Working Capital Management and Firm Profitability: An Empirical Review

Abstract

Working capital management is very important for the survival of a company no matter the size of that company. Inadequate working capital or illiquidity is a major issue confronting Many Nigerian companies. The main objectives of this study is to review the impact of working capital management on the profitability. The variables used in the study were cash conversion cycle, accounts receivable, inventory and accounts payable proxies to working capital management while, return on equity and return on assets as proxies to profitability. The study adopted conceptual approach where data collected from already existing data on the impact of working capital management on profitability. it is quite clear that a positive correlation exists between working capital management and firms’ profitability. Finally, a company which maintain sufficiently low inventory levels will reduce the holding cost of the inventory which results to higher profitability. The managements of companies should improve their cash conversion cycle, focus more on credit transactions with their vendors, and decrease their receivables days’ by offering a discount to those who paid early and those paid in advance, and should maintain optimum level of inventory in order to maximize their profitability.