The effect of working capital management on firm profitability: a study of listed manufacturing firms on the Ghana Stock Exchange

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Researchers all over the world believe that one way of maintaining the high profitability is an efficient management of working capital. In order to manage working capital, a firm should have a defined policy. Working capital is the lifeblood of every firm and if it is efficiently managed it becomes beneficial to the firm because it has a direct impact on firm’s profitability but inefficient working capital management negatively impacts the firm’s profitability. Working capital management is an important part of financial management and its primary task is concerned with the matching of asset and liability movements over time. The study of the effect of different variables on working capital management was used and this includes Average collection period, Average payment period, inventory turnover in days, Cash conversion cycle, Debt ratio, Current ratio and the Size of the firm (measured in terms of natural logarithm of sales) on Return on Total asset as dependent variable of Ghanaian firms. Descriptive and Regression were used for the analysis and the results show that there is a negative relationship between profitability and, the number of days receivables and the number of days account payable. However, the study found no relationship between the number of days of inventory and the cash conversion period and profitability for the selected manufacturing firms in Ghana. Besides, the study found that current ratio and the size of the firm affects profitability positively. Some of the recommendations suggested were that, manufacturing firms should implement policies aimed at ensuring that the number of days of account receivables is shortened in order to improve on their profitability levels. Also, manufacturing firms should endeavour to pay their debt obligations on time in order to avoid sending bad signals to the market that firms have some financial problems and it might go bankrupt resultantly its goodwill will be spoiled and the value of its shares will go down which may affect their operations.
A thesis submitted to the Institute of Distance Learning (IDL) KNUST, in partial fulfillment of the requirement for the award of a Commonwealth Executive Masters Degree in Business Administration (CEMBA), 2011