The Effect of Working Capital Management on Profitability

Ntui Ponsian; Kiemi Chrispina; Gwatako Tago; Halim Mkiibi

doi:doi:10.11648/j.ijefm.20140206.17

| Peer-Reviewed

The Effect of Working Capital Management on Profitability

Ntui Ponsian, Kiemi Chrispina, Gwatako Tago, Halim Mkiibi

Published in International Journal of Economics, Finance and Management Sciences (Volume 2, Issue 6)

Received: 2 December 2014 Accepted: 11 December 2014 Published: 19 December 2014

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

The purpose of this study is to find out the effect of working capital management on company profitability. The study aims at examining the statistical significance between company’s working capital management and profitability. In light of this objective the study adopts quantitative approaches to test a series of research hypotheses. A sample of three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange (DSE) is used for a period of ten years (2002-2012) with the total of 30 observations. Data is analyzed on quantitative basis using Pearson’s correlation and Regression analysis (Ordinary Least Square). The key findings from the study are; Firstly, there exists a positive relationship between cash conversion cycle and profitability of the firm. This means that as the cash conversion cycle increases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders by increasing the cash conversion cycle to a reasonable level; Secondly, there is a negative relationship between liquidity and profitability showing that as liquidity decreases, the profitability also increases; Thirdly, there exists a highly significant negative relationship between average collection period and profitability indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively; Fourthly, there is a highly significant positive relationship between average payment period and profitability. This implies that the longer a firm takes to pay its creditors, the more profitable it is.; and Fifthly, there exists a highly significant negative relationship between inventory turnover in days and profitability hinting that firms which maintain sufficiently low inventory levels reduce the cost of storing the inventory which results to higher profitability.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 2, Issue 6)
DOI	10.11648/j.ijefm.20140206.17
Page(s)	347-355
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Working Capital, Profitability, Manufacturing Companies, Dar es Salaam Stock Exchange, Tanzania

References

[1]	Arnold, G. (2008). Corporate financial management 4th edition. Pearson education limited; New York
[2]	Arunkumar O.N & Ramanan T.R (2013) Working Capital Management and profitability: A Sensitivity Analysis. International Journal of Research and Development: A Management review. Vol 2, pp 52 - 58
[3]	Brigham, F. and Houston, F. (2003), ‘Fundamentals of financial management’, 10th ed. McGraw-Hill Inc: New York
[4]	Deloof M (2003), ‘Does working capital management affect profitability of Belgian firms’, Journal of Business Finance and Accounting, Vol 30, No. 3 &4, pp. 573-588.
[5]	Dong H. P. (2010), “The Relationship between Working Capital Management and Profitability”. International Research Journal of Finance and Economic. Issue-49.
[6]	Dr Ray, S. (2012) “Evaluating the Impact of Working Capital Management Components on Corporate Profitability: Evidence from Indian Manufacturing Firms” International Journal of Economic Practices and Theories, Vol. 2, No. 3, pp. 2247 – 7225
[7]	Dr. Azam, M and Haider, S. I. (2011), “Impact of Working Capital Management on Firms’ Performance: Evidence from Non-Financial Institutions of KSE-30 index”, Interdisciplinary Journal of Contemporary Research in Business, Vol 3, No 5, pp. 481 - 492.
[8]	Eljelly A. (2004), Liquidity-profitability trade-off: an empirical investigation in an emerging market. International Journal of Commerce and Management, Vol 14, No. 2, pp. 48-61
[9]	Falope, O. I, Ajilore O. T (2009), “Working capital management and corporate profitability: evidence from panel data analysis of selected quoted companies in Nigeria”, Research Journal of Business Management, vol.3: pp. 73-84.
[10]	Gill, A., Biger, N., Mathur, N. (2010). “The relationship between working capital management and profitability: Evidence from the United States”, Business and Economics Journal, 10, 1-9.
[11]	Kazi Naimulbari MD. (2012) “The Impact of Working Capital Management on Profitability” of pharmaceuticals sector in Bangladesh. Unpublished undergraduate, research work: independent university, Bangladesh
[12]	Lazaridis, I. and Tryfonidis, D. (2006), ‘Relationship between working capital management and profitability of listed companies in the Athens stock exchange’, Journal of Financial Management and Analysis, Vol 19(1)
[13]	Mansoori, E. and Dr. Muhammad (2012), “The Effect of Working Capital Management on Firm’s Profitability: Evidence from Singapore” Interdisciplinary Journal of Contemporary Research in Business, Vol 4, No 5, pp 472 - 486
[14]	Mathuva, D. M. (2010) “The Influence of Working Capital Management Components on Corporate Profitability: A Survey on Kenyan Listed Firms”, Research Journal of Business Management, 4(1): 1-11.
[15]	Mekonnen, Mulualem(2011) “The Impact Of Working Capital Management On Firms’ Profitability” Unpublished Master Thesis, Addis Ababa University: Ethiopia
[16]	Raheman et al (2010) “Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan”, International Research Journal of Finance and Economics, 47: 151-163.
[17]	Raheman, A. and Nasr M., (2007), ‘Working capital management and profitability – case of Pakistani firms’, International Review of Business Research Papers
[18]	Ruichao, Lu (2013). Impact of Working Capital Management on Profitability: The Case of Canadian Firms: Unpublished Master Thesis, Saint Mary’s University: Canada.
[19]	Saghir, A., Hashmi, F, M., and Hussain, M, N (2011), “Working Capital Management and Profitability: Evidence from Pakistan Firms”, Interdisciplinary Journal of Contemporary Research in Business, Vol 3, No 8, pp. 1092 - 1105
[20]	Teruel P and Solan P. (2005). “Effects of Working Capital Management on SME Profitability”, Working Paper series: Spain
[21]	Teruel PJG and Solano PM. (2007). “Effects of Working Capital Management on SME Profitability”, International Journal of Managerial Finance, Vol. 3, No. 2, pp. 164-177, 2007.
[22]	Velnampy, T. and Niresh, J.A. (2012). “The Relationship between Capital Structure and Profitability”, Global Journal of Management and Business Research, Vol. 12 (13).
[23]	Vural, G. Sökmen, A.G and Çetenak, E. H (2012). “Affects of Working Capital Management on Firm’s Performance: Evidence from Turkey”, International Journal of Economics and Financial Issues Vol. 2, No. 4, 2012, pp.488-495

