Abstract:
Working capital management has a vital role for success or failure of a firm because of its
immediate impact on profitability as well as liquidity. Because of its routine nature of working
capital management is the most important one among all issue of financial management. The
purpose of this study is to examine the impact of working capital management on profitability of
selected large tax payers wholesale firms found in Addis Ababa city. In order to achieve the
objectives this study quantitative approaches and explanatory research design were employed.
The study was used audited financial statement of six two (62) purposively selected large tax
payers wholesale firms for a period of five years (2011-2015) with the total of 310 observations.
Accounts receivable period, inventory holding period, account payable period and cash
conversion cycle were used as independent variable to measure working capital management.
Current assets to total assets ratio and current liabilities to total assets ratio were used to
measure working capital investment and financing policy respectively. The dependant variable,
firm profitability was measured by return asset. For data analysis the study used descriptive
analysis, correlation analysis and a random effects regression model. The result of random effect
regression sowed that; there was positive relation between account receivable period and
profitability indicating that aggressively collecting receivable adversely affects sample whole
sale firms profitability. There was positive relation between inventory holding period and
profitability suggesting that maintaining high inventory increase sales. Accounts payable period
had significant negative impact on profitability indicate that less profitable firm wait longer
periods to pay their obligation. There was significant negative relation between cash conversion
cycle and profitability suggesting that sample wholesale firm improve their profitability by
shortening the time gap between firm’s actual cash inflows and outflows. There was significant
positive relation between current assets to total assets ratio and profitability means that sample
wholesale should invest more in working capital than fixed asset in order to get more profit. The
study conclude that liberal credit collection, holding high inventory, quick payment of debt and
keeping the length of cash conversion cycle to possible minimum level can increase the
profitability of a firm.
