Journal of Applied Science and Agriculture, x(x) Month 2013, Pages: x-x

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Journal of Applied Science and Agriculture

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THE IMPACT OF WORKING CAPITAL MANAGEMENT ON THE

PERFORMANCE OF FOOD AND BEVERAGES INDUSTRY
Saheed Adebowale Nurein*, Mohd Salleh Hj Din, Mohd Suberi Ab.Halim
School of Business Innovation and Technopreneurship, Universiti Malaysia Perlis, Kangar, Perlis, Malaysia

ARTICLE INFO

Keywords: Corporate performance,

working capital management, net
trade cycle, shareholders value.

ABSTRACT
ABSTRACT
One of the vital issues that must be vividly considered before making financial
decision is the working capital; because it is an integral part of the investment and
has a direct effect on the liquidity cum the performance of the firm. The purpose of
this paper is to give an empirical evidence of the working capital management
efficiency in the food and beverages industry in Malaysia. The study was carried out
on the basis of the listed food and beverages firms in Bursa Malaysia. The data for this
study was retrieved from the DataStream, consisting of 73 firms for the period 20092013. Tobins Q is used as a proxy for corporate performance, while cash conversion
cycle (CCC) , net trade cycle (NTC), inventory, accounts receivables, account payable
cycle are used as proxies for working capital management. Other variables applied are
firm size, leverage, growth opportunity and return on assets (ROA). This study proved
that higher performances were achieved with the shortest working capital cycles
and. An encouraging impact of working capital cycles on performance was verified
by through the use of a regression analysis with GLS estimation. This study
recommends that for a firm to achieve an improve performance as well as
maximizing shareholders wealth, there is need to obtain an improve working
capital with a shorter working capital management.

2013 AENSI Publisher All rights reserved.

To Cite This Article: Nurein et al., The impact of working capital management on the performance of food and beverages industry. J.
Appl. Sci. & Agric., 7(13): x-x, (2015).

INTRODUCTION

One of the vital issues that must be vividly considered before making financial decision is the working capital;
because it is an integral part of the investment and has a direct effect on the liquidity cum the performance of the
organization (Ray, 2012). Though, working capital encompasses short term financing and investments, it is always
overlooked when making financial decisions (Ray, 2012). Furthermore, its lack of contribution to return on equity
makes it work as a hold back for financial performance (Sanger, 2001). Managing an efficient and effective working
capital needs proper plan and control of firms current assets and its liabilities in such a way that it will reduce the
incapability risk of meeting short term commitments in one hand, and the avoidance of investing excess in the assets
in the other hand (Ray, 2012; Eljelly, 2004). Managing an efficient and effective working capital contributes a vital
role in the general corporate strategy of a company towards creating shareholder wealth. Working capital can be
referred to as outcome of time interval that exists between expenditure for purchasing raw material and collection of
sales of finished goods (Ray, 2012). The approach towards managing working capital of a firm can result in a
significant influence on both its profitability and liquidity (Shin and Soenen, 1998).
According to Ganesan (2007), optimizing the balance of working capital means minimizing the requirements of
working capital and realizing maximum probable revenues. Furthermore, companies free cash flow is increased by
managing an efficient and effective working capital, which has positive influence on the shareholders wealth and the
companies growth opportunity. Thus, companies always try to maintain the working capital at an optimal level in
order to maximize their targeted value (Afza and Nazir, 2007), and while managing working capital efficiently is
likely to provide a positive significant results, neglecting it can lead to highly dangerous situation to any company
(Christopher and Kamalavalli, 2009).
In spite of the significance of the interconnections that exist between the items of working capital when assessing
their impact on firm performance (Kim & Chung, 1990; Sartoris & Hill, 1983; Schiff & Lieber, 1974), only a few
Corresponding Author:. Saheed Adebowale Nurein, Universiti Malaysia Perlis, School of Business & Technopreneurship, 01000,
Kangar. Perlis. Malaysia. +60166885982. saheed_nurein@yahoo.com

