Impact of working capital management on business profitability: Evidence from the Polish dairy industry

https://doi.org/10.17221/335/2019-AGRICECONCitation:Gołaś Z. (2020): Impact of working capital management on business profitability: Evidence from the Polish dairy industry. Agric. Econ. – Czech, 66: 278-285.
download PDF

The main purpose of this paper was to examine the causative link between Working Capital Management (WCM) and Return On Assets (ROA) in milk processing companies. Days Sales of Inventory (DSI), Days Sales Outstanding (DSO), Days Payable Outstanding (DPO) and the Cash Conversion Cycle (CCC) were used as WCM metrics. The study was based on micro-data for Polish dairy companies from 2008–2017, retrieved from the Emerging Markets Information Service (EMIS) database. Based on panel regression models, it was demonstrated that extending the DSI and CCC had an adverse effect on ROA, whereas extending the DSO and DPO had a beneficial impact on ROA in dairy companies. Such relationships were mostly characteristic of SMEs which form the largest group of businesses in Poland.

References:
Ahmadi M., Arasi I.S. (2012): Studying the relationship between working capital management and profitability at Tehran Stock Exchange: A case study of food industry. Research Journal of Applied Sciences, Engineering and Technology, 4: 1868–1874.
 
Akdoğan E.C., Dinç D.T. (2019): Managing working capital efficiency in Turkish agribusinesses and the impact of globalization: insights from an emerging market. International Food and Agribusiness Management Review, 22: 557–569.  https://doi.org/10.22434/IFAMR2018.0069
 
Arellano M., Bond S. (1991): Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58: 277–297. https://doi.org/10.2307/2297968
 
Arellano M., Bover O. (1995): Another look at the instrumental variables estimation of error-components models. Journal of Econometrics, 68: 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
 
Blundell R., Bond S. (1998): Initial conditions and moment restriction in dynamic panel data models. Journal of Econometrics, 87: 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
 
Deloof M. (2003): Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30: 573–588.
 
EMIS (2019): Emerging Markets Information Service. [Dataset]. Available at https://www.emis.com/. (accessed May, 2019).
 
Garcia-Teruel P.J., Martinez-Solano P. (2007): Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3: 164–177. https://doi.org/10.1108/17439130710738718
 
Gill A., Biger N., Mathur N. (2010): The relationship between working capital management and profitability: evidence from the United States. Business and Economics Journal, 10: 1–9.
 
Gitman L.J. (1974): Estimating corporate liquidity requirements: A simplified approach. The Financial Review, 9: 79–88. https://doi.org/10.1111/j.1540-6288.1974.tb01453.x
 
Hsiao C. (1985): Benefits and limitations of panel data. Economic Review, 4: 121–174. https://doi.org/10.1080/07474938508800078
 
Jose M.L., Lancaster C., Stevens J.L. (1996): Corporate return and cash conversion cycle. Journal of Economics and Finance, 20: 33–46. https://doi.org/10.1007/BF02920497
 
Karaduman H.A., Akbas H.E., Caliskan A.O., Caliskan, Durer S. (2011): The relationship between working capital management and profitability: Evidence from an emerging market. International Research Journal of Finance and Economics, 62: 61–67.
 
Labra R., Torrecillas C. (2018): Estimating dynamic panel data. A practical approach to perform long panels. Revista Colombiana de Estadística, 41: 31–52. https://doi.org/10.15446/rce.v41n1.61885
 
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, 19: 26–35.
 
Lyroudi K., Lazaridis I. (2000): The cash conversion cycle and liquidity analysis of the food industry in Greece. EFMA 200 Athens. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=236175 https://doi.org/10.2139/ssrn.236175
 
Mansoori E., Datin M. (2012): The effect of working capital management on firm’s profitability: evidence from Singapore. Research Journal of Finance and Accounting, 31: 15–24.
 
Mohamad N., Saad N. (2010): Working capital management: The effect of market valuation and profitability in Malaysia. International Journal of Business and Management, 51: 140–147.
 
Richards V., Laughlin E. (1980): A cash conversion cycle approach to liquidity analysis. Financial Management, 9: 32–38. https://doi.org/10.2307/3665310
 
Roodman D. (2009): How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9: 86–136. https://doi.org/10.1177/1536867X0900900106
 
Sharma A., Kumar S. (2011): Effect of working capital management on firm profitability empirical evidence from India. Global Business Review, 12: 159–173. https://doi.org/10.1177/097215091001200110
 
Shin H.H., Soenen L. (1998): Efficiency of working capital management and corporate profitability. Financial Practice and Education, 8: 37–45.
 
Singh H.P., Kumar S., Colombage S. (2017): Working capital management and firm profitability: a meta-analysis. Qualitative Research in Financial Markets, 9: 34–47. https://doi.org/10.1108/QRFM-06-2016-0018
 
Thapa P.D.P. (2013): How does profitability get affected by working capital management in food and beverages industry? Journal of Advanced Research in Management, IV: 79–88.
 
Van Horne J., Wachowicz J. (2004): Fundamentals of financial management. 12th Ed. New York, Prentice Hall.
 
Wasilewski M., Chmielewska M. (2006): A working capital management strategies in relation to a dairy cooperatives’ financial situation. Annals of Agricultural Sciences, Series G – Economy, 93: 102–109.
 
Wasilewski M., Zabolotnyy S. (2009): Financial situation of the enterprises of different working capital strategies. Scientific Journal of Warsaw University of Life Sciences: Economics and Organization of Agri-Food Sector, 70: 5–20.
 
download PDF

© 2020 Czech Academy of Agricultural Sciences