Impact of Working Capital Management on Profitability: A Case Study of Trading Companies

The success of any business depends on its profitability, liquidity, and solvency. Liquidity plays an important role in the successful running of a business. Many prior studies have been conducted to measure the relationship between working capital and profitability. The results showed that the high investment in inventories and receivables is associated with lower financial performance. They found a negative relationship between Return on Assets and Inventory turnover and Cash conversion cycle the present study is designed to know the direct impact of working capital on profitability by choosing the days of collection, days of payment, days inventory converts to sales and finally the cash conversion cycle. This study examines the association between the profitability and working capital using the data of 15 US trading companies for the period of 2015 to 2019. The key points in this study are firstly there exists a negative relationship between the profitability and the average collection period, the lower the average collection period higher will be the profitability, indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively. Secondly there is a highly significant positive relationship between average payment period and profitability. This implies that the longer a firm makes the payment to its creditors, the more profitable it is. Thirdly the cash conversion cycle decreases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders which indicates that it has been maintained. The regression analysis showed the value for the R-squared in the model is 0.584, i.e., 58.4% of the variation in the dependent variable Net Profitability is explained by the independent variables.

Working capital management and profitability: evidence from Indonesian manufacturing companies

Diponegoro International Journal of Business ◽

10.14710/dijb.3.1.2020.36-46 ◽

2020 ◽

Vol 3 (1) ◽

pp. 36-46

Author(s):

Irfan Aryawan ◽

Astiwi Indriani

Keyword(s):

Stock Exchange ◽

Manufacturing Companies ◽

Capital Management ◽

Working Capital ◽

Return On Assets ◽

Cash Conversion Cycle ◽

Conversion Period ◽

Collection Period ◽

The aims of this study is to analyze the relationship between working capital management and profitability (return on assets) as a dependent variable and cash conversion cycle (CCC), inventory conversion period (ICP), average collection period (ACP) and average payment period (APP) as independent variables with leverage, liquidity, and size as the controlling variables. The sample of this study are manufacturing companies in the Indonesian Stock Exchange 2013-2017. The analysis using OLS showed that the ACP has a negative and significant effect on ROA and the APP has a positive and significant effect on ROA, meanwhile CCC and ICP has a negative and insignificant effect on ROA.

Working Capital Management and Its Impact on the Profitability of Pukar International Co.Ltd.

NCC Journal ◽

10.3126/nccj.v4i1.24747 ◽

2019 ◽

Vol 4 (1) ◽

pp. 141-147

Author(s):

Puspa Raj Ojha

Keyword(s):

Descriptive Analysis ◽

Negative Relationship ◽

Capital Management ◽

Working Capital ◽

Return On Assets ◽

Current Ratio ◽

International Trading ◽

Collection Period ◽

This paper aims to report the results of an investigation of the relative importance of working capital management, measured by the Return on Assets (ROA), and its components (Current ratio, average collection period and average payment period) to the profitability of Pukar International Trading. This paper analyzes the effect of working capital Management on firm’s profitability in Nepal for the period 2071 to 2072. For this Purpose, financial data of four year is used. Pearson’s correlation and Descriptive analysis were used to establish the relationship between working capital management and firm’s profitability and components of working capital like Average collection period, Average payment period and Current ratio. The study finds a negative relationship between profitability and average collection period and average payment period, but appositive relationship between profitability and current ratio. Moreover, current ratio and firm size also have significant effects on the firm’s profitability. Based on the key findings from this study it had been concluded that the management of a firm could create value for their shareholders by reducing the number of day’s accounts collection. Firms could also take long to pay their creditors in as far as they did not worry their relationships with these creditors.

The Relationship between Working Capital Management and Profitability: Evidence from Pakistan

International Letters of Social and Humanistic Sciences ◽

10.18052/www.scipress.com/ilshs.20.14 ◽

2014 ◽

Vol 20 ◽

pp. 14-25 ◽

Cited By ~ 1

Author(s):

Nadeem Iqbal ◽

Naveed Ahmad ◽

Zeeshan Riaz

Keyword(s):

Positive Relationship ◽

Stock Exchange ◽

Negative Relationship ◽

Theoretical Research ◽

Capital Management ◽

Working Capital ◽

Cash Conversion Cycle ◽

Collection Period ◽

In this paper secondary data is used for analysis of working capital on profitability. In this research paper we take working capital as independent variable and net operating profit as dependent variable. We have found a significant negative relationship between net operating profitability and the average collection period, inventory turnover in days, average payment period and cash conversion cycle for a sample of Pakistani firms listed on Karachi stock exchange. Previous theoretical research predicts negative relationship between cash conversion cycle and corporate profitability. The results of regression indicate that the coefficient of account receivable is negative; that is, the increase or decrease in average collection period wills significantly affect the profitability of the firm. According to inter-item correlation matrix the relationship of account receivables, account payables and inventory with profit shows positive relationship but cash conversion cycle, financial debt and financial assets shows negative relationship with profitability. Inventory shows the positive relationship with dependent variable which proves that working capital management has a positive effect on firm’s probability.

