Effects of working capital management on the profitability of South African construction companies listed on the JSE

Abstract

This study examines the correlation between inventory and accounts payable management and the profitability of construction companies listed on the Johannesburg Stock Exchange (JSE). The annual financial statements of all 13 listed construction businesses from 2009 to 2019, including statements of financial position and financial performance, were obtained from an external database for statistical analysis. The study employed multiple linear regression to assess the impact of working capital management on the financial performance of construction companies listed on the JSE. Additionally, a correlation model was utilised to investigate any potential relationships among the variables being examined. The study's findings indicate that the management of working capital has a notable impact on the profitability of construction companies listed on the Johannesburg Stock Exchange (JSE) in South Africa. Despite contradicting findings from other studies that support the opposite conclusion, this study demonstrates that effective management of working capital does not necessarily lead to a positive relationship with financial performance for financial managers of construction companies. Therefore, it is crucial to consider other aspects of management in addition to working capital.

Keywords: {'name': 'Accounts Payable Management'}, {'name': 'Construction Companies'}, {'name': 'Financial Performance'}, {'name': 'Inventory Management'}, {'name': 'Johannesburg Stock Exchange'}, {'name': 'Profitability'}

Authors & affiliations

Letshaba Sejake
Affiliation not supplied

John Beneke
Affiliation not supplied

Johannes G Maseko
Affiliation not supplied

Bouba Ismaila
Affiliation not supplied

Deposited references

Supplied references, not a list of publications citing this article.

Agbo, E.I. & Nkwankwo, S.N.P. (2018). Impact of average payment period on the return on assets of Quoted insurance companies in Nigeria. European Journal of Business and Management, 10(28), pp. 25-34.

DOI: 10.1016/j.hbrcj.2014.02.010

Alipour, M. (2011). Working capital management and corporate profitability: evidence from Iran. World Applied Sciences Journal, 12(7), pp. 1093-1099.

Alkhamali, K.S.H. (2014). Leadership style, organisational culture and disputes in public construction. PhD. Thesis, Heriot-Watt University.

DOI: 10.5296/ijafr.v9i1.13984

Al-Mawsheki, R.M.S.D. (2014). The relationship between working capital management and profitability of construction firms in Malaysia. Masters Dissertation, University of Malaysia.

DOI: 10.5296/ajfa.v11i2.15640

DOI: 10.1016/S2212-5671(14)00985-X

DOI: 10.3390/jrfm14010009

Babalola, A.A. & Anifowose, O.S. (2018). Improving the profitability of construction contracting firms in Nigeria through strategic alliancing initiatives. The International Journal of Engineering and Science, 7(2), pp. 61-67.

Bakar, A.H.A., Said, I., Razak, A.A., Yusof, M.N. & Awang, A. (2008). A contingency theory approach for construction companies in Malaysia during the period of crisis: Survival strategies. Retrieved October 22, 2020, from http://eprints.usm.my/34772/1/HBP41.pdf

DOI: 10.1155/2014/283298

Bhandari, P. (2020). An introduction to quantitative research. Retrieved November 3, 2020, from https://www.scribbr.com/methodology/quantitative-research/

Bolek, M. & Wojciech, W. (2012). The influence of liquidity on profitability of Polish construction sector companies. Financial Internet Quarterly, 8(1), pp. 38-52.

DOI: 10.11113/ijbes.v4.n2.177

Campbell, P. (2019). Total contract value: why It’s important and how to calculate it? Retrieved April 7, 2021, from https://www.profitwell.com/recur/all/total-contract-value

DOI: 10.3846/13923730.2012.671272

Chua, B.P. (2019). The impact of Inventory Control on construction industry, Research Proposal, Open University Malaysia.

Colonnell, E. & Haas, A. (2016). Corruption in construction. Retrieved September 1, 2020, from https://www.theigc.org/blog/corruption-in-construction/

Construction Industry Development Board. (2019). Construction monitor. Retrieved November 17, 2020, from http://www.cidb.org.za/publications/Documents/Construction%20 Monitor%20-%20April%202019.pdf

DOI: 10.1051/matecconf/201818404009

Dithebe, K., Aigbavboa, C., Oke, A. & Muyambu, M.A. (2018). Factors influencing the South African construction industry: A case of Limpopo Province. Proceedings of the International Conference of Industrial Engineering Operations Management. Pretoria/ Johannesburg South Africa, October 29 – November 1.

