The Impact of working capital management on firm’s profitability

Abstract

The aim of this study is to find the interaction and relationship between working capital management and firms‟ profitability. As components of net working capital are kept at optimal levels, this situation benefits company to use resources more efficiently and help profitability. Similarly, high levels of profitability helps avoiding idle working capital practices. .To investigate this relationship between these two, using a sample consisting of six companies listed in the Egyptian stock exchange market, and 4 years data covering years from 2013 to 2017. For this purpose, in this study the researchers used variable of return on assets ratio to measure the profitability of company and variables of working capital management. Regressions were run to analyze how profitability affects working capital management which is measured in terms of Cash Conversion Cycle (CCC), Current Ratio (CR), Average collection period (ACP), Average inventory period (AIP) and Average payment period (APP). The hypothesis showed that there‟s a positive relation between the average collection period and return on assets, current ratio and return on assets, cash conversion cycle and return on assets. On the other hand there‟s an insignificant negative relationship between both average payment period and average inventory period with return on assets. The results indicate that through proper working capital management allocation the company can improve their profit levels. Working capital management plays a significant role in improved profitability of firms. Firms can achieve optimal management of working capital by making the trade-off between profitability and liquidity.