Abstract
This research aims to analyze the impact of efficient working capital management on the profitability of the manufacturing firm in Bangladesh. Fifty-two manufacturing companies listed with Dhaka Stock Exchange (DSE) have been selected randomly from 2012 to 2017. Return on Assets (ROA) and Return on Equity (ROE) are used as indicators of profitability, while the inventory conversion period (ICP), the average collection period (ACP), the average payment period (APP), and the Cash Conversion Cycle (CCC) are used as the independent variables which are used as a measurement of working capital management of the firm. Ordinary Least Squares regression models and Pearson's Correlation are used to establish the relationship between working capital management and profitability. The results revealed a significant negative relation between ROA and CCC, ACP; a significant negative relationship exists between ROE and CCC, APP. Manufacturing companies can increase profitability by decreasing the cash conversion cycle, average payment period, and average collection period. It also revealed that ICP is also positively related to ROA and ROE. Therefore, this research concludes that efficiently and effectively managing working capital is very important for increasing manufacturing companies' profitability.
Highlights
Working Capital Management (WCM) is the process of planning and controlling the level and mix of current assets and current liabilities
Where Return on Assets (ROA) denotes the return on assets, Return on Equity (ROE) is the return on equity, CR is the current ratio, DR is the debt ratio, SG is the sales growth, FS is the firm size as measured by the natural logarithm of total assets, ICP is the inventory conversion period, ACP denotes the average collection period, APP denotes the average payment period, and Conversion Cycle (CCC) is the cash conversion cycle, ε is the error term of the model and β0, β1, β2, β3, β4, β5 are the Regression model coefficients
The study has investigated the relationship between working capital management and profitability of manufacturing companies in Bangladesh
Summary
Working Capital Management (WCM) is the process of planning and controlling the level and mix of current assets and current liabilities. It ensures a company has sufficient cash flow to meet its short-term debt obligations and operating expenses. It works to manage the relationship between a firm's short-term assets and the liability of a firm. Working Capital Management requires financial managers to decide what quantities of cash, other liquid assets, accounts receivables, and inventories the firm will hold at any point in time. Managing effective working capital is a superb way to sustain the company's operations and to improve earnings
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