Consequences of Financial Management Practices on Profitability on Selected Private Manufacturing Companies in Mekelle City

Abstract

The objective of this study was to analyze the relationships of the existing practices with the profitability of the companies. Data were collected from secondary sources and primary sources. An Econometric tool, i.e., Order probit regression technique was applied to assist the researcher verifying the relationship between the practices and the profitability of the companies. Moreover, the study has analyzed the consequences of existing financial management practices on profitability and found that there was direct relationship between profitability and financial reporting and analysis; and the accounting information system. On the other hand, profitability was inversely related with age of the company, capital budgeting and capital structure management practices. The companies should exercise to maintain suitable ratio between debt and total capital; use effective financial leverage and should review the debt level in order to use it for making finance decisions. Moreover, the companies should evaluate their future projects and fixed assets after acquisition using different capital budgeting techniques rather than a simple determination of accounting profit. The variables used in the study were not exhaustive. Thus, future research may incorporate other financial management practices such as budgeting and CVP analysis and the potential researchers may also assess the practices in different sectors.

Keywords: Accounting Information System, Capital Budgeting, Capital Structure, Financial Management Practices, Financial Management, Financial Reporting and Analysis, Profitability, Working Capital