The Impact of Working Capital Management on Firms’ Performance: The Case of Selected Metal Manufacturing Companies in Addis Ababa, Ethiopia.

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