EFFECTS OF WORKING CAPITAL CYCLE ON PROFITABILITY OF MANUFACTURING FIRMS IN GHANA

Abstract

Purpose: The study was on the effects of working capital cycle on profitability of manufacturing firms in Ghana.Methodology: The research design used in this study was explanatory research design. There are 78 large manufacturing firms in Loan Book of Barclays Bank Ghana. The population of the study is therefore 78 firms. The sampling frame was the loan book of Barclays Bank Ghana. It is for this reason that the study considered 50% of the population to be the sample size. This yielded 39 large manufacturing firms. The study used secondary data only for the purposes of analysis and drawing of conclusions. Descriptive statistics included mean scores and inferential statistics included regression modeling.Results: Results show that there is a negative relationship between profit before tax and mean debtor’s collection period whose beta coefficients is -1817.81. Results show that there is a negative relationship between profit before tax and mean inventory conversion period whose beta coefficients is -103.762. The mean payable deferral period had a positive relationship with profitability with a beta coefficient of 1097.073. The findings show that there is a negative relationship between profit before tax and working capital conversion cycle with a beta coefficient of -816.198.Policy recommendation: It was recommended that speeding up payments to suppliers might increase profitability because firms often receive a substantial discount for prompt payment.It was also recommended that the government should intervene by way of a legislation that would impose penalty interest for delayed payment of commercial debts. Such a provision would create a level playing field by binding all firms to pay promptly and ease the cash flow problems of small firms, who will be compensated for any overdue payments. It was recommended that the owners of firms be made more aware and trained on the best credit management practice. That way, they could reduce the amount of overdue debt and alleviate the problem.