THE EFFECT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY EVIDENCE FROM SELECTED MANUFACTURING FIRMS IN ADDIS ABABA

Abstract

The overall objective of this study was to examine the effect of working capital management on profitability of selected food and beverage manufacturing companies in Addis Ababa, Ethiopia for the period of 2009 to 2018. The total population of this study was 39 large tax payer food and beverage manufacturing firms and 19 firms were included in the sample that had at least ten years’ annual report. In order to achieve stated objective quantitative research approach and explanatory research design were used. Accounts receivable period, inventory holding period, accounts payable period, cash conversion cycle, current assets to total assets ratio and current liabilities to total assets ratio as measures of working capital management, and return on assets as a measure of firm’s profitability were the variables used in this study. The collected data was analyzed by using both descriptive and inferential statistics. The results of fixed effects regression exhibit that accounts receivable period, inventory holding period & cash conversion cycle found to have a negative and statistically significant effect on firms’ ROA. The results also showed that accounts payable period and current assets to total assets ratio have a positive and statistically significant effect on ROA of manufacturing firms. Based on these findings, the manufacturing firms are recommended to maintain accelerated cash collections, extend their credit period, and reduce receivables and inventory periods. In addition, the firms are recommended to maintain high level of current assets to total assets ratio to enhance their profitability.