Working capital management and firms’ profitability_ evidence from manufacturing companies listed on the Ghana stock exchange

Abstract

Working capital management is a very complex task, more so due to the presence of an inverse relationship between working capital and profitability it therefore demands a compromise between the two important goals. Interestingly, there is no conventional wisdom as to the required threshold of working capital a business has to maintain in order to remain sustainable hence, every business entity will require its own working capital management policy. The study investigated how working capital management affect firms’ profitability using listed manufacturing firms’ on the Ghana Stock Exchange as the study context. Specifically, the objectives of the study were to identify the working capital management policy of the understudied firms’, to investigate the effect of working capital management on the understudied firms’ profitability and finally to investigate the relationship between cash conversion cycles and accounts payable periods and the understudied firms’ profitability. This study followed the longitudinal study design hence, panel data and specifically OLS was used for the study data analysis. The total population for the study, came from all the 12 listed manufacturing companies. The study employed simple random sampling to select the study samples. The study used seven (7) companies representing 58.33% of the listed manufacturing companies on the Ghana Stock Exchange and dataset for eight-year period (2007-2015). Findings from the study showed that the understudied firms adopted an aggressive working capital management policy. The study recommended that the understudied companies ought to employ more conservative working capital management policy since it will provide favorable terms for its buyers and likewise incentivise them to keep their working relationship with these companies.