Dong, H.P. & Su, J.T. (2010). The Relationship between Working Capital Management and Profitability: A Vietnam Case. International Research Journal of Finance and Economics, 49, pp. 60-67.

DOI: 10.21511/imfi.13(1).2016.07

DOI: 10.1108/S0733-558X(2013)0000038005

Fuhrmann, J. (2019). How to calculate Return on Equity? Retrieved October 15 2020, from https://www.investopedia.com/ask/answers/070914/how-do-you-calculate-return-equity-roe.asp

Ghazali, P.S. (2019). Relationship between working capital management and profitability. Retrieved April 7, 2021, from https://www.researchgate.net/publication/336720653_Relationship_Between_Working_Capital_Management_and_Profitability

DOI: 10.1080/00207543.2012.746796

DOI: 10.1139/cjce-2018-0249

DOI: 10.18820/24150487/as23i2.4

DOI: 10.9790/0837-2107066269

DOI: 10.1088/1742-6596/1402/2/022040

Ismail, M, & Fathi, M.S. (2018). Leadership in Construction: Leadership Styles Practiced in Construction Project – A Review. Journal of Advanced Research in Business and Management Studies, 13(1), pp. 24-30.

DOI: 10.1109/TIMES-iCON.2018.8621817

Jewell, J.J. & Mankin, J.A. (2018). What is your ROA? An investigation of the many formulas for calculating ROA. Academy of Educational Leadership Journal, 15, pp. 79-91.

Jones, K. (2019). 6 ways to improve your construction company's profitability. Retrieved May 10, 2021, from https://www.constructconnect.com/blog/6-ways-improve-construction-companys-profitability

DOI: 10.5958/0976-478x.2015.00001.4

DOI: 10.1108/JFMPC-01-2018-0004

DOI: 10.1016/j.jbusres.2015.10.121

DOI: 10.5901/mjss.2013.v4n13p531

DOI: 10.1016/j.proeng.2015.10.091

DOI: 10.5267/j.msl.2019.7.010

Louw, E. (2014). Management of working capital by listed South African retail companies. Masters. Dissertation, University of Pretoria.

DOI: 10.4102/sajesbm.v11i1.165

DOI: 10.12816/0019005

Meintjies, F. (2019). Construction sector in crisis. Retrieved January 23, 2021, from news24.com/ SouthAfrica/Local/Maritzburg-fever/construction-sector-in-crisis-20191126-2

DOI: 10.3846/13928619.2006.9637745

DOI: 10.5465/256809

Moses, M. (2014). Effect of working capital management on financial performance on non-financial firms listed in the Nairobi Security Exchange. Masters. Dissertation, University of Nairobi.

Mukherjee, C. & RAO, P.V. (2020). Working capital management practices in the construction sector. International Journal of Creative Research Thoughts, 8(2), pp. 1437-1441.

Musarat, M.A., Alaloul, A.S. & Liew, M.S. (2019). Impact of in?ation rate on construction projects budget. Journal of Engineering, 9(4), pp. 1-8.

Muturi, H.M, Wachira, V. & Lyria, R.K. (2015). Effect of inventory conversation period on profitability of tea factories in Meru County, Kenya. International Journal of Economics, Commerce and Management, 3(10), pp. 366-378.

Nduta, M.W. (2015). The effect of working capital management on financial performance of manufacturing firms listed in Nairobi Security Exchange. Masters. Dissertation, University of Nairobi.

Newell, B. (2017). Five construction problem areas that decrease profits. Retrieved April 7, 2021, from http://constructionexec.com/article/five-construction-problem-areas-that-decrease-profits

DOI: 10.4038/jm.v8i1.7556

DOI: 10.17512/pjms.2018.18.2.17

Nurein, S., Din, S. & Halim, M. (2017). A contingency view to working capital management in emerging market. Global Conference on Business and Economic Research. University of Putra, Malaysia, August 14 –15.

