Working Capital Management and Its Effect on Profitability (A Case study on Finchaa Sugar Factory)

Ashenafi Biru

doi:10.7176/ejbm/11-28-06

Abstract

The Working capital management plays an important role for success or failure of firms business because of its effect on firm’s profitability as well as on liquidity. The aim of this study is to investigate the working capital management and its effect on profitability of Finchaa Sugar Factory (2007-2018). The study adopts explanatory research type. The necessary data required for this study was Secondary data. The secondary data was the audited financial statement of the firm for the period of 2007 to 2018.The researcher has studied the components of working capital and the effect of different variables including the day’s inventory outstanding, day’s sales outstanding, day’s payables outstanding and Cash conversion cycle on the profitability of the company. Debt ratio, sales growth and Current ratio are used as control variable. The data was analyzed using correlation coefficients and multiple linear regression to study the relationship between variables. The result shows that Days inventory outstanding, day’s receivables outstanding, day’s payables outstanding, cash conversion cycle and sales growth are significantly affecting the profitability of the company. The Current ratio and debt ratio are insignificant in the research in affecting the profitability of the firm. Keywords : Working Capital Management, profitability. DOI : 10.7176/EJBM/11-28-06 Publication date :October 31 st 2019

Highlights

The term working capital management refers to firms’ investments in short-term assets-cash, marketable securities, account receivables and inventories
This study has mainly focused on the impact of working capital management on profitability of Finchaa Sugar which is found in Horo Guduru Wollega Zone of Oromiya Region in Abay Chommen District at Finchaa Valley Agamsa area, 350 Kilo Meters from North West of Addis Ababa
Similar to Shin and Soenen (1998), Deloof (2003), results of this study show that a strong negative relationship between components of the working capital management and profitability of the firm

Summary

Introduction

The term working capital management refers to firms’ investments in short-term assets-cash, marketable securities, account receivables and inventories. Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. It deals with current assets and current liabilities. The current assets of a typical manufacturing firm accounts for over half of its total assets. Excessive levels of current assets can result in a firm’s realizing a substandard return on investment. Firms with too few current assets may incur shortages and difficulties in maintaining smooth operations (Horne and Wachowicz, 2000)

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