The Effect of Working Capital Management on Profitability of Manufacturing Firms in Ethiopia: With Reference To National Alcohol and Liquor Factory
No Thumbnail Available
Date
2021-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
A.A.U
Abstract
The ultimate objective of any firm is to maximize wealth. However, the preservation of the liquidity of a firm is an important objective too and it is the efficient management of the various components of working capital that helps to preserve liquidity. However, problem lies in the efficient management of these various components that makes up the working capital by managers. The objective of the current study is to investigate the effect of working capital management on the profitability of alcohol and liquor firms with reference to National alcohol and liquor factory. The study was limited to the effect of working capital management on the profitability of alcohol firms in Ethiopia with reference to National alcohol and liquor factory and also limited to cash conversion cycle, average collection period, inventory conversion period, and average payment period as measures for working capital management determinant, and firm size, current ratio, and leverage as control variables that affect profitability of firms. The study covered the period of ten (10) years (i.e. from 2011-2020). The study adopts explanatory research design with quantitative research approach. The target population of this study was liquor factories operating in Ethiopia and this study used convenience sampling method and selected National alcohol and liquor factory for its convenience for availability of audited annual financial reports for the study periods. This study employed the use of secondary source of data. The secondary data was derived from audited financial statements of National alcohol and liquor factory. The data collected using the data collection instrument was presented using tables and analysed using percentages, means, and standard deviation in line with the objectives of the study. The data was cleaned, coded, and entered in to Microsoft excel 2010 and Eviews 8 for analysis. The study used descriptive statistics, correlation and multiple regression analysis to establish the relationship between the independent variables of working capital components and the profitability of firms. The regression results investigated a negative significant relationship between average collection period and inventory conversion period and profitability of national alcohol and liquor factory. Also, the regression results examined constant effect of cash conversion cycle on profitability of national alcohol and liquor factory. Additionally, the study revealed that there is a positive significant relationship between firm size and current ratio and profitability but firm leverage has a negative significant relationship with profitability of national alcohol and liquor factory. The study also revealed significant positive relationship between average payment period and profitability of national alcohol and liquor factory which indicates that delaying paying creditor’s increases profitability. The study concludes that a relax debt collection policy reduced profitability of national alcohol and liquor factory. Further, the study examined that firm size and current ratio have a significant positive relationship with profitability but firm leverage is found to have insignificant negative relationship with profitability. This indicates that firm size and current ratio enhances profitability while firm leverage inversely affects profitability. Hence, the study concludes that firm size and current ratio enhances while firm leverage negatively affects the profitability of national alcohol and liquor factory. Based on the result the study recommends that national alcohol and liquor factory managers should speed up the collection of receivables so that they can maximize profits. In addition, the study recommends that the factory should avoid holding excessive stocks since this would reduce profitability.
Description
Keywords
Cash conversion cycle,Average collection period, Inventory conversion period