EFFECTS OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF ETHIOPIAN SUGAR MANUFACTURING INDUSTRY

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. .