The impact of working capital management on firm`s performance (A Case Study on Endowment Fund for Rehabilitation of Tigray (E.F.F.O.R.T) Manufacturing Companies)
DM Sheaba Rani, Haftu Arefe Abreha
Management of working capital refers to management of current assets and current liabilities. Firms may have an optimal level of working capital that maximizes their value. Prior evidence has determined the relationship between working capital and performance. Thus, this study examined the impact of working capital management on corporate performance by using audited financial statements of a sample of 9 E.F.F.O.R.T manufacturing companies for the period of 2011 to 2015. Non-probability sampling technique called purposive sampling was adopted. Data were collected from the audited financial statement of the sample companies. Analysis was conducted using descriptive statistics and the econometric model of random effect estimates to test literature-driven hypothesis. The performance was measured in terms of profitability by return on total assets, return on equity, and operating profit margin as dependent variables. The data was analyzed using STATA version 14, estimation equation by Random effect panel data regression models. Results indicate that longer accounts receivable and inventory holding periods are associated with lower profitability. The results conclude that cash conversion cycle has significant negative relationship with return on asset. In general paying suppliers lately and collecting payments from customers earlier, and keeping product in stock less time, are all associated with an increase in the firms performance. Managers, therefore, can increase firms’ profitability by improving the performance of management of working capital components.