EFFECTS OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY: (THE CASE OF PRIVATE LARGE SCALE MANUFACTURING FIRMS IN HAWASSA CITY)

Abstract

Working capital management involves the management of the most short-term assets and liabilities of the firm which includes cash and cash equivalents, Inventories and trade and other receivables. Most firms do not hold the required amount of working capital and this has been a major obstacle to their overall profitability. The study used a quantitative research design of the six (6) selected private limited large scale manufacturing firms operating in the Hawassa city. For this purpose, balanced panel data obtained from document analysis of annual financial reports of years ending June 30: 2011-2015. Multiple regression and correlation analyses were carried out on the data to determine the relationships between components of working capital management and the gross operating profit of the firms. The study established that gross operating profit was positively correlated with Average Collection Period and Average Payment Period but negatively correlated with Cash Conversion Cycle. The relationship between Inventory Turnover in Days and gross operating profit was insignificant. Based on the key findings from this study it has been concluded that the management of firms are capable of gaining sustainable competitive advantage by means of effective and efficient utilization of the resources of the organization through a careful reduction of the cash conversion cycle to its minimum and can create value for their shareholders by investing account payables in short-term financings. In so doing, the profitability of the firms is expected to increase.