THEORY INTO PRACTICE (BSS056-6) UNIT

IMPACT OF WORKING CAPITAL MANAGEMENT ON FIRM’S

PROFITABILITY: THE CASE OF HYUNDAI MOTORS COMPANY LIMITED
LISTED ON THE LONDON STOCK EXCHANGE IN UK.

By:

BENJAMIN APPIAH (1433775)

A project report submitted to the School of Business, University of Bedfordshire, Luton

campus in partial fulfilment for the requirement for the
degree
of

MASTER OF BUSINESS ADMINTRATION (FINANCE)

School of Business,

Department of Strategy and Management

14TH SEPTEMBER 2018

 EXECUTIVE SUMMARY
Working capital management deals with firm’s current assets and current liabilities to
manage short-term finances. Firms may have an optimal level of working capital that seeks to
maximizes profit and shareholders wealth. There have been numerous prior studies to
determine the relationship between working capital management and firm’s profitability. The
aim of this research is to examine the impact on working capital management on the
profitability of Hyundai Motors Company Limited listed on the London Stock Exchange. To
achieve this aim, the research investigated the impact of inventory management on the
company’s profitability, the effect of accounts receivable management on its profitability, the
impact of accounts payable period on the profitability and how cash conversion cycle affects
the profitability of the firm.

A comparative method of analysis was used to conduct the research. The research used
purely secondary evidence which was obtained from the audited financial statement of the
case company for a five-year period starting from 2013 to 2017. The research used four
components including: inventory conversion period, accounts receivable period, accounts
payable period and cash conversion cycle as measures of working capital management, that
represent the independent variables. The net profit figures obtained in the financial statement
was used to denote profitability. Tables were used in presentation of the results accompanied
with analysis and associated discussions.

The research after applying the theories on the raw data or evidence obtained concludes that,
the inventory conversion period and accounts receivable period has negative impact on the
company’s profitability. This means that, longer inventory holding days and accounts
receivable days are linked with lower profitability. Similarly, the results show significant
negative effect of the company’s accounts payable period and cash conversion cycle on its
profitability.

Generally, the findings show that the company’s working capital management has impact on
its profitability. Therefore, to increase profitability, the research recommends that the
management to improve on the management of its working capital components.
 CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE RESEARCH

Good working capital management is a requirement for any company aiming consistent
profitability. WCM deals with decision making relating to components of working capital
and short-term financing. It helps in ensuring a company has enough cash flows to carry out
day-to-day operations and meet short-term requirements (Akoto et al, 2013). Working capital
management is a very vital element of corporate finance as it directly affects the liquidity and
profitability of a firm (Appuhami, 2008, Christopher and Kamalavalli, 2009). The role of
working capital is significant in current business operations and recently many companies
have paid serious attention to improving and managing working capital. Working capital can
create a cash flow crisis when it gets to negative whiles too much working capital may imply
that a company’s is not working hard enough.

Working capital is a critical measure of business financial health, which is the difference
between current assets and current liabilities of a company is composed of numerous
variables including: cash, inventories, account receivables, account payables and other short-
term investment (Mathuva, 2010). Woking capital management deals with firm’s current
assets and current liabilities to manage short-term finances. It serves the purpose of managing
current accounts of a company to attain a desirable balance of it profitability and risk
(Mathuva, 2010).

There are several components that must be investigated when considering the management of
working capital. These include: account receivables period (ARP), inventory conversion
period (ICP), account payables period (APP), cash conversion cycle (CCC), current ratio
(CR), inventory turnover ratio (ITR) and others. For the aims of this research, the focus will
be on four components of WCM including CCC, ARP, APP and ICP, as it expected that these
selected components significantly affect profitability of a manufacturing company (Mathuva,
2010; Akoto et al, 2013)

The main purpose of this research is to examine the connection between the working capital
management on the profitability of Hyundai Motors company limited as a manufacturing
firm. The research investigated the relationship of working capital components including
inventories, cash, trade receivables and trade payables on the company’s profitability. To
examine the impact of working capital management on profitability, the issue working capital
policy is very important which cannot be overlooked. Because it will be difficult for a firm to
run its operations successful without a proper management of the working capital
components. Hence, the research considered the working capital policies and profitability of
the company.

THE RATIONALE OF THE RESEARCH

The major portion of a company’s operation have direct and indirect impact on the working
capital of the company. For example, the purchases of raw materials result in increasing the
investment in materials stock and cash payments or account payables. On the other hand,
sales of inventory end up in decreasing finished goods inventory and increasing cash or
account receivables. The management of working capital components may be difficult and
could demand more time should the working capital investment and other short-term
investment financing be actively managed. But, Rehn (2012) recorded that, effectively
managing of a firm working capital components has a significant effect which can increase
the net present value of its cash flows. Sarbapriya (2012) researched about the relationship
between working capital management and 311 Indian manufacturing company’s profitability.
He concludes that, a company’s ability to operate continuously in longer successive period
depends much on how it deals with investment in working capital management. Could this be
the secret behind the success of Hyundai Motors Company Limited since it started operations
in 1967 as a multinational automotive manufacturing company?

Effective and efficient working capital management is very crucial to business success
because insufficient and excessive working capital affect company’s profitability (Bei and
Wijewardana, 2012). Working capital management is very important because most
manufacturing companies face challenges in obtaining external capital to finance their day-
to-day operations. Karadag (2015) stated that, analysing the role of working capital as a key
driver of company’s profitability is vital to address the challenges.

Confidently, the results of the research will provide management of the company a better
understanding of the working capital management and the relationship with its profitability.
This research will help the management by dwelling on the findings to strike balance of its
working capital management components to maximise profit as well as shareholders wealth.
Also, the management of the company will use the findings of the research to establish or
improve on partnerships with their suppliers and customers to get better business dealings
(Karadag, 2015). Again, the result of the research is expected to serve as a guide for policy
makers and administrators of the company’s finance department in the formulation of policies
relating working capital management. Moreover, the results of the research will drive
changes in the decision-making processes and practices within the company and
manufacturing firms. Furthermore, this research will provide some relevant information to
investors, managers, shareholders and interested parties about working capital of the
company and manufacturing firms. Hence, the reasons why this research seeks to examine
the impact of working capital management on the profitability of Hyundai Motors Company
Limited as a manufacturing firm.

SCOPE OF THE RESEARCH

This research is pleased to examine the impact of working capital management on the
profitability of Hyundai Motors Company Limited. The researcher limited its scope to
automotive manufacturing companies listed on London Stock Exchange in UK. These
companies are seen to require substantial investment in the account receivables, account
payables and inventories comparing the financial and service companies (Kroes and Manikas,
2014). The case company was chosen because of its successful longer period for been in
operation of about fifty years, the nature of business, its multinational state, number of
subsidiaries, the availability of evidence, time factor and personal interest in Hyundai
products.

AIM OF THE RESEARCH

The aim of the research is to examine the impact of working capital management on the
profitability of Hyundai Motors Company Limited listed on the London Stock Exchange in
UK.

OBJECTIVES OF THE RESEARCH

To achieve the aim of this research, the following objectives have been set:
1. To examine the impact of inventory management on the profitability of Hyundai
Motors Company Limited.
 2. To evaluate the effect of account receivables management on the profitability of
Hyundai Motors Company Limited.
3. To analyse the impact of account payables management on the profitability of
Hyundai Motors Company Limited.
4. To examine the effect of cash management on the profitability of Hyundai Motors
Company Limited.

