Sep 07, 2015 many previous researches have indicated the relationship between working capital management and profitability of firm in different environments. Working capital management and profitability academic journals. The aim of this paper is to examine the relationship between working capital management and firm profitability. Pdf working capital management and profitability researchgate. Working capital management wcm is an important corporate financial decision since it directly affects the liquidity and profitability of the firm. Asaduzzaman and tabassum chowdhary 2014 have examined the nature and extent of the relationship between working capital management and profitability of bangladeshi textile. Evidence from turkey 4 erj 7 2 2016 bagchi and khamrui 2012 investigated the relationship between working capital and profitability. Greener journal of business and management studies issn. Article information, pdf download for the relationship between working.
The impact of working capital management on profitability. How does profitability get affected by working capital management in food and beverages industry. Working capital is part of the total assets of the company. A sample of three 3 manufacturing companies listed on. Profitability and working capital management the jordanian. Article pdf available in european journal of economics, finance and. The objective of this study is to establish the relationship between working capital management and performance ratio over a period of seven years for rural banks in kwahu ridge.
The interplay between working capital management and a. Article pdf available august 2018 with 8,301 reads. The objective of this research is therefore to establish the effect of working capital management on the profitability of manufacturing companies in kenya. The efficiency of working capital management can be measured through a variety of methods and ratios.
In this context, the objective of the current study is to provide empirical evidences about the effect of working capital management on profitability for a sample of 10 manufacturing and construction companies during the period 200320. Many previous researches have indicated the relationship between working capital management and profitability of firm in different environments. Abstract firms financial management policies compose ofvery important decisions including working capitalmanagement. Working capital is made by the three important factors, debtor, creditor and stock. Working capital is the money used to make goods and attract sales. Is profitability driven by working capital management. Working capital management definition investopedia. In light of this objective the study adopts quantitative approaches to test a series of research hypotheses. Hence, working capital is deemed as an effective management technique to guarantee longterm success.
Using a sample of 30 uk firms and employing the pearson correlation data analysis technique, the study confirms a significantly negative association between profitability and working capital management variables. Working capital management is considered to be a vital issue in financial management decision and it has its effect on liquidity as well as on profitability of the firm. Impact of working capital management on the profitability of public. A firms high liquidity risk results in high profitability.
Therefore, the working capital management role will be clearer on firm profitability. The importance of working capital management for hospital. Secondly, the efficiency of working capital management was checked. The relationship between profitability and working capital management finance essay. Impact of working capital management on profitability. It is difficult trying to achieve and maintain an optimum level of. The behaviors that support better workingcapital management, such as analyzing oftignored. Profitability at microeconomic level has been studied depending also on indicators such as current ratio, liquid ratio, receivables turnover ratio and working capital to total asset singh and pandey, 2008. Prior evidence has determined the relationship between working capital and performance. Therefore, the present article tries to examine the impact of working capital management on profitability of the firms of indian steel industry. This management of working capital needs to be evaluated, which is done with its effect on firms profitability. Transforming the culture of managing working capital january 2018 article.
The purpose of this study is to find out the effect of working capital management on company profitability. Mawutor, john kwaku mensah, working capital management and profitability of firms. The impact of working capital management on profitability of. Working capital management is about the commercial and financial aspects of inventory, credit, purchasing, marketing, and royalty and investment policy. Transforming the culture of managing working capital. Pdf effect of working capital management on profitability. The following working capital items were studied in the article. He finds that profitability and working capital management have negative impact on positive relationship. Anchored in the cash conversion cycle theory, the purpose of this correlational study was to examine the relationship between wcm, wcp, and pft. Effects of working capital management and profitability. The information about company performance, especially about its profitability, is.
