Restate hypothesis and research questions and describe the chapter organisation. In order to explore these objectives it is necessary to first establish a set of methods and approaches as a structure for this purpose; this can be done through using the appropriate methodology. The methodology provides a clear guidance about how the research has been undertaken. In this chapter I will explore and explain a range of approaches, strategies and methods that will be adopted in this research. These methods are as follows:
Give summary
The main objective of this study is to examine the working capital management techniques used by SMEs in this financial crisis period and how they have improved their profits. Exploring these objectives requires the establishment of research methods to design the structure of the research and how objectives will be achieved. The methodology will help answer the research questions. In this chapter, the process for applying the research methodology will be discussed and the rationale behind it will be outlined. This chapter discusses in detail the nature of the study, the research design, the sample, the data collection methods, the data analysis and the limitations of the study.
This research has been conducted using a quantitative method
This study is a quantitative research that attempts to examine............ Author stated that a key reason for doing quantitative research is to .......................... This study wishes to ........... The researcher decided to use quantitative approach in order to identify the current techniques used by SMEs. The most common types
The objective of research should be to be able to generalize and the ability to reproduce the same results if possible. This will help to verify knowledge to further the reliability of a theory or to form a new theory. The objective of this research is to calculate the various ratios relating to WCM and suggest steps to increase the efficiency with which firms should manage their working capital.
RESEARCH APPROACH
Therefore, the way of developing the theory is important for determining the applicable research approach. Saunders et al. (2000) mentioned that this is whether your research uses the deductive approach, where you develop a theory and hypothesis (or hypotheses) and design a research strategy to test the hypothesis, or the inductive approach, where you would collect data and develop theory as result of your data analysis.
Research design
Research strategies include survey, case study, grounded theory, experiment, ethnography,
Research strategy according to Bryman and Bell (2003) is the general orientation that underlines the conduct of a research. In an attempt to meet the objectives of the research, it is necessary to choose a strategy that enables the researcher to provide answers to the research questions. Saunders et al noted that the choice of research strategy is guided by the research question and objective, the existing knowledge, amount of time, the resources available and the philosophy underpinning the research. They added that researchers often employ strategies like ethnography, experiment, archival research, case study and grounded theory in their research*.
Since the objective of this research is to investigate a phenomenon, it is the believe of the researcher that the workings of the phenomenon can better be understood if it is studied within a context. In this respect a case study stands out to be the most appropriate strategy.
This strategy is usually associated with the deductive approach (Saunders et al, 2009). It is frequently used to answer who, what, what, where, how much and how many questions. One advantage of using a survey is that it is economical and can allow researcher collect large amount of data. however, there is a limit to the number of questions any questionnaire should have in order to get more response. Cross-sectional studies often employ the survey strategy (Easterby-Smith et al., 2008)
Addresses the research questions by the description of its approach with rational citing appropriate methodological literature.
Why quantitative method is the best. Closed-ended questionnaires are used to generate information which can be statistically analysed. It would have been ideal to use both questionnaire and interview in order to overcome the weaknesses in both methods. However, due to time and cost constraints this is not feasible. The questionnaires were designed to include both closed and open ended questions. Closed-ended questions are used because companies are very busy these days to conduct interviews or answer open-ended questions which may demand more time. Few closed-ended questions are used so as to assure respondents that it will not take too much of their time. It is easier and quicker to tick boxes and respondents are likely to answer all the questions.These questions are also easy to code for statistical analysis (Dawson, ). However, its disadvantage is respondents can only answer in a predefined way making them not able to bring out new issues in working capital management. Questionnaires were also distributed personally to enable researcher build a rapport and re-assure respondents that information given out is strictly confidential. A return postage envelope was also included for onwards delivery to researcher. According to Bryman (2012), a survey research involves using questionnaires or structured interview to obtain quantitative data which are then examined to detect patterns of association. It enables the researcher to gather information from respondents to understand the behaviour their sample and predict the behaviour of the population. Survey research is appropriate for this study because it is efficient and flexible since it can be designed to suit all kinds of problems and budgets. However, it has some disadvantages which include the unwillingness of respondents to provide the desired information and the capability of respondents to provide data. in implementing this survey, the researcher decided that a self-completion questionnaire was the most feasible way of collecting data.