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Journal of Applied Science and Agriculture, x(x) Month 2015, Pages:X-X

studies found significant relation between investment effects on working capital, and the impact of financing (BaosCaballero, Garca-Teruel and Martnez-Solano, 2013).
There are two competing views on investment in working capital management. The first view argues that increase in
sales and higher discounts for early payment will be achieved by companies with high level of working capital and
this will increase the value of the firm (Deloof, 2003). The other view argues that financing is required to achieve a
high level of working capital; hence firms will incur extra financing expenses to achieve this and subsequently, will
increase the probability of bankruptcy (Kieschnick et al., 2011). This indicates that inefficient and ineffective working
capital management processes may also result into bankruptcy, even if the company continues to have positive
profitability (Samiloglu and Demirgunes, 2008).
Precisely, an investment in working capital encompasses a trade-off between risk and profitability because it has
effects on the firm performance and firm value (Sharma and Kumar, 2010). Increased risk is caused by corporate
decisions that wish to increase profitability, while reduced of potential profitability is caused by corporate decisions
that has its focus on reduction of risk (Sharma and Kumar 2010). Though, most study have focused on the influence of
additional working capital investment on firm value, the form of the relationship that exist between performance and
working capital of food and beverages industry is examined by this study.

LITERATURE REVIEW

Previous studies that found negative significant relationship between working capital management and firm
performance indicate that the reduction in working capital will increase firm performance through improving their
stock returns, and also indicate that managing working capital efficiently will increase firms market value (Shin &
Soenen, 1998; Deloof, 2003; Eljelly, 2004; Padachi, 2006; Lazaridis and Tryfonidis, 2006; Garcia-Teruel & MartinezSolano, 2007; Raheman & Nasr, 2007; Anand & Malhotra, 2007; Samiloglu & Demirgunes, 2008; Zariyawati et al.,
2009; Mohamad & Saad, 2010; Ching et., 2011; Bagchi et al., 2012; Baos-Caballero, S., et al., 2013). This implicates
that there can be improvement in the performance of firms if the time span of tying up working capital in the
company is reduced (Garcia, 2011). These negative relationship is found in all markets, such as developed markets
(Shin & Soenen, 1998; Deloof, 2003; Lazaridis and Tryfonidis, 2006; Garcia-Teruel & Martinez-Solano, 2007; Nobanee
and Al-Hajjar, 2009; Gill et al., 2010; Garcia, 2011; Baos-Caballero, S., et al., 2013), emerging markets ( Shah & Sana,
2006; Anand & Malhotra, 2007; Raheman & Nasr, 2007; Samiloglu & Demirgunes, 2008; Zariyawati et al., 2009;
Mohamad & Saad, 2010; Ching et al., 2011; Bagchi et al., 2012; Ray, 2012; Tufail et al., 2013; Golas et al., 2013), and
developing markets (Eljelly, 2004; Padachi, 2006; Dong, 2010; Saghir et al., 2011; Napompech, 2012). However, the
reliability on the negative relationships found in these markets is only based on the presence and the level of capital
market imperfection (i.e., agency costs and informational asymmetries), internal finance availability, financing costs,
or accessibility to capital markets (Baos-Caballero, S., et al., 2013; Fazzari et al., 1988; Myers & Majluf, 1984;
Greenwald et al., 1984; Stiglitz & Weiss, 1981; Jensen & Meckling, 1976).
Meanwhile, studies that found positive relationship between working capital management and firm performance
indicate that firm with higher working capital will achieve higher firm value (Lyroudi & Lazaridis, 2000; Mathuva,
2009; Rimo & Panbunyuen, 2010; Abuzayed, 2011; Vural et al., 2012; Ali & Ali, 2012). The implication of this positive
relationship on the stock market is that investors do not base their firm selection on firms with efficient and effective
working capital, and also ignores liquidity as a crucial factor in evaluating companies performance (Abuzayed, 2011).
A positive relationship also shows that firms that are more profitable are less driven to manage working capital
efficiently; the letdown of the financial market to penalize these companies with managing working capital
inefficiently leads to such positive relationship. Though, investors realized that companies practicing and formulating
efficient and effective working capital management merit more value, the financial market show less reaction in
providing evidence of negative significant relation between cash conversion cycle and market valuation of firm
(Abuzayed, 2011).
However, the study of Baos-Caballero, S., et al., (2013) on UK non-financial firms found that while Net Trade Cycle is
positively related with corporate performance, its square is negatively related with corporate performance. This is
confirming a huge and statistically significant inverted U-shaped relationship between corporate performance and
working capital. The implication of their finding is that the results of higher sales couple with early payments
discounts arises when working capital level is below the optimal level, therefore, firm performance is positively
influenced by working capital. On the contrary, the financing cost as well as the opportunity cost effects arises when
the level of working capital of the firm is above this optimum and, as a result, corporate performance and working
capital management will be negatively related. Therefore, since there are mixed results regarding the relation
between corporate performance and managing of working capital, there is need to examine the influence of
requirements of working capital management on firm performance to ascertain an improvement in the market value
of the firm, which the firms operational and strategic thinking relies on for efficient and effective operation
(Mohamad and Saad, 2010).
The majority of the findings on the study of the relation between corporate performance or profitability and working
capital management have been able to give an evidence of their relativity through findings of their respective
measurements. The combination of Tobins q as a proxy of firm performance or profitability and cash conversion
cycle (CCC) or net trade cycle (NTC) as a proxy of working capital management to find the relationship between firm
performance and working capital management is expected to show either a negative or positive significant
relationship. Tobins q developed by Tobin (1969) is expected to have a negative sign because it gives a comparison
to the value of the firm provided by financial markets and the value of its assets (Nasir and Afza, 2009). CCC is used as
a comprehensive of working capital because it gives details of the time frame amidst the disbursement that is made
for the procuring of raw materials and the assorting of sales of finished products. Thus, the longer this time frame, the

