The Impact of Working Capital Management on Firms’ Profitability (In Case of Manufacturing Share Companies in Addis Ababa)

Abstract

The purpose of this study is to investigate the impact of working capital management on firms’ profitability. The study aims to examine the statistical significance between firms’ working capital management and profitability. In light of this objective, the study adopted quantitative method of research approach to test a series research hypothesis. Specifically, the study used survey of documentary analysis of companies audited financial statements. Stratified sampling design was employed based on nature and turnover of companies. Then companies were selected based on simple random sampling method from each stratum to avoid biases and represent firms from each sub classification (stratum) within manufacturing companies. Consequently, the study selected a sample of thirteen (13) companies for the period of five years (2013-2017) with the total of 65 observations. Data was then analyzed on quantitative basis using correlation and multiple regression analysis. The results showed that there is significant positive relationship between profitability and working capital management. It means that, companies’ managers can create profits or value for their companies and shareholders by handling correctly the cash conversion cycle and keeping each different component of working capital to a possible optimum level. The researcher found that there is an insignificant negative relationship between Cash conversion cycle and profitability. Moreover, the study finds that there is significance positive relationship between Average payable period and firm profitability. Finally, the study will suggest about management of manufacturing firms made under study can create value for the shareholders as well to make the firms performance well by reducing: the net time interval between actual cash expenditures on a firm’s purchase of productive resources and the ultimate recovery of cash receipts from product sales.