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Applied Finance and Accounting

Vol. 4, No. 1, February 2018
ISSN 2374-2410 E-ISSN 2374-2429
Published by Redfame Publishing
URL: http://afa.redfame.com

The Impact of Working Capital Management on Profitability:

Evidence from the Listed Retail Stores in Botswana
Sathyamoorthi C.R.1, Mogotsinyana Mapharing1, Popo Selinkie1
1
Faculty of Business, University of Botswana, Gaborone, Botswana
Correspondence: C.R. Sathyamoorthi, Faculty of Business, University of Botswana, P.O.Box 70430, Gaborone,
Botswana. E-mail: sathyamo@mopipi.ub.bw; sathyamcr@gmail.com

Received: December 15, 2017 Accepted: January 18, 2018 Available online: January 24, 2018
doi:10.11114/afa.v4i1.2949 URL: https://doi.org/10.11114/afa.v4i1.2949

Abstract
This study focused on the effect of working capital management on the profitability of the listed retail stores in
Botswana Stock Exchange for the period 2012-2016. Financial statements of the listed Retail Stores were used as the
main source of data. Return on Assets was used as the dependent variable to measure profitability and the components
to measure working capital management comprised of Average Collection Period, Inventory Conversion Period,
Average Payment Period, Cash Conversion Cycle, Debt, Current and Quick Ratios. Correlation analysis revealed that a
few variables were significantly correlated with each other. Average Payment Period and Inventory Conversion Period
were found to be positively and significantly correlated and Cash Conversion Cycle was significantly and positively
correlated with Inventory Conversion Period.The regression results showed that only three variables out of the seven
independent variables were statistically significant, namely Average Payment Period, Current Ratio and Quick Ratio.
The remaining four variables were found to be statistically insignificant. The above findings have implications for the
management of the listed retail store in Botswana.
Keywords: Botswana, retail stores, working capital management components, profitability, return on assets
1. Introduction
Working capital is considered as the life blood of business and signifies the funds required for the day-to-day running of
a firm (Abosede & Lugman, 2014). Working capital can be conceptualized as Gross Working Capital and Net Working
Capital. The Gross Working Capital is described as the total value of current assets whereas Net Working Capital is
seen as the difference between Current Assets and Current Liabilities. Current assets include accounts receivable,
inventory, cash and cash equivalents. Current liabilities are made of accounts payable and other short term obligations.
Working capital management deals with management of current assets and current liabilities and monitoring the
inter-relationship between them. It aims to manage both current assets and current liabilities in such a way that a
satisfactory level is maintained. Poor management of working capital may lead to business collapse resulting in
insolvency. For a business to succeed, it is, therefore, imperative that the working capital is managed efficiently. Azeez,
Abubakar, and Olamide (2016), highlights the importance of managing short-term assets and liabilities to ensure sound
financial health for all organizations and points to the fact that the investment in working capital are generally higher in
proportion to the total assets employed, and this scenario demands serious examination of working capital management.
The importance of working capital management as an essential component of financial management originates from the
fact that investment in current asset constitutes a significant part of total investment of a business enterprise. Working
capital management comprises management of current assets and current liabilities and good working capital
management ensures a satisfactory level of working capital at all times (Kumari & Anthuvan, 2017). Windaus (2014),
states that working capital gives a clear indication of how well a business is managed as it is a reliable indicator of good
management and underscores that top working capital performers have outperformed across all indicators. According to
Windaus (2014), only 9% of companies around the globe manage to improve working capital consistently over multiple
years.
Working capital management has become an important component of financial management in an organization on
account of its impact on profitability, risk and consequently on its value (Ebenezer & Asiedu, 2013). According to
Nandom, Mubarik and Abdul-Aziz (2017), one of the critical constituents of financial management is working capital

