Abstract:
The purpose of this study was to establish the relationship between working capital management and
firm performance in metal manufacturing firms in Addis Ababa Ethiopia. To help in the study, the
study objectives were formulated together with a conceptual framework that linked working capital
management and its components to firms’ performance. Firm performance was measured using
attributes like profitability and future viability.
Thus, this study examined the impact of working capital management on firms’ performance by using
audited financial statements of a sample of 11 metal manufacturing private limited companies in Addis
Ababa, Ethiopia for the period of 2008 to 2012. The study used return on assets, and return on
investment capital as dependent financial performance (profitability) variables. Cash conversion
period, Accounts receivable period, inventory conversion period and accounts payable period are used
as independent working capital variables. Moreover, the traditional measures, current ratio are used
as liquidity indicators, firm size as measured by logarithm of sales, firm growth rate as measured by
change in annual sales and financial leverage as control variables. Data was collected using formal
letters from head of business administration of Jimma University to the metal manufacturing firms
under study.
The data was analyzed using SPSS (version 20.0), Pearson’s correlation coefficient and the regression
to determine the relationship between the independent variables impact on the dependent variables.
The results show that longer accounts receivable and inventory holding periods are associated with
lower profitability. The results also show that there exists significant negative relationship between
cash conversion cycle and profitability measures of the sampled firms. No significant relationship
between cash conversion cycle, account receivable period, inventory conversion period and account
payable period with return on investment capital has been observed. On the other hand, findings show
that a highly significant negative relationship between account receivable period, inventory conversion
period and account payable period with return on asset. Finally, cash conversion cycle has significant
negative relationship with return on asset
