Relationship between Working Capital Management and Profitability
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Date
2024-08-08
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Business, Management and Economics: Research Progress Vol. 3 Relationship between Working Capital Management and Profitability
Abstract
Business is crucial for a country's capital formation and plays a vital role in a
growing economy. So, effective management is essential. Fund managers face
the challenge of procuring and deploying funds for maximum returns. The
purpose of this study is to find out the effect of working capital management on
company profitability. In light of this objective, the study adopted quantitative
approaches to test the research hypotheses. A sample of three (3) manufacturing
companies listed on the Dar es Salaam Stock Exchange (DSE) was used for a
period of ten years (2002-2012) with a total of 30 observations. Annual financial
statements (statement of comprehensive income and statement of financial
position) for the period of ten years from 2002 to 2012 were used to collect data
for this study. The data was analyzed on a quantitative basis using Pearson’s
correlation and Regression analysis (Ordinary Least Square). The main findings
from the study are; Firstly, there exists a positive relationship between the cash
conversion cycle and profitability of the firm. This means if the cash conversion
cycle increases it will lead to an increase in the profitability of the firm, and
managers can create a positive value for the shareholders by increasing the cash
conversion cycle to a reasonable level. Secondly, there is a negative relationship
between liquidity and profitability showing that as liquidity decreases, the
profitability also increases. Thirdly, there exists a highly significant negative
relationship between average collection period and profitability indicating that a
decrease in the number of days a firm receives payment from sales affects the
profitability of the firm positively. Fourthly, there is a highly significant positive
relationship between the average payment period and profitability. This implies
that the longer a firm takes to pay its creditors, the more profitable it is. Fifthly,
there exists a highly significant negative relationship between inventory turnover
Description
Keywords
Working capital, profitability, manufacturing companies, Dar es Salaam stock exchange, Tanzania.