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management which has a direct impact on the financial performance of an organization. Iqbal, Khan, Shah and Raza
(2016), highlight the importance of investment in current assets as essential to ensure timely delivery of goods and
services to firms‟ customers and underscores the fact that effective management will result in favourable impact on
profitability. According to Rehman, Khan, Muhammad, Iqbal and Khan (2016) working capital management is an
important element for a business enterprise, and research has revealed that it has a positive association with the firm
profitability. Temtime (2016) highlights that every business enterprise should try to optimize its working capital and is
seen as a tool to balance liquidity and profitability.
1.1 Significance of the Study
This study focused on the effect of working capital management on the financial performance of listed retail stores in
Botswana. Three listed companies in the retail sector were considered for the study and covered a 5-year period from
2012 to 2016. Retail sector constitutes an important constituent of a country‟s economy. It plays a significant role in job
creation. The study looked at important components of working capital management, namely, average collection period,
inventory conversion period, average payment period, cash conversion cycle, debt, current and quick ratios and tested
as to how they affect the profitability of the selected retail enterprises. The study will benefit a number of stakeholders,
viz. creditors, shareholders and management of the selected organizations. The creditors will be better placed to know
whether the organization has adequate funds to pay them off on time. A good credit history will always motivate easy
approvals of loans by lending institutions. The management of the selected enterprises will have a better understanding
of the firms‟ current working capital management practices and then work around those strategies and policies that
would enhance firms‟ financial performance. To the shareholders, the study will provide insight on the importance of
effective working management as a critical component for profit generation. In the academic arena, the study will be
seen as a contribution to the existing body of knowledge by presenting one of the latest findings on the topic, working
capital management and its impact on the financial performance of business organizations.
1.2 Statement of the Problem
Financial management practices do provide a sound and effective framework for management of assets. It has been
observed that investment in fixed asset has been receiving more emphasis and attention in both management area and
research. On the other hand effective working capital management, which has been receiving little attention from
researchers, will yield more significant results and for these reasons demands more serious attention from researchers
and management.
A firm‟s prime objective is profit generation and maximization that will result in business growth. One way of
achieving this is through efficient management of working capital. The major challenge that management faces today is
to strike a balance between liquidity and profitability. If profit maximization is targeted ignoring liquidity level, the
company may face financial threat leading to potential bankruptcy. On the other hand, a conservative approach to
liquidity may result in locking up too much of funds, leading to low profit generation. Firms have different collection
and settlement periods and they have to come up with models that will focus on critical areas that would keep their
working capital components at optimum level without compromising on profit maximization. The lack of understanding
about the impact of working capital on profitability, the lack of clarity on its determinants and the inability of
management to plan and control its components may lead to insolvency and bankruptcy (Gill, 2011).
Windaus (2017) analysed the financial performance of the largest global listed companies in the last 5 years and noted
that there was deterioration in the Return on Capital Employed of global listed companies. This could be due to
dramatic increase in leverage and suggested that improved working capital management could be the solution to the
problem. He also highlighted a reduction in investment in the last 5 year period among global listed companies, and a
way of enhancing investment would be improved working capital management.
It is therefore, established that sound working capital management is the panacea to worsening financial performance of
business enterprises. The problem that most firms currently face is how to encourage their managers to pay mor e
attention to the management of working capital to bring in a positive impact on the financial performance of the business.
In this context, a study on the impact of working capital management on the profitability of selected listed retail
businesses in Botswana will be found relevant. In addition, research indicates that very few studies have been carried out
in Botswana on the relationship between working capital management and profitability. The study will fill in the
research gap that currently exists on this topic.
1.3 Objectives of the Study
The main purpose of the study is to explore the effect of working capital management on the profitability of the listed
retail stores in Botswana.

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1.4 Hypotheses of the Study

A hypothesis is a tentative statement that predicts the relationship between two or more variables (Azeez, 2015). The
null hypothesis (H0) for the study is that there is no statistically significant relationship between working capital
management and profitability of listed retail stores in Botswana.
Working capital management components for the study include average collection period, inventory conversion period,
average payment period, cash conversion cycle, debt ratio, current ratio and quick ratio. Return on assets is used to
measure profitability.
1.5 Literature Review
The impact of working management on the financial performance of listed companies in various sectors has been
assessed by academicians and researchers at various times. Search for prior studies on the impact of working capital
management on profitability of retail stores indicates that very few studies have so far been carried out on this topic.
The review of literature that follows captures the findings of those limited studies as well as in other areas of trade so as
to provide a broader perspective of the concept. A review of those studies is presented below:
The review is grouped into two sections to capture studies that used Return on Total Assets to measure profitability and
studies that focused on other units of performance measurements.
1.5.1 Return on Total Assets as a Measure of Profitability
Padachi (2006) looked at the trends in working capital management and its impact on the performance of a selected
sample of 58 Mauritian Small Manufacturing firms for the period 1998-2003. The results revealed that high investment
in inventories and receivables were associated with lower profitability. The findings also disclosed increasing trend in
the short-term component of working capital financing.
A study by Saghir, Hashmi, and Hussain, (2011) on the relationship between profitability and working capital
management conducted among a sample of 60 textile companies listed in Karachi Stock Exchange for the period
2001-2006, showed a negatively significant relationship between return on assets (as a measure of profitability) and
cash conversion cycle. It was also noted that profits could be maximised by proper management of cash conversion
cycle.
A negative relationship was detected between profitability and number of day‟s accounts receivable and cash
conversion cycle and a positive relationship between profitability and number of days of inventory and number of day‟s
payable in the study by Makori and Jagongo (2013) on the listed manufacturing and construction firms in Kenya for the
period 2003-2012. Also, a significant relationship was found between profitability and financial leverage, sales growth,
current ratio and firm size.
Another research by Agha, (2014) on the impact of working capital management on profitability in a listed
pharmaceutical company in Karachi Stock Exchange, Pakistan for the period 1996-2011 revealed that there was
significant impact of working capital management on the profitability of the company, measured by return on assets.
The independent variables consisted of accounts receivable turnover, creditors‟ turnover, inventory turnover and current
ratio.
A study on the relationship between working capital management on profitability among 50 retail stores in Kenya by
Odhiambo (2014) revealed a positive relationship between inventory turnover and profitability (return on assets); a
negative association between average collection period and return on assets; a significant positive relationship between
average payment period and return on assets and a positive relationship between debt ratio and profitability.
An investigation by Azeez (2015) on relationship between working capital management and profitability among the
listed Nigerian manufacturing firms indicated that profit was significantly affected by inventory conversion period, but
negatively and significantly influenced by cash conversion cycle.
Another investigation by Temtime (2016) on the relationship between working capital management policies and
profitability of 176 publically traded small U.S. manufacturing companies was carried out for the period 2004-2013.
The overall conclusion from the study was that accounts receivable period, accounts payable period, working capital
investment policy, working capital finance policy, are significant predictors of firm profitability.
Rehman et al. (2016) examined the impact of working capital management on profitability of firms in the Chemical
Sector in Pakistan and reported that inventory turnover showed a significant impact on profitability, but did not see any
significant impact for current ratio, acid test ratio and debtors‟ turnover ratio on firms‟ profitability
A positive significant relationship between profitability and current ratio and average collection period with a negative
and insignificant relationship between profitability and inventory turnover in days was the outcome of a study by Iqbal,
et al (2016) on 30 listed companies in Karachi Stock Exchange. A similar study by Zafar, Nazam, Hanif, Almas, and

