| Abstract: | Management of working capital refers to management of current assets and current liabilities.
Firms may have an optimal level of working capital that maximizes their value. Past studies has
shown the relationship between working capital and performance. To investigate this relationship
between these two. The researcher collected secondary data from 19 manufacturing share
companies which are located in Addis Ababa, Ethiopia for the year 2010 G.C- 2014 G.C.
Working capital measurement parameters like, Accounts receivable period, inventory holding
period and accounts payable period are used as independent working capital management
variables. Moreover, cash conversion cycle is used as comprehensive measures of working
capital management variable. In addition firm size as measured by logarithm of asset, GDP and
inflation as control variables.. in general paying suppliers longer and collecting payments from
customers earlier and keeping product in stock less time are all associated with an increase in the
firms performance. The performance was measured in terms of profitability by return on total
assets,The data was analyzed using e-view software estimation equation by both correlation
analysis and pooled panel data regression models of cross-sectional data was used for analysis.
The regression results show inverse relationship between accounts receivable and inventory
holding periods with profitability. However there is statistically insignificant relationship
between accounts payable period and profitability. The results also show that there exists
significant negative relationship between cash Conversion cycle and profitability of the sampled
firms. Manager, therefore, can increase firm’s profitability by improving the performance of
management of working capital components like account receivable days, inventory conversion
period, and account payable days and cash conversion cycle respectively.
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