JUSTIFICATION FOR USING RESEARCH MODEL
They were not able to test all of the hypotheses due to lack of data and it is unclear whether the generally weak or inconclusive support for most tested hypotheses relate to incorrect specification or the unreliability of secondary data sources. Produce results that are easy to summarize, compare and generalize
RESEARCH METHOD
Research method is a technique for collecting data (Bryman, 2012). It may involve the use of participant observation, structured interviews, self-completion questionnaires and focus groups.
SAMPLING
The research is based on checking the relationship between WCM and profitability of SMEs in UK. Purposive sampling will be used in this research to get the right information for the project. A smaller and more manageable sample is taken
Target Population : managers of SMEs across the UK except those providing financial services
Sample size:
Data were collected through a postal questionnaire, using mainly `closed' questions, supported by a follow-on survey, exploring findings in greater depth, and four on-site interviews in selected companies. The questionnaire, covering a range of questions relating to credit management, was distributed to finance and credit executives in large UK companies
Initially, 400 companies were randomly selected from the top 800 UK firms in the FAME database, which also provided the financial and industry sector information required for the study. This sample subsequently reduced to 296 after eliminating companies in sectors where trade credit was not extensively employed. Financial analysis made easy (FAME). Has objective and reliable data as well as comprehensive and substantial enough data to be able to generalize. FAME is reputable and so have a reputation to lose should the data be deliberately altered. They also apply objective and globally accepted accounting principles in publishing financial statements. In addition, there is a minimum cost in accessing this database considering the University of Bradord's subscription. The initial sample consisted of 200 students of whom 13 did not complete all of the interviews
Population
Population of the study is all ........The population covered in this research are all SMEs in the UK in all sectors except the financial sector. This is because
Sample size
Sampling provides a practical way of collecting data from a population since it will be impracticable to conduct a survey for the entire population due to time and budget constraints. Probability sampling is generally associated with survey research strategies (Saunders et al., 2009). 30 firms that fit the above criteria and are active and covered by FAME will form this research sample.
Sampling procedure
No probabilistic quota
A total of 154 usable responses were received, after two reminders, representing an effective response rate of 52% ± far higher than any known prior survey in the field.
To meet the criticism of superficiality frequently directed at postal surveys, on-site interviews were conducted with finance and credit managers in four large companies to explore credit management practices, policies and hypotheses in much greater depth. 20 companies were selected from the FAME database. Since FAME does not cover all SMEs, the research also targets micro companies that are not represented in FAME. 10 of these companies are used. The only limitation is that these companies do not provide their financial statements as a public information. Questions were sent to them to discover their practices and policies adopted to improve their WCM.
Justification
This method is used since it is not possible to include every member into the list and also costly and time consuming since the members are scattered all around the UK. In this sense, the internet survey was used to get to the respondents with ease and also at little cost. Survey monkey was used to design the questionnaire and distribute it to respondents. Random sampling cannot be applied since it is time consuming. Survey monkey also helps to maintain confidentiality at the highest level.
DATA COLLECTION
techniques employed to obtain and analyse data needed to produce results. Techniques include...... Each technique is used to collect data based on the type of research questions to be answered. Secondary data refers to data that has been collected by others for a different purpose (Bryman and Bell 2003). On the other hand, Primary data is data collected by the researcher for the purpose of providing answer to the research problem.
