Mazen Hammad and Abdulwahed Alsuhaibani
Working(Capital(Management(and(Profitability(of(Two(Listed(Auto(Manufactures((Ford(Motor(Co.(and(General(Motors(Co.)
!
Analyzing the Relation between Working Capital Management
and Profitability of Two Listed Auto Manufactures
(Ford Motor Co. and General Motors Co.)
MBA 529 – Global Managerial Finance
Shippensburg University
Mazen Hammad, SU ID 600144358
Abdulwahed Alsuhaibani, SU ID 600176994
Mazen Hammad and Abdulwahed Alsuhaibani
Working(Capital(Management(and(Profitability(of(Two(Listed(Auto(Manufactures((Ford(Motor(Co.(and(General(Motors(Co.)
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2(
Abstract
Working capital management is very crucial in making financial decisions, as a part
of investment in assets, which affect the liquidity, and profitability of firm. This paper
investigated the relation between working capital management and financial performance
based on a sample of two auto manufacturing firms as Ford Motor Co. and General Motors
Co. listed on the New York Stock Exchange (NYSE), United States. Data were collected
from 10-K annual reports of both firms and company financials from websites for the period
of 2009 to 2013. The effect of different variables of working capital management including
average collection period, inventory turnover in days, average payment period, cash
conversion cycle, current ratio, debt ratio, size of the firm on the gross operating profitability
of firms was measured. Correlation and regression analysis were used for analyzing the
relation. The analysis concludes that there is no significant relation between working capital
management variables concerned and gross profitability.
Mazen Hammad and Abdulwahed Alsuhaibani
Working(Capital(Management(and(Profitability(of(Two(Listed(Auto(Manufactures((Ford(Motor(Co.(and(General(Motors(Co.)
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3(
Formal Proposal for Report Preparation
• Project Title:
Working Capital Management and Profitability of two Listed Auto Manufacturers (Ford
Motor Co. and General Motors Co.)
• Subtitles:
Abstract (Objectives, Findings, Conclusion), Table of Contents, I. Introduction (importance
of study, objectives of study, scope of study, description of WCM of firms), II. Critical
Analysis and Evaluation (theoretical foundation, methodology, data collection, analysis), III.
Findings and Suggestions, IV. Appendices
• Objective:
Key objective of conducting this report is to identify the nature of relationship between
working capital management and profitability of firms and provide recommendations on
appropriate management policy of working capitals.
• Plan:
The primary purpose of this paper is to investigate the relationship between Working Capital
& Current Assets Management and financial performance of two listed Auto manufacturer
firms of NYSE as Ford Motor Company and General Motors Company. Efficient utilization
of the firm’s working capital leads to increased profitability and reduces volatility, which
leads to the reduction in default risk and thus improves the firm’s value. For the measurement
of performance Gross Profit Margin (GPM) will be used while Cash Conversion Cycle
(CCC), Inventory Conversion Period (ICP), Receivable Collection Period (RCP), Payables
Deferral Period (PDP), Firm Size (FS) and Debt Ratio (DR) will be used as measures of
working capital management. For the analysis of this paper Correlation of the variables and
Regression of four Models will be measured.
• Justification:
Management of working capital was found to have a significant impact on profitability of
companies in different articles based on different countries.
Mazen Hammad and Abdulwahed Alsuhaibani
Working(Capital(Management(and(Profitability(of(Two(Listed(Auto(Manufactures((Ford(Motor(Co.(and(General(Motors(Co.)
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4(
Table of Contents
Titles
Subtitles
Page No.
I.
Introduction
5 – 7
Importance of Study
5 – 6
Objectives of Study
6
Scope of Study
6
Description of WCM of Firms
6 – 7
II.
Critical Analysis and Evaluation
8 – 12
II.1
Theoretical Foundation
8 – 10
II.2
Methodology
11
II.3
Data Collection
11
II.4
Analysis
11 – 14
III.
Findings and Suggestions
15
IV.
Appendices
16 – 18
Mazen Hammad and Abdulwahed Alsuhaibani
I. Introduction
Working capital management is very crucial in making financial decisions, as a part
of investment in assets, which affect the liquidity and profitability of firm, and in determining
the financial performance of an organization. Working capital management ensures the
ability of the firm to fund the difference between short-term assets and short-term liabilities
(Harris, 2005). The management of working capital deals with maintaining adequate liquidity
in day-to-day operations to ensure smooth functioning of the business operation. In general
firms are required to invest more in current assets rather than fixed assets to maintain
adequate liquidity. When a firm invests more in its current assets, it reduces the risk of
illiquidity. At the same time it loses in terms of profitability as the opportunity of earning
from the investment of current assets amount is lost. Working capital management efficiency
is very important for manufacturing firms, because a major part of their assets is composed of
current assets (Horne and Wachowitz, 2000). The way of working capital management has a
significant impact on profitability of firms (Deloof, 2003). The global financial crisis and
collapses of colossal organizations such as General Motors, Lehman Brothers and Bear
Stearns recognizes the importance of management of organizational resources especially
working capital management. Executives have been giving emphasize in the efficient
utilization of firm’s resources since it has an effect on the firm’s financial performance
although there has been little empirical evidence on this issue (Ricci and N. DiVito, 1998;
Garcia-Teruel and Martinez Sonano, 2007; Hill et al., 2010). Efficient utilization of resources
through working capital management tells executives should find effective and efficient ways
to deal with the cash available for the day-to-day operations of the firm in order to achieve
the optimum benefit from its working capital. Efficient ways of working capital management