RELATIONSHIP BETWEEN WORKING CAPITAL AND CASH LINES AFFECTS THE PROFIT OF VIETNAM SECURITIES COMPANY

International Journal of Scientific Research and Management ◽

10.18535/ijsrm/v9i07.em05 ◽

2021 ◽

Vol 9 (07) ◽

pp. 2312-2318

Author(s):

Tran Van Hai

Keyword(s):

Cash Flow ◽

Negative Relationship ◽

Cash Flows ◽

Tobit Model ◽

Working Capital ◽

Time Dimension ◽

Cash Conversion Cycle ◽

Securities Company ◽

Collection Period ◽

Studying the relationship between working capital and cash flow affecting profitability of Vietnamese securities companies, through tobit model presented in the form of two-dimensional panel data: time dimension (from 2012 to 2019), the space dimension is the enterprise (48 securities companies), corresponding to 370 observations, using STATA 14 software to verify and estimate the tobit model. As a result, the relationship between working capital and cash flow (available cash flow) significantly affects the profitability of Vietnamese securities companies, Average collection period (ACP) has a negative relationship with ROE/ROA, while Average Payout Period (APP) has no significant effect on ROE/ROA. The implication is that securities companies can increase the profitability of the business by shortening the cash conversion cycle, shortening the receivable collection period, that is, for securities companies with positive cash flows, investment should be reduced. working capital to increase profitability.

The Relationship Between Working Capital Management And Firms Profitability: An Empirical Investigation For An Emerging Asian Country

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v11i8.7162 ◽

2012 ◽

Vol 11 (8) ◽

pp. 839 ◽

Cited By ~ 3

Author(s):

Melita Charitou ◽

Petros Lois ◽

Halim Budi Santoso

Keyword(s):

Empirical Investigation ◽

Global Financial Crisis ◽

Asian Country ◽

Capital Management ◽

Working Capital ◽

Return On Assets ◽

Major Objective ◽

Cash Conversion Cycle ◽

The major objective of this study is to examine the relationship between working capital management and firms profitability. Using a dataset of all Indonesian firms over the period 1998-2010, results show that the Cash Conversion Cycle and Net Trade Cycle are positively associated with the firms profitability. Results also show that firms riskiness, as measured by the debt ratio, is negatively related to the firms Return on Assets. The results of this study should be of interest to executives and major stakeholders, such as investors, creditors, and financial analysts, especially after the recent global financial crisis and the latest collapses of giant organizations worldwide.

The Relationship between Working Capital Management and Profitability of Bumiputera-Controlled Companies in Malaysia

Indian-Pacific Journal of Accounting and Finance ◽

10.52962/ipjaf.2018.2.3.58 ◽

2018 ◽

Vol 2 (3) ◽

pp. 24-34

Author(s):

Fairuz Sofia Kaharuddin ◽

Ahmad Rizal Mazlan

Keyword(s):

Capital Management ◽

Working Capital ◽

Trade Off ◽

Cash Conversion Cycle ◽

Conversion Period ◽

Panel Data Regression ◽

Data Regression ◽

Collection Period ◽

This study investigated the relationship between working capital management and profitability of 94 listed Bumiputera-controlled companies in Malaysia for 2006 until 2012. The underlying theory is the trade-off theory of working capital and cash conversion cycle, and its components are used as measures for working capital management. Findings of the panel data regression reveal that inventory conversion period and receivable collection period are significantly negatively correlated to profitability. This suggests that the shorter the period, the higher the profitability of Bumiputera-controlled companies tends to be. However, the cash conversion cycle is significantly and positively correlated to profitability, suggesting that the longer the cash conversion period, the higher the profitability. The payable collection period is not significantly correlated to profitability. The findings of this study assert that in general, Bumiputera-controlled companies are relatively less efficient in its working capital management, as far as the comparison to previous related studies is concerned.

The effect of working capital management on profitability

International Journal of Research in Business and Social Science (2147-4478) ◽

10.20525/ijrbs.v9i6.872 ◽

2020 ◽

Vol 9 (6) ◽

pp. 114-122

Author(s):

Tarik Hossain

Keyword(s):

Negative Relationship ◽

Ordinary Least Squares ◽

Manufacturing Companies ◽

Capital Management ◽

Working Capital ◽

Manufacturing Firm ◽

Cash Conversion Cycle ◽

Collection Period ◽

The Impact

This research aims to analyze the impact of efficient working capital management on the profitability of the manufacturing firm in Bangladesh. Fifty-two manufacturing companies listed with Dhaka Stock Exchange (DSE) have been selected randomly from 2012 to 2017. Return on Assets (ROA) and Return on Equity (ROE) are used as indicators of profitability, while the inventory conversion period (ICP), the average collection period (ACP), the average payment period (APP), and the Cash Conversion Cycle (CCC) are used as the independent variables which are used as a measurement of working capital management of the firm. Ordinary Least Squares regression models and Pearson's Correlation are used to establish the relationship between working capital management and profitability. The results revealed a significant negative relation between ROA and CCC, ACP; a significant negative relationship exists between ROE and CCC, APP. Manufacturing companies can increase profitability by decreasing the cash conversion cycle, average payment period, and average collection period. It also revealed that ICP is also positively related to ROA and ROE. Therefore, this research concludes that efficiently and effectively managing working capital is very important for increasing manufacturing companies' profitability.

