Abstract
Working capital is essential for the day-to-day operations of a firm. The study examines the impact of working capital management on the profitability of non-financial firms listed on the Zimbabwe Stock Exchange (ZSE). Using panel data methodology, the direction and extent of the impact of working capital management on profitability is scrutinised. The regression analysis is based on a panel sample of 39 non-financial firms listed on the ZSE from 2009 to 2013, the period under which the Zimbabwean economy has been operating under the multicurrency system. It was found that there is a positive relationship between debtors’ days and firm’s profitability, a negative relationship between creditors’ days and profitability and a positive relationship between firm’s cash conversion cycle and its profitability. There is some negative relationship between current ratio and profitability, while inventory turnover days and profitability are positively related. Debt to asset ratio as a control variable has a significant negative relationship with firm value and profitability. The results of the study show that for the companies included in the sample, there are mixed effects of the components of working capital on firm performance. Managers can thus create value for shareholders by taking note of the existence of such relationships and take measures that enhance firm profitability.
Highlights
Working capital is the amount by which total current assets exceed current liabilities and it is affected by current assets such as stock, cash, the bank balance and prepayments as well as current liabilities that include creditors and accruals depending on the type of business
Akinsulire (2008) refers to working capital as the items that are required for the day-to-day production of goods to be sold by a company. (Reddy and Patkar, 2004) equate working capital in businesses to blood in the human body as it is an essential part in firm financial management decision
Good working capital management will ensure that the business is able to meet its financial obligations
Summary
Working capital is the amount by which total current assets exceed current liabilities and it is affected by current assets such as stock, cash, the bank balance and prepayments as well as current liabilities that include creditors and accruals depending on the type of business. Akinsulire (2008) refers to working capital as the items that are required for the day-to-day production of goods to be sold by a company. (Reddy and Patkar, 2004) equate working capital in businesses to blood in the human body as it is an essential part in firm financial management decision.According to Harris (2005) working capital management is a simple and straightforward concept of ensuring the ability of the firm to fund the difference between the short term assets and short term liabilities. Akinsulire (2008) refers to working capital as the items that are required for the day-to-day production of goods to be sold by a company. (Reddy and Patkar, 2004) equate working capital in businesses to blood in the human body as it is an essential part in firm financial management decision. According to Harris (2005) working capital management is a simple and straightforward concept of ensuring the ability of the firm to fund the difference between the short term assets and short term liabilities. Firms need to manage this working capital efficiently so as to ensure that they cater for their day to day expenses. Good working capital management will ensure that the business is able to meet its financial obligations. Working capital management is a very important component of corporate finance because
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