The Effect of Working Capital Management on Profitability: The Case of Selected Manufacturing and Merchandising Companies in Hawassa City Administration

Abstract

The purpose of this study is to investigate the effect of working capital management on profitability. The study aims to examine the statistical significance between component of working capital management and firm’s profitability. In light of this objective the study adopted quantitative method of research approaches to test a series research hypothesis. Specifically, the study used survey of documentary analysis of companies’ audited financial statements. Purposive sampling design was employed based on purposively of companies. Then companies were selected based on purposively from each company to avoid biases. Consequently, the study selected a sample of 5 (five) Manufacturing and 13(Thirteen) Merchandise companies for the period of seven years (2009-2015) with the total of 18 observations. Data was analyzed on quantitative basis using Pearson’s correlation and pooled panel data regression models of cross-sectional and time series data were used for analysis. More over the study used gross operating profit as dependent profitability variable. Accounts receivable Days, inventory Period, and accounts payable Days and cash conversion cycle are used as independent variables. Also current ratio, firm size and sale growth as control variable The results showed that there is statistical significance negative relationship between profitability and working capital management. It means that, companies managers can create profits or value for their companies and shareholders by handling correctly the cash conversion cycle and keeping each different component of working capital to a possible optimum level. The researcher found that there is a significant negative relationship between liquidity and profitability. Moreover the study finds that there is a significance positive relationship between size and firm profitability. Meanwhile the study found that there is positive relationship between firm’s growths and firm’s profitability

Keywords: Working capital management, Profitability, Cash conversion cycle, Account Receivables, Inventory

DOI: 10.7176/RJFA/10-1-07