristics. This was tested in a cross-sectional study
on the Swedish wholesale industry, covering a sample of 1,485 companies. The
companies were segmented by size and whether they were listed or not. By using
correlation and regression analyses, the relationship between Working Capital
Management and profitability is compared between the different company groups.
The conclusion drawn from the study is that there is a positive relationship between the
Cash Conversion Cycle and profitability, inconsistent with previous research. However,
strong significant results indicated that smaller firms are returning a higher profit,
regardless the level of Cash Conversion Cycle. No difference was found in the
sensitivity to changes in Working Capital Management strategies. This was true also for
non-listed firms, although they were performing worse than listed firms in accordance
to the theory presented. The foremost conclusion from the analysis is the weak
explanatory power of the Cash Conversion Cycle on Gross Profit Margin. A debate is
therefore included, discussing the possibility of lurking variables influencing the results.
Keywords: Working Capital Management, Cash Conversion Cycle, Profitability, size,
public, private, trade credit, wholesale industry, Sweden
2014. , 62 p.