. Owing to restrictions of time, money and access, the data collected is small. We collected secondary data from FAME database. We note that there are some problems with using information from databases as described by Edward et al. (2007). Some of these problems include incomplete and inaccurate information held by databases. This research makes use of self-administered questionnaires. These questionnaires were given out through the internet and hand delivery and collected later. Using a postal questionnaire will have generated some problems. These questions are supposed to be answered by managers. Addressing a questionnaire to a company does not guarantee that the managers will fill it. Hand delivered or email will ensure that the right persons answer the questions to ensure the validity and accuracy of information obtained. Non-respondents can also be easily tracked. Interview could have been used in this research. However, managers look busy within this period due to the Olympics, holiday season and going through their half-year reports. Also, the time needed to do these interviews were unavailable. Moreover, questionnaires provides me with ease of data entry.
.
The reason for restricting the time period to these spans was that the latest data for the study was available in these years. In addition we considered some other conditions like: a) their financial term should be ended up by nineteen of March (this is coincident with the end of year in Iran). b) They should not be investment companies. c) They should be adopted in stock exchange of Tehran before 2000. d) their financial activities should not be stopped during mentioned area. In an attempt to increase the response rates, introduction letters were sent to target respondents in order to inform them about the objectives of the study. The use of these letters give rise to the number of response one gets. It is important to ensure that data collected are up to date and relevant to the purpose of the research questions (Saunders et al., 2009). To avoid inaccurate data, FAME has been used. For the purpose of analysis........... respondents were asked to .......... . Statistical significance was analysed using analysis of variance and t-tests as appropriate .Significance levels were set at the 5% level using a t-test. Prior to commencing the study, ethical clearance was sought from
Data will be collected using two methods
Primary data:
This is first-hand data generated from surveys etc.A survey method will be used to collect primary data where structured questionnaires will be presented to respondents. Questionnaire and request letters to fill out the questionnaires where first examined by supervisor before distributing it to respondents. Using survey monkey was fast and accurate. It allowed researcher to quickly incorporate data into the analysis software.
Secondary data:
This includes data from secondary sources. This may include the
internet and web pages of organisations examined,
newspapers, magazines, television,
relevant academic journals, relevant professional reports and surveys
online data sources- FAME database was used in this research
The secondary data used in this project helps to support reliability of results. They can sometimes yield more accurate results where a government agency undertakes a survey which is large scale then this will be better than your primary survey with a small sample size. secondary data will be collected from company websites, literature reviews, textbooks for theoretical background, peer-reviewed articles. Secondary data is easier, cheaper and quicker to collect than primary data. it can also be more accurate than primary data.
Source bias of secondary data. figures can be inflated to serve the interests of researchers.
Reliability
Time span
Multiple data should be used so that one source can be cross-checked with the other for consistency.
Advantages
It is not expensive to obtain and can be obtained quickly since it is publicly available.
Comparison of different companies is much easier due to the fact that FAME database presents all the financial statements of companies in a similar manner.
Information from FAME database is relatively accurate
Disadvantages
The accuracy of information rests on the researcher and not the source.
Secondary data may be collected from a different purpose thus making data not completely adequate for research.
Problems faced in using secondary data
Extracting information relating to working capital from financial statements was quite difficult and required a lot of time to complete the process.
List all information sources: websites, textbooks, research articles, journals, national statistics, commercial services who provide reports on SMEs. Clear instructions and explanations are given to enable respondents know how to answer the questionnaires in order to make them valid and also which questions they can ignore. Follow ups were made on questionnaires sent. This help to retrieve some of the forms but others simply did not have the time to fill out the questionnaire. Reminders were sent out to respondents for them to complete the questionnaires.
Non-respondents were followed at least once to enquire why they are still not able to fill-out the questionnaire. Clear instructions were also given on how to respond. Some questions were not answered. Some may be due to questions not applicable to them and others may be due respondents not willing to answer. Respondents were under no obligation to answer all questions or even fill out the questionnaire. The reason being, for some companies it was against their policies to give out sensitive financial information to others for research.
Reasons for non-reply
Work overload
Time of the year (holiday)
Olympic
And if people don't answer no findings can be found
DATA ANALYSIS
Various statistical tools will be applied which include correlation and regression analysis. These function to determine relationships among variables. In the work of ......... which is related to this study ..........., the analysis were done using .........