Working Capital Management Issues in Educational Sector: A Case Study of a Private Campus in Sri Lanka

Asian Journal of Economics Business and Accounting ◽

10.9734/ajeba/2021/v21i1330458 ◽

2021 ◽

pp. 30-45

Author(s):

Kaushika Gamage ◽

Vilani Sachitra

Keyword(s):

Financial Performance ◽

Thematic Analysis ◽

Qualitative Data ◽

Capital Management ◽

Working Capital ◽

Cash Conversion Cycle ◽

The Relationship ◽

Management Issues

Business organizations try to maintain financial sustainability in the long run and ultimately try to maximize shareholders’ wealth. It has been argued that financial constraints in short term are a major barrier to the firms’ long term financial success. Working capital has seen as the basic factor that affect firm’s ability to continue their day-to-day business operations with financial stability. This case study mainly focuses on examining the reasons for working capital management issues faced by the Campus and the relationship between working capital and firm’s financial performance. This study is mainly focusing on working capital problems faced by a private Campus that operates in Sri Lankan educational sector. Required qualitative data gathered through semi-structured face to face interviews with financial experts and the quantitative data gathered using annual financial statements for last six years. Panel data regression was performed to identify the relationship between working capital management and financial performance. Qualitative data was analyzed using content and thematic analysis. Based on the regression results, average collection period, average payment period and cash conversion cycle have significant relationship over return on assets and net profit margin of the Campus. Five major themes were recognized in the thematic analysis which contained distinct subthemes. As the existing research articles lack the working capital management issues faced by the organizations in private education industry, this can be considered as an opportunity to perform an empirical study on working capital management issues faced by a private campus.

Working capital management: evidence from Norway

International Journal of Managerial Finance ◽

10.1108/ijmf-01-2016-0012 ◽

2016 ◽

Vol 12 (3) ◽

pp. 295-313 ◽

Cited By ~ 27

Author(s):

Hakim Lyngstadaas ◽

Terje Berg

Keyword(s):

Fixed Effects ◽

Capital Management ◽

Working Capital ◽

Return On Assets ◽

Content Type ◽

Cash Conversion Cycle ◽

Specific Effects ◽

The Relationship ◽

Practical Implications

Purpose – The purpose of this paper is to provide empirical evidence of whether working capital management (WCM) has an effect on the profitability of small- and medium-sized Norwegian firms. Design/methodology/approach – The data comprise 21,075 Norwegian small- and medium-sized enterprises and 84,300 observations made between 2010 and 2013. Panel data regressions were applied with fixed effects and a two-stage least squares analysis was employed to control for endogeneity. Findings – The results indicate that reducing cash conversion cycle will increase profitability. Even though endogeneity may exist, this does not affect the results from the previous analysis. Similar results are also obtained when industry-specific effects are controlled for, supporting the robustness of the results. The relevance of quadratic dependencies of the profitability on independent variables was also identified and suggests a decreasing trend of return on assets with increasing values of the WCM’s characteristic variables. Research limitations/implications – Drawing on similar studies, this study confirms that WCM is relevant for firms’ profitability. Practical implications – The practice of aggressive working capital policy in Norwegian firms is confirmed by the results of this study. Originality/value – This study contributes to the current research on the relationship between WCM and profitability by using a large dataset to add further robustness to results, and thus verifying whether or not the results in previous studies may be confirmed or not. Moreover, this is the first published study about this relationship among Norwegian firms in different industries, thus filling a gap in similar research conducted in other European countries.

Working Capital Management and Firms' Profitability in the Midst of an Economic Crisis

International Journal of Applied Management Sciences and Engineering ◽

10.4018/ijamse.2018070104 ◽

2018 ◽

Vol 5 (2) ◽

pp. 66-80

Author(s):

Dimitris Axiotis ◽

Alina Hyz ◽

Petros Kalantonis

Keyword(s):

Economic Crisis ◽

Financial Constraints ◽

Negative Relationship ◽

Capital Management ◽

Working Capital ◽

Cash Conversion Cycle ◽

Size Growth ◽

The Impact ◽

The purpose of this article is to identify the relationship between working capital management and corporate performance in adverse economic circumstances. The results show positive relationship between profitability and cash conversion cycle, firm's size, growth and leverage and negative relationship between profitability and components of cash conversion cycle. Analysing the impact of the crisis it can observe that the companies can increase their profitability by reducing the period of credit granted to customers. The significance of this study stems from the fact that it sheds light for the desirable firms' policy during the period of financial constraints. Prior research on this subject has looked into various issues related to the linkage between working capital management and profitability, however, none has examined what this relationship looks like following a prolonged economic crisis.