Effect of Working Capital Management on Profitability: A Case of Listed Manufacturing Firms in Nigeria
- November 29, 2019
- Posted by: RSIS
- Categories: Accounting, Banking and Finance, IJRISS
International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue XI, November 2019 | ISSN 2454–6186
Dr. Samuel Adebayo OLAOYE1, Dr. Abolade Francis AKINTOLA2, Adeyemi Samson OGUNDIPE3
1Department of Accounting, Babcock University, Ilishan-Remo, Ogun-State, Nigeria
2,3Department of Banking and Finance, Babcock University, Ilishan-Remo, Ogun-State, Nigeria
Abstract: – The purpose of this study was to determine the impact of working capital management on profitability of selected quoted Nigeria manufacturing companies from 2006-2015. Secondary data was obtained to investigate relationship between working capital management and profitability. Panel data methodology similar to Sharma and Kumar (2011) was employed in this study. The results showed positive significant relationship between working capital management and profitability. This means that efficient management of working capital will increase profitability.
Key words: Working capital management; Profitability; Cash conversion; Average collection period and Inventory conversion period
I. INTRODUCTION
Working capital is defined as excess of current assets over current liabilities (Guthman & Dougalt). Working capital is very significant to an organization because its efficient utilization will result in increase in shareholders wealth. Working capital refers to the items that are required for day-to-day production of goods to be sold by a company.
The working capital meets the short-term financial requirements of a business enterprise. It is the investment required to run the business on day-to-day basis. It is the result of the time lag between the expenditure for the purchase of raw materials and the collection for the sales of the finished products. The components of working capitals are inventories, accounts to be paid to suppliers, and payments to be received from customers after sales. Financing is needed for receivable and inventories net of payable. The proportion of these components in the working capital change from time to time during the trade cycle. The working capital requirement decide the liquidity and profitability of a firm and hence affect the financing and investing decisions. Lesser requirement of working capital leads to less need for financing and less cost of capital and hence availability of more cash for shareholders. However, the lesser working capital may lead to lost of sales and thus may affect the profitability (Vedavinayagam, 2007).
