THE IMPACT OF WORKING CAPITAL MANAGEMENT ON FINICIAL PERFORMANCE OF ETHIOPIAN BREWERY FACTORIES

Abstract

Management of working capital refers to management of current assets and current liabilities. Firms may have an optimal level of working capital that maximizes their value. Prior evidence has determined the relationship between working capital and financial performance. Thus, this study examined the impact of working capital management on financial performance by using audited financial statements of a sample of 6 brewery factories companies in Addis Ababa, Ethiopia for the period of 20010 to 2017. The performance was measured in terms of profitability by return on total assets, capital as dependent financial performance (profitability) variables. The working capital was determined by the Cash conversion period, Accounts receivable period, inventory conversion period and accounts payable period are used as independent working capital variables. The data was analyzed using STATA 12, estimation equation by both correlation analysis and pooled panel data regression models of cross-sectional and time series data were used for analysis. Results indicate that longer accounts receivable and inventory conversion periods are associated with higher profitability. The results also show that there exists significant positive relationship between cash conversion cycle and profitability measures of the sampled firms. On the other hand, findings show that a highly significant negative relationship between account receivable period, inventory conversion period and account payable period with return on asset. The results conclude that cash conversion cycle has significant positive relationship with return on asset. In general, paying suppliers longer and collecting payments from customers earlier, and keeping product in stock less time, are all associated with an increase in the firm‘s performance. Managers, therefore, can increase firms‟ profitability by improving the performance of management of working capital component