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Sana, (2016), but on the Food Sector in Pakistan indicated a strong positive significant relationship between working
capital management and firm‟s profitability.
Mahato, and Jagannathan (2016) compared Profitability (ROA) with working capital management components, debt
and current ratios among eight listed telecom industry in India and the results revealed a negative relationship between
profitability and inventory conversion period, average collection period, cash conversion cycle and current ratio, and a
positive relationship of return on assets to average payment period, debt ratio and firm size.
An investigation by Mbawuni, Mbawuni, and Nimako, (2016) on the working capital management impact on
profitability on five Petroleum retail firms in Ghana for the period 2008-2013 revealed that average payment period had
a significant impact on profitability (ROA). It was also noted that the cash conversion cycle, average days of inventory
and average day‟s receivables did not have any significant relationship with financial performance of selected firms.
Giri and Gyasuddin (2017) looked at the directional effect of working capital management and liquidity on profitability
in the Petro Chemical industry in India for the period 2004-2014, and concluded that there was a bidirectional causal
relationship between working capital management and profitability and a unidirectional causal relationship running
from liquidity to profitability.
Maisiba, Muturi and Atambo (2017) looked at the effect of working capital management on profitability of 44 retail
firms in Kenya and concluded that liquidity ratio, debt ratio and current ratio significantly influence profitability of
selected retail firms.
A study on six listed manufacturing companies in Ghana by Tuffour, and Boateng (2017), reported that current ratio
had significant impact on profitability, whereas inventory conversion period and cash conversion cycle had negative,
but insignificant effect on financial performance. It was also noted that average collection period and accounts payable
period had positive, but insignificant effect on profitability.
Nandom, Mubarik and Abdul-Aziz (2017) examined working capital and performance of non-financial firms in Ghana
and found that average collection period, average payment period, cash conversion cycle and current ratio had a
significant influence on firms‟ performance.
Kasozi (2017) examined the influence of working capital management on profitability among 69 listed manufacturing
firms of Johannesburg Stock Exchange for the period 2007-16 and concluded that the average collection period and the
average payment period significantly, but negatively influenced the financial performance of the listed firms. It was also
observed that a positive and statistically significant relationship existed between the number of days in inventory and
profitability.
1.5.2 Other Parameters Used for Measurement of Profitability
Deloof (2003) chose a sample of 1009 large Belgian non-financial firms to study the relationship between working
capital management and profitability for the period 1992-1996. The study revealed a significant negative relationship
between gross operating income and the number of days accounts receivable, inventories and accounts payable, which
were consistent with the view that fewer profitable firms wait for a long a period of time to settle their outstanding bills.
The results also suggested that managers could increase profitability by reducing the number of day‟s accounts
receivable and inventories.
An investigation on working capital management and profitability was done by Lazaridis and Tryfonidis (2006) on a
sample of 131 listed companies in Athens and noted significant relationship between profitability (gross operating profit)
and the cash conversion cycle.
Gill, Biger, and Mathur (2010) tested a sample of 88 American firms listed on New York Stock exchange for a period
of 3 years from 2005 to 2007 to find the relationship between working capital management and profitability. The test
results indicated a significant relationship between cash conversion cycle and profitability, measured through gross
operating profit.
The study by Vahid, Elham, Mohsen, and Mohammadreza, (2012) of 50 different Iranian firms listed in Tehran Stock
Exchange for the period 2006-2009 indicated that there was a negative and significant relationship between the
variables of average collection period, inventory turnover in days, average payment period, net trading cycle and the
performance of the selected firms. In addition, no evidence was found to show the existence of a significant relationship
between cash conversion cycle and the performance of the business (net operating profit). It also revealed the fact that
the profitability would decrease on account of the increase in the collection period, payment period and in net trading.
Abuzayed (2012), analysed listed firms in Jordan for the period of 2002-2008 to measure the impact of working capital
management on firms‟ profitability and noted that profitability is positively affected by the cash conversion cycle.

