The effect of working capital management on profitability: Evidence from Beverages manufacturing comp

Abstract

The main objective of this research study was to examine the effect of working capital management on performance of manufacturing firms in Addis Abeba specifically beer, brewery and beverage manufacturing firms. The study covers the time from 2005-2010 E.C (2013-2018) for 6(six) consecutives years. The main target of the of working capital management is managing of current assets and current liabilities. To study this research thesis the researcher mainly uses secondary data from the tax center for tax payers and their yearly finical statement of the each manufacturing firms. The component of working capital component that used by this research study was cash conversion cycle, account payable period, inventory conversion period and account receivables period. The variables that control their effect on the performance of the firms are growth domestic product, firm size (natural logarithm of sales of firms) and the growth rate of the firms. The performance was measured by the return on asset. The data was analyzed using e-view software estimation equation by correlation analysis, descriptive and a pooled panel data regression model of cross-sectional data was used for analysis. The regression result shows negative effect with account receivables period and inventory conversion period, also positive effect on account payable period and cash conversion cycle and the negative effect of current ratio on profitability of the firm indicated that less current asset management than liability. There is statistically significance relationship between the account payable periods and profitability of the firms. The results also show that there exists significant negative relationship between cash Conversion cycle and profitability of the sampled firms. And also the negative relation between the current ratio and the profitability of manufacturing companies on average. Manager, therefore, can increase firm’s profitability by controlling and leading the performance of management of working capital components like account receivable period, inventory conversion period, and account payable period and cash conversion cycle. In general the study recommended that firms should minimize working capital management components in order to maximize profitability.