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Journal of Applied Science and Agriculture, x(x) Month 2015, Pages:X-X

larger is the investment in working capital blocked (Bagchi et al., 2012). NTC was proposed by Shin and Soenen
(1998) to serve as a similar substitute measure of working capital to Cash Conversion Cycle. NTC also focuses on the
three core components of working capital specifically the accounts receivable, inventory and the accounts payable
but it is different from CCC because it measures all the components of CCC as a percentage of sales. NTC could be
negative or positive. A positive outcome shows the number of days a firm must tie up or borrow capital while
expecting customers payment. A negative outcome is indicating number of days a firm has obtained cash from sales
before its suppliers must be paid (Hutchison et al., 2007).
Inventory turnover cycle describes the number of days cash is tied up in the inventory or the numbers of days it takes
the firm to refresh the inventory. Receivable cycle describes the number of days it takes a company to receive
payment from its customers. Account payable cycle is the number of days a company is granted to pay for the trade
goods bought on credit (Bieniasz & Golas, 2011). Both receivables cycle and inventory turnover cycle are the
determinant of the span of operating cycle which describes the time frame from the purchase of trade materials to
the day of collecting account receivables through the sale of finished goods or products. There is need to shorten
these periods so as to reduce cost of capital as well as increasing its rotation (Bieniasz & Golas, 2011). Deloof (2003)
also suggests that managers can achieve shareholder values through plummeting receivable cycle and inventory
turnover cycle. Meanwhile, extending account payable cycle will benefit the firm in regards to liquidity risk because it
reduces the demand of working capital. However, well-organized firms should not unnecessarily extend but
synchronized together with operating cycle (Bieniasz & Golas, 2011). A positive relationship between account
payable cycle and firms profitability indicates that companies that achieve higher profits will use shorter period to
settle their creditors (Baos-Caballero, S., et al., 2013).
A positive significant firm size influences firms profitability since firms that possess higher credit worthy can assess
capital through the stock market more easily, which will make them always keep cash at low level (Abuzayed, 2011;
Su, 2001; Peel & Wilson; 1996; Chan, 1993). On the side of the growth opportunity, it has been also demonstrated by
previous studies that short-term investment and cash holding of a firm will increase when there is more future cash
flow fluctuations and more opportunities for growth (Abuzayed, 2011; Opler et al., 1999; Kim et al., 1998); this
growth would increase performance of firms. On leverage, the perking order theory stated that a firm that lack funds
will like to raise funds internally before attempting to borrow externally or issue new stocks (Myers, 1984). Hence,
firms keep their own available capital for internal utilization and /or for debt payments. Firms with more debt will
have low internal capital for their business operations, which will increase firm risk, while the projected debt ratio
and market value are negatively related. However, this may persuade the capability to raise fund and improve
profitability (Abuzayed, 2011). Return on assets (ROA) has been widely used as a measure in determining the
intensity and level of returns generated by a firm through engaging its total assets (Rehn, 2012). Firms are
comfortable when they are able to attract more lenders and investors, but in distress if there is necessity for them to
raise the funds needed for capital projects and growth, or if their level of ROA could not convince or attract financiers.
The earnings acquired through capital invested reflected on ROA. Thus, the asset turnover ratio of a firm increases
when there is reduction in investment in working capital, which will in turn increases ROA.