Questionnaires were transformed into computer readable data. All data was entered into SPSS for analysis
VARIABLES
In addition to identify capital expenditure, the study undertakes the issue of identifying all the variables that affect the working capital management. Most of the variables identified in the investigation have been taken from the existing literature on working capital management. The study takes into account all the variables discussed below. Variables, which include dependent, independent, and control variables, have been used to investigate under the test hypotheses
DEPENDENT VARIABLE
Table-2: List of Ratios Examined
S.N. S.N
Independent variables
. Dependent variable
Current Ratio (CR)
Liquid Ratio (LR)
Cash Position Ratio (CPR)
Debt-Equity Ratio (DER)
Interest Coverage Ratio (ICR)
Inventory Turnover Ratio (ITR)
Debtors Turnover Ratio (DTR)
Creditors Turnover Ratio (CTR)
Working Capital Cycle (WCC)
Return on Capital Employed (ROCE)
Description of Variables
Variable Name
Measure
Variable Symbol
Expected Effect
Dependent Variable
Return on capital employed
Earnings before interest and tax/Capital Employed
ROCE
Independent Variables
Number of days accounts receivable
Number of days accounts payable
Number of days inventory
Cash conversion cycle
(Accounts Receivable/ Net Sales) * 365
(Account Payable / Purchases) *365
(Inventory / Cost of goods sold) *365
DAR + DI - DAP
DAR
DAP
DI
CCC
-
+
-
-
Control Variable
Sales growth
(Sales t - Sales t-1 ) / Sales t-1
SG
+
All the above variables have relationships that ultimately affect working capital management.
This study measured working capital management using the concept of cash conversion cycle (CCC). This was used in Deloof (2003) and lAzArIDIS and TryFONIDIS, 2006. The CCC is used as a comprehensive measure of WCM
(Inventory / Cost of goods sold) *365
The questionnaires shows us the number of days of accounts receivable, number of days of accounts payable and number of days of inventory. Thus, it is easy to find the CCC of the companies involved
Financial assets were excluded in order to remove the effect of shares of other companies unrelated to the operational activities of the studied companies (DElOOF, 2003)
INDEPENDENT VARIABLES
Cash Conversion Cycle is used as measure of Working Capital Management
CONTROL VARIABLES
Enter all control variables at the IV side. The effect that is given of each variable controls for all the others. Sales growth, which can also represent future growth opportunities, can have an impact on working capital management since managers can decide to prepare the company to meet a different demand level, such as building up inventories for future sales growth (MOUSSAWI, 2006). The sales growth variable (grOWTH) was measured by [this year's sales - previous year's sales]/previous year's sales (DElOOF, 2003; NAzIr e AFzA, 2008; APPUHAMI, 2008)
LIMITATIONS
Finally, a number of important limitations need to be considered. First
The current study was unable to analyse these variables.
