Effect of Working Capital Management on Profitability of Firms in India

Abstract

Working capital management is important part in firm's financial management decision. An optimal working capital management is expected to contribute positively to the creation of firm value. To reach optimal working capital management, the firm manager should control the trade-off between profitability and liquidity accurately. The purpose of this study is to investigate the relationship between working capital management and firm profitability. Cash conversion cycle is used as a measure of Working Capital Management. The coefficient results of pooled Ordinary Least Square (OLS) regression analysis provide a strong negative significant relationship between cash conversion cycle and firm profitability. This reveals that reducing cash conversion period results to increase in profitability. Therefore, in order to create shareholder value, the manager should concern on cash conversion cycle till achieving optimum level.

Keywords: Working Capital Management, Cash Conversion Cycle, Profitability, Liquidity, Ordinary Least Squares (OLS)

JEL Classification: G30