METHODOLOGY

The data for this study is collected from the DataStream. The sample comprises of firms in Food and Beverages
industry listed at the Bursa Malaysia stock exchange for the period of 2009 - 2013. This consists of 73 firms, making
up a total of 365 firm-year observations. This study used Tobins Q as a measure for firm performance, while net
trade cycle (NTC), inventory cycle, accounts receivables cycle, and account payable cycle are used as proxies for
working capital management. Control variables applied are firm size (SIZE), leverage (LEVERAGE), growth
opportunity (GROWTH) and return on assets (ROA). The measurements for the variables are depicted in the table 1
below.
Table 1: Variables Measurement
No Variables
Connotation Method of Measurement
1.
Tobins Q
Q
(market value of equity + book value of liability)/ total assets
2.
Cash Conversion Cycle (CCC) CCC
(Acct rec/sales) x 365 + (inv/COGS) x 365 (Acct pay/COGS) x 365
3.
Net Trade Cycle (NTC)
NTC
(Acct rec/sales) x 365 + (inv/sales) x 365 (Acct pay/sales) x 365.
4.
Inventory turnover cycle
INV
(Average inventories/sales) x 365
5.
Receivables cycle
REC
(Average receivable/sales) x 365
6.
Account payable cycle
PAY
(Average payable/sales) x 365
7.
SIZE
SIZE
Natural logarithm of sales
8.
LEVERAGE
LEV
Total debt / total assets
9.
GROWTH
GROWTH
Book value of intangibles assets/ total assets
10. ROA
ROA
Earnings before interest and taxes / total assets.
The relationship between the dependent and the independent variables is examined through applying correlation
and the use of a regression analysis with GLS estimation. The hypothesis developed to find the significant relationship
between working capital variables and firm performance goes thus:
H1: There is a relationship between Tobins Q and Working Capital variables.
Therefore, the following model was estimated:
Qit = o + 1CCCi,t + 2NTCi,t + 3INVi,t + 4RECi,t + 5PAYi,t + 6SIZEi,t + 7LEVi,t + 8GROWTHi,t + 9ROAi,t + i

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ANALYSIS AND FINDINGS

The analysis of this study started with the summary of the descriptive statistics.
Table 2: Summary statistics
TOBIN's Q
CCC
NTC
INV
REC
PAY
SIZE
LEV
GROWTH
ROA

Mean

Std. Dev

Median

Variance

Std. Error

Confidence Level (95%)