The current study has only examined
However, with a small sample size, caution must be applied, as the findings might not be transferable to
Thirdly, the study did not evaluate the use of
An issue that was not addressed in this study was whether
Anything leading to ethical concerns was considered before undertaking this research. The school authorities also checked the ethicality of the project. However, the research method proposed has got some limitations. time and cost constraints have limited . every aspect of WCM cannot be tackled since the time allocated for this research is very short. There exist the possibility of a better medium of looking at ................. compared to regression analysis. Financial ratios used can be of significance in the comparison of firms. However, all the businesses in the sample are not identical. Some may be larger than the orders and their operations differ. The higher the differences, the greater the limitations of the ratio analysis (Author). Limitations of balance sheets due to window dressing (Chadwick, 2007). Also timeframe allowed is not significant to maximize the researcher's potentials as a very robust research would have been done if the time given was long enough. Due to scarce resources, that is money, data collection could have covered a lot more companies to increase the sample in order to be able to generalize with higher confidence. Data collection through self-delivered questionnaires was done only in Bradford. If there were enough funds, this could have covered the entire country. Some of the companies used are not listed on the stock exchange. This therefore makes some of the possible finance sources irrelevant to the sample used for this project. Low response rate was due to the fact that people did not have time to fill out questionnaires. Also, due to the Olympics businesses had so many activities to do and other companies had their key persons required to fill out the questionnaire gown on holiday. It was not possible to investigate the significant relationships of X and Y further because the sample size was too small
I am restrained to handle to collect not so much information since I will be unable to handle it if the information is too much. Judge the reliability and breadth of the data so as to enable you judge the soundness of your results. State problems that occurred and steps taken to minimize their impact. Record how you overcame an obstacle which will help you give a rationale for certain decisions and a realistic view of the method chosen
Cash which is an important and complex component of WCM was excluded in the computation of working capital ratios and the content analysis of annual reports
This stud was not able to consider the Firm size, Firm Growth (in sales), Leverage (Lev) and Fixed Financial Assets (FFA) as Control variables, GDP and Debt
Chapter Summary
In conclusion, this chapter has been conducted in order to emphasise the qualitative characteristics of the research. I attempted to link between the methods and approaches in a way that would underpin the rectitude of the research procedures and the processes that reflect the characteristics of this research. These were the methods and the ways needed to collect, analyse, interpret and represent the data. The implementation of these methods on the case study and working capital management will clearly appear in chapter (6) which will be the analysis chapter
This chapter discussed the var
Further work should be done because of low response
Multiple Regression Function
R2 measures the proportion of the total variation in y that is explained by the predictive power of all the explanatory variables, through the multiple regression model. The profitability is measured by return on capital employed (ROCE) which is the ratio of Earnings Before Interest and Taxes to Capital Employed
The Cash Conversion Cycle (CCC) is used for measuring the efficiency of Working Capital Management of firms. Calculated as Receivable Collection Period plus Inventory Conversion Period minus Payable Deferral Period, it serves as one of the best known measures so far for representing WCM.
Receivable Collection Period (RCP) is the number of days (on average) for which the company receivablesremain unsettled. It is calculated as:
Receivable Collection Period = (Receivables/Sales) - 365
Inventory Conversion Period (ICP) is the number of days (on average) for which a company retains its Inventory.
It is calculated as:Inventory Conversion Period = (Inventory/Cost of Sales) - 365
Payable Deferral Period (PDP) is the number of days (on average) it takes a firm to pay off its credit purchases. It is calculated as: Payable Deferral Period = (Payables/Cost of Sales) - 365
Statistical Tools used in the Study
This study makes use of the Statistical tools for both its descriptive and quantitative analysis using the SPSS 16.
The Mean and Standard Deviation are used in the descriptive portion of the analyses to determine the Mean values of each set of variables and their Standard Deviation. In the quantitative analysis portion, a statistical Correlation analysis is made to determine the relationship between an efficient management of working capital and corporate profitability for the sample under study. Similarly, the Correlation analysis is also made to assess the impact of liquidity on profitability of the sample firms.
The Pearson Product Moment Coefficient of Correlation is used throughout the study. The Quantitative analysis also includes Multiple Regression analyses in order to shed more light on, and develop a better understanding of, the relationship of WCM and corporate performance, and that between the Liquidity and Profitability of firms under study
The Regression Model
the general model used for the analysis is
Equation 1
Profitabilityit = ƒ(WCMit , Firm's Characteristicit)
Where the subscripts i, t are the firm i at the time t. Profitability is used as a proxy for the firm's performance. The ROCE is used as a measure of the profitability of the company. WCM is the vector of working capital management variables which include AR, AP, INV and CCC. Firm's characteristic is the vector of the control variable SG.
From equation 1, we can estimate the linear regression model as follows
ROCE = β0 + β1(WCMit) + β2 (SGit) + ε
Where:
β0 = The intercept of equation
β1= unknown parameters of the WCM variables to be estimated
β2 = unknown parameters of the firm's specific characteristics included in the model to be estimated
t = Time = 1,2,3, …, Years
i = Firm, 1,2,3......,20.
