The impact of Working Capital Management on Firms’ Profitability: (The Case of Pharmaceuticals manufacturing firms in Ethiopia)

Abstract

Working capital refers to the firms’ investment in short term assets. Working capital management (WCM) is the management of short term financing requirements of a firm which includes maintaining optimum balance of working capital components; account receivable, inventory, and account payables and using cash efficiently for day to day operation. This study investigates the impact of working capital management on the profitability of listed pharmaceuticals manufacturing firms in Ethiopia, which are classified under pharmaceuticals category as per register book of FMHACA. The study used secondary data in the form of income statement and balance sheet which covers a period of eight years (2008-2015); panel data being collected from five manufacturing firms using purposive sampling technique. The data was analyzed on quantitative basis using Descriptive statistics, Pearson’s correlation and Regression analysis. The key findings of the study were; firstly, the length of receivable collection period and day payment outstanding have a negative relationship with the profitability of listed pharmaceuticals manufacturing firms but no significant. Secondly, the length of time to which raw materials were converted to finished goods has positive insignificant effect on firms’ profitability during the study period. Thirdly, the length of the time between paying labor and materials and collecting receivable has a significant positive effect on profitability of listed pharmaceuticals manufacturing firms. Fourthly, firm size and growths in sales have statistically significant positive impact on firms’ profitability. Lastly, the debit ratio has a positive relationship with profitability of listed pharmaceuticals manufacturing firms but not significant during the period span of the study. Therefore, to improve the profitability of listed pharmaceuticals manufacturing firms in Ethiopia, the study recommends to financial managers, finance officers and general manager should keep their working capital at optimum level, increase sales at high rate may be by giving a reasonable time for customers to settle their credit invoice because growth in sales and firm size have significance positive impact on the profitability of listed pharmaceuticals manufacturing firms in Ethiopia. In addition, if the firm has enough space to store a stock or it incurs a minimum holding cost and higher ordering cost, the responsible person should decide to hold a large quantity of raw materials.