Working capital management of South African retail firms

Abstract

The way a firm manages its working capital can have a decisive influence on the firm’s profitability and liquidity. In view of the prominent role that the retail industry plays in the South African economy, the purpose of this study was to investigate the effect of working capital management on the profitability of South African retail firms. Eighteen retail firms that were listed on the Johannesburg Securities Exchange for a period of nine years (2004-2012) were analysed. The findings show that a strategy of reducing investment in inventory and trade receivables, while increasing trade payables, appears to improve the profitability of South African retail firms. Inventory management seems to have the strongest statistically significant impact on a firm’s profitability. Hence, it is recommended that retail firms implement advanced inventory management systems in order to optimise inventory levels and enhance profitability.