AR = Number of days accounts receivable
AP = Number of days accounts payable
INV = Number of days inventory
CCC = Cash Conversion Cycle
SG = Sales Growth
ε = The error term
In substituting WCM with its components, four basic models will be obtained as follows
ROCEit = β0 + β1(ARit) + β2 (SGit) + ε ................................ Model 1
ROCEit = β0 + β1(APit) + β2 (SGit) + ε ................................Model 2
ROCEit = β0 + β1(INVit) + β2 (SGit) + ε ..............................Model 3
ROCEit = = β0 + β1(CCCit) + β2 (SGit) + ε ............................Model 4
The Multiple Regression analysis was employed in the study to explore the effect of the variables of working capital management on profitability.
The Regression Equation for the sample follows:
ROA ot = β0 + β1 (RCP ot) + β2 (ICP ot) + β3 (PDP ot) + β4 (CCC ot) + β5 (CR ot) + β6 (LNS ot) + β7 (SG ot) + β8 (FL ot) + ε
Where:
ROA ot = Return on Assets of firm o at time t; o = 1, 2, 3, …, 40 Small firms listed in Karachi Stock Exchange
β0 = The intercept of equation
t = Time = 1,2,3, …, Years
RCP = Receivable Collection Period
ICP = Inventory Conversion Period
PDP = Payable Deferral Period
CCC = Cash Conversion Cycle
CR = Current Ratio
LNS = Natural Logarithm of Sales
SG = Sales Growth
FL = Financial Leverage
ε = The Error Term
Intro
State goals of the research and any distinct challenges that may stand in the way of achieving these goals. Single paragraph
Research method
Write summary of research methodology. As you write, keep in mind that the purpose of this summary is to inform readers who do not read the extended version of the methodology, which you will write next. This section should also have its own heading. Give clear reasons why you chose a particular method
Data collection
First part of extended methodology should address the data collection methods
Materials
Research duration
Participants
Step-by-step procedures
Data analysis
Write data analysis section.should cover every detail of the system you use to draw meaningful conclusions from the data you've collected.
Time table
detail the specific number of days or weeks the author spent performing relevant tasks such as typing up the dissertation or distributing questionnaires.
METHODOLOGY
FORMAT
Description of materials, procedures, theory. Where to find materials
Limitations, assumptions and range of validity
Other alternative methods that could have been used
Explain why you are excluding qualitative data
Using Data-gathering method
Questionnaires
Research setting/context:
Justifies research setting selection with background information on program, school, district or community college, such as demographics and student achievement data.
Research sample and data sources:
Gives details and justifies type of sample used and the selection procedure of the participants (including population, sampling frame, and sampling procedures for quantitative or mixed methods studies).
Describes characteristics and size of sample (all) and/or data set (quantitative/mixed methods only, if applicable).
Confirms the protection of the participants' rights with reference to the conventions of research ethics and the IRB process.
Research Approach: Deductive Approach
Involves the development of theory that is subject to rigorous test (Saunders et al, 2009)
Research Strategy: Survey
Techniques and Procedures: data collection and data analysis
Instruments used
Data collection:
Explains and justifies the methods and procedures of data collection that includes how, when, where, and by whom data were collected
Data analysis:
Describes and justifies methods and statistical tools (if applicable) used for analysis. Discusses measures taken to improve study validity. Summarizes outcomes of pilot studies, if applicable. Descriptive and inferential statistics will be used to analyse data. in order to avoid having spurious results, the data analysed must be normally distributed. It is worth
Role of the Researcher:
Illustrates the role of researcher in planning and conducting the research study; makes clear, rational and relevant researcher opinions, assumptions, beliefs, biases (if applicable).
