Working Capital Management and Profitability of Firms: A Study of Listed Manufacturing Firms in Ghana

Abstract

The efficient management of working capital is crucial to the profitability of firms therefore, it is prudent that management of firms make available in the right amount, resources to manage working capital. The main objective of the study was to establish a statistical relationship between profitability measured by the return on assets and the elements of working capital such as the cash conversion cycle (CCC), average collection period (ACP), average payment period (APP) and inventory turnover days (IT). Growth, size and leverage were control variables identified. A sample size of four (4) companies listed on the Ghana Stock Exchange (GSE) out of a population of five (5) listed trading companies for the 2006 to 2010 financial years. The results showed a fairly negative significant relationship between the cash conversion cycle, average collection period and average payment period implying that a reduction in the periods for receiving cash, an increase in the period for paying cash a reduction in the cash conversion cycle will cause an increase in profit. The inventory turnover days as well as all other control variables showed a positive relationship with profitability. Hence, study recommends that trading companies should manage their working capital more efficiently so as to keep it in equilibrium.

Keywords: Profitability, Capital Management, Growth, Resources, Size, Ghana Stock Exchange