Working Capital Management (WCM) And Corporateprofitability (CP): A Study Of Selected Listed Companies In Sri Lanka

Abstract

Working capital is needed for day-to-day operations of a firm. The purpose of this study is to investigate the relationship between working capital management and corporate profitability and to identify the variables that most affect corporate profitability. Working capital management is considered to be a vital issue in financial management decision and it has its effect on liquidity as well as on profitability of the firm. Moreover, an optimal working capital management positively contributes in creating firm value. In this study,three sectors are selected as a sample size: Manufacturing (MFG), Beverage Foods and Tobacco (BFT)and Chemical and Pharmeuticals (CP)sector. The time period is from 2007 - 2011. The Profitability has been measured in terms of net profit margin(NPM);return on assets (ROA) and return on equity (ROE). Cash conversion cycle (CCC), age of inventory (AI), age of creditors (AC), age of debtors (AD) have been used as explanatory variables whereas liquidityratio (LR) and current ratio (CR)) and  interest coverage ratio (ICR) have been used as control variables. Descriptive statistics, Pearson's correlation andregression analysis are used in the study.The relationship between working capital management and corporate profitability was confirmed. The results which are robust to the presence of endogeneity, demonstrate that managers can create value by increasing their firm's number of day's accounts payable than increasing number of day's accounts receivable and inventories. Equally, shortening the cash conversion cycle also improves the firm's corporate profitability