The Impacts of Working Capital Management of Firms Profitability

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Addis Ababa University


The purpose of this study is to investigate the impact of working capital management on firms’ profitability. The study aims to examine the statistical significance between firms’ working capital management and profitability. In light of this objective the study adopted quantitative method of research approaches to test a series research hypothesis. Specifically, the study used survey of documentary analysis of companies’ audited financial statements. Stratified sampling design was employed based on nature and turnover of companies. Then companies were selected based on simple random sampling method from each stratum’s to avoid biases and represent firms from each sub- classification (stratum’s) within manufacturing companies. Consequently, the study selected a sample of thirteen (13) companies for the period of five years (2005-2009) with the total of 65 observations. Data was then analyzed on quantitative basis using Pearson’s correlation and OLS regression analysis. The results showed that there is statistical significance negative relationship between profitability and working capital management. It means that, companies managers can create profits or value for their companies and share holders by handling correctly the cash conversion cycle and keeping each different component of working capital to a possible optimum level. The researcher found that there is a significant negative relationship between liquidity and profitability. Moreover the study finds that there is strongly significance positive relationship between size and firm profitability. Unlike, the study found that there is no statistically significance negative relationship between debt used and firms profitability. Keywords: working capital, working capital management, firm size, cash conversion cycle and profitability



Working capital, Working capital management, Firm size, Cash conversion cycle and profitability