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Research carried out by Ray (2012) on the relationship between working capital management components and
profitability of 311 Indian manufacturing firms for the period 1996-97 – 2009-10, revealed a strong negative
relationship between average collection period, cash conversion cycle and debt ratio with corporate profitability. The
study used average collection period, inventory turnover in days, average payment period, cash conversion cycle,
current ratio, debt ratio, size of the firm and financial assets to total assets ratio to assess the impact of working capital
management on profitability.
Ademola (2014), studied on working capital – profitability relationship among 120 food and beverages firms listed in
Nigerian Stock Exchange for the period 2002-2011 and found insignificant relationship between cash conversion cycle
and net operating profit, a significant negative relationship between accounts collection period and net operating profit
and an insignificant negative relationship between inventory conversion period and accounts payment period to net
operating profit.
Fahim, Kaviani, and Fashtali (2015), examined 90 listed companies on the Tehran Stock Exchange for the period 2008
-2012 to establish the relationship between working capital management and profitability and observed a significant
inverse U-shape relationship of current ratio and quick ratio with Return on Assets, but did not see any significant
inverse U-shape relationship of cash conversion cycle and net working capital to return on assets.
Jahfer (2015) investigated the effects of working capital management on profitability of manufacturing companies in Sri
Lanka for the period 2008-2013. Findings indicated that there was a significant negative relationship between accounts
payable and profitability and that managers could create value by reducing accounts receivable and net trading cycle
and maintain reasonable inventory level. In addition, no evidence was found of a significant relationship between cash
conversion cycle and profitability.
Garg and Gumbochuma (2015), studied the working capital management relationship with profitability among retail
sector companies in South Africa listed in Johannesburg Stock Exchange for the period 2004-2013 and found a negative
relationship between working capital and profitability. Debt ratio and financial performance was also found to be
having a negative relationship. The leverage factor showed a statistically insignificant impact on profitability.
Louw (2015) examined 18 South African retail firms in the Johannesburg Stock Exchange for the period 2004-12 on
their working capital management and its impact on financial performance. The results showed that South African firms
reduce their cash conversion cycle by reducing their selling prices and/or cost prices, leading to increased profit.
Anarfi and Boateng (2016), used the average collected period, inventory turnover days, and average payment period as
working capital management indicators along with cash conversion cycle to establish the effect of working capital
management on profitability in the firms operating in the Czech Agriculture and Forestry sector for the period of 2005-
2014. The results highlighted that indicators of working capital management do not affect profitability, but firm size,
ratio of financial assets to total assets, leverage and current ratio significantly affect profitability.
A strong negative correlation between working capital management components and profitability was identified by
Abbas and Yushan (2016), in their study on the effects on profitability of Tanzanian Insurance companies for the period
2006-2010.
Selecting a period of 15 years from 2000-2015, Dalayeen (2017), looked at the working capital management and
profitability of selected real estate industry in Jordan and the findings showed significant influence of working capital
management on the profitability of selected real estate companies.
The above review of literature indicates varied use of working capital management components to measure the impact
of working capital management on corporate financial performance. Table 1 shows the variables used by various
researchers in their studies.

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Table 1. Variables and their application in prior studies