1.4455
50.7421
72.0160
43.5440
56.1318
27.6599
12.4850
0.1812
0.0349
0.1010

2.0341
25.4888
59.0852
31.5210
42.0961
24.0810
1.7930
0.1741
0.0722
0.3009

0.9292
34.4642
68.4561
39.4312
45.0135
21.2978
12.5154
0.1499
0.0055
0.0821

4.1377
2546.82
3491.06
993.57
1772.08
579.8966
3.2149
0.0303
0.0052
0.0905

0.1065
2.4514
3.0927
1.6499
2.2034
1.2605
0.0939
0.0091
0.0038
0.0157

0.2094
6.0360
6.0817
3.2445
4.3330
2.4787
0.1846
0.0179
0.0074
0.0310

The descriptive statistics for firm performance, working capital variables and the control variables are reported in
table 2 above. Market to book ratio is on average of 145%, while the median is 92%. This indicates that the firms in
food and beverages have strong market value during this periods examined. The average days for CCC are 50.74 days,
while the median is 34.46 days. The average days for NTC are 72.02 days, while the median is 68.46 days. The
average days to turnover inventory are 43.54 days, while the median is 39.43 days. These companies use averagely
of 56.13 days to receive payment from their trade debtors while the median is 45.01 days. In addition, averagely
27.66 days is used to pay their trade creditors, while the median is 21.30 days. The size of the firms averagely
increases to 12.49% with a median of 12.52%. The leverage shows that 18.12% of the total assets are averagely
financed with financial debt. The GROWTH opportunity for the firms is averagely 3.49%, while the median is 0.55%.
However, the ROA that shows an average of 10.10% (and median of 8.21%) indicates that 10.10% of total assets of
these companies are generated from earnings.
Table 3: Correlation Matrix
TOBIN's Q
CCC
NTC
INV
TOBIN's Q
1.0000
CCC
0.0456b
1.0000
NTC
-0.1400
0.0270b
1.0000
INV
-0.0570c
0.1428
0.7274
1.0000
REC
-0.1288
-0.0036a
0.7634
0.3129
PAY
0.0437b
0.1144
-0.1669
0.0711c
SIZE
0.3712
0.1793
0.0379b
0.2049
LEV
-0.0812c
0.1042
0.1716
0.2621
GROWTH
-0.0026a
-0.0194b
-0.0418b
-0.0679c
ROA
0.1779
0.0196b
0.0481b
0.0653c
Note: a, b, c indicate significant at 1%, 5% and 10% respectively.

REC

PAY

SIZE

LEV

GROWTH

ROA

1.0000
0.2845
-0.1193
0.1907
0.0342b
-0.0110b

1.0000
-0.0334
0.2554
0.0735c
-0.0519c

1.0000
0.1784
0.0518c
0.0819

1.0000
-0.0588c
-0.1371

1.0000
-0.0167b

1.0000

Table 3 shows the correlations that exist among the variables. Correlation coefficient is applied to measure the
degree of linear relationship that exists between two or more variables. A formal test was used to ascertain that
multicollinearity is not present in this analysis by using variance inflation factor (VIF) for each independent variable
in the models. The largest VIF is 1.224 (LEV), confirming that multicollinearity is not present in the sample, because it
is not up to 5 (Studenmund, 1997), and less than 10 (Hair et al., 2006). The result indicates that Tobins Q has a
positive correlation with CCC (0.0456) and PAY (0.0437) at 5% significant level and a negative correlation with INV (0.0570), LEV (-0.0812) and GROWTH (-0.0026) at 10%, 10% and 1% significant level respectively.
Table 4: REGRESSION ANALYSIS USING GLS ESTIMATION
Variable
Coefficient
Std. Error
z
C
-6.358
0.5204
-12.22
CCC
0.0127
0.0061
2.10
NTC
-0.0137
0.0042
-3.26
INV
0.2874
0.0749
-3.84
REC
0.0008
0.0033
0.27
PAY
0.0127
0.0061
2.09
SIZE
0.6922
0.0524
13.20
LEV
-1.5761
0.2846
-5.54
GROWTH
-1.3317
1.0399
-1.28
ROA
0.9181
0.1630
-1.28
R-squared
0.2521
Wald chi2(9)
1716.27
Prob > chi2
0.0000
Observations
365
Note: a, b, c indicate significant at 1%, 5% and 10% respectively.

