Business is crucial for a country's capital formation and plays a
vital role in a growing economy. So, effective management is essential. Fund
managers face the challenge of procuring and deploying funds for maximum
returns. The purpose of this study is to find out the effect of working capital
management on company profitability. In light of this objective, the study
adopted quantitative approaches to test the research hypotheses. A sample of
three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange
(DSE) was used for a period of ten years (2002-2012) with a total of 30
observations. Annual financial statements (statement of comprehensive income
and statement of financial position) for the period of ten years from 2002 to
2012 were used to collect data for this study. The data was analyzed on a
quantitative basis using Pearson’s correlation and Regression analysis
(Ordinary Least Square). The main findings from the study are; Firstly, there
exists a positive relationship between the cash conversion cycle and
profitability of the firm. This means if the cash conversion cycle increases it
will lead to an increase in the profitability of the firm, and managers can
create a positive value for the shareholders by increasing the cash conversion
cycle to a reasonable level. Secondly, there is a negative relationship between
liquidity and profitability showing that as liquidity decreases, the
profitability also increases. Thirdly, there exists a highly significant
negative relationship between average collection period and profitability
indicating that a decrease in the number of days a firm receives payment from
sales affects the profitability of the firm positively. Fourthly, there is a
highly significant positive relationship between the average payment period and
profitability. This implies that the longer a firm takes to pay its creditors,
the more profitable it is. Fifthly,
there exists a highly significant negative relationship between inventory
turnover in days and profitability hinting that firms which maintain
sufficiently low inventory levels reduce the cost of storing the inventory
which results in higher profitability. The management of working capital is one
of the most important financial decisions of a firm. A sufficient level of
working capital should be present for the smooth running of a company
regardless of the nature of the business. Future research should investigate
the generalization of the findings beyond the companies listed on the Dar es
Salaam Stock Exchange.
Author(s) Details
Gwatako Tago
Accounting and Finance, Tanzania Institute of Accountancy (TIA), Tanzania.
Ntui Ponsian
Accounting and Finance, St. Augustine University of Tanzania (SAUT),
Tanzania.
Please
see the book here:- https://doi.org/10.9734/bpi/bmerp/v3/2979G