Variables Authors and year of publication
Return on Assets Kasozi (2017); Maisiba, Muturi and Atambo (2017); Nandom, Mubarik and Abdul-Aziz
(2017); Tuffour, and Boateng, (2017); Iqbal, Khan, Shah and Raza (2016); Mahato, and
Jagannathan (2016); Mbawuni, Mbawuni, and Nimako, (2016); Rehman, Khan,
Muhammad, Iqbal and Khan (2016); Temtime (2016); Zafar, Nazam, Hanif, Almas, and
Sana, (2016); Azeez (2015); Fahim, Kaviani, and Fashtali, (2015); Agha, (2014);
Odhiambo (2014); Makori and Jagongo (2013); Saghir, Hashmi, and Hussain, (2011)
Average Collection l Dalayeen, (2017); Kasozi (2017); Tuffour, and Boateng, (2017); Nandom, Mubarik and
Period Abdul-Aziz (2017); Mahato, and Jagannathan (2016); Padachi (2006); Vahid, Elham,
Iqbal, Khan, Shah and Raza (2016); Rehman, Khan, Muhammad, Iqbal and Khan (2016);
Abbas and Yushan, (2016); Anarfi, and Boateng, (2016); Temtime (2016); Mbawuni,
Mbawuni, and Nimako, (2016); Azeez (2015); Jahfer (2015);Ademola, (2014); Agha,
(2014); Odhiambo (2014);Makori and Jagongo (2013); Saghir, Abuzayed, B. (2012);
Mohsen, and Mohammadreza, (2012); Ray (2012); Hashmi, and Hussain, (2011); Gill,
Biger, Mathur, (2010); Lazaridis and Tryfonidis, (2006)
Inventory Kasozi (2017); l Dalayeen, (2017); Tuffour, and Boateng, (2017); Nandom, Mubarik and
Conversion Period Abdul-Aziz (2017);); Iqbal, Khan, Shah and Raza (2016); Rehman, Khan, Muhammad,
Iqbal and Khan (2016); Mahato, and Jagannathan (2016); Anarfi, and Boateng, (2016);
Temtime (2016); Mbawuni, Mbawuni, and Nimako, (2016); Jahfer (2015); Ademola,
(2014); Agha, (2014); Azeez (2015); Odhiambo (2014); Makori and Jagongo (2013);
Vahid, Elham, Mohsen, and Mohammadreza, (2012); Abuzayed, B. (2012); Ray ( 2012);
Saghir, Hashmi, and Hussain, (2011);); Gill, Biger, Mathur, (2010); Lazaridis and
Tryfonidis (2006); Padachi (2006)
Average Payment Kasozi (2017); Nandom, Mubarik and Abdul-Aziz (2017); Tuffour, and Boateng, (2017);
Period Abbas and Yushan, (2016); Anarfi, and Boateng, (2016); Mahato, and Jagannathan (2016);
Mbawuni, Mbawuni, and Nimako, (2016); Temtime (2016); Jahfer (2015); Ademola,
(2014); Agha, (2014); Odhiambo (2014); Makori and Jagongo (2013); Vahid, Elham,
Mohsen, and Mohammadreza, (2012); Abuzayed, B. (2012); Ray (2012); Saghir,
Hashmi, and Hussain, (2011); Gill, Biger, Mathur, (2010); Padachi (2006); Lazaridis and
Tryfonidis (2006)
Cash Conversion Kasozi (2017); Tuffour, and Boateng, (2017); Anarfi, and Boateng, (2016); Mbawuni,
Cycle Mbawuni, and Nimako, (2016); Mahato, and Jagannathan (2016); Temtime (2016); Garg,
and Gumbochuma, (2015); Jahfer (2015); Fahim, Kaviani, and Fashtali, (2015); Azeez
(2015); Ademola, (2014); Agha, (2014); Odhiambo (2014); Makori and Jagongo (2013);
Vahid, Elham, Mohsen, and Mohammadreza, (2012); Abuzayed, B. (2012); Ray (2012);
Saghir, Hashmi, and Hussain, (2011); Gill, Biger, Mathur, (2010); Padachi (2006);
Lazaridis and Tryfonidis (2006);
Debt Ratio Maisiba, Muturi and Atambo (2017); Mahato, and Jagannathan (2016); Zafar, Nazam,
Hanif, Almas, and Sana, (2016); Anarfi, and Boateng, (2016); Garg, and Gumbochuma,
(2015); Odhiambo (2014); Ray (2012); Vahid, Elham, Mohsen, and Mohammadreza,
(2012); Gill, Biger, Mathur, (2010); Lazaridis and Tryfonidis (2006)
Current Ratio l Dalayeen, (2017); Maisiba, Muturi and Atambo (2017); Tuffour, and Boateng, (2017);
Nandom, Mubarik and Abdul-Aziz (2017); Mahato, and Jagannathan (2016); Iqbal, Khan,
Shah and Raza (2016); Zafar, Nazam, Hanif, Almas, and Sana, (2016); Rehman, Khan,
Muhammad, Iqbal and Khan (2016); Abbas and Yushan, (2016); Anarfi, and Boateng,
(2016); Fahim, Kaviani, and Fashtali, (2015); Ademola, (2014); Agha, (2014); Makori and
Jagongo (2013); Vahid, Elham, Mohsen, and Mohammadreza, (2012); Ray (2012);
Quick Ratio Maisiba, Muturi and Atambo (2017); Rehman, Khan, Muhammad, Iqbal and Khan (2016);
Fahim, Kaviani, and Fashtali, (2015)
2. Methodology
This paper explores the effect of working capital management on the profitability of listed retail stores in Botswana.
The study has adopted a panel data methodology (2012-2016) and an analytical and descriptive research design.
Literature indicates that a number of working capital parameters are used to measure the effect of working capital
management on firms‟ performance. The following model developed for the study takes into account the literature on
working capital management and profitability.

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Table 2. Variables and their computation

