Effects of working capital management on firm profitability: empirical evidence from Sri Lanka

Abstract

This paper investigates the effects of working capital management on profitability of manufacturing companies in Sri Lanka for the period 2008 to 2013. It was analysed using both pooled ordinary least squared and fixed effect model. Working capital management were measured using accounts receivable, accounts payable, inventory period, cash conversion cycle and net trading cycle. Gross operating profit was used to measure the profitability. This study finds that managers can create value by reducing accounts receivable and net trading cycle and maintaining reasonable inventory level. The study also finds a significant negative relationship between accounts payable and profitability which is consistent with the view that less profitable firms wait longer to pay their bills. There is no evidence to prove the existence of significant relationship between cash conversion cycle and profitability but there is negative association.