Cite This Article

Plain Text BibTeX RIS

APA Style

Ntui Ponsian, Kiemi Chrispina, Gwatako Tago, Halim Mkiibi. (2014). The Effect of Working Capital Management on Profitability. International Journal of Economics, Finance and Management Sciences, 2(6), 347-355. https://doi.org/10.11648/j.ijefm.20140206.17

Copy | Download

ACS Style

Ntui Ponsian; Kiemi Chrispina; Gwatako Tago; Halim Mkiibi. The Effect of Working Capital Management on Profitability. Int. J. Econ. Finance Manag. Sci. 2014, 2(6), 347-355. doi: 10.11648/j.ijefm.20140206.17

Copy | Download

AMA Style

Ntui Ponsian, Kiemi Chrispina, Gwatako Tago, Halim Mkiibi. The Effect of Working Capital Management on Profitability. Int J Econ Finance Manag Sci. 2014;2(6):347-355. doi: 10.11648/j.ijefm.20140206.17

Copy | Download

@article{10.11648/j.ijefm.20140206.17,
  author = {Ntui Ponsian and Kiemi Chrispina and Gwatako Tago and Halim Mkiibi},
  title = {The Effect of Working Capital Management on Profitability},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {2},
  number = {6},
  pages = {347-355},
  doi = {10.11648/j.ijefm.20140206.17},
  url = {https://doi.org/10.11648/j.ijefm.20140206.17},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20140206.17},
  abstract = {The purpose of this study is to find out the effect of working capital management on company profitability. The study aims at examining the statistical significance between company’s working capital management and profitability. In light of this objective the study adopts quantitative approaches to test a series of research hypotheses. A sample of three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange (DSE) is used for a period of ten years (2002-2012) with the total of 30 observations. Data is analyzed on quantitative basis using Pearson’s correlation and Regression analysis (Ordinary Least Square). The key findings from the study are; Firstly, there exists a positive relationship between cash conversion cycle and profitability of the firm. This means that as the cash conversion cycle increases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders by increasing the cash conversion cycle to a reasonable level; Secondly, there is a negative relationship between liquidity and profitability showing that as liquidity decreases, the profitability also increases; Thirdly, there exists a highly significant negative relationship between average collection period and profitability indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively; Fourthly, there is a highly significant positive relationship between average payment period and profitability. This implies that the longer a firm takes to pay its creditors, the more profitable it is.; and Fifthly, there exists a highly significant negative relationship between inventory turnover in days and profitability hinting that firms which maintain sufficiently low inventory levels reduce the cost of storing the inventory which results to higher profitability.},
 year = {2014}
}

Copy | Download

TY  - JOUR
T1  - The Effect of Working Capital Management on Profitability
AU  - Ntui Ponsian
AU  - Kiemi Chrispina
AU  - Gwatako Tago
AU  - Halim Mkiibi
Y1  - 2014/12/19
PY  - 2014
N1  - https://doi.org/10.11648/j.ijefm.20140206.17
DO  - 10.11648/j.ijefm.20140206.17
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 347
EP  - 355
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20140206.17
AB  - The purpose of this study is to find out the effect of working capital management on company profitability. The study aims at examining the statistical significance between company’s working capital management and profitability. In light of this objective the study adopts quantitative approaches to test a series of research hypotheses. A sample of three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange (DSE) is used for a period of ten years (2002-2012) with the total of 30 observations. Data is analyzed on quantitative basis using Pearson’s correlation and Regression analysis (Ordinary Least Square). The key findings from the study are; Firstly, there exists a positive relationship between cash conversion cycle and profitability of the firm. This means that as the cash conversion cycle increases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders by increasing the cash conversion cycle to a reasonable level; Secondly, there is a negative relationship between liquidity and profitability showing that as liquidity decreases, the profitability also increases; Thirdly, there exists a highly significant negative relationship between average collection period and profitability indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively; Fourthly, there is a highly significant positive relationship between average payment period and profitability. This implies that the longer a firm takes to pay its creditors, the more profitable it is.; and Fifthly, there exists a highly significant negative relationship between inventory turnover in days and profitability hinting that firms which maintain sufficiently low inventory levels reduce the cost of storing the inventory which results to higher profitability.
VL  - 2
IS  - 6
ER  -