Variables Abbreviation Formula
Dependent Variable
Return on Assets ROA Profit before Interest and Tax/ Total Assets
Independent Variables
Average Collection Period ACP Accounts Receivable /Net (Credit) Sales *365
Inventory Conversion Period ICP Average Inventory/Cost of Goods Sold (Cost of Sales)*365
Average Payment Period APP Accounts Payable/ Net (Credit) Purchases * 365
Cash Conversion Cycle CCC ACP+ICP-APP
Debt Ratio DR Total Liabilities/Total Assets
Current Ratio CR Current Assets/Current Liabilities
Quick Ratio QR Current Assets less Closing Inventory/ Current Liabilities
2.1 Variables
2.1.1 Dependent Variable:Return on Assets (ROA)
Return on Assets which is a profitability ratio that measures the net income generated by total assets during a period is
widely considered as the one of the most reliable measure of profitability. A number of researchers have used Return on
Assets to find the impact of working capital management on profitability. Return on Assets is one of the central ratios
defined by Selling and Stickney (1989) as „a useful measure for evaluating the operating and investing performance of a
firm.‟ These authors however argue that the behavior of this ratio is impacted upon by the macroeconomic and business
strategies of the firm. They, of course, indicate that the ratio naturally varies „over time and across firms and industries‟.
Selling and Stickney‟s key argument is that the firm‟s environment and how strategies adopted to in response to that
environment should be considered in understanding the behavior of ROA. They also concluded in their study that:„…
industries with significant operating leverage and high entry barriers tended to have the lowest asset turnovers and the
highest profit margins, while industries with low capital intensity and commodity-like products tended to have the
highest asset turnovers and the lowest profit margins.‟ p. 43
2.1.2 Independent Variables
1. Average Collection period (ACP): It is a significant component of working capital management that determines
the cash flows of a firm. It is the period from the date the credit facility is extended to when the actual payment is
received.
The management of this ratio is critical for the firm‟s ability to meet its own obligations.
2. Inventory Conversion period (ICP): The Inventory conversion period is the time the firm takes to convert
inventory into sales. This ratio therefore measures the time from acquisition of inventory to its sale. The longer
the inventory remains in the shelves, the longer the time to acquire cash. This is problematic because sales here
might also be on credit and this further pushes the cash realization further.
3. Average Payment Period (APP): Average payment period is the average time it takes for a firm to pay its
creditors. A shorter payment period is preferred if it attracts discounts, otherwise the full length of the credit
facility provided by the supplier should be taken advantage of.
4. Cash Conversion Cycle (CCC): The cash conversion cycle is considered a more effective measure of liquidity
than the traditional assessments such as current and quick ratio (Moss and Stine, 1993; Almamy., Aston & Ngwa,
2016). Moss and Stine suggests that the current and quick ratios are static values. CCC is considered more
versatile in its ability to measure to cover obligation because it also indicates the ability of the firm to manage its
cash. Here levels of cash are important to avoid excessive cash balances or lack of it. Moss and Stine observed
that the CCC is the focal point of other working capital ratios such as inventory conversion period and
receivables conversion period.
5. Debt Ratio (DR): Debt ratio is generally considered as a measure of debt level of a firm against its assets. The level
of debt against assets helps assess whether it is sustainable to continue with debt financing. Higher levels of debt
can actually cripple the firms operations given the type of environment especially where interest is high, and banks
are not an intrinsic part of the business. A lower debt level may also indicate that the firm is not effectively using a
financing facility that may improve growth. The question of whether an optimal debt ratio exists remains a
significant point for debate (Smyth &Hsing, 1995; Chudik., Mohaddes., Pesaran & Raissi, 2017).
6. Current Ratio: Current ratio is a traditional measure of a firm‟s ability to pay off its short-term obligations. The
complexity in contemporary business is that a higher current ratio suggests inability to effectively utilize cash for
investment whilst a lower current ratio is perceived as risky, leaving a firm susceptible to defaulting (Richards &
Laughlin, 1980; Dambolena & Khoury,1980).

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7. Quick Ratio: Quick ratio measures the firm‟s ability to settle its short-term obligations using assets that are readily
convertible into cash, i.e. excluding inventories. Inventory may take longer to convert into cash hence it is
excluded.
2.2 Conceptual Frame Work
The following diagram indicates the independent variables and dependent variable used in the study to measure the
impact of the independent variables of average collection period, inventory conversion period, average payment period,
cash conversion cycle, debt ratio, current ratio and quick ratio on the dependent variable Return on Assets of the listed
retail stores in Botswana.

Figure 1. Diagram of Independent & Dependent variables

2.3 Data Source and Sampling
The research population for the study are all the listed retail stores in Botswana. The study used non-probability
sampling (purposive sampling) where a pre-specified group are purposively pursued and tested. The data was obtained
from the annual reports of the three listed retail stores on Botswana Stock Exchange (BSE) for the period 2012-2016.
2.4 Model for Data Analysis
This data included the dependent variable being Return on Assets (ROA) and the independent variables being seven
components generally used to measure working capital management, that is , average collection period, inventory
conversion period, average payment period, cash conversion cycle, debt ratio, current ratio and quick ratio. The
relationship is mathematically expressed in equation 1;
ROAt=β0+β1ACPt+β2ICPt+β3APPt+β4CCCt+β5DRt+β6CRt+β7QRt+ε t (1)
Where;
ROAt=Return on Assets
ACP=Average collection period
ICP= Inventory conversion period
APP= Average payment period
CCC= Cash conversion cycle
DR= Debt ratio
CR= Current ratio
QR= Quick ratio
β0, β1, βn=Coefficients
εt =error term
3. Data Analysis and Discussion of Findings
The central hypothesis of the study states that there is no statistically significant association between working capital
management and firm profitability. A review of prior studies confirmed that correlation and regression analysis
techniques are found most appropriate to establish relationship between working capital management and financial
performance of business enterprises. The data of this study, therefore, was analysed using descriptive statistics,
correlation analysis and regression analysis. The data covers a 5- year period from 2012 to 2016. Statistical Package for
Social Sciences (SPSS) was used to carry out the analysis.