RESEARCH QUESTIONS
Research questions assist researchers to choose appropriately the method of analysis, take
decision about how to get evidence and applying the adopted theory (Zelealem, 2016). The
main research question guiding the study is: What is the impact of working capital
management on the profitability of Hyundai Motors Company Limited listed on the London
Stock Exchange in UK?

THEORY TO BE APPLIED FOR THE RESEARCH

According to Turner et al (2013), a theoretical framework provides the context of conducting
research and interpreting findings. This research takes into consideration the cash conversion
cycle (CCC) theoretical framework. The CCC is a dynamic measure of working capital that
establishes the time to convert a dollar of cash outflow back into a dollar of cash inflow
(Richards and Laughlin, 1980). The CCC show the relationship between the working capital
management and firm’s profitability. It is the sum of inventory period (INP) and the account
receivables period (ARP) minus the account payable period (APP). A longer CCC shows that
a company takes more time to convert its cash outflows into cash inflows (Mathuva, 2014).
However, a shorter CCC may improve a company profitability because its inventories and
account receivables are turn into cash quickly and serve as good indicator of efficient use of
working capital (Marttonen et al, 2013).

INTEGRATION OF AREAS OF THE MBA

The key components of working capital management are the inventory, cash, trade
receivables and trade payable. Most companies buy and sell inventories on credit basis which
leads to trade payables and trade receivables. Handling of inventory from raw materials and
processing them into finish goods as well as delivery falls under the management of logistics
and supply chain. For a company to sell out its finished goods as quick as possible, the
marketing department has key roles to play in the form of advertisement, promotions,
reaching out to customers to ensure satisfaction of products purchased. When finished goods
are sold at faster rate, inventory decreases, and the company gets cash to invest in other
business or increase production. Investigating the impact of working capital management on
firm’s profitability will be of importance to the logistics and supply chain management and
marketing department. Therefore, the research is integrated with the logistics and supply
chain management and marketing areas of MBA.

METHOD OF ANALYSIS
Looking at the impact of working capital management on firm’s profitability as the main aim
of the study, comparative method of analysis was deployed. The variables including
inventory period, account receivable period and account payable period were calculated from
the financial statements in the annual published reports of selected Hyundai Motors Company
Limited for a five-year period starting from 2013- 2017. This method is like that of investors
and financial analyst to evaluate the performance of listed companies (Johnston, 2014). To
ensure that researchers have consistent and comparable evidence over time and offer a solid
basis for rigorous analysis, a systematic collection of financial data is important (Tasic and
Feruh, 2012).

EVIDENCE/ DATA FOR THE RESEARCH

Evidence or data can be primary or secondary. To achieve the goal of the research, secondary
evidence or data were gathered from existing research and used in the literature review.
Evidence of the research were obtained from the website of Hyundai Motors Company
Limited and the London Stock Exchange in UK where this company is been listed. The data
including inventories, trade receivables, trade payables, sales, cost of sales and others will be
used as basis for the calculations. These were obtained from the financial statements in the
annual published reports of the company for five years starting from 2013 – 2017.

ORGANISATION OF THE RESEARCH

This research is organised into four chapters. Chapter one, which is the introduction provides
a background of the research, the rationale of the study, the scope, main aims, the objectives
and the research questions. It also contains the theory to be applied, related areas of MBA
integration, method of analysis and the evidence or data to be collected for the research.
Chapter two contains the detailed review of relevant literature on working capital
management and firm’s profitability. The next section which is chapter three, covers the
method of analysis. Chapter four presents the discussion of analysis by applying the theory to
the evidence. The final part which is chapter five covers the conclusion and the
recommendations appropriate for the management of the case company.

CHAPTER TWO

LITERATURE REVIEW

INTRODUCTION
This chapter focuses on the relevant literature relating to the working capital management
and firm’s profitability regarding the objectives of the research. This chapter has been divided
into two parts. The first part deals with the theoretical review of the working capital
management and firm’s profitability whiles the second part reviews the empirical evidence
relating to working capital management and firm’s profitability.

THE THEORITICAL REVIEW

OVERVIEW OF WORKING CAPITAL MANAGEMENT
The management of working capital concerns on the optimisation of company’s cash,
inventories receivables, payables in a way that maximise company’s profitability (Kaur and
Singh, 2013). Working capital management refers to the organisation and control of current
asset and current liabilities to ensure that a company has an adequate cash resources to
effectively run their operations. Firms under certain markets must maintain enough cash level
to meet the running expenses and at the same time must try to reduce the cost of holding cash
(Mateut and Zanchetti. 2013). For companies to improve their earnings, effective
implementation of working capital management system is an excellent way to achieve that.

For the past forty years major concern on the theoretical development have been on long-
term investment and financial decision- making (Kumar and Singh, 2014). There has not
been much concern in the aspect of short-term finances, thus working capital management.
Some companies due to norms have consider working capital with little importance.
According to Kumar and Singh (2014), after the fall in performance of companies during and
after 2008 great recession, working capital management started to gain interest of managers
and researchers.
 Working capital is very delicate in the field of financial management. Financial management
deals with the making of economic wealth, planning and controlling of firm’s resources,
maximising the share price for shareholders equity, increasing firm’s profitability and
maximising the rate of return of equity. Financial management in companies operate in
accordance to problems and opportunities. Most companies have limited financing options
but also have the same financial problems they faced (Arnold, 2008; Gitman, 2009; Sagner,
2010). One of these major problems is the deployment current assets and current liabilities
hat are sensitive elements of working capital management.

The objective of working capital management is to minimise the cash conversion cycle, thus
the amount of funds locked up in short-term investment (Gitman, 2009). It is critical to
understand the objective and financial functions by identifying the main components of
working capital management relative to day- to- day business operations. Working capital
management is very important for all companies’ survival, sustainability and its direct effects
on firm’s profitability.

Figure: 1 The Conceptual model of Working Capital Management

FINANCIAL
MANAGEMENT

WORKING
CAPITAL
MANAGEMENT

OPERATING ACCOUNT ACCOUNT

INVENTORY CASH
CYCLE RECEIVABLES PAYABLES
MANAGEMENT MANAGEMENT
MANAGEMENT MANAGEMENT

IMPACT ON IMPACT ON IMPACT ON IMPACT ON IMPACT ON

PROFITABILITY PROFITABILITY PROFITABILITY PROFITABILITY PROFITABILITY

Source: (Author’s Construct 2018)

THE COMPONENTS OF WORKING CAPITAL MANAGEMENT

Working capital management is very important for companies’ day-to-day operations because
any decision made on one component influences the other components. Working capital is
“the difference between current assets less the current liabilities” (Arnold, 2008). Working
capital deals with investment in short-term source of finance, such as cash, inventories, trade
receivables and can be reduced in term of payments made to trade payables. For companies to
optimise the balance level of benefits and costs, suitable techniques must be adopted to
manage the liquidity components of working capital through increasing or decreasing the
inventories, cash, trade receivables and trade payables (Arnold, 2008; Gitman, 2009).
The below figure depicts a typical working capital cycle and other cash flows which
enunciates the basic components of working capital management interrelations and their
changes with the liquidity stage of a company.

