Working capital management and firm profitability

Abstract

Managing a firm’s current assets and liabilities (working capital management) is highly relevant to the success of that firm. While the short-term liquidity effects of working capital management are straightforward to derive, it is an empirical question how it affects firm profitability. This short survey paper consolidates the empirical literature on the association between working capital management and firm profitability. This state of the art analysis provides evidence of positive effects of accounts receivable management and inventory management on profitability. However, results for the effects of accounts payable management on profitability are driven by reverse causality. Finally, this paper highlights critical aspects of prior research and points to avenues for future research.