Summary
INTRODUCTION
RESEARCH PROBLEM
State your research questions and hypothesis
RESEARCH APPROACH
RESEARCH DESIGN
Survey results and discussion
Industry represented by the respondents
Industry %
Agriculture, Hunting and Forestry, Fishing
Manufacturing
Construction
Wholesale/Retail
Hotels and Restaurants
Transport, Storage and Communication
Real Estate, Renting and Business Activities
The results of this survey cannot be generalized to the entire SME population due to the small nature of responses received
MODEL SPECIFICATION
Researcher used multiple regression model to predict the effects of
this paper analyzes working capital management performance of manufacturing sectors by using different working capital management measures which include Cash Conversion Cycle (CCC), Net Trade Cycle (NTC), Receivable Turnover in Days (RTD), Inventory Turnover in Days (ITID), Payable Turnover in Days (PTD) and Return on Total Assets (ROTA). The working capital measures include Receivable Turnover in Days (RTD), Inventory
Turnover in Days (ITID), Payable Turnover in Days (PTD), Cash Conversion Cycle (CCC) and Net Trade Cycle (NTC). Return on Total Assets (ROTA) represents the performance of firms. Cash Conversion Cycle is calculated on the basis of three components RTD, ITID and PTD. These components of CCC help us to analyze the collection, inventory conversion and payment policy on sectoral basis
Timetable
detail the specific number of days or weeks the author spent performing relevant tasks such as typing up the dissertation or distributing questionnaires
Data analysis - describe all the methods of analysis used in the thesis and remember to review other student theses or dissertations, which are normally available from the library
REASONS FOR METHODOLOGY SELECTION
Cluster samples will be used due to resource and time constraints. The clusters will be selected from 4 major sectors.
Research Question
Research Method
Investment in current assets
Composition of current assets
Current assets to sales ratio
Current ratio
Acid test ratio
Debtors to sales ratio
Inventory to sales ratio
Cash management: adequacy of cash, control of cash flows and investing excess cash
Consistent with Deloof(2003), firms in banking and financial institutions were omitted. This is because the definition of WC is different for these firms from the definition being investigated in this study(Lazaridis and Tryfonindis, 2006)
Noreen et al (2009)Personal interviews and telephone surveys were deemed infeasible due to high cost and geographical dispersion of the firms. It was decided to use the tool previously used by Ricci and Vito in 2000 in their paper to identify working capital management practices in UK*. While this method allows for easier analysis of the data due to standardized questions, its limitation is that it allows the researcher to determine only what the respondents are doing, not how or why they are doing it. Again the researchers have tried to overcome this limitation by adding few open ended questions in order to get the picture closer to the reality.
SAMPLE
It is based on the data provided by the Bank of England that consists of the financial statements of 20 SMEs.
Profitability(Gross Operating Income)= Sales - Cash COGS
Total Assets - Financial Assets
Financial assets(shares in other firms) are significant part of total assets. Reason why return on assets is not considered a measure of profitability. when a firm has mainly financial assets on its balance sheet, its operating activities will contribute little to the overall return on assets. Profitability measures based on stock market valuation are not considered because only a limited number of Belgian firms is listed on a stock exchange
CCC = Number of days accounts receivable + number of days of inventory - number of days of accounts payable
Used Pearson Correlation Coefficients. A shortcoming of Pearson correlations is that they do not allow to identify causes from consequences
Profitability affects accounts payable policy and not the vice versa because there is a negative relation between the number of days of accounts payable and profitability. Negative relation could also mean that firms wait too long to pay their accounts payable. Speeding up payments to suppliers could increase profitability because of the substantial discounts received by firms.
However, in Belgian
fuiancial statements, discounts received for prompt payment should be booked as financial income, and should not affect operating income.
REGRESSION ANALYSIS
The variables used in this study based on previous researches about the relationship between working capital management and profitability. Table 5 and Table 6 show the results of regression analysis, which is used to identify the significant variables influencing the dependent variable
Gross operating profitability that is a measure of profitability of firm is used as dependent variable. It is defined as sales minus cost of goods sold, and divided by total assets minus financial assets.
