| Abstract: | Profitability & Liquidity are the major concerns of working capital management for banks and therefore achieving the optimum level of working capital is essential. The main objective of this study was to examine the effect of Working capital management on the Profitability of Private commercial banks in Ethiopia. In order to achieve the research objectives, data was collected from a sample of 13 Private commercial banks in Ethiopia of the period from 2011 to 2020. Working capital management components which related to banks activity (Liquidity, Cash Conversion Cycle, Debtors Collection Period, Creditors Payment Period, Size, and Credit risk) were analyzed by using descriptive statistics, Pearson’s correlation coefficients and Multiple Regression analysis: expanded simple regression equation to represent multiple regression analysis that can take General Linear Model (GLM). Bank’s Profitability measured with ROA whereas Liquidity is measured by loan to deposit ratios. The findings of the study revealed that, Liquidity negatively on the other hand Debtors Collection period & Bank size are positively related with Profitability but not significantly so they have no significant effect on Profitability. Based on the two mode formulated in this study Credit risk and Profitability have different or significant positive & positive but not significant relationship. Creditors payment period have significant negative relationship with the Profitability so that it has significant effect on Profitability. The relationship of cash conversion cycle and Profitability of private commercial banks is significant positive. Private commercial banks can reduce the length of its Creditors payment period & lengthened Debtors Collection period to increase its cash conversion cycle so that the Profitability of banks is greatly enhanced as the cash conversion cycle is lengthened. As Liquidity (L) has negative impact on Profitability (ROA) it indicates when Private commercial banks are more Liquid or strong to pay their short term obligation; their Profitability will be low but the result show the relationship is not significant. Private commercial banks can keep optimum level of Working capital to balance Profitability & Liquidity and maximize organizational value through Effective Working capital management. |
