THE IMPACT OF WORKING CAPITAL MANAGEMENT ON THE FINANCIAL PERFORMANCE OF LARGE TAX PAYER LEATHER PROCESSING COMPANIES IN ETHIOPIA

Abstract

The aim of this paper is to identify the impact of working capital management on financial performance of leather processing firms of Ethiopia that have been registered in the large taxpayer office of Ministry of Revenue and were operating in the years from 2014 to 2018. The paper has been structured based on the four major components of working capital management namely: Cash Management measured by Cash Ratio; Accounts Receivable Management measured by Average Collection Period; Inventory Management measured by Inventory Turnover in Days; and Accounts Payable management measured by Average collection Period. In addition, the researcher measured financial performance using return on asset. The paper would fill the literature gap of inconsistent findings and scarcity of researches that incorporate cash ratio as a measure of cash management. The researcher used quantitative approach, and an explanatory research design in order to show causal relationships between independent and dependent variables. Data from financial statements covering the period from 2014-2018 of 14 sample companies out of a population of 18 firms has been analyzed using a fixed cross-section panel least squares multiple regression technique using the E-views 10 software package. The study has identified that, at a significance level of 5%, all the independent variables: Cash Ratio, Average collection Period, Inventory Turnover in Days and Average Payment have significant negative impact on the dependent variable; Return on Asset of large tax payer leather processing firms in Ethiopia. The researcher recommends the management of the firms to follow a working capital management policy that reduces idle cash, average collection period, inventory turnover in days and average payment period.