Linking working capital management to value-based financial performance

Abstract

Background: Effective working capital management (WCM) enables corporate leaders to direct scarce resources to the most promising and productive uses. Value can thus be created in a sustainable manner by deploying excess capital to financially feasible projects. As prior authors focused on the associations between WCM and short-term profitability metrics, the value-based perspective warrants attention.
Aim: The linkages between WCM and value-based financial performance were investigated in the South African emerging market context.
Setting: The value-based WCM and financial performance outcomes of 122 firms that were listed on the Johannesburg Stock Exchange between 2006 and 2022 were analysed, thereby incorporating two crisis periods.
Method: Panel regression analysis was conducted to explore the linkages between selected value-based financial performance and WCM metrics.
Results: Significant negative relationships were noted between net operating working capital (NOWC) and return on invested capital and spread, respectively. In contrast, a significant positive link was observed between NOWC and free cash flow (FCF). The sampled companies’ WCM strategies thus enhanced their value-based financial performance.
Conclusion: Optimal WCM had positive value-based financial performance implications for selected JSE-listed companies over a 17-year period, including the 2008 global financial crisis and the COVID-19 pandemic.
Contribution: The value-based perspective can enable corporate leaders to optimise the allocation of working capital.