Research On Effect Of Working Capital Management On Corporate Proiftability

Poor working capital management always accelerates a company’s failure. Either thesecond largest supermarket in U.S. Kmart or the brilliant steel producer Ferro China becameinsolvent because of short-term liquidity. In contrast, Wal-Mart, Dell, Haier and Suning createsignificantly higher profitability through effective management of accounts receivable,inventory and accounts payable, achieving Zero Working Capital Management or NegativeWorking Capital Management.The paper examines the relationship between working capital management and corporateprofitability using1014Chinese listed companies. It finds that they are significantly related.Cash conversion cycle and its components including accounts receivable cycle, inventorycycle and accounts payable cycle are negatively related to corporate profitability.Given the industrial differences in working capital management, the paper furtherinvestigates the relationship in different sectors, which shows cash conversion cycle isnegatively related to corporate profitability, but there are significantly industrial differences inthe relationship between its components and corporate profitability. Thus, the inherentmeasurements and standards of working capital management performance varies in industries,which should be taken into consideration at the same time rather than from a single judgmentof cash conversion cycle and its components.Profit model and operating features also significantly affect a company’s working capitalmanagement. In case study, the paper analyzes Suning Appliance’s OPM strategy of workingcapital management based on its business model, and takes Haier Group for example of ZeroWorking Capital Management practice, providing a reference for other listed companies andeven SME in working capital management.All in all, the paper explores the relationship between working capital management andcorporate profitability through theoretical summaries, empirical analysis and case studies, andprovides a theoretical and practical reference.