Effect of Working Capital Management Policy on Firms' Profitability

The management of working capital is very important to businesses of all sizes (Padachi, 2006).Thus, the purpose of this study is to examine the effect of working capital management policies on firms profitability. To investigate this issue, the researcher used audited financial statements of a sample of 22 manufacturing private limited companies in Addis Ababa, for the study period of 2006 to 2010. EViews 6 was used to undertake both correlation and regression analysis of cross-sectional and time series data. The results from the study show that, longer accounts receivable period and inventory holding periods are associated with lower profitability. A weak and negative relationship also exhibited between accounts payable period and profitability measures. A significant negative relationship between cash conversion cycle and profitability measures also recognized. In addition, findings show a significant positive relationship between current liabilities to total assets ratio and profitability. Managers, therefore, can increase firms’ profitability by improving the efficiency of management of working capital investment and financing policies