A shortcoming of Pearson correlations is that they do not allow identifying causes from consequences. Hence, we use regression analysis to investigate the impact of working capital management on corporate profitability
. The determinants of corporate profitability are estimated with a fixed effects model. Fixed effects estimated assumes firm specific intercepts, which capture the effects of those variables that particular to each firm and that are constant over time.
Model 1:
GROSSPRit
= β0 + β1 (ARit) + β2 (DRit) + β3 (LOSit) + β4 (FATAit) + ε
In model 1, we use gross operating profitability (GROSSPR) as a dependent variable. Number of days accounts receivable (AR) is used as an independent variable. While, Debt ratio (DR), Natural logarithm of sales (LOS) and Fixed financial assets to total assets (FATA) are used as control variables.
All regression models were tested for multicollinearity. The variance inflation factor (VIF) or `the tolerances of the explanatory variables is used to detect whether one predictor has a strong linear association with the remaining predictors. VIF measures how much the variance of an estimated regression coefficient increases if your predictor are correlation (multicollinearity). The largest VIF among all predictors is often used as an indicator of serve muticollinearity.
Findings from this study becomes difficult to generalize for relatively small sample size
Personal interviews and telephone surveys were deemed infeasible due to high cost and geographical dispersion of the firms. It was decided to use the tool previously used by Ricci and Vito in 2000 in their paper to identify working capital management practices in UK. While this method allows for easier analysis of the data due to standardized questions, its limitation is that it allows the researcher to determine only what the respondents are doing, not how or why they are doing it. Again the researchers have tried to overcome this limitation by adding few open ended questions in order to get the picture closer to the reality.
HYPOTHESIS
The study makes a set of testable hypothesis to examine the working capital management practices of SMEs.
H01: There is no significant effect of Number of days Account receivable on the
Performance of SMEs.
H11: There is a significant effect of Number of days Account receivable on the profitability of Textile industry
H02: There is no significant effect of Number of days Account payable on the profitability
of Textile industry.
H12: There is a significant effect of Number of days Account payable on the profitability
of Textile industry.
H03: There is no significant effect of Number of days Inventory on the profitability of
Textile industry.
H13: There is a significant effect of Number of days Inventory on the profitability of
Textile industry.
H04: There is no significant effect of CCC on the profitability of Textile industry.
H14: There is a significant effect of CCC on the profitability of Textile industry.
Ho5: Companies of different industries differ in their management of working capital.
Ho6: effective WCM increases the survival of a firm
Hypothesis 6: Firm performance is negatively related to working capital management
Data Analysis and
This research is intended to achieve the following objectives
Find out the optimum levels of working capital requirements
Find out whether working capital management increases the survival of a firm
Find out the impact of working capital management on the profitability of a firm
The high rate and threat of insolvency in small business most time lend itself to poor and ineffective working capital management. A further problem is the question of volume and level of current debt, which a firm can manage and afford (Geoffrey, 1969). It is evident that small firms have very weak financial position. They rely on credit facility to finance their operation and this credit facility most times comes from account payable.
Most small firms become insolvent and fail because they find it difficult to access financial assistance due to their inability to provide the necessary requirements demanded by the financial institutions to secure a loan.
There is also poor record keeping system in most small firms, which reduces the ability of the firm to monitor the proper flow of their working capital.
The poor management of working capital of SMEs have not allowed them to compete effectively with competitors.
RESEARCH QUESTIONS
Main Research Question
The research will investigate how small businesses can use working capital management techniques to get cash to pay for debts and finance investments, that is, improve their liquidity positions.
Sub-questions
How can SMEs increase their liquidity by 10% in a month
How can SMEs operate efficiently to avoid waste of resources
What ways can SMEs use their existing customer base to improve liquidity
What roles do banks have in supporting SMEs and the specific schemes they have for SME support
What are the changes that need to be done in working capital policies
Research Question
Key Hypothesis
Research Methodology
Pearson's Correlation
In the above equation,
Bi =..........
