Comprehensive Explanation of the Correlation between the Average Payment Period, the Working Capital Financing Policy, and a Firm's Profitability

Abstract

The success of a business is closely tied to its performance, which is influenced by corporate strategy and goal achievement. Effective management of Average Payment Period and effective implementation of working capital financing policy is a critical factor in this success, as it directly affects the company's profitability. Previous research has predominantly focused on the relationship between accounts payable and firm profitability in developed economies, overlooking the dynamics of developing economies. To address this gap, the study examines the impact of accounts payable and working capital financing policy on the profitability of 40 Tanzanian firms from 2012 to 2023, specifically focusing on Return on Total Assets (ROTA). The researchers employed random effects regression analysis using STATA statistical packages and conducted panel data analysis. The analysis considered various variables, including Average Payment Period, Working Capital Financing Policy, firm size, debt ratio and business growth.The findings revealed a significant negative relationship between Average Payment Period and firm’s profitability, as well as an insignificant positive relationship between Working Capital Financing Policy and firm’s profitability. Additionally, the study observes a significant relationship between control variables, such as firm size and business growth, and firm profitability. However, the study results exhibit conflicting outcomes among individual sectors, with some sectors showing positive correlations, others showing negative correlations, and some demonstrating insignificant relationships among the variables. Therefore, financial managers should consider industry-specific dynamics when making decisions regarding accounts payable management and working capital financing policy to achieve optimal outcomes.

Keywords: Average Payment Period, Working Capital Financing Policy, Firms and Profitability.

DOI: 10.7176/EJBM/16-2-02

Publication date:March 31^st 2024