Copy | Download

Author Information

Ntui Ponsian

Lecturer, Accountancy and Finance, St. Augustine University of Tanzania (SAUT)
Kiemi Chrispina

Lecturer, Accountancy and Finance, St. Augustine University of Tanzania (SAUT)
Gwatako Tago

Lecturer, Accountancy and Finance, St. Augustine University of Tanzania (SAUT)
Halim Mkiibi

Bachelor of Business Administration (BBA), St. Augustine University of Tanzania (SAUT)

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Ntui Ponsian, Kiemi Chrispina, Gwatako Tago, Halim Mkiibi. (2014). The Effect of Working Capital Management on Profitability. International Journal of Economics, Finance and Management Sciences, 2(6), 347-355. https://doi.org/10.11648/j.ijefm.20140206.17

Copy | Download

ACS Style

Ntui Ponsian; Kiemi Chrispina; Gwatako Tago; Halim Mkiibi. The Effect of Working Capital Management on Profitability. Int. J. Econ. Finance Manag. Sci. 2014, 2(6), 347-355. doi: 10.11648/j.ijefm.20140206.17

Copy | Download

AMA Style

Ntui Ponsian, Kiemi Chrispina, Gwatako Tago, Halim Mkiibi. The Effect of Working Capital Management on Profitability. Int J Econ Finance Manag Sci. 2014;2(6):347-355. doi: 10.11648/j.ijefm.20140206.17

Copy | Download

@article{10.11648/j.ijefm.20140206.17,
  author = {Ntui Ponsian and Kiemi Chrispina and Gwatako Tago and Halim Mkiibi},
  title = {The Effect of Working Capital Management on Profitability},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {2},
  number = {6},
  pages = {347-355},
  doi = {10.11648/j.ijefm.20140206.17},
  url = {https://doi.org/10.11648/j.ijefm.20140206.17},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20140206.17},
  abstract = {The purpose of this study is to find out the effect of working capital management on company profitability. The study aims at examining the statistical significance between company’s working capital management and profitability. In light of this objective the study adopts quantitative approaches to test a series of research hypotheses. A sample of three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange (DSE) is used for a period of ten years (2002-2012) with the total of 30 observations. Data is analyzed on quantitative basis using Pearson’s correlation and Regression analysis (Ordinary Least Square). The key findings from the study are; Firstly, there exists a positive relationship between cash conversion cycle and profitability of the firm. This means that as the cash conversion cycle increases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders by increasing the cash conversion cycle to a reasonable level; Secondly, there is a negative relationship between liquidity and profitability showing that as liquidity decreases, the profitability also increases; Thirdly, there exists a highly significant negative relationship between average collection period and profitability indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively; Fourthly, there is a highly significant positive relationship between average payment period and profitability. This implies that the longer a firm takes to pay its creditors, the more profitable it is.; and Fifthly, there exists a highly significant negative relationship between inventory turnover in days and profitability hinting that firms which maintain sufficiently low inventory levels reduce the cost of storing the inventory which results to higher profitability.},
 year = {2014}
}

Copy | Download

TY  - JOUR
T1  - The Effect of Working Capital Management on Profitability
AU  - Ntui Ponsian
AU  - Kiemi Chrispina
AU  - Gwatako Tago
AU  - Halim Mkiibi
Y1  - 2014/12/19
PY  - 2014
N1  - https://doi.org/10.11648/j.ijefm.20140206.17
DO  - 10.11648/j.ijefm.20140206.17
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 347
EP  - 355
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20140206.17
AB  - The purpose of this study is to find out the effect of working capital management on company profitability. The study aims at examining the statistical significance between company’s working capital management and profitability. In light of this objective the study adopts quantitative approaches to test a series of research hypotheses. A sample of three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange (DSE) is used for a period of ten years (2002-2012) with the total of 30 observations. Data is analyzed on quantitative basis using Pearson’s correlation and Regression analysis (Ordinary Least Square). The key findings from the study are; Firstly, there exists a positive relationship between cash conversion cycle and profitability of the firm. This means that as the cash conversion cycle increases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders by increasing the cash conversion cycle to a reasonable level; Secondly, there is a negative relationship between liquidity and profitability showing that as liquidity decreases, the profitability also increases; Thirdly, there exists a highly significant negative relationship between average collection period and profitability indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively; Fourthly, there is a highly significant positive relationship between average payment period and profitability. This implies that the longer a firm takes to pay its creditors, the more profitable it is.; and Fifthly, there exists a highly significant negative relationship between inventory turnover in days and profitability hinting that firms which maintain sufficiently low inventory levels reduce the cost of storing the inventory which results to higher profitability.
VL  - 2
IS  - 6
ER  -

Copy | Download