Figure: 2 The Model of the Working Capital Cycle

Trade
Receivable
s
Taxation

Sales

Fixed Assets
Operations Finished
Cost Goods
Labour,
Overhead, CASH
Marketing,
Distribution Work in Medium-Term
etc Progress Finance

Raw Materials Long-Term Debt

Trade
Payables
Shareholders

Working Capital Cycle

Source: (Adapted from Arnold, 2008) Other Cash Flow

Looking at the above figure, the working capital cycle starts at firms buying of raw materials
from suppliers to be processed, through work in progress and ending as finished goods. The
finished products are kept by the firms as inventories, yet to be sold for customer’s
consumption in return for cash or credit basis if the accrual accounting system is in operation.
Failure or delay in payments of inventories sold on credit to customers could lead to cash
tightening in the form of trade receivables. considering the dynamics of working capital
management, the total current assets and the total current liabilities of any company are very
perilous for short-term financial decisions because they are the drive force of firms’ day-to-
day operations and performance as well (Sagner, 2010).

Time and Money Surrounded in Working Capital Cycle

When it comes to the management of working capital, it components including inventories,
trade receivables and trade payables has two dimensions namely Time and Money (cash).
According to Arnold (2008), the term money (cash) may move faster or locked up in the
operating cycle which can result in reduction of cash in the company depending on the
operational policy and the components dynamics.

Table: 1 Dimensions of Working Capital Component

TIME MONEY (CASH)

Faster collection of trade receivables Enough cash release from operating cycle
Slower collection of trade receivables Cash tied up in the operating cycle
Faster sale of inventories Free up cash
Slower sale of inventories More cash consumed
Better negotiation of credit trade from Increases cash resources
suppliers
Source: (Author’s Construct, 2018)

Inventory Management
Inventory management is pivotal in effective and efficient management of working capital. It
is also very important in the control of stocks that must be held either for later use for
production or exchange in case of services (Adeyemi and Salami, 2010). The kind of
production a company is involved determines the composition of its inventories. There are
five different assets an inventory may comprise of namely, raw materials, working in
progress materials, finished goods, extra materials and consumption materials.
Manufacturing and engineering companies may hold an inventory with these five
compositions because inventory is crucial for their production.
Emphasising on the composition of inventory, Gitman, (2009) and Arnold, (2008) proposed
that inventory is basically made up of three components namely, raw materials, working in
progress and finished goods.
1. Raw Materials: According to Cinnamon et al (2010), raw materials consist of
delivered goods by a firm’s supplier to its warehouse yet to be taken into the
production area for conversion processes. Minimising it is vital in certain part of
working capital but can be offset by the economic order quantities.
2. Work in Progress (WIP): Work in progress refers to when the raw materials are
move from the warehouse until declared for sale and delivery to customers. Working
capital need to be considered throughout this process in terms of reducing buffer
stocks, abolishing the production process, reducing the whole production cycle period
(Cinnamon et al, 2010).
3. Finished Goods: Finished goods are the stock hold in the warehouse waiting for sale
and delivery to customers. It may take some time to sell these finished goods
therefore managers must find available options to dispose them as quick as possible
by either reprocessing or repacking and sell them at lower discounted prices. For
example, the best inventory management are vehicle manufacturing companies. They
normally used the Just in Time system to deliver finished goods and by doing so
eliminate both raw materials stock and work in progress (Cinnamon et al, 2010; Van
Home and Wachowicz, 2008).

One of the main challenging tasks for working capital management is the inventory
management which is to minimise the inventory as much as possible to reduce the cash
conversion cycle period and cost. Minimising an inventory is associated with risk because if
it gets to a level close to zero, it increases the likelihood of running out of materials needed
for production or reduces the finished products during high demand to cause lose in revenue.
For effective and efficient inventory management, the Just in Time system is a strategy that
needs to be adopted to help keep inventory levels on a lower level without any high
possibility of risk.

Accounts Receivable Management

Most companies do sells goods or service on credit, these credit sales are recorded as trade
receivables in the ledgers and balance sheet. This represent amounts owed to the company by
its customers because of the sale of goods or service in the ordinary course of business.
According to Kelly and McGowen (2010) when goods are sold on credit and customers delay
payment or did not pay at all causes problems. Therefore, it is vital for financial managers to
implement a good credit policy that can effectively control the advantages of credit sales with
the associated cost.

Firms normally embark on credit analysis to check customers paying time. Cash is the life-
blood of companies, hence receiving cash early improve their working capital. On the other
hand, when cash are collected too early without providing better credit terms could hamper
sales in the long run because customers might switch to competitors. Another way firm
usually use to get cash early as well as improve their working capital is to sell and handover
the trade receivables to a factoring firm. The associated risk here is that, the factoring firm
might treat the credit customers badly when there is delay in payment or no payment. This
could create problems in terms of trade customer relation with the firm that gave out the trade
receivables.

Accounts Payable Management

Account payables arises from the fact that most companies, especially manufacturing and
retail purchase their goods or services on credit. Trade payable is the amount of money owed
by a company to its suppliers and shown as current liabilities on a company’s balance sheet.
Base on good relationship with suppliers, firms can extend its credit policy but should note
that it is a short-term debt to make sure suppliers are receiving the payments on time to make
them satisfied. Therefore, effective management of trade payables is very important.

Purchasing goods on credit and the selling on credit to customers is a cheaper way of finance
than companies, borrowing from bank to finance credit sales (Arnold, 2008). Firms with trade
credit enjoy benefits because if payable period long the cash could be used for other
investment. It is important for companies to pay their suppliers on time to enable more trade
credit from supplier. However, failure to pay or delay in payment may cost the company
because suppliers could shift to other companies who may pay on time. This will lead to
shortage of raw materials for production and can affect revenue as well.

Cash Management
Cash is financial sense refers to all money items and sources that are available to assist
companies to pay their bills. Cash management appears to be very important function in most
companies. According to Ward (2010), firms can maximise profit by investing cash and
keeping an appropriate level of liquidity. The management of trade receivables and trade
payables described above comes under cash management.

Below is the brief of what cash management is involve shortening the cash conversion cycle
(Lantz, 2008)
1. Shortening the credit time for trade receivables
2. Extending the credit time for trade payables
3. Implementing more efficient and effective policies to manage trade receivables and
trade payables
4. Improving the procurement of capital surplus and deficits

Cash management forms part of working capital management which deals with the way in
which cash goes through several process of managing a company’s liquidity in it planning
and monitoring (Lamberg and Valming, 2009). When cash management is monitored
effectively it ensures and improved profit margins and huge earnings ratio which can result in
higher profitability.

MEASUREMENT OF WORKING CAPITAL MANAGEMENT

Inventory conversion period (ICP), account receivables period (ARP), account payable period
(APP) and the cash conversion cycle (CCC) are known to be consisted as working capital
management construct. For companies to improve profitability, managers need to endeavour
for a shorter ARP, INP, CCC and a longer APP but the period length depends on several
factors both internal and external to companies (Molina and Preve, 2012).

Inventory Conversion Period

According to Pong and Mitchel (2012). Inventory is the stock of physical goods or products
ready for final sale. They stated that an efficient and effective inventory management help
firms to ensure a stable working capital in effect increases profitability. The inventory period
represents the time frame that stocks are held by the firms before sales. Shockley and Turner
(2014) refers to an average inventory period as the ratio of inventories to cost of goods sold,
multiplied by 365 days.

Inventory Conversion Period = Average Inventory × 365

 Cost of goods sold
A shorter ICP means a quick conversion of inventories whiles a longer ICP indicates that
companies keep inventory in stock for a longer period (Kaur and Singh, 2013). Firms should
not keep inventory level too low to impact production or sales and not too high to tie up funds
(Pong and Mitchel, 2013). Excess inventory can lead to liquidity problems because of huge
inventory cost. On the other hand, Mathuva (2014), contended that huge level of stocks could
contribute to profitability by reducing the associated risk of stock out and delay in operations
whiles a small level of inventory minimises it costs. However, keeping inventory at low level
also increases the chances of stock out and loss of sales (Mishra et al, 2013). Therefore, a
longer and shorter than optimum ICP could affects working capital management and firm
profitability.

Account Receivables Period

Account receivables refers to the unpaid trade credit that a firm offer to its business clients
(Yano and Shiraishi, 2012). The account receivable period represents the average number of
days it takes firms to collect payment from their clients. The ARP is the ratio of average of
account receivables to sales, multiplied by 365 days and express the average number of days
companies expect to collect unpaid credit sales from customers (Yazdanfa and Ohman,
2014).

Account Receivable Period = Average accounts receivables ×365

Sales
The ARP and company’s profitability have an inverse relation because a short ARP
demonstrates a firm ability to collect receivables quickly whiles longer ARP depicts a slow
rate of collection of receivables (Kestens, et al 2012; Rauscher and Wheeler, 2012). Kestens
et al (2012) and Sheng et al (2013) came to agree that firms giving time to customers to pay
goods sold to them helps to establish good customer relationship that could improve long-
term profitability. Hence, a shorter or longer than the optimum ARP has impact on working
capital management and firm profitability.

Account Payable Period

Account payable is an immediate firm financing source as it instinctively rises from normal
business transactions (Kaur and Singh, 2013). The APP represents the average number of
days it takes firms to pay their suppliers. The APP is a proportion of average account payable
to the cost of goods sold, multiplied by 365 days.

Account Payable Period = Average account payable × 365

Cost of goods sold
A longer APP help small firms to manage short-term financing problems and offer available
resources for other investment (Tauringana and Afrifa, 2013). However, late payments may
bring the risk of losing suppliers and loss of creditworthiness (Talonpoika et al, 2014). For
small companies to maximise profit and maintain creditworthiness, managers must ensure
payment are made on time, but as slowly as possible without destroying its credit rating (Gill
and Biger, 2013). In respect, a longer and shorter APP may affect the working capital
management and firm profitability.

Cash Conversion Cycle

Cash budget is a forecast of a company future cash inflows and outflows and how it can be
used for operational activities (Gitman, 2009). However, cash conversion cycle is concerned
with the duration of time that a firm’s resources (cash) is tied up in the inventory and account
receivables. CCC is mathematically represented by the below equation (Gill et al, 2010;
Dong, 2010; Gitman, 2009).

CCC = Account receivable period + Inventory period – Account payable period

CCC = ARP + ICP – APP

According to Mathuva (2014), a longer CCC shows that a firm takes more time to convert its
cash outflows into cash inflows. A shorter CCC may enhance a firm profitability because its
inventories and account receivables are turn up into cash quickly and serve as an indicator of
efficient use of working capital (Marttonen et al, 2013). CCC is seen as a composite measure
of working capital management, therefore, a longer and shorter CCC has great impact on
firm’s profitability.

WORKING CAPITAL POLICY

Working capital policy is referred to as a strategy which provides procedures to managers to
manage the current assets and the current liabilities in such a manner to minimise associated
risk (Afza and Nazir, 2007). Working capital policy mainly emphases on the liquidity of
firm’s current assets to meet current liabilities. Liquidity is very vital because, if firms
maintain too high level of liquidity a lot of resources will be idle, and it must bear the cost of
these idle resources but if liquidity is too low, firms faces lack of resources to meet its current
financial liabilities (Arnold, 2008). Working capital policy can be mainly classified in three
forms namely, defensive policy, aggressive policy and conservative policy.
Defensive Policy
Companies use defensive policy in a situation whereby its fixed assets and greater part of
current assets are financed by using long-term debt and equity. For this policy, firms adopt a
financial plan that meets the projected life span of assets with the projected life of the sources
of funds raised in financing the assets (Paramasivan and Subramanian, 2009). According to
Arnold (2008), defensive policy minimises risk by reducing the current liabilities however it
affects profitability because high interest rate pay on long-term debt would increase the cost
of financing. Companies who are not sure about future prices, demand and short-term interest
rate prefer to adopt such policy because it better to have high level of current assets.
Firms operating under the defensive policy has a longer cash conversion cycle which
provides the shield against the financial suffering created by the lack of funds to meet the
short-term liability. Therefore, the defensive policy could affect the company by reducing its
profitability and the cost of the policy might out weight the benefits (Arnold, 2008).

Aggressive Policy
For aggressive policy, it gives low interest rate for companies to finance its current assets and
short-term debt but the associated risks with short-term debt are higher than the long-term
debt. With this policy, the whole amount of current assets is to be financed by short-term debt
and even part of the fixed assets which might push the working capital on the negative side
(Paramasivan and Subramanian, 2009). The aggressive policy is very risky and companies in
an expansion moment, boosting sales and profitability will find it difficult because the short-
term debt might not be enough to finance the increased inventories and receivables. However,
companies operating under stable economic might see it as better policy because product are
to be settled and give fixed cash flow and hence improve working capital management
because cash forecasting will be easier. Basically, firms with aggressive policy do offers
short trade credit time to customer, try to hold minimal inventory and keep some cash in
hand. This policy needs attention because it is a high risky strategy but offers high return to
the firm (Arnold, 2008).
Conservative Policy
This is a mixture of defensive policy and aggressive policy. Most firms for instance may
neither go for defensive policy, thus by increasing the current assets level as compared to
current liabilities nor aggressive policy, thus by reducing the current assets level as compared
to current liabilities. These companies adopt conservative policy because it helps to find the
reasonable level of working capital and balance firms’ profitability and risk. Paramasivan and
Subramanian (2009), referred to this policy as “low profit low risk” policy.

However, the level of working capital again depends on the sales level, as it’s the main
source of revenue for every firm. According to Arnold, (2008), sales can have effect on firms
working capital in three probable ways:
1. When the cash conversion cycle period remains same, working capital will increase in
same proportion with sales increase.
2. As sales increase, working capital in a slower rate.
3. The level of working capital can rise in misappropriate way as sales increase because
it might rise in a rate more than the rate of increased in the sales.
Generally, firms with stable sales can implement the aggressive policy because it confidently
assures its future cash inflows and is confident to pay its short-term liabilities when due.
However, aggressive policy will not be a recommended policy for firms with unstable sale
because future cash inflows are not assured. Therefore, understanding the current assets and
current liabilities will inform the company decision on the best choice of working capital
policy (Arnold, 2008).

THE EMPERICAL REVIEW

This section reviews previous researches done on the relationship between working capital
management and firm’s profitability and their outcomes according to the aim and the
objectives of the research. The review covers inventory management, account receivables
period (ARP) and account payables period (APP), and cash conversion cycle (CCC).

Inventory Management
most companies prepare inventory budgets and revised their inventory level regularly. In the
work of Nyabwanga and Ojera (2012), when determining the inventory management
practices of small scale enterprises in Kenya concluded that most of the firms prepare
inventory budgets and reviewed inventory levels. This shows that managers have higher
possibility of effectively managing inventory to make sure of balance between availability
and customer demand. Samiloglo and Demirgunes (2008), proposed a negative relationship
between profitability and inventory conversion period. On this basis, they recognised that
firms listed on the Istanbul Stock Exchange gained high profits by selling inventories with
less time in two ways: by selling more inventories within a given period and improving
liquidity because they sell inventories faster.

Muthuva (2010), used a sample of thirty companies listed on the Kenya Stock Exchange to
examine the impact of working capital management components on corporate profitability for
the period 1993-2008. In his analysis, he found a positive significance of inventory
conversion period on the listed companies’ profit. Makori and Jagongo (2013) also indicated
positive relationship between inventory conversion period and profitability of twenty sample
manufacturing and construction companies listed of the Kenya Stock Exchange. However,
Nzioki et al (2013) found insignificant relationship between inventory conversion period and
profitability of six sample listed manufacturing firms in Kenya. Muchiri (2014) in his
research in the case of Kenya Creameries Cooperative also indicated negative correlation of
firm’s profit with inventory conversion days.

Account Receivables Period and Account Payables Period

Most researches have indicated that account payables period has positive relationship with
firm’s profitability. Meaning, an increase in accounts payable days leads a consequent
increase in firm’s profitability (Pindado and Bastos, 2012). In such instance, Akoto et al
(2013) recorded that increase in profitability of firms in Ghana were resulted by increased
accounts payable period. They also found that increasing companies’ accounts receivable
period led into decrease in profits, which could be manages by increasing accounts payable
period. Gill et al (2010) in their investigation about the relationship between working capital
management and profitability of eighty-eight US companies listed on the New York Stock
Exchange concluded that there was no significant relationship between APP and profitability.
However, they found a negative relationship between ARP and profitability.

Karaduman et al (2010) similarly researched about the effects of working capital

management and profitability of some firms listed on the Istanbul Stock Exchange. They
found negative relationship between firms’ profitability and ARP but indicated positive
relationship between profitability and APP. Zawaira and Mutenheri (2014) in their study of
Zimbabwean companies indicated that there was no significant association between ARP and
profitability. However, they found negative significance between profitability and APP.

Another research by Makori and Jagongo (2013) on twenty manufacturing companies listed
on the Kenya Stock Exchange indicated that firms’ profitability relates negatively with ARP
but positively with APP. However, Nzioki et al (2013) used six manufacturing companies
listed on the same Stock Exchange in their study found that APP and ARP had a positive and
significant relationship with profitability.

Cash Conversion Cycle

The CCC is the main theoretical framework of this research which a dynamic measure of
working capital management that combines evidence from the balance sheet and income
statement to create a time dimension measurement (Muscettola, 2014). He examined the
impact of the CCC on the profitability of 4226 manufacturing companies in Italy and found a
significant positive relationship between the CCC and company profitability. Mathuva (2014)
appreciated that the CCC is a dynamic theory in examining the effect of working capital
management on firms’ profitability. In his study in 2010 on the Kenyan companies also
indicated that companies had a significant inverse association with CCC. Again, Akoto et al
(2013), in their research on Ghanaian firms also found a positive and significant relationship
between the CCC and profitability.

On the other hand, Nzioki et al (2013, in their study among six listed manufacturing firms on
the Kenya Stock Exchange found a significantly negative relationship between CCC and
profitability. Dong (2010) also found that there is a negative relationship between working
capital management and firm’s profitability in his research of selected listed companies on
the Vietnam Stock Exchange covering the period of 2006-2008. His analyses were mainly on
the relationship between working capital and cash conversion cycle. He further concluded
that there is a negative relationship between the cash conversion cycle and firm’s
profitability.

The above review shows that many researches have been conducted on the relationship
between WCM and firms’ profitability. These studies however, showed different
relationships of the components of WCM and profitability from case to case, different
industries and countries. For instance, Akoto et al (2013) indicated positive relationship
among WCM components and profitability. However, different studies present different
findings, therefore, the need to research Hyundai Motors Company Limited as an automotive
manufacturing firm listed on the London Stock Exchange to examine the kind of relationship
WCM components have over its profitability.
CONCEPTUAL FRAMEWORK
A conceptual framework reflects on theoretical matters involving research work which form a
comprehensible and consistent basis that will support the development and identification of
existing variables (ACCA, 2011). This research seeks to examine the impact of WCM on the
profitability of Hyundai Motors Company Limited listed on LSE and the below figure
presents the conceptual framework.

Figure 3: Conceptual Framework

Independent Variables Dependent Variable

Inventory Conversion
Period (ICP)

Accounts Receivable Working Capital

Period (ARP) Management Net Profit
(WCM)
Accounts Payable
Period (APP)

Cash Conversion
Cycle (CCC)

Source: (Author’s Construct, 2018)

This research suggested four variables that impact WCM in the case company. The selected
variables have been influenced by existing researches relating to WCM. The components of
WCM chosen needs to managed well to increase effectiveness of working capital which
affect the dependent variable (profitability) denoted as net profit in the conceptual
framework.
 CHAPTER THREE

METHOD OF ANALYSIS
INTRODUCTION
This chapter presents the method of analysis that was used to handle the research regarding
the aim and the objectives. This section presents how the evidence/ data for the research was
collected and how the evidence will be analysed in the research.

COMPARATIVE METHOD OF ANALYSIS

This research adopted comparative analysis method. According to Wilkinson (2013),
comparative analysis is often used to measure and understand the financial relationship
between variables over a reporting period. Most companies use such method to identify their
competitive position and operating results over a certain period. Since this research examined
the impact of working capital management on firm’s profitability, comparative analysis
empowered the researcher to understand the relationship between the two main variables
under study and how they relate in the context of Hyundai Motors Company Limited listed
on the LSE.

EVIDENCE/ DATA COLLECTED

This research used secondary base evidence. The evidence was obtained from the audited
annual report of Hyundai Motors Company Limited. On the phase of the annual report, the
researcher focused on the annual financial statements of the case company. A five-year
period was considered for the research, that was from 2013 to 2017. With the financial
statements, the interest of the researcher was on the income statement and the balance sheets.
These financial statements presented the company’s sales, cost of goods sold, account
receivables, account payables and inventory which were used as basis for the calculations of
the account receivables period, account payables period, inventory conversion period and the
cash conversion cycle used as the independent variables in this research. The net profit used
in the research as the dependent variable was also obtained from the same financial
statements.
The financial reports were seen to be appropriate source to get evidence to measure the
construct of WCM and firm profitability for below reasons. Firstly, the audited financial
statements provide all the necessary evidence to operationalize the research construct
regarding the aim and objectives. Secondly, financial reports provide reliable measure when
researchers used a company as a case of analysis (Zelealem, 2016). Thirdly, financial ratios
are appropriate tools for performance evaluation. Finally, creditors, external analysts,
investors, managers use audited financial reports for decision making purposes (Tasic and
Feruh, 2012).

Table 2: Raw Evidence obtained from the Audited Financial Statements of the
Case Company

Variables 2013 2014 2015 2016 2017

(KRW) (KRW) (KRW) (KRW) (KRW)
Account
Receivables 3,485,345 3,750,092 4,468,351 4,437,552 3,840,432
Account
Payables 6,722,740 7,041,529 7,081,124 6,985,942 7,178,063

Inventories 7,073,116 7,417,239 9,198,999 10,523,812 10,674,712

Sales 87,307,636 89,256,319 91,958,736 93,649,024 23,365,959

Cost of
Goods Sold 67,859,491 70,126,276 73,701,296 75,959,720 19,072,656

Net Profit 8,993,497 7,649,468 6,509,165 5,719,653 1,405,694

Source: (Author’s Construct, 2018)

EVIDENCE/ DATA ANALYSIS

This section presents how the evidence/ data obtained from the audited financial statement as
depicted in figure are going to be analysed. The researcher used the working capital
management measures including: inventory conversion period, accounts receivable period,
accounts payable period and cash conversion cycle period as tools or theories to analyse the
evidence obtained. These theories were applied on the evidence with respect to make sense
out of the data and enable strong conclusion to be drawn as to how the case company’s
working capital management impacted on its profitability.

Inventory Conversion Period

Inventory conversion period (ICP) concerns how long firm’s resources are tied up in
inventory and measures whether it can or not converts the inventories into cash quickly (Gill
and Biger, 2013). A shorter ICP reflects how speedy a firm converts it inventories into cash,
which can result in profitability increase. However, a longer ICP may lead to rise in firm’s
opportunity cost of fund tied up in inventory (Napompech, 2012). Below if the formula used
to calculate inventory conversion period.

Inventory Conversion Period (ICP) = Average Inventory × 365 days

Cost of Goods Sold

Accounts Receivable Period

According to Mathuva (2014), the accounts receivable period (ARP) expresses the average
number of days it takes a company to collect their trade receivables from the respective
debtors. Accounts receivable mainly depends on amount of sales, hence the formula is
expressed as proportion to sales.

Account Receivables Period (ARP) = Average Account Receivables × 365 days

Sales
A longer period for receivable collections indicates inefficient trade credit collection and may
lead to insolvency whiles a shorter collection time can lead to improvement in profit as trade
debtor make payment on time which reduces the chances of doubtful debts (Kroes and
Manikas, 2014; Mathuva, 2014).

Accounts Payable Period

Accounts payable period (APP) is expressed as the ratio of average trade payables to the cost
of goods sold multiplied by 365 days (Mathuva, 2014). According to Abuzayed (2013), a
shorter APP indicates that a firm settles its short-term obligations on time which helps to get
trade discounts from suppliers. On the other hand, a longer APP shows a sing of a firm
 failure to meet its short-term obligations on time, which can lead to loss of creditworthiness.
APP is not straight forward because whether longer and shorter a firm APP is, both have
advantages and disadvantages depending on the transactions nature (Enqvist et al, 2014). But
negotiating for a longer APP has a positive impact on firm’s profitability (Napompech, 2012;
Rauscher and Wheeler, 2012). APP is mathematically represented as below:
Accounts Payable Period (APP) = Average Accounts Payables × 365 days
Cost of Goods Sold
Cash Conversion Cycle
Mathuva (2014) refers to the cash conversion cycle (CCC) is the summation of inventory
conversion period (ICP) and accounts receivable period (ARP) less accounts payable period
(APP). Gill and Biger (2013), proposed that a shorter CCC of a company indicates that it
current assets are been converted into cash quickly and help to settle short-term obligations
within the credit period. However, a longer CCC indicates that firm’s cash will be tied up in
operating cycle and can affect profitability negatively.
Cash Conversion Cycle (CCC) = ARP + ICP - APP

Table 3: The Research Construct, Variable and Measures

Construct Variables Measures

Working Average Receivables × 365

Capital Accounts Receivable Period (ARP) Sales
Average Payables × 365
Management
Accounts Payable Period (APP) Cost of Goods Sold
Average Inventory × 365
Inventory Conversion Period (ICP) Cost of Goods Sold

Cash Conversion Cycle (CCC) ARP + ICP - APP

Profitability Net Profit Profit After Tax

Source: (Author’s Construct, 2018)
Table 4: The Results used for the Research after applying Theories on the
Evidence/ Data

VARIABLES 2013 2014 2015 2016 2017

ICP (Days) 37 38 41 47 203

ARP (Days) 15 15 16 17 65

APP (Days) 36 36 35 34 136

CCC (Days) 16 17 20 30 132

Net Profit
(KRW) 8,993,497 7,649,468 6,509,165 5,719,653 1,405,694
Source: (Author’s Construct, 2018)

This chapter has presented the methods of analysis which shows how the research was
conducted. The analysis method chosen has been stated with it justification as well as the
kind of evidence used and how it was collected for the research. This section also explained
how the collected evidence were analysed regarding the aim and objectives of the undertaken
research. Table 4 illustrated the finding for the research after the application of the theories
used for the research.
 CHAPTER FOUR

RESULTS PRESENTATION, ANALYSIS AND DISCUSSIONS

INTRODUCTION
This chapter presents the results obtained from the evidence by the researcher after applying
the theories used in the research, the analysis of the results and the discussions concerning the
results. This section first elaborates on the descriptive picture of the result in accordance with
objective of the research. Secondly, presents analyse with associated discussion of the results
obtained relating to the aim of the research which is to examine the impact of working capital
management on the profitability of Hyundai Motors Company Limited regarding the
objectives as well.

THE DESCRIPTIVE RESULTS

The research considered the descriptive results of the selected four components of working
capital management that affect the profitability of the case company. The following subtopics
illustrate the results.

Inventory Conversion Period (ICP)

This research investigated the number of days it was taking the company to convert
inventories to cash.

Table 5: The Inventory Conversion Period

Variable 2013 2014 2015 2016 2017

ICP
(Days) 37 38 41 47 203
Source: (Author’s Construct, 2018)

The results in table 5 shows that the company had different ICP for the five-year period under
studied. It was taken the company thirty-seven days in 2013 to convert its inventories into
cash which happens to be the minimum days under the five-year period considered for the
research. However, the company was converting its inventories in 2017 with 203 days as the
maximum days. The ICP in 2014 was thirty-eight days and forty-one day in 2015. The
company’s ICP continued increasing as forty-seven days was been used in 2016 to convert
inventories into cash.

Accounts Receivable Period (ARP)

The accounts receivable period shows the number of days the company was using to collect
cash for goods sold to its customers on credit basis

Table 6: The Accounts Receivable Period

Variable 2013 2014 2015 2016 2017

ARP
(Days) 15 15 16 17 65
Source: (Author’s Construct, 2018)

Table 6 presents the results of the accounts receivable days of Hyundai Motors Company
Limited. From the table, the company’s policy concerning days to collect accounts receivable
from debtors differs within the five- year period considered for the research. The company
was collecting its trade receivables fifteen days in 2013 and 2014 after credit sales which
indicates the minimum days given to credit customers for the period considered for the
research. In 2015, the company was using sixteen days to collect payments from customers
and seventeen days in 2016. The company in 2017 was taking sixty-five days to collect cash
from its trade debtors. This however represents the maximum days the company was using to
collect accounts receivable.

Accounts Payable Period (APP)

This research looked at the number of days it was taking the company to settle payments to
supplier for raw materials bought on credit.

Table 7 below depicts that the company was paying its suppliers thirty-six days after supply
of raw materials in 2013 and 2014. However, the minimum credit length given by the
suppliers to the was thirty-four days which happened in 2016 considering the five years under
studied. The company was using thirty-five days to make payments of raw material after
purchases in 2015. The company was enjoying more payables days in 2017, that is 136 days
given to make payments after supplies of materials.

Table 7: The Accounts Payable Period

Variable 2013 2014 2015 2016 2017

APP
(Days) 36 36 35 34 136
Source: (Author’s Construct, 2018)

Cash Conversion Cycle (CCC)

The cash conversion cycle of the company was also investigated. This reflects on the number
of days the company was using to convert its current assets to cash to meet the short-term
obligation (current liabilities).

Table 8: The Cash Conversion Cycle

Variable 2013 2014 2015 2016 2017

CCC
(Days) 16 17 20 30 132
Source: (Author’s Construct, 2018)

The above table, labelled table 8 demonstrates varying CCC in different years of the
company. Reflecting on the five-year period considered for the research, the company was
using of sixteen days to convert its current assets to cash which from the table occurred in
2013. In 2014, it was taking the company seventeen days to convert current assets into cash.
The company in 2015 was using twenty days to convert current assets into cash. The
company’s CCC in 2016 was increased to thirty days, which means it was taking thirty days
to convert assets into cash that very year. In 2017, the company was converting current
assets in 132 days and that is the maximum days among the five years.

WORKING CAPITAL MANAGEMENT AND PROFITABILITY

This research seeks to examine the impact of working capital management on the profitability
of Hyundai Motors Company Limited. To achieve this aim, the researcher structured four
main objectives to enable examine the impact. With that respect, the research investigated
how profitability of the company related to its inventory conversion period (ICP), accounts
receivable period (ARP), accounts payable period (APP) and cash conversion cycle (CCC)
for the five-year period under studied.

Inventory Conversion Period and Profitability

Table 9: Impact of Inventory Conversion Period on Profitability

VARIABLE 2013 2014 2015 2016 2017

ICP (Days) 37 38 41 47 203

Net Profit
(KRW) 8,993,497 7,649,468 6,509,165 5,719,653 1,405,694
Source: (Author’s Construct, 2018)

Table 9 shows the results on the impact of ICP on profits of the company. This indicates that
the number of days the company was using to convert inventories to cash are inversely
related to its profitability under the studied period. This mean that, as the company ICP was
increasing from year to year, the net profit was decreasing in same respect. The results
represented in the table shows that there is a negative significant impact of ICP on the
profitability of the company. This result is inconsistent with the one recorded by Muthuva
(2010); Makori and Jagongo (2012) that ICP and profits had a positive significant
relationship but agrees to Samiloglo and Demirgunes (2008) who proposed a negative
relationship between profitability and inventory conversion period.

For instance, the company was using thirty-seven days in 2013 to convert inventories to cash
and at the end of the financial year recorded a net profit of KRW8,993,497. In 2014, the
company was using thirty-eight days to convert inventories to cash but had KRW7,649,468
as net profit. When you compare 2013 ICP with 2014 ICP, it indicates that the company
increased its ICP by just a day from thirty-seven to thirty-eight which was the decision of the
company. As a result, the company loss KRW1,344,029 in profit which was a huge loss for
the company. Again, comparing the findings in 2016 and 2017, the ICP increased from forty-
seven days to 203 days. The company’s net profit was decreased from KRW5,719,653 to
KRW1,405,694. The company made a loss of KRW4,313,959 which very significant.
Probably the company does not consider the inventory conversion period as a key factor of
profit and might consider other factors hence, the results of the research regarding the aim,
the company’s ICP has great impact on its profitability.

Accounts Receivable Period and Profitability

The effect accounts receivable period of the company has on its profitability is presented in
the table below.

Table 10: Effect of Accounts Receivable Period on Profitability

VARIABLES 2013 2014 2015 2016 2017

ARP (Days) 15 15 16 17 65
Net Profit
(KRW) 8,993,497 7,649,468 6,509,165 5,719,653 1,405,694
Source: (Author’s Construct, 2018)

The results presented in the above table 10 shows that, the collection days of the company
has negative significant effect on its profitability. The findings concur with Karaduman et al
(2010) who established in their work involving some firms listed on the Istanbul Stock
Exchange that, ARP had a negative and significant relationship with profitability. However,
the result is inconsistent with Zawaira and Mutenheri (2014) who found that there was no
significance impact between ARP and profitability of Zimbabwean companies.

To elaborate more on the findings, the company receivable days increased in 2015 to sixteen
days compare to fifteen days in 2014. The company recorded KRW7,649,468 net profit in
2014 and KRW6,509,165 net profit in 2015. The basis of this comparison is that a day
increase to collect trade receivables as change in policy by the company experienced a shift
in the net profit. The company made a loss of KRW1,140,303 considering the net profit
recorded in 2015 and 2016. Looking at the ARP for 2016 and 2017 supports the finding that,
the company’s ARP has significant effect on its profitability. The policy decision concern
accounts receivable days was increased from seventeen days in 2016 to sixty-five days in
2017. The company again experienced a huge decrease in profit from KRW5,719,653 in
2016 to KRW1,405,694 in 2017. Comparing these two periods, the company made loss of
KRW4,313,959 and it is enough cash to increase production or for other investment. Again,
the company might not consider the ARP as a determinant of profit hence the results.

Accounts Payable Period and Profitability

Table 11 depicts the impact of accounts payable period on the case company’s profitability.

Table 11: Impact of Accounts Payable Period on Profitability

VARIABLES 2013 2014 2015 2016 2017

APP (Days) 36 36 35 34 136

Net Profit
(KRW) 8,993,497 7,649,468 6,509,165 5,719,653 1,405,694
Source: (Author’s Construct, 2018)

Looking at the results presented in table 11 above, the company in the five-year period was
operating under different policy concerning credit payment days after receiving supplies.
From 2013 to 2016, the finding indicates clearly that decrease in accounts payable days leads
a consequent decrease in the company’s profitability. this shows negative significant impact
of APP on profitability. In that respect, this finding concurs earlier finding Zawaira and
Mutenheri (2014) who found negative significance between profitability and accounts
payable period in their study of Zimbabwean firms. This result disagrees with Karaduma et al
(2010) who found that there is positive relationship between profitability and APP of some
firms listed on the Istanbul Stock Exchange when investigating about the effects of working
capital management and profitability.

Just a day decrease in credit payment between these years, the company was recording
significant decreases in net profit. In 2013, the company was operating under thirty-six days
payment policy after receiving raw material. This same policy was repeated in 2014 but
recorded loss of KRW1,344,209. This shows that even maintaining a firm accounts period for
certain period can affect profitability. But decreased in days in 2015 to thirty-five, loss of
KRW1,140,303 was recorded. Same applies to 2016, where the days was decreased to thirty-
four, still recorded loss of KRW789,512.

Referring to table 11 again, the company in 2017 payment days for good purchase on credit
changed. The company was using 136 days to make payment after receiving raw materials
from suppliers. However, as accounts payable days was increased, net profit declined
drastically. This shows negative impact on profitability of the company. This is consistent
with Zawaira and Mutenheri (2014) in their study of Zimbabwean companies which indicated
negative significance between profitability and APP.

Cash Conversion Cycle and Profitability

To find out whether the company cash conversion cycle has effects on its profitability, the
results in table 12 were obtained.

The results presented in table 12 shows that, the company’s CCC is inversely but has
negative significant effect on profitability. A decrease in profits is caused by an increase in
the number of days it takes the company to convert current assets into cash. This result come
to an agreement with those presented by Mathuva (2010); and Makori and Jagongo (2013)
that cash conversion cycle associated inversely but significantly to profitability in their
works. This means that when the company was taking shorter period to convert their current
assets into cash, it was highly liquid, which impacted on the profits. The finding concurs with
Nzioki et al (2013) who concluded that, there exist negative significant relationship between
CCC and profitability of six manufacturing firms listed on the Kenyan Stock Exchange
included in their study. However, it disagrees with Akoto et al (2013) who found positive and
significant relationship between CCC and profitability among Ghanaian firms.

Table 12: Effects of Cash Conversion Cycle on Profitability

VARIABLES 2013 2014 2015 2016 2017

CCC (Days) 16 17 20 30 132

Net Profit
 (KRW) 8,993,497 7,649,468 6,509,165 5,719,653 1,405,694
Source: (Author’s Construct, 2018)

For instance, it was taking the company sixteen days in 2013 to convert its current assets into
cash and recorded KRW8,993,497 as net profit. In 2014, the conversion of current assets day
was increased by a day which resulted in KRW7,649,468. The number of days it was taken
the company to convert its assets into cash continued increased year by year whiles net profit
was decreasing year by year correspondently. Looking at the losses the company made for
example, thirty days to convert current assets into cash in 2016 and 132 CCC in 2017. The
company made loss of KRW4,313,959 which was very significant loss.

The main aim of the research was to examine the impact of working capital management on
the profitability of Hyundai Motors Company Limited listed on LSE in UK. The results
showed that WCM has great impact on the company’s profitability. The obtained findings
showed that ICP of the company has impact on its net profit. Accounts receivable period
indicated significant effects as well as account payable period on the company’s profitability.
CCC on the other hand, has great impact on the company because as days to convert current
assets into cash were changing by increasing from year to year, net profits were decreasing in
that respect.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

INTRODUCTION
This chapter presents a well-drawn conclusion that perfectly answer the aim and the objective
including the main points in the analysis and discussion of the report. From there, this section
continues with relevant recommendations deduce from the conclusion been made to Hyundai
Motors Company Limited regarding working capital management and profitability.
CONCLUSION
The main aim of the research is to examine the impact of working capital management of the
case company on its profitability. The study investigated how the components of working
capital management including: inventory conversion period, accounts receivable period,
accounts payable period and cash conversion cycle of the company affects its profitability.

The study concludes that inventory conversion periods of the company has negative
significant impact on its profitability. This disagrees with the conclusions made by Mahtuva
(2010) and Makori and Jagongo (2013) but agrees with Samiloglo and Demirgunes (2008)
who found negative relationship between profitability and ICP. Referring to the five-year
period been considered for the research, the shorter day the company was using to convert
inventories into cash recorded higher profit which occurred in 2013. However, the longer day
it was taking to convert inventories into cash, low profit was recorded that’s in 2017.

Accounts receivable period deals with the number of days it takes a company to collect
payment of goods or products sales to customers on credit. The research finds that there is a
negatively substantial effect of the company’s accounts receivable periods on its profitability.
This result confirms karaduman et al (2010) who found that ARP had negative and significant
relationship with firm’s profitability. However, the conclusion disagrees with on presented by
Zawaira and Mutenheri (2014) who concluded the firms did not use ARP to make profit
decision hence, it has no significant impact on profitability. Shorter ARP enhanced the
company profit while longer reduced its profit. Mathuva (2010) and Makori and Jagongo
(2013) concluded that Kenyan companies shortened their ARP to improve their profits.
Concerning the accounts payable period, the research establishes that, the company APP has
negative impact on its profit. This contrarily with Karaduma et al (2010) who concluded that
listed companies APP on the Istanbul Stock Exchange was positively related to profitability.
However, the result agrees with Zawaira and Mutenheri (2014) who established negative
effect between APP and profitability of Zimbabwean companies.

The research accomplishes that, the company’s cash conversion cycle inversely however
significantly negative impact on it profitability. The shorter days the company was taking to
convert current assets into cash, more liquidity it was which greatly impacted profit as
occurred in 2013. This verdict agrees with Mathuva (2010) who concluded that CCC allied
inversely but significant to profitability among Kenyan companies. This conclusion also
concurs with Makori and Jagongo (2013) who established that Kenyan companies became
profitable when they implemented shorter cash conversion cycle. It also agrees with Nkzioki
et al (2013) who found negative significant relationship between CCC and profitability of six
manufacturing firms listed on the Kenyan Stock Exchange. However, the result disagrees
with Akoto et al (2013) who concluded that there is positive significant relationship between
CCC and profitability among Ghanaian firms.

RECOMMENDATIONS
This research has revealed that the components working capital management has impact on
the company’s profitability. This promotes the efforts of the company’s management to
improve their profitability which can be achieved through appropriate management of
working capital components. The management of the company should strengthen initiatives
to inspire better understanding and acceptance that management of working capital
components enhances profitability. For the company to improve its profitability, management
must seek to find and employ a feasible working capital structure that will help to increase its
profits. Therefore, the following are the recommendations proposed to the company base on
the findings.

The research concluded that the companies inventory conversion period posed negative
significant impact on its profitability. Holding inventories tied up cash and decreases profit.
Looking at the period under studied, the company year to year increased the number of days
it takes to convert inventories into cash. For instance, it was taking the company over six
months to convert inventories into cash in 2017. Therefore, the research recommends that,
management should seek to eliminate the days it takes to convert inventories into cash as this
enhances profitability. Management can do this by introducing services that allow customers
to make advance payment, for example using pre -paid cards to purchase products.
Management also can negotiate with suppliers to facilitate just-in-time delivery of raw
materials to reduce company’s cash being held up inventories.

The company’s accounts receivable period has negative effect on its profitability. When
goods or products are sold to customers on credit basis and they delay paying on time or fail
to pay tied up cash and reduces cash which has impact on profit. The research recommends
that, management of the company must develop an explicit approach for collecting their
receivables. This can be done by embarking on credit analysis to check credit customers
paying time. Again, the company can negotiate with factoring firm then sell and handover
accounts receivable to get cash. This should be carefully looked at because of associated risk
being that, customers might be treated badly if they delay or fail payment. This could create
problems concerning the relationship between the company and its customers.

Similarly, to the above results, the accounts payable period of the company has negative
impact on its profitability. This indicates that, shorter and longer APP has advantages and
disadvantages. The management should create better relationship with suppliers to negotiate
for more extension of credit payment after receiving supplies. By doing this, the company
should take care when setting up the payable days because longer than agreed days can affect
the relationship. The research also recommends that the management should desire to
welcome more creditors on board because more of its money can be used for other business
for more profits. The management can do this by outsourcing some non-core functions of the
company and take long time to pay those supplies.

Equally, the company’s CCC has negative effect on its profitability. CCC deals with the
numbers of days the company uses to convert current assets into cash, which has impact on
profitability. The research suggests that, the management of the company should employ
viable policies to shorten the days it takes to convert its current assets into cash quickly. The
management can do this by dealing with how to shorten the credit time for collection of
accounts receivables and extend the credit period for payments of accounts payable. The
company should also reduce the time frame of the physical flow from receipt of raw materials
to sale of finished goods.