Prob.
0.000
0.036b
0.001a
0.000a
0.789
0.036b
0.000a
0.000a
0.200
0.000a

The results of the regression analysis applying GLS estimation is depicted in table 4. The R2 value, implies that the
regression model which consists of working capital variables and control variables explain only 25 percent (0.2521)
variations in Tobins Q, which indicates a weak relationships. However, the CCC is positively significant with Tobins
Q at 5% significant level, indicating a positive significant relationship between corporate performance and working

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Journal of Applied Science and Agriculture, x(x) Month 2015, Pages:X-X

capital management when applying CCC. A firm with higher CCC will achieve a higher corporate performance.
Meanwhile, NTC is negatively significant with Tobins Q at 1% significant level, indicating a negative significant
relationship between corporate performance and working capital management when applying NTC. A firm with
lower NTC will achieve a higher corporate performance. This is consistent with predictions because it shows
evidence that a statistically significant relationship exist between working capital and corporate performance. The
positive relationship using CCC is in line with previous studies results such as Lyroudi & Lazaridis (2000); Vural et al.,
(2012); Abuzayed (2011), Mathuva (2009), Rimo and Panbunyuen (2010), and Ali and Ali (2012); while the
negative relationship using NTC is consistent wth previous studies such as Shin and Soenen (1998), Deloof (2003),
Eljelly (2004), Padachi (2006), Lazaridis and Tryfonidis (2006), Garcia-Teruel and Martinez-Solano (2007), Raheman
and Nasr (2007), Anand and Malhotra (2007), Samiloglu and Demirgunes (2008), Zariyawati et al. (2009), Mohamad
and Saad (2010), Ching et. (2011), Bagchi et al. (2012), and Baos-Caballero, S., et al. (2013).
Inventory cycle has a positive relationship with Tobins Q at 1% significant level, indicating that increase in inventory
cycle which is related with increase in sales resulted to increase in firms performance. Receivable cycle has no
significant relationship with firm performance. Accounts payable is positively related with firm performance at 5%
significant level; the plausible reason for this is that more profitable firms pay their bills in short period. Size is
positively related with firm performance at 1% significant level. The plausible reason for this is that larger firms that
possess higher credit worthy were able to assess capital through the stock market more easily, which make them
keep cash at low level to increase their operating income. Meanwhile, Growth opportunity does not influence firm
performance because the firms were not able to capitalize on the future cash flow fluctuations and more
opportunities for growth to increase their short-term investment and cash holding. ROA is positively related with
firm performance at 1% significant level, indicating that the reduction in investing in working capital of these firms
increases their asset turnover ratio which then increases their ROA. Thus, the hypothesis of this study that stated that
there is a significant relationship between Tobins Q and working capital variables is accepted.

CONCLUSION

Theoretical and empirical evidence have been provided by this study to justify the relationship that exists between
corporate performance and managing of working capital. The objective of this study is to examine whether working
capital decision affect firm performance. The data for this study is collected from the DataStream. The sample
comprises of firms in food and beverages industry listed at the Bursa Malaysia stock exchange. The data for 73 firms
was analyzed from the period of 2009 - 2013. A regression analysis was applied through GLS estimation, which show
that working capital variables have significant influence on firm performance. Therefore, for a firm to maintain and
improve shareholder value it must achieve a better working capital with a longer CCC or a shorter net trade cycle
(NTC) as well as meeting its short-term obligations. This study implies that maintaining an efficient and effective
working capital should be a priority for managers because of its effect on overall firm performance. In addition,
working capital should be of concern to managers due to the costs that could be incurred if optimal working capital
level is not achieved by the firm. Moreover, negative impact on corporate performance can arise through early
payments lost discounts, lost sales, or through incurring additional financing expenses. However, there is need focus
on optimal level of working capital and control of financial constraints, and also the effect of financial constraints on
the optimal level of working capital because they hinder firm performance at the long-run.

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