Ogundare, O. & Olatunji, O.A. (2018). Management of accounts receivables: a pitot study on three Nigerian construction firms. Retrieved October 10, 2020, from https://www.academia. edu/35642525/Management_of_account_receivables_a_pilot_study_on_three_Nigeria_construction_firms

Olarewaju, O.M. & Ibrahim, S.S. (2020). Construction industry performance and the growth of South African economy: Any causal Relationship? Article of Engineering and Management, (83), pp. 508-521.

Onana, J.C. (2018). Factors Affecting the Performance of Contractors on Road Projects Supervised by the National Agency of Public Works in Gabon. Masters. Dissertation, University of Witwatersrand.

DOI: 10.1061/9780784413517.210

Patil, T.C, Wangmare, A. P. & Gawande, P.S. (2016). Tender and bidding process in construction projects. International Journal of Innovative Science, Engineering & Technology, 3(3), pp. 492-498.

DOI: 10.1080/01446193.2018.1478109

Pistorius, C. (2017). The impact of emerging technologies on the construction industry. Journal of Innovation Insight, 4(17), pp. 1-70.

DOI: 10.11648/j.ijefm.20140206.17

Praveen, V.P. (2017). What does a construction company do? What do the jobs consist of, or what does the company make? Retrieved October 6, 2020, from https://www.quora.com/What-does-a-construction-company-do-What-do-the-jobs-consist-of-or-what-does-the-company-make

DOI: 10.14419/ijet.v7i3.12.16558

Reidinger, B. (2015). The importance of working capital for construction companies. Retrieved May 11, 2021, from https://www.assuranceagency.com/blog-post/the-importance-of-working-capital-for-construction-companies

DOI: 10.18488/journal.1007/2019.9.2/1007.2.27.37

DOI: 10.18045/zbefri.2018.1.337

Sugathadasa, D.D.K. (2018). The relationship between cash conversion cycle and firm profitability: Special reference to manufacturing companies in Colombo Stock Exchange. Journal of Economics and Finance, 9(6), pp. 38-47.

Tether, T., Serafino, M., Dany, L. & Lincoln, J. (2015). Construction project payments: Fundamental challenges and solution. Retrieved November 10, 2020, from https://vdocuments.net/by-thomas-tether-michael-serafino-lawrence-dany-by-thomas-tether-michael.html

Thomas, M. (2019). What is a tender? Retrieved October 6, 2020, from https://www.quora.com/What-is-a-tender

Tingbani, I. (2015). Working capital management and profitability of UK firms: a contingency theory approach. PhD. thesis, Bourne University.

DOI: 10.5539/ijbm.v12n8p175

DOI: 10.9790/5933-03211922

Vinasithamby, S. (2018). Empirical examination of the association of inventory conversion period and gross profit margin of beverage, food and tobacco companies listed in Colombo Stock Exchange. Research Journal of Economics and Business Studies, 7(4), pp. 17-23.

Viswanath, M.S., Surendra, S.Y., Singh, S. & Chaudhry, N. (2018). Analysis and optimization working capital management in construction industry. International Journal of Management and Applied Science, 4(7), pp. 1-7.

Wallvik, E. & Viklund, E. (2014). Dependence of strategic management in account receivable collections. Masters. Dissertation, Umea University.

White, C.B. (2020). How to calculate return on assets with examples? Retrieved October 15, 2020, from https://www.investopedia.com/ask/answers/031215/what-formula-calculating-return-assets-roa.asp

Windapo, A.O & Cattell, K. (2013). The South African construction industry: Perceptions of Key Challenges Facing Its Performance, Development and Growth. Journal of Construction in Developing Countries, 18(2), pp. 65-79.

Yahaya, A. & Bala, H. (2015). Working Capital Management and Financial Performance of Deposit Money Banks in Nigeria. Research Journal of Finance and Accounting, 6(16), pp. 57-71.

DOI: 10.2478/v10031-010-0011-9

DOI: 10.5539/ibr.v1n1p78