The Impact of Working Capital Management on Firm Profitability: Evidence from Selected Wholesale Trade Firms in Addis Ababa, Ethiopia

Zewdu Kebede

doi:10.7176/dcs/11-8-01

Abstract

Working capital management has a vital role for the success or failure of a firm because of its paramount impact on profitability and liquidity. The purpose of this study is to examine the impact of working capital management on profitability of large tax payer wholesale firms found in Addis Ababa city. The study used audited financial statement of 62 purposively selected wholesale firms for a period of 5 years from2015 to 2019. Data had been analysed by descriptive statistics and a multiple regression. The finding shows that CATAR and IHP had a significant positive relation with profitability meaning that firms maintains optimal level of inventory and higher level of current asset leads towards profitability respectively. Furthermore, negative and significant relationship between APP and CCC with profitability implies that a firm paying its obligation with earlier time and the shorter a time gap between cash outflows and inflows leads to higher profitability respectively. However, ARP and CLTAR had insignificant positive and negative relation with profitability respectively. To summarize, the study conclude that working capital management significantly affect profitability of wholesale firm. Keywords: Working capital management, working capital policy, Profitability, wholesalers, and panel data DOI: 10.7176/DCS/11-8-01 Publication date: October 31 st 2021

Highlights

Working capital management is one of the core areas in which financial managers devote most effort in decision making in the field of corporate finance (Ross et al, 2008)
The result of this study showed that significant negative relationship between working capital and profitability
The result of this study indicate that average days payable was the only variable had negative significant impact on profitability, others cash conversion cycle and average days receivable have positive relation with profitability but insignificant, and average days inventory had negative relation with profitability but insignificant

Summary

Introduction

Working capital management is one of the core areas in which financial managers devote most effort in decision making in the field of corporate finance (Ross et al, 2008). Working capital management is very important part of corporate finance because of its paramount effect on profitability as well as liquidity of a company (Arshad and Gondal, 2013). Working capital management has undeniable role for success of firm since the primary objective of any firm is to maximize profit and increase shareholders wealth (Raheman and Nasr, 2007). Effective working capital management leads to towards better profitability, increase cash flows, decrease the needs of external financing and reduce failures of business (Charitou et al, 2010). Working capital management is very necessary for long lasting success of any business. Making decision on working capital is more challenging due to its cyclical in nature and sensitive to change for various factors

Objectives

Methods

Findings

Conclusion