ACCOUNTING- AND VALUE-BASED PERSPECTIVES ON THE LINKAGES BETWEEN WORKING CAPITAL MANAGEMENT AND FINANCIAL PERFORMANCE
Date
2024-12
Authors
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Publisher
Stellenbosch University
Abstract
Financial managers are constantly searching for methods to direct scarce resources toward their optimal uses to enhance financial performance. Prior researchers who considered the relationship between working capital management (WCM) and financial performance focused on accounting-based metrics within developed countries. Value-based financial performance metrics remove some of the distortions associated with accounting-based metrics, thereby contributing to a cycle of sustainable value creation. Against this background, the primary research objective of this study was to assess the linkages between WCM and financial performance by incorporating accounting-based and value-based perspectives. Quantitative data were collected for a sample of companies listed on the Johannesburg Stock Exchange over the period 2006 to 2022, thereby including two crisis periods. When considering the outcomes of the panel regression analyses, various statistically significant relationships were noted between working capital and financial performance metrics, mainly from the value-based perspective for the entire sample. A statistically significant negative relationship was noted between net operating working capital (NOWC) and return on invested capital and the spread, respectively. In contrast, a statistically significant positive relationship was observed between NOWC and free cash flow (FCF). Furthermore, a statistically significant negative relationship was reported between the net operating trade cycle and FCF. Based on the reported results, the researcher recommends that managers, directors and investors include value-based measures when reflecting on WCM considerations instead of excessively focussing on short-term profitability. Furthermore, tertiary educators should emphasise the importance of sustainable value creation. As such, they can inspire future managers, directors, and investors to contribute to a more sustainable future.