Abstract
Working capital management plays a vital role in the success of businesses because of its effect on profitability and liquidity. The purpose of this study is to examine the relationship between working capital management practices and profitability of listed manufacturing firms in Ghana. The study used secondary data collected from all the 13 listed manufacturing firms in Ghana covering the period from 2005-2009. Using panel data methodology, the study finds a significantly negative relationship between profitability and accounts receivable days. However, the firms’ cash conversion cycle, current asset ratio, size, and current asset turnover significantly positively influence profitability. The study suggests that managers can create value for their shareholders by creating incentives to reduce their accounts receivable to 30 days. It is further recommended that, enactments of local laws that protect indigenous firms and restrict the activities of importers are eminent to promote increase demand for locally manufactured goods both in the short and long runs in Ghana. Key words: Manufacturing firms, working capital management, Ghana stock exchange, cash conversion cycle, profitability.
Highlights
Working capital management (WCM) refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital (Kaur, 2010)
The call to embark on optimal WCM practices is even more pronounced, given that it has the potential of revamping the manufacturing sector with its attendant benefits of job creation and tax contributions (World Bank Report, 2007)
We find that accounts receivable days significantly negatively influence profitability of listed manufacturing firms in Ghana
Summary
Working capital management (WCM) refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital (Kaur, 2010). The most important issue in WCM is the maintaining of liquidity in the day-to-day operations of the firm This is crucial so as to prevent creditors and suppliers whose claims are due in the short-term from exerting unwarranted pressure on management and ensure the smooth running of the firm. Finance sound WCM ensures that organisations have the ability to meet their short-term liabilities adequately and on time This further makes it possible to curb the situation where firms have accumulated idle resources which may not generate any income or as indicated earlier prevent unavailability of sufficient financial resources needed for meeting short-term financial obligations. This explains why it is often argued that efficient WCM is very crucial in achieving the over-arching goal of the firm, which is shareholders value maximisation
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