Impact of Working Capital Management on Profitability: Evidence From Listed Companies in Sri Lanka

Abstract

Working capital management is a crucial component of financial management and has a crucial effect on profitability and liquidity of firms. Moreover, most of the literature have identified that optimal working capital management positively contributes to the firm value. This study based on the data during 2008- 2012 on listed manufacturing companies in the Colombo Stock Exchange investigated the effect of working capital management on profitability. The findings suggest that the profitability is negatively associated with the account receivable period, inventory turnover period, and cash conversion cycle. Further, it was found that the profitability is positively associated with account payable period. Moreover, the evidence suggests that increase in leverage leads to decline in the profitability. Therefore, the findings of paper reveal that manufacturing companies can boost their performance in terms of profitability by managing working capital appropriately.