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3.1 Descriptive Statistics

Descriptive statistics generated through SPSS are shown in Table 3. The dataset is comprised of 15 observations. The
dependent variable is measured by Return on Assets (ROA). ROA measures the effectiveness of management in terms
of use of assets. The ROA has a minimum value of 0.045 and a maximum of 0.184. Meanwhile the mean return is 0.118.
This shows that on average, the three retail stores generated a return on assets of around 11.8%. On the other hand, the
independent variables are the measures of working capital management and they include; the average collection
period (ACP), inventory conversion period (ICP), Average payment period (APP), Cash conversion cycle(CCC),Debt
ratio (DR), Current ratio(CR) and quick ratio (QR). The ACP had a mean of 11.060 days and standard deviation of
5.538. The maximum and minimum values were 19.855 and 3.113 days respectively. On the other hand, the ICP, which
measures how quickly the company is able to turn raw material into finished goods, had a mean value of 75.505 days.
The maximum value was 155.821 days with a minimum value of 29.729 days. Meanwhile the APP stood at an
average value of 46.597 days and was skewed to the right (skewness =0.5), with a maximum value of 84.877 days. In
contrast, the CCC had a mean value of 39.988, with a maximum of 106.648 and a minimum value of -7.030. The DR
had a mean value of 0.503 and a standard deviation of 0.0044. Lastly, the liquidity ratios of CR and QR has a mean
(standard deviation) of 2.3686 (1.5150 and 1.582 (1.274) respectively.
Table 3. Descriptive Statistics
N Minimum Maximum Mean Std. Deviation Skewness Kurtosis
Statistic Statistic Statistic Statistic Statistic Statistic Std. Error Statistic Std. Error
ROA 15 0.045 0.184 0.118 0.035 -0.248 0.58 0.352 1.121
ACP 15 3.113 19.855 11.060 5.538 0.398 0.58 -1 1.121
ICP 15 29.729 155.821 75.505 53.130 0.778 0.58 -1.552 1.121
APP 15 14.112 84.877 46.597 15.460 0.500 0.58 2.662 1.121
CCC 15 -7.030 106.648 39.968 42.982 0.568 0.58 -1.553 1.121
DR 15 0.361 0.503 0.412 0.044 0.854 0.58 -0.249 1.121
CR 15 1.030 5.431 2.386 1.515 1.278 0.58 0.107 1.121
QR 15 0.388 4.028 1.582 1.274 1.149 0.58 -0.289 1.121
3.2 Correlation Analysis
In order to confirm whether the variables are not highly correlated with each other (multicollinearity), Pearson
correlation was performed on SPSS and the results are shown in Table 4. Most of the variables were not significantly
correlated with each other. APP and ICP were positively and significantly correlated with each other at 10% significant
level (p =0.683). Further analysis indicates that CCC is significantly and positively correlated with ICP (p=0.957)
which is one of its components. This shows that a 1 unit increase in ICP will increase CCC by 0.957. This makes sense
because theoretically if inventory conversion increases, CCC should increase; all other components held constant. On
the other hand, CR is found to be significantly and positively correlated with ICP and CCC at 10% level with p values
of 0.860 and 0.842 respectively. Meanwhile, the QR was found to be positively and significantly correlated with ICP,
CCC and CR at 10% level and with APP at 5% level. Since majority of the variables were not highly and significantly
correlated with each other, multicollinearity was found not to be of a problem. The only two variables which were
significantly correlated with four or more variables were ICP and QR. We therefore proceeded with regression analysis.
Table 4. Pearson correlation
ROA ACP ICP APP CCC DR CR QR
ROA Pearson Correlation 1
Sig. (2-tailed)
ACP Pearson Correlation 0.025 1
Sig. (2-tailed) 0.928
ICP Pearson Correlation 0.018 -0.258 1
Sig. (2-tailed) 0.948 0.354
APP Pearson Correlation 0.195 -0.164 .683** 1
Sig. (2-tailed) 0.487 0.559 0.005
CCC Pearson Correlation -0.044 -0.131 .957** 0.463 1
Sig. (2-tailed) 0.876 0.643 0 0.082
DR Pearson Correlation -0.291 -0.292 -0.351 -0.169 -0.41 1
Sig. (2-tailed) 0.292 0.291 0.2 0.546 0.129
CR Pearson Correlation -0.256 -0.284 .860** 0.513 .842** -0.33 1
Sig. (2-tailed) 0.356 0.305 0 0.051 0 0.23
QR Pearson Correlation -0.18 -0.279 .888** .576* .855** -0.353 .995** 1
Sig. (2-tailed) 0.52 0.314 0 0.025 0 0.197 0
**. Correlation is significant at the 0.01 level (2-tailed).

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*. Correlation is significant at the 0.05 level (2-tailed).

