Abstract:
Management of working capital refers to management of current assets and current liabilities. Thus, in order to maintain healthy business, managers involve in trade-off decisions between profitability and liquidity. In response for this, researchers from developed economies have been striving to investigate the impact of firms’ working capital management on their profitability, since recent years. But, those researches have not considered the issue in underdeveloped economies and there exist a knowledge gap on the literature, with only scanty of studies available in such economies. Therefore in an attempt to fill this research gap, this study investigated the impact of working capital management on profitability of 12 large taxpayer manufacturing firms from four industries of Amhara region ; namely, chemical, plastic and textile and metallic industries by employing explanatory research design with quantitative approach. Firms’ financial statements were collected for five years period from 2013-2017 The profitability was measured by return on total assets, dependent financial performance (profitability) variables. The working capital was determine by the Cash conversion period, Accounts receivable period, inventory conversion period and accounts payable period are used as independent working capital variables. Moreover, the traditional measures, current ratio are used as liquidity indicators, firm size as measured by logarithm of total asset, and current assets to total assets used as control variable. Data analyzed with the help of STATA (version 14) and, correlation analysis and pooled panel data regression models of cross-sectional and time series data will be employee. The results of this study Firstly, there is negative and significant relationship between ARP and profitability measures ROA.This means that ARP decrease it will lead to increase profitability of the firm. Secondly, there is a negative relationship between IHP and profitability showing that as IHP decreases, the profitability also increases; indicating that a firms which maintain sufficiently low inventory levels reduce the cost of storing the inventory which results to higher profitability. Thirdly there is negatively relationship between APP and profitability, this implies that the shorter a firm takes to pay its creditors, the more profitable it is.Fourthly there is insignificant negative relationship between CCC and ROA
