Working Capital Management and Profitability: An empirical Investigation in an Emerging Market.

Abstract

The paper seeks  to examine the effect of working capital management (WCM)  on firms’ performance for non-listed Ghanaian firms. The paper includes conceptual as well as empirical analysis in which data from a sample of non-listed firms from 2004-2009 are analyzed to examine if efficient WCM improves firms’ profitability. Cash conversion cycles as well as its components are used as measures of WCM skills. Gross operating Profit to Total Assets is used as performance measure. This paper found that, profitability is negatively related to the length of the cash conversion cycle. The results demonstrate that managers can create value by reducing their firm’s number of day’s accounts receivable and inventories. Also, performance is affected positively by the firms’ size, GDP growth and firms’ sales growth. This work’s originality and value lies in suggesting that policy makers in emerging markets need to motivate and encourage managers and shareholders to give more attention to working capital management.

Keywords: Working Capital Management,  Profitability, Cash Conversion Cycle