The Impact Of Working Capital Management On Profitability

Capital is the scarcest productive resource in most developing economies and proper utilization of such a limited resource is of vital importance.Manufacturing firms in the East African Community have enormous capital invested in their businesses,and it is crucial for them to utilize this capital effectively in order to maximize shareholder value.Several studies have revealed that working capital management has a significant effect on firm profitability.However,Makori&Jagongo,(2013)argue that there is limited empirical research on its relationship with profitability of developing economies like the East African states.This paper therefore seeks to establish the impact of working capital management on the profitability of listed manufacturing firms in the East African Community using a balanced panel data set of 21 firms over 7 years(2012-2018).Data was analysed using the Pearson's correlation,the pooled OLS and random effects regression models.The results of the study reveal that profitability measured using return on asset has a highly significant positive relationship with the cash conversion cycle,meaning that manufacturing firms in East African can increase their profit margins by increasing the cash conversion cycle.The study further observes a negative significant relationship between accounts payable period and profitability,meaning that more profitable manufacturing firms in the region take a lesser period to pay their creditors to take advantage of the trade discounts and thus,the firm's improved credit reputation.The study further finds a highly significant positive relationship between inventory conversion period and profitability,implying that manufacturing firms that maintain higher inventory levels report higher profits.In addition,the study finds an insignificant relationship between recievable conversion period and profitability.The control variable financial debt ratio is found to have a highly significant negative relationship with firm profitability while sales growth has a significant positive impact on the profitability of the firms.The study concludes that managers can increase their shareholder value by optimally handling cash conversion cycle and its components as they are found to have a significant impact on profitability.The study contributes to the limited literature on the relationship between working capital management and profitability not only in the East African Community but also in many other developing economies.