The Impacts of Working Capital Management on Firm’s Profitability
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Date
2016-06
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Addis Ababa University
Abstract
Management of working capital refers to management of current assets and current liabilities.
Firms may have an optimal level of working capital that maximizes their value. Prior evidence has
determined the relationship between working capital and performance. Thus, this study examined
the impact of working capital management on firms‟ performance by using audited financial
statements of a sample of 9 textile manufacturing share companies in Ethiopia for the period of
2010 to 2014. The performance was measured in terms of profitability by return on total assets as
dependent variables. The working capital was determined by the Cash conversion period, Accounts
receivable period, inventory conversion period and accounts payable period are used as independent
working capital variables. Moreover, the traditional measures, current ratio are used as liquidity
indicators, firm size as measured by logarithm of sales, firm growth rate as measured by change in
annual sales and financial leverage as control variables. The data was analyzed using E-view version
8, estimation equation by pooled panel data regression models of cross-sectional and time series
data were used for analysis. Results indicate that longer accounts receivable and inventory holding
periods are associated with lower profitability. The results also show that there exists significant
negative relationship between cash conversion cycle and profitability measures of the sampled
firms. On the other hand, findings show that a insignificant negative relationship between account
receivable period, inventory conversion period and account payable period with return on asset. The
results conclude that cash conversion cycle has significant negative relationship with return on
asset. In general paying suppliers longer and collecting payments from customers earlier, and
keeping product in stock less time, are all associated with an increase in the firms performance.
Managers, therefore, can increase firms‟ profitability by improving the performance of
management of working capital components.
Keywords: working capital, working capital management, firm size, cash conversion cycle
and profitability
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Keywords
working capital; working capital management; firm size; cash conversion cycle and profitability.