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The IUP Journal of Applied Finance

Components of Working Capital Management and Firm Profitability

Article Details

Pub. Date	: April, 2022
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

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Abstract

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.

Introduction

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