3.3 Regression Analysis
A multiple regression analysis was performed to test the significance of the relationship between profitability measured
by return on assets (ROA) as a dependent variable and the seven working capital management components as
independent variables. The model was first tested for goodness of fit using the r-squared value which retained a value of
0.903. This outcome shows that 90.3% of the variation in ROA can be explained by the seven independent variables.
The regression output is shown in Table 5. SPSS dropped ICP automatically as it was significantly correlated with CCC
as one of the components.The regression output shows that only three variables out of the remaining six were
significant, namely APP, CR and QR (p-value<0.05).
First, profitability as measured by ROA is found to be negatively and significantly related with average payment period
(APP) with a p-value of 0.009, which confirms the findings of Kasozi (2017) who examined the influence of working
capital management on profitability among 69 listed manufacturing firms of Johannesburg stock exchange for the
period 2007-16. Kasozi (2017) concluded that the average collection period and the average payment period were
significantly, but negatively influenced the financial performance of the listed firms. However, our outcome is contrary
to the findings of Mahato, and Jagannathan (2016) and Mbawuni, Mbawuni, and Nimako, (2016) who found a
positive relationship. The beta coefficient associated with this variable in Table 5 is -0.02. This shows that a 1%
increase in ACP will reduce profitability as measured by return on assets by 0.0002%. Though the magnitude of this
impact is small, it is found to be significant (p value=0.009).
Secondly, a negative and significant relationship was found between the return on assets and current ratio (CR)
(p=0.000). This outcome confirms the findings of Fahim, Kaviani, and Fashtali, (2015) and Mahato, and Jagannathan
(2016) who observed a significant negative relationship between the two variables. However a current study by Rehman
et al. (2016) who examined the impact of working capital management on profitability of firms in the Chemical sector
in Pakistan reported that inventory turnover showed a significant impact on profitability, but did not see any significant
impact for current ratio. In contrast, the current ratio was found to significantly influence profitability in other latest
studies (Iqbal, et al, 2016; Maisiba, Muturi and Atambo, 2017; Tuffour, and Boateng, 2017; Nandom, Mubarik and
Abdul-Aziz, 2017). Likewise, the beta coefficient associated with this regression model as presented in Table 5 is
-0.332. In this respect, a 1% increase in CR will reduce profitability as measured by return on assets by 0.03%.
Thirdly, a positive and significant relationship is found between return on assets and quick ratio or acid test (p=0.000).
This outcome is contrary to the findings of Fahim, Kaviani, and Fashtali, (2015) who examined 90 listed companies on
the Tehran stock exchange for the period 2008 -2012 in order to establish the relationship between working capital
management and profitability and observed a significant inverse U-shape relationship of quick ratio with Return on
Assets. Meanwhile, Rehman et al. (2016) did not see any significant impact for current ratio, acid test ratio and debtors‟
turnover ratio on firms‟ profitability in Pakistan. The beta coefficient of the regression model is 0.402, which shows that
a 1% increase in quick ratio will increase profitability by 0.004%.
Table 5. Regression Output
Model Unstandardized Coefficients Standardized t Sig. or
Coefficients p-value
B Std. Error Beta
1 (Constant) .409 .055 7.435 .000
ACP -.001 .001 -.148 -1.134 .290
APP -.002 .001 -.872 -3.460 .009
CCC .000 .000 -.129 -.553 .595
DR -.074 .117 -.093 -.634 .544
CR -.332 .052 -14.448 -6.394 .000
QR .402 .068 14.741 5.945 .000
a. Dependent Variable: ROA
3.4 Summary of Findings
A total of seven working capital items were identified from literature as independent variables and these were
comprised of average collection period, inventory conversion period, average payment period, cash conversion cycle,
debt, current and quick ratios. Correlation analysis revealed that few variables were significantly correlated with each
other. In particular, APP and ICP were found to be positively and significantly correlated with each other at 10%
significant level, CCC was significantly and positively correlated with ICP;CR is found to be significantly and
positively correlated with ICP and CCC at 10% level, and QR was found to be positively and significantly correlated
with ICP, CCC and CR at 10% level and with APP at 5% level. A multiple regression analysis was also performed and

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the results showed that only three variables out of the seven independent variables were significant, namely APP, CR
and QR. The remaining four variables were found to be statistically insignificant. Profitability as measured by return on
assets was found to be negatively and significantly related to average payment period (APP), a negative and significant
relationship was found between return on assets and current ratio, and a positive and significant relationship is found
between return on assets and quick ratio. Overall, the findings indicated that there was no significant relationship
between independent variables “average collection period, inventory conversion period, cash conversion cycle, debt
ratio” and the dependent variable “ return on assets” leading to the acceptance of null hypothesis for the
above-mentioned variables. The hypothetical testing, however, rejected the null hypothesis on the relationship between
independent variables “average payment period, current ratio, quick ratio” and the dependent variable “return on
assets”.
4. Conclusion and Recommendations
The importance of working capital management as an essential component of financial management originates from the
fact that investment in current asset constitutes a significant part of total investment of a business enterprise. As a result,
this study sought to establish the impact of working capital management on the financial performance of listed retail
stores in Botswana.
The above findings have implications for management of the retail stores in Botswana. In particular, management
should pay more attention to APP, CR and QR if they want to improve profitability of their firms. Working capital
management deals with management of current assets and current liabilities and monitoring the inter-relationship
between them. It aims to manage both current assets and current liabilities in such a way that a satisfactory level is
maintained. Poor management of working capital may lead to business collapse resulting from insolvency.
Since a negative relationship is found between average payment period and the return on assets, management should
devise ways of ensuring that they reduce the average payment period in order to improve profitability of their firms.
This could include negotiating better credit terms with suppliers which could include not delaying payments to suppliers
unnecessarily. In terms of the current ratio, a negative relationship is also found. In this respect, management should
ensure that they reduce the current ratio by minimizing their current asset levels in order to stimulate profitability. In
contrast, the quick ratio showed a positive and significant relationship with return on assets, which confirms that
management should increase their most liquid assets if they want to improve their profitability. In this case, they should
increase their holdings of cash and cash equivalents, securities and receivables. In retrospect, fewer inventories should
be held at all times in order to improve profitability of retails stores in Botswana. Therefore better inventory handling
techniques should be put in place such as consistently reducing lead times and putting in place better Management
Resource Planning techniques.
The study focused on the three listed retail stores for the period 2012-16. A future study with extended dataset on the
above components might help to assess in more detail the relationship between profitability and working capital
management. The current dataset was constrained by data on one of the retails stores which was only listed about five
years ago. Also, a much larger sample size by including all the listed firms in the consumer services sector may improve
the relevance of the findings. Despite the aforementioned limitations, the study provides an in depth understanding of
the impact of working capital management on the financial performance of listed retail stores in Botswana.
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