Working Capital Management and Firms’ profitability: Evidence from Manufacturing S.C. in Addis Ababa,Ethiopia

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. Past studies has shown the relationship between working capital and performance. To investigate this relationship between these two. The researcher collected secondary data from 19 manufacturing share companies which are located in Addis Ababa, Ethiopia for the year 2010 G.C- 2014 G.C. Working capital measurement parameters like, Accounts receivable period, inventory holding period and accounts payable period are used as independent working capital management variables. Moreover, cash conversion cycle is used as comprehensive measures of working capital management variable. In addition firm size as measured by logarithm of asset, GDP and inflation as control variables.. 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 firms performance. The performance was measured in terms of profitability by return on total assets,The data was analyzed using e-view software estimation equation by both correlation analysis and pooled panel data regression models of cross-sectional data was used for analysis. The regression results show inverse relationship between accounts receivable and inventory holding periods with profitability. However there is statistically insignificant relationship between accounts payable period and profitability. The results also show that there exists significant negative relationship between cash Conversion cycle and profitability of the sampled firms. Manager, therefore, can increase firm’s profitability by improving the performance of management of working capital components like account receivable days, inventory conversion period, and account payable days and cash conversion cycle respectively. Key words: ,