IDEAS home Printed from https://ideas.repec.org/a/rbs/ijbrss/v9y2020i6p114-122.html
   My bibliography  Save this article

The effect of working capital management on profitability: A study on manufacturing companies in Bangladesh

Author

Listed:
  • Tarik Hossain

    (Assistant Professor, Department of Accounting and Information Systems, Comilla University, Bangladesh.)

Abstract

This research aims to analyze the impact of efficient working capital management on the profitability of the manufacturing firm in Bangladesh. Fifty-two manufacturing companies listed with Dhaka Stock Exchange (DSE) have been selected randomly from 2012 to 2017. Return on Assets (ROA) and Return on Equity (ROE) are used as indicators of profitability, while the inventory conversion period (ICP), the average collection period (ACP), the average payment period (APP), and the Cash Conversion Cycle (CCC) are used as the independent variables which are used as a measurement of working capital management of the firm. Ordinary Least Squares regression models and Pearson's Correlation are used to establish the relationship between working capital management and profitability. The results revealed a significant negative relation between ROA and CCC, ACP; a significant negative relationship exists between ROE and CCC, APP. Manufacturing companies can increase profitability by decreasing the cash conversion cycle, average payment period, and average collection period. It also revealed that ICP is also positively related to ROA and ROE. Therefore, this research concludes that efficiently and effectively managing working capital is very important for increasing manufacturing companies' profitability. Key Words: Working Capital Management, Profitability, Manufacturing Companies, and Bangladesh.

Suggested Citation

  • Tarik Hossain, 2020. "The effect of working capital management on profitability: A study on manufacturing companies in Bangladesh," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(6), pages 114-122, October.
    • Handle: RePEc:rbs:ijbrss:v:9:y:2020:i:6:p:114-122
    DOI: 10.20525/ijrbs.v9i6.872
    as

    Download full text from publisher

    File URL: https://www.ssbfnet.com/ojs/index.php/ijrbs/article/view/872/692
    Download Restriction: no
    File URL: https://doi.org/10.20525/ijrbs.v9i6.872
    Download Restriction: no
    File URL: https://libkey.io/10.20525/ijrbs.v9i6.872?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Muhammad Matin Khan & Md. Ismail Hossain Shagor & Abu Kalam & Md. Sojib Ahmed, 2020. "Working Capital Management and Firm Profitability in the Textile Industry of Bangladesh," International Journal of Science and Business, IJSAB International, vol. 4(7), pages 118-127.
    2. Sin Huei Ng & Chen Ye & Tze San Ong & Boon Heng Teh, 2017. "The Impact of Working Capital Management on Firm's Profitability: Evidence from Malaysian Listed Manufacturing Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 662-670.
    3. Azhagaiah Ramachandran & Muralidharan Janakiraman, 2009. "The Relationship between Working Capital Management Efficiency and EBIT," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(1), pages 61-74.
    4. Godfred Adjapong Afrifa, 2013. "Working Capital Management Practices of UK SMEs: The Role of Education and Experience," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(4), pages 185-196, October.
    5. A.K. Sharma & Satish Kumar, 2011. "Effect of Working Capital Management on Firm Profitability," Global Business Review, International Management Institute, vol. 12(1), pages 159-173, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Samuel Tabot Enow, 2022. "A Meta-Analysis of the Impact of Working Capital on Profitability," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 10(1), pages 1-10.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bilgehan TEKİN & Yusuf GÖR, 2022. "Cash conversion cycle and its relationship with profitability as a cash management tool in companies: An application on companies trading in Borsa Istanbul," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(632), A), pages 113-130, Autumn.
    2. Randa Mohammed Shams Addin Al-Mawsheki & Norzalina Binti Ahmad & Norhafiza Binti Nordin, 2019. "The Effects of Efficient Working Capital Management and Working Capital Policies on Firm Performance: Evidence from Malaysian Manufacturing Firms," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(3), pages 59-69, July.
    3. Shikha Bhatia & Aman Srivastava, 2016. "Working Capital Management and Firm Performance in Emerging Economies: Evidence from India," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 41(2), pages 71-87, May.
    4. ManYing Kang & Marcel Ausloos, 2017. "An Inverse Problem Study: Credit Risk Ratings as a Determinant of Corporate Governance and Capital Structure in Emerging Markets: Evidence from Chinese Listed Companies," Economies, MDPI, vol. 5(4), pages 1-23, November.
    5. Genesis Gyasi Sah & Judit Furedi-Fulop, 2022. "The Effects of Proper Inventory Management on the Profitability of SMEs," Technium Social Sciences Journal, Technium Science, vol. 32(1), pages 340-351, June.
    6. Lupu Dan, 2013. "Financial Micromanagement For Bse Firms," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 5, pages 5-9, October.
    7. Zheng, Xiaotian & Zhou, Youcheng & Iqbal, Sajid, 2022. "Working capital management of SMEs in COVID-19: role of managerial personality traits and overconfidence behavior," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 439-451.
    8. Mafumbate J & Ndlovu U & Mafuka A & Gavhure P, 2017. "The Influence of Firm Specific Determinants on Financial Performance in the Power Industry," Journal of Economics and Behavioral Studies, AMH International, vol. 9(5), pages 18-28.
    9. Abudu Braimah & Yinping Mu & Isaac Quaye & Alhassan Abubakar Ibrahim, 2021. "Working Capital Management and SMEs Profitability in Emerging Economies: The Ghanaian Case," SAGE Open, , vol. 11(1), pages 21582440219, February.
    10. Ajaya Kumar Panda & Swagatika Nanda & Pradiptarathi Panda, 2021. "Working Capital Management, Macroeconomic Impacts, and Firm Profitability: Evidence from Indian SMEs," Business Perspectives and Research, , vol. 9(1), pages 144-158, January.
    11. Sumathi Kumaraswamy, 2016. "Impact of Working Capital on Financial Performance of Gulf Cooperation Council Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1136-1142.
    12. Padachi Kesseven D & Carole Howorth, 2014. "Focus on working capital management practices among Mauritian SMEs: Survey evidence and empirical analysis," E3 Journal of Business Management and Economics., E3 Journals, vol. 5(4), pages 097-108.
    13. Shrