LSBM307 Accounting and Finance Research Project

Proposal

Assessment 1.

Katalin Kanalas

LON170930002

Supervisor: Mubashir Qurashi

Impact of Working Capital Management on Sainsbury’s Profitability

Terms of Reference

The working capital is determined from how a company makes use of its available assets.

The working capital is calculated from the difference between the current assets and the current

liabilities. If current assets can settle the outstanding liabilities with cash in remaining in the

accounts, the business, is presume profitable. Alternatively, if that not clear its liabilities with the

current assets, then it is a probable indication that the company will need to sell one or more of

its assets to clear outstanding or overdue amounts. It is either that or declaration of bankruptcy.

The working capital is calculated through the ratio analysis yielding 3 management

ratios. The current ratio is calculated by sharing the current assets with the current liabilities to

yield a value below one indicative of an unhealthy financial status of the company-the curt

liabilities overweigh the assets; 1.2-2.0 indicate the general financial status of the company and

values above 2.0 are indicative of a low reserve of current assets to generate profits[ CITATION

Tuo20 \l 1033 ]. The collective turnover of the firm on accounts receivable management is; (a) a

value is a multiple of the outstanding amounts of accounts receivable by the number of

accounting days in a predetermined accounting time frame, and (b) the inventory ratio that

declares the level of demand of the company’s inventory by her consumers; this value is obtained

by dividing the revenue by the inventory cost, this method is attractive to determine a company's

financial health and is the necessary and preferred ratio of evaluation taken by potential

investors.
Aim

This project aims to work ouy the effect of working capital on profitability by company of

Sainsbury.

Research Question

On this study we going to answer the following question.

This project aims What is the impact of working capital; on the profitability of Sainsbury

Research Objectives

The research seeks to address the research topic through:

 To conduct an Analysis of the profitability ratio

 To analysis the liquidity and efficiency ratio

 To interpret the correlation and covariance between the working capital and the

profitability of Sainsbury’s.

Scope of the Project

To determine the profitability ratio, gross profit margin, operating profit margin, net

profit margin, return on assets, return on equity, and return on capital employed are financial

ratios to be calculated. Calculating these financial ratios will lead to the successful assessment of

the profitability of the organization.

The current ratio, Quick ratio, working capital ratio, Receivable days, Payable days,

Inventory days, Cash operating cycle are constituents of liquidity and efficiency. Therefore, to
calculation Sainsbury's liquidity and efficiency ratios, calculating the functions will yield the

desired output.

Relevant Literature

Synopsis 1

According to Choudhury et al., a study to determine the profitability effect by the

working capital management of Pharmaceutical companies in Bangladesh were worked out on 9

pharmaceutical listed companies in Dhaka Stock Exchange (2001-2015). Chowdhury and his

working partners also advised that working capital management fully warrants investment if the

goal is to create profit for all of the stakeholders concerned. Should this be the case, then an

efficient policy guidance document on this absolutely warrants development. There is no

significantly substantial relationship between profitability and the Actual Collection Period, or

substantial relationship between profitability and the actual collection period. There is a

substantial relationship between the Inventory conversion period and profitability; there is a

substantial resemblance between the profitability and APP. There is not a substantial

interrelation between the profitability and Cash Conversion Cycle, there may exist a substantial

interdependence between the profitability and the INV, was the hypothesis. It been worked out

for both the Return on asset and Roe for the Dobutamine stress echocardiography companies.

The study concluded that the Return on Assets, average payment period, CCC, and inventory

conversion period resulted in a negative correlation output.

 When compared, Return on equity provided a similar result for the relationship with

investment in marketable securities, earnings per share, CCC, plus the inventory conversion

period. At 5% level significance for the regression analysis, a negative relationship is inferred

from the analysis of the relationship between the Return on assets and CCC, inventory

conversion cycle and average collection cycle while the same relationship between the average

collection period, average payment cycle, earnings per share to the Return on equity results in a

similar outcome. A positive relationship is ascertained from the relationship between the CCC

and return on equity and the asset's Return with the average payment period[CITATION

Cho181 \l 1033 ].

Gaps

Choudhury and the partners evaluate the profitability in terms of returns on assets and

returns on profitability. This segregates the overall picture of the profitability maps, from the

Return on capital employed to the gross profit and net profits. However, the analysis does not

take into account yet another essential element that entails profitability-liquidity and the

companies' efficiency ratios during the evaluation process.

Synopsis 2

Debabrata's analysis on the impact of the working capital on profitability of the Fast-

Moving Consumer Goods companies in India aims to ascertain the relationship between the

WCM, profitability, and liquidity. "Hindustan Unilever Ltd., ITC, Nestlé India, Dabur India Ltd,

Asian Paints (India), Britannia Industries Ltd, Marico Industries Ltd, Colgate-Palmolive (India),

Gillette India Ltd, Godfrey Phillips, Johnson & Johnson, Wipro, Godrej Consumer Products Ltd

Emami, and Pedilite Industries”[ CITATION Jan18 \l 1033 ] were the chosen industries for the
analysis. By far, Jana's work is an improvement on Choudhury et al. study as it analyses both

factors of profitability and focuses on an extra element return on investments.

Jana’s work however is consistent with Choudhury's work in terms of results. The

analysis revealed that there does exist a positive and negative relationship between profitability

and working capital management from the non-substantial relationship between different

variables of working capital management and return on: assets, investments, and equity. P-values

of the chi-square lay above the 0.05 level of significance. 92.36% of the Return on investment

values were as a result of the change in “Net Profit Ratio, Total Assets Turnover Ratio, Dividend

Payout Ratio, Firm Size, Current Ratio, and Working Capital Turnover Ratio the independent

variable Return on Investment positively changes at 1% and 5% level of significance

respectively”[ CITATION Jan18 \l 1033 ].

The Return on assets accounted for a 26.34% movement on the dependent scale.

The fixed-effect model's coefficients reveal that for change in Dividend Payout Ratio, Net

Profit Ratio, Working Capital Turnover Ratio, and Gross Profit Ratio, the independent

variable Return on Assets positively changes at 1%, 1%, 5%, 10% level of significance

respectively.

Gaps

A 5 level of significant change in assets had an effect on a total asset turnover ratio and net

profit ratio on the fixed effect model. The Return on assets provided an explanation for a 21.345

level of significance for the change in the dependent variable. Adversely, the company's net size

affected the Return of equity, with a statistical significance level of 1%. The study is marked with

sufficient lack of data on the 15 analyzed Indian Firms. So there is no doubt that the firm's
profitability is affected by the management of the working capital in an organization. Jana's work

however does not consider the days: payable, receivable, and inventory; moreover, it

concentrates not on the gross profit margin though net profit margins are evident from the

results.Undoubtedly, this work concurs with the findings of Choudhury of the positive

relationship of the variables.

Other Related Studies and the Project Novelty

Similar results are also set down by Afrifa in an analysis of SMEs' performance in the

United Kingdom in relation to working capital. He examined a concave relationship between the

variables without considering cash flow, which resulted in a change to the convex curve. The

evidence from his study analysis leads to his conclusion that companies with values below the

media have low cash investment on working capital[ CITATION God16 \l 1033 ].

In the United Kingdom there is not a great deal of supporting documentation to analyze

as studies are not undertaken regularly enough relating to the working capital management to the

profitability of organizations. Sainsbury's phenomenal transformation from a small corner store

to significant retail empire attracts studies of its potential and financial health. Aluko and Knight

conclude that for a company to transcend along the trajectory alike to that of Sainsbury, it would

need to have at its disposal an inadmissible amount of resources to fully fit and grow into the

broader market[CITATION Olu \l 1033 ]. This work will also take into account the shortcomings

of the above-analyzed research of Jana, Afrifa, and Choudhury, and his partners. The research

data is even less available on the Retailers of commodity goods. Determining the profitability of
the investments may give investors a better understanding of the overall profitability of the

Company and consequently impact their decision to invest or not.

Methodologies

The data collection

Sources

Determine how the working capital management affected the organization's profitability

will help calculate how Sainsbury has fared in the past- a longitudinal approach, which is good

but not as the current financial statistics.

Sainsbury is one of the biggest supermarkets in the United Kingdom, commanding a

16% of total market share. The study is based on both primary and secondary data to achieve the

desired results of this study.

Primary data will be collected with the help of thorough interviews, focus groups and

questionnaires, from the beer, wine, and grocery store and spirit manager to prove the data's

integrity and authenticity. The public limited company Sainsbury’s websites posts its financial

report every quarter on its financial website making the data free to view and easily

downloadable. On the other hand, secondary data is also reliable data and it can be used to help

determine the working capital ratio, liquidity, and profitability ratios. It can be find from

newspapers, government journals and websites, dissertations, and financial annual reports about
the relationship between the working capital management and the profitability of Sainsbury. This

data is used to evaluate the profitability and the performance of the company.

