Pub. Date | : April, 2022 |
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Product Name | : The IUP Journal of Applied Finance |
Product Type | : Article |
Product Code | : IJAF030422 |
Author Name | : Mahesh Chand Garg and Meentu |
Availability | : YES |
Subject/Domain | : Finance |
Download Format | : PDF Format |
No. of Pages | : 13 |
The paper assesses the impact of various components of working capital management on firm profitability. The study is based on secondary financial data of 122 listed firms on BSE 200 Dollex index, covering a period of 10 years from 2011-2020. This study uses panel data analysis with fixed effects model and random effects model. The Hausman test represents the goodness of fit of the model. Finally, the results reveal that there exists a significant negative relationship between the components of working capital management and profitability. The study found that cash conversion cycle and inventory conversion period have a significantly negative relationship with firm profitability, whereas receivables collection period and accounts payable period have an insignificant relationship.
Working Capital Management (WCM) is a critical aspect of a company's short-term financial
issues. Firms of all sizes show sensitivity in their profit growth to cost-effective WCM (Bagh
et al., 2016). However, it is unclear as to which type of company (small or large) is more able
to respond to the competents of WCM. If firm size increases, the need for working capital will
be more (Naskar and Guha, 2017). WCM is concerned with the ability to pay short-term
obligations, and the objective of WCM is to encourage satisfying cash flow, revenue growth,
and value for shareholders (Makori and Jagongo, 2013). WCM is the ability to quickly and
successfully influence liquidity position in such a way that the company's return on assets is
maximized while liabilities are minimized (Bagchi et al., 2012; and Singh and Kaur, 2017).
WCM is especially important for manufacturing and construction companies, where
current assets make up the majority of assets. It has a direct impact on firm profitability and
liquidity (Yilmaz and Acar, 2019). The profit margin trade-off is critical because companies
tend to fail and incur losses if WCM is not prioritized (Ramana et al., 2013). Maintaining
goods more than the necessary level will result in financial resources detention in nonproductive cases. On the other hand, if earlier payment of the statements is included in
discount, the delay in payment of statements will involve expenses for the company (Nejad
et al., 2015). Businesses require liquidity to meet their short-term obligations while also