Abstract:
Working capital plays a vital role in the company’s operations and requires the efficient management
and it concerns the management of cash, inventories, accounts receivable, and accounts payable. It is
necessary for a company to monitor its working capital properly and maintain its balance at the
appropriate level. The purpose of the study was to examine the effects of working capital management
on profitability of sugar manufacturing companies in Ethiopia. The study used secondary data collected
from 3 sugar manufacturing companies covering the period from 2002-2013. The study used explanatory
research design also adopted quantitative method of research approaches to test research hypothesis.
The dependent variables used in the study was Return on asset (ROA) and while the independent
variables were Cash conversion period (CCP), Account receivable period (ARP), Account payable
period (APP), and Inventory conversion period (ICP) for measurements of working capital
management, also the control variables used in the study were Current ratio (CR) as a measure of
liquidity, Debit ratio (DR) for a measure of firm leverage, Firm size (FS) measured by natural logarithm
of sales and Firm growth rate (FGR) which is measured by changing in annual sales value with
reference to previous year’s sales. The data were run using SPSS (version 20) and STATA (version 12)
then analysis was made through descriptive statistics, Pearson correlation, and OLS regression. Using
panel data, the study found that account payable period has a significant negative effect on profitability
while account receivable period has a significant positive effect on profitability. Moreover the study
found that there is significant negative effect of size on firm profitability. Furthermore, the study found
that Cash conversion period, Inventory conversion period, Firm growth rate have insignificance positive
effect on companies profitability. Furthermore insignificance negative effect of Debt ratio and current
ratio on profitability was found. Based on the key findings from the study it has been suggested that the
management of a firm can increase profitability by increasing the number of day’s accounts receivable
by implementing applicable collection policy for the sector and decreasing account payable period from
this action the firm can benefit from discount and will have a worthy relation with the suppliers for
future transaction.
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