Time horizon

The study will be focused on working capital management and profitability only. The

primary and secondary data will be collected for Sainsbury during a period of 5 years. (2016-

2020.) This data is to be current due to the objectivity of the study. Sainsbury rose through the

ranks from 2010. Which means that he had a good performance and a higher profitability during

that period.

My choice of analysis of the present data provides a clear and effective picture of the

performance of the company. The data can be used to analyze, from a general perspective, and

provide a conclusion as to how the company has performed during this period and why the

company appears to be so profitable.

Analysis

The verifiable data analyzed is to be shared into two sets. First data set determines the

effects of working capital on Sainsbury's profitability while the second data set analyses the

effect of probability as instigated by the liquidity. Regarding this analysis the relationship
between this two, variables are important to calculate how the working capital management can

be affected by the company profitability they can be used to prevent any negative impact. Those

variables are summarized in the following section.

1. The pendent variable it refers to the measurement of the compony profitability.in that

case it is commonly on gross profit margin, and operating profit margin and the net

profit margin, and on the return on asset and return on eguity and on the return on

capital employed.

2. The independent variables it refers to the measurement of the working capital

efficiency, that case cash conversion cycle days of inventory days of account

receivables days of the account payables. The variation in the independent variables is

used to explained, the variation in firm’s profitability.

However, the is more variables used in the studies to analyzed the company profitability

as well, as (Dummy) variables which according to Enqvist et al. (2014) this variable is

used to analyzed the effect of economic fluctuation on the relationship between working

capital efficiency and companies profitability. Control variables is also used and included

in the regression modules in general for the company s years and it is industry, it

measured and analyzed by current ratio companies size company debt ratio and lastly

company year an industry. By during this analysis it will be possible to analyze how the

working capital has efficient impact on the companies profitability and how it effect the

company s performance during the analyze period of 5 years, however with the

appropriate data and information it will be possible to provide evidence in the matter of

how Sainsbury’s can increase, it’s profitability true improvement of it s working capital
 efficiency, for this reason it is important that it working capital management is present for

the company’s profitabilities.

Resources

Consequently, the materials resources needed for this project are sample questionnaires,

and the annual reports, listed on the company s financial statements the company newspaper to

the current period, articles about the company s profitability, working capital management and

liquidity. Furthermore, financial ratios and other working capital variables will also be calculated

and discuss. This research will also be made with the help of government websites and previous

research data information.

WORKS CITED

[1] Godfred Adjapong Afrira 2016. "Net working capital, cash flow and performance of UK
SMEs," Review of Accounting and Finance, Review of Accounting and Finance,
Emerald Group Publishing, vol. 15(1), pages 21-44, February.

[2] Choudhury, Ahm Yeaseen, 2018 et at. “Impact of working capital management on
profitability: A case study on Pharmaceutical Companies of Bangladesh.” “Journal of
Economies Business, and Management” 6.1 (2018):27-35
https://www.researchgate.net/deref/http%3A%2F%2Fdx.doi.org
%2F10.18178%2Fjoebm.2018.6.1.546

[3] Jana, Debabrata.2018 “Impact of working capital on profitability of the selected listed FMCG
companies in India” International Research Journal of Business Studies.11.1 (2018):21-30
https://doi.org/10.21632/irjbs.11.1.21-30

[4] Olu Aluko and Hellen Knight 2017 “From the corner store to superstore: a historical analysis
of Sainsbury´s co-evolution” Journal of Management History (2017)
https://www.researchgate.net/deref/http%3A%2F%2Fdx.doi.org%2F10.1108%2FJMH-04-2017-
0017

[5] Sainsbury´s. Sainsbury´s 2020 https://www.about.sainsburys.co.uk/investors/results-reports-

and-presentations/2020 (23 November 2020.)

[6] Tuovila, Alicia. 2020 Working capital management, Ed. Amy Drury (2020 14. July 2020.)
https://www.investopedia.com/terms/w/workingcapitalmanagement.asp#:~:text=Working
%20capital%20management%20is%20a,liabilities%20to%20the%20best%20effect.>.