DETERMINANTS OF WORKING CAPITAL MANAGEMENT AND ITS IMPACT ON PROFITABILITY OF MANUFACTURING COMPANIES IN CASE OF ADDIS ABABA

Abstract

This study was title Determinants of working capital management and its impact on profitability manufacturing companies in case of Addis Ababa. In light of the above objective, the study adopted quantitative research approach to test hypothesis. The study used survey of documentary analysis of companies audited financial statement. Sample of twenty (20) manufacturing companies were purposively selected from some selected industry classes and financial statement (particularly balance sheet and income statement) of sample firms was collected for the study period from Ethiopian customs and revenues authority large tax payer branch office. The data was analyzed with the help of Eview-8 software program on quantitative basis by using descriptive statistics, correlation and regression analysis. The results of correlation analysis revealed that the firms’ profitability was negatively correlated with working capital management efficiency measures (CCC, ACP, ICP and CATA, CLTAR, O) similarly control variables of CR and DR were also negatively correlated with the firms profitability. But the remaining control variables like CATAR and CLTAR were positively related with the firms’ profitability. Cash conversion cycle was found with significant negative impact on profitability of those selected manufacturing firms. In order to enhance their profitability firms should minimize their time delay in cash conversion cycle. To minimize CCC firms should manage receivables, inventories and payables efficiently and effectively. Average collection period is also found with significant negative impact on profitability of those selected manufacturing firms. Therefore, firms should minimize the average collection period to the lowest possible time period that would not harm their sales.