Effect of working capital management on profitability of manufacturing companies in case of Hawassa city, Ethiopia

Abstract

This study examined the effect of working capital management on firm’s profitability by using audited financial statements of manufacturing plc Company in Hawassa city from the period of 2011 to 2020. In this study, it was examine the components and financial performance of working capital such as account receivable period, account payment period, inventory holding period, tax payable, a cost of goods sold and cash conversion cycle was used as independent variable and return on asset was used as dependent variable. In addition the study was used current ratio, used as liquidity indicator; firm size, as measured by logarithm of sales; firm growth rate as measured by change in annual sales and financial leverage, as control variables. The data was analyzed using descriptive and regression analysis method The sample size was determined by using purposive sampling method also statistical analysis was computed by using Eview’s version 10 The result of this study has also indicated that inventory conversion period, ,account payment period, account receivable period, tax payable, current ratio and firm growth have insignificant negative relation with profitability but positive insignificant relationship between cash conversion cycle, cost of goods sold, firm leverage and firm size with profitability Therefore, managers of manufacturing company in hawassa city can maximize firm’s value and profitability by improving management of working capital component at optimal level. In general paying suppliers longer and collecting payments from customers earlier, and keeping product in stock less time, are all associated with an increase in the firms performance. Therefore, Managers, can increase firms‟ profitability by improving the performance of management of working capital components