Working capitalmanagement may be regarded as a very crucial source of profitability for abusiness firm.
A lot of researchers have studied the working capital managementand its impact on the success i-e the firm’s profitability, and they have foundthat there is a very important link between efficient working capitalmanagement and profitability. Almost many researchers have analyzed effect ofworking capital management on profitability from different views andperspectives. Mathuva (2009)studied working capital management components on corporate profitability using InventoryConversion Cycle (ICC), Average Payment Period (APP), Cash Conversion Cycle(CCC), as Independent variables and Profitability as Dependent variable. Sampleof 30 listed firms data has collected from the period of 1993 to 2008 which arelisted at Nairobi Stock Exchange (NSE).
In his investigation he actually usedPooled OLS and the fixed effects Regression model. He found that significantnegative relationship between Accounts Receivables Period and Profitability i-ethe profitable firms use the shortest time strategy to get back their cash fromthe customers. He also found that there is a significant and highly importantrelation between the Inventory Conversion Period and the Profitability. He alsofound that a very significant positive relation between Average Payment Periodand profitability which indicates that the more time a firm takes to pay itscreditors, the more profitable a firm is.Agha (2014) alsostudied the working capital management and its effect on profitability using Independentvariables such as Inventory turnover, Current Ratio, Account Receivable turnoverand Return on Assets as Dependent variable. She took Glaxo Smith KlinePharmaceutical Company as a sample and collected secondary data from 1996 to2011 i-e for a period of 15 years. After using Correlation Matrix andRegression analysis she found that the working capital management has a verystrong effect on the profitability of a business firm.
She found in herempirical results that exist positive significant relationship betweenInventory turnover, Account Receivable turnover and Return on Assets i-eProfitability, hence success of a firm can be increased by increasing inventoryturnover and account receivable ratio while profitability of a business firmhas no such significant relationship with current assets ratio which means thatprofitability cannot be affected by minimizing or maximizing current ratio.Charitou, Elfaniet al. (2010) examined working capital management and its impact on theprofitability of companies. The researchers used Cash Conversion Cycleconstituents that are Creditors payment period, days in inventory & dayssales outstanding as Independent variables and firm’s profitability as Dependentvariable in their study. 43 firms data has been collected which were listed onCyprus Stock Exchange (CSE) from the period of 1998 to 2007. They usedmultivariate regression as data analysis technique in their study. They foundthrough empirical testing and analysis that all components of CCS aresignificantly associated with the firm’s profitability.Akoto,Awunyo-vitor et al.
(2013) also worked on the working capital management andprofitability of firms. They took Accounts Receivable days, Accounts Payabledays, Cash Conversion Cycle, Current Asset ratio, Firm’s Size and Current Assetturnover as Independent variables and Return on Equity used as proxy forprofitability as Dependent variable. The study used a sample of 13 listed firmsin Ghana. The secondary data was collected for the selected firms during periodof 2005-2009.
Ordinary least square Regression technique was used as Dataanalysis technique. The investigation found negatively significant relationshipbetween Accounts Receivable days and Return on Equity, while the current assetratio, Current asset turnover, Size of the firm and Cash conversion cycle ofthe firm showed positively significant association with profitability.