Working Capital Variations by Industry and Implications for Profitable Financial Management

Abstract

Data on annual working capital and profitability for 5 years, 2010-2015, in 7000 U.S. companies were grouped into three industrial sectors, retailing, production, and services. Mean current and inventory ratios and profitability were calculated for each industrial sector, and the correlation and regression tests were run for data analysis. No significant difference in profitability was found between industries. However, within industries, a correlation was found between current ratio, sales inventory ratios, and profit margin. A positive correlation was found between current and sales inventory ratios and profit margin in the production industry. In the retail industry, no correlation was found between current ration and profit margin, but a negative correlation was found between sales inventory ratio and profit margin. In the services industry, a correlation was found between current ratio and profit margin, and a negative correlation between sales inventory and profitability. High inventory volumes are profitable to manufacturing and production industries. Low inventory volumes are profitable in retail industries. None, if not very little inventory is profitable for the services industry. From the findings, a predictive model was developed for profitable working capital management. Further research that tests the model is suggested using data from other companies and countries.

Keywords: Working Capital, Current Ratio, Profitability, Industry

JEL Classification: G31, G34