WORKING CAPIAL MANAGEMENT AND FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS IN ETHIOPIA.

Abstract

Maintaining working capital management is essential healthy for manufacturing firms because the major aims of manufacturing firms are profitability. The purpose of this study is to find out the relation between working capital management and financial performance of manufacturing firms. In this study uses from quantitative analysis methods: descriptive, correlation analysis(Pearson’s correlation) and ordinary least square regression analysis is done by statistical software E-views software Version 8s’ & SPSS statistics 21 is used. The variables used in working capital measurement are cash conversion cycle, average collection period, inventory conversion period, ratio of current asset to total asset and ratio of current liabilities to total assets. Financial performance is measured in return on asset and return on equity and a set of control variables including ratio of current asset to current liabilities (liquidity), firm size and total debt to total asset (leverage) are employed. A sample of 61 manufacturing firms the data comes from Ethiopian Revenue Custom Authority Branch office is used a period of ten years from 2008-2017 GC, the total observation is 610. The findings reveal that cash conversion cycle has negative and statistically significant relationships with financial performance (ROA & ROE). This means negative (shorter days) cash conversion cycle leads to higher profitability. Inventory conversion period has negative and significant relationships with financial performance while the ratio of current asset to total asset has positive and significant relationships with financial performance. The result of average collection period has negative correlation coefficient and no statistical significance while the regression result of average collection period is negative and statistically significance relationships with financial performance. The ratio of current liabilities to total asset has positive and statistically significant relationships with financial performance. In addition firm size and ratio of total debt to total asset have significant effect on profitability while ratio of current asset to current liabilities is no significance relationships. Based on the key finding from this study it has been concluded that short cash conversion cycle and inventory conversion period create profitability of the firms.