A Note on Working Capital Management and Corporate Profitability of Japanese Firms

Abstract

The primary aim of this paper is to investigate the relationship between working capital management and firm profitability. The analysis based on a sample of 2123 Japanese non-financial firms listed in the Tokyo Stock Exchange for the period 1990-2004. The results suggest that managers can increase profitability of their firms by shortening the cash conversion cycle, the receivable collection period and the inventory conversion period. The results suggest that managers can also increase the profitability of their firms by lengthening the payable deferral period. However, managers should be careful when lengthening the payable deferral period because this could damage the firm’s credit reputation and harm its profitability in the long run.

Keywords: working capital management, cash conversion cycle, receivable collection period, inventory conversion period, payable deferral period, return on investment, Japan

JEL Classification: G3