While not perfect, workingcapital days are the closest thing to a measure of. Jude leon officer, union bank of colombo plc, sri lanka. Working capital management is about the commercial and financial aspects of inventory, credit, purchasing, marketing. The effect of working capital management on profitability. Working capital, cash holding, and profitability of. Impact of working capital management on the profitability. In respect of smes, 4 emphasized in his recent study the importance of management of working capital in terms of financial performance in smes to be increased. The components and determinants of working capital are summarized in the table below. Payable days, inventory days, cash conversion cycle, debt, and size of the firm. Working capital is a financial measure used to assess corporate liquidity naser et al.
A study of commercial vehicle industry in india divya jindal apeejay school of management, new delhi, india. Effects of working capital management on company profitability. Firms may have an optimal level of working capital that maximizes their value. They find that there is a strong negative relationship between variables of the working capital management and profitability of the firm. The less working capital used to attract sales, the higher is likely to be the return on investment.
Over the years there have been numerous articles written about the importance of working capital management regarding the profitability of a firm shin and. The relationship between profitability and working capital. Impact of working capital management on firms profitability. H1 there is positive impact of working capital management on profitability of firm. The findings ascertain a strong inverted ushape relationship between working capital and a firms profitability, which indicates the existence of an optimal working capital level for restaurant firms. On the other hand, 5 determined that smes often used equity, low, and they couldnt provide sufficient employment. Working capital management and performance measures. The relationship between working capital management efficiency and profitability is examined using correlation and regression analyses. Increased financial pressures on hospitals have elevated the importance of working capital management, that is, the management of current assets and current liabilities, for hospitals profitability. Working capital management and profitability of firms. Profitability and working capital management the jordanian case.
Over the years, it appeared that firms failed to subject shortterm investments to proper management thereby leading to either excessive or inadequate working capital which in turn affected their profitability. Shin and soenen 1998 used a sample of 58,985 firms years covering the period 19751994 in order to. Working capital to the company is like the blood to human body. Companies search for liquidity and operational efficiency through minimizing their investment in working capital. Thus, this study examined the impact of working capital management on firms. Priya darshini pun thapa london school of commerce abstract this study examines the working capital management of the food and beverage corporations from the u. 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. Impact of working capital management on firms performance. Introduction when we talk about implication of working capital management wcm we mean profit and liquidity. Working capital of a firm comprises on current assets. The concept of working capital management is concerned with managing working capital components to promote a satisfying liquidity, profitability and shareholders value. The study aims at examining the statistical significance between companys working capital management and profitability. Impact of working capital management on profitability in uk. This article looks at return on investment as a measure of profitability and some traditional and more.
As it included items like cash, inventory, receivables, payables etc the working capital shows the activities of the companies. Article pdf 680kb transforming the culture of managing working capital. Shin and soenen 1998 used a sample of 58,985 firms years covering the period 19751994 in order to investigate the relationship between nettrade cycle. Azam and haider, 2011 conducted research on impact of working capital management and firms performance as well as. To empirically satisfy this, this paper examined working capital management and firms profitability in nigeria quoted firms on nigerian stock exchange nse. Efficient working capital management allows hospitals to reduce their holdings of current assets, such as inventory and accounts. Working capital management is the administration of current assets and current liabilities. He also determines proof that the rate of increase in firms profitability is less than from decrease in working capital. Working capital management, profitability, cash conversion cycle, inventory. The two conflicting goals of working capital management are profitability and liquidity. Abstract in this research the researcher attempt to take result of comparison among industries based on working capital management. The impact of working capital management on profitability of the listed firms in sri lanka s.
Abstractdespite the importance of highgrowth firms hgfs for job creation, innovation, and economic development in transition economies, current knowledge on the role of financial decisions in explaining their profitability is limited. The dependent variable, profitability is measured using gross operating income. Effects of working capital management on company profitability abstract. Investors to earn profit and to maximize their wealth invest funds in various business activities. Working capital management refers to the management decisions and strategies that are adopted by companies in order to deal with problems relating to the management of working capital, which generally influence the size and effectiveness of the working capital of a firm. Pdf working capital management and its impact on profitability. 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 ri. Impact of working capital management on profitability in. Return on total assets represents the profitability of the industry and acts as a dependent variable to develop an empirical model in order to establish relationship between working capital management and profitability of the steel industry in india by using panel data regression.
For this study and quantitative analysis along with multiple regressions has been done to analyze the data using deductive approach. The impact of working capital management on profitability is analyzed by computing pearsons simple correlation coefficients, multiple correlation analysis and multiple regression analysis between. Here are few ways in which effective working capital management can ensure profitability. This study aimed to provide empirical evidence about the impact of working capital management, performance management companies. Analysis of the effect of working capital management on. Impact of working capital management on the profitability of. Working capital management and firms profitability.
Anova analysis is done to study the impact of working capital management on profitability. Working capital management wcm plays an imperative role in corporate financial sustainability as it can directly affect firm liquidity, profitability and solvency 5,6. This study analyses the working capital management efficiency of firms from telecommunication equipment industry. Companies search for liquidity and operational efficiency through minimizing their investment in. The purpose of this paper is to provide empirical evidence on the effects of working capital management on the profitability of small and mediumsized portuguese firms. Working capital management has lately been a hot topic since the financial turmoil of the late 2000s. Proper selection and management of working capital management policies can create competitive advantage. A rolling average of workingcapital days is best to mitigate seasonality. Evidences from textile sector of pakistan nadeem iqbal faculty of management sciences, baha uddin zakariya university multan, pakistan naveed ahmad. When we include cash conversion cycle ccc to working capital then it becomes working capital management wcm. The period of study is 17 years, that is, 20002016. Working capital management efficiency is vital especially for manufacturing firms, where a major part of assets is composed of current assets 1.
Efficiency of working capital management and corporate. Generally, it is the difference between current assets and current liabilities. Factors influencing the companies profitability camelia burja1 abstract. Effective management of working capital ensures that the organisation is maximising the benefits from net current assets by having an optimum level to meet working capital demands. The impact of working capital management on firm performance. Profitability at microeconomic level has been studied depending also on indicators such as. Keywords keywordsworking capital management, profitability.
We prefer focusing on both workingcapital balancesnormalized for uncontrollable factors such as currency exchange rates, major input prices, and inflationas well as workingcapital days. Relationship between working capital management, policies. Analysis of the effect of working capital management on profitability. Evidence from pakistan global journal of management and business research volume xii issue xvii version i 2 y 2012 ear. The correlation between working capital and profitability of firms is analyzed for the management of cash cycle management. The paper examines the effects of working capital management on malaysian smes profitability within the sight of control factors measured by the size of the firm, leverage, and sales growth. The impact of working capital management on management. This study also reveals that a firms cash level is an important factor for efficient working capital management. The most important aspect in working capital management is proper allocation of resources. In this regard, the better working capital is managed, the higher the profitability of a firm will be. Working capital supports the daytoday operations of the firm.
Transforming the culture of managing working capital mckinsey. H2 there is positive impact of total assets on profitability of firm. The purpose of this study is to examine the relationship between working capital management practices and profitability of listed manufacturing firms in ghana. Jun 01, 2015 the purpose of this paper is to provide empirical evidence on the effects of working capital management on the profitability of small and mediumsized portuguese firms. Using a sample of 443 annual financial statements of 349 telecommunication equipment companies covering the period 20012007, this study found evidence that even though days working capital is negatively related to the profitability, it is not significantly.
Practically, the results indicate that there is a significant relationship between the cash conversion cycle. Pearsons correlation and regression analysis to explore the relationship between the profitability and the working capital components. The relationship between working capital management and profitability. A panel data methodology was used with different regression estimators to analyze this relationship based on a balanced panel of 10 listed firms during the period 20082017. Working capital management objective is to maximise the profits, which results into reducing the risk of not able to satisfy the maturing shortterm debt. Profitability, working capital, efficient management, jordan 1. The relationship between working capital management and. Practically speaking, it is the daily, weekly and monthly cash requirement for the operations of a business.
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