The Impacts Of Working Capital Management On Firms Profitability

Management of working capital refers to management of current assets and current liabilities.rnFirms may have an optimal level of working capital that maximizes their value. Prior evidence hasrndetermined the relationship between working capital and performance. Thus, this study examinedrnthe impact of working capital management on firms‟ performance by using audited financialrnstatements of a sample of 9 textile manufacturing share companies in Ethiopia for the period ofrn2010 to 2014. The performance was measured in terms of profitability by return on total assets asrndependent variables. The working capital was determined by the Cash conversion period, Accountsrnreceivable period, inventory conversion period and accounts payable period are used as independentrnworking capital variables. Moreover, the traditional measures, current ratio are used as liquidityrnindicators, firm size as measured by logarithm of sales, firm growth rate as measured by change inrnannual sales and financial leverage as control variables. The data was analyzed using E-view versionrn8, estimation equation by pooled panel data regression models of cross-sectional and time seriesrndata were used for analysis. Results indicate that longer accounts receivable and inventory holdingrnperiods are associated with lower profitability. The results also show that there exists significantrnnegative relationship between cash conversion cycle and profitability measures of the sampledrnfirms. On the other hand, findings show that a insignificant negative relationship between accountrnreceivable period, inventory conversion period and account payable period with return on asset. Thernresults conclude that cash conversion cycle has significant negative relationship with return onrnasset. In general paying suppliers longer and collecting payments from customers earlier, andrnkeeping product in stock less time, are all associated with an increase in the firms performance.rnManagers, therefore, can increase firms‟ profitability by improving the performance ofrnmanagement of working capital components.rnKeywords: working capital, working capital management, firm size, cash conversion cyclernand profitability

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