Empirical Analysis of Working Capital Management and its Impact on the Profitability of Listed Manufacturing Firms in Ghana

Abstract

This paper empirically analyses working capital management and its impact on firm profitability. Panel data is obtained from the financial statements of listed manufacturing firms in Ghana from 2004 to 2011 inclusive. In all, six (6) out of seven (7) manufacturing firms quoted on the Ghana Stock Exchange with complete financial data constituted the research sample. This paper uses working capital cycle and gross operating profit margin as proxies for working capital management and profitability respectively. Whiles leverage, interest cover and the ratio of current assets to total assets are used as control variables. The study employs descriptive statistics, Pearson correlation and ordinary least squares regression analyses.  The results reveal that working capital cycle significantly affects firm profitability negatively. This means that less profitable listed manufacturing firms in Ghana have longer working capital cycle. From the correlation analysis, the study also finds that inventory turnover period, account receivables collection period and account payables payment period each negatively correlates with profitability. Finally while leverage negatively but significantly relates to profitability, interest cover and the ratio of current to total assets have significantly positive relation with profitability.

Keywords: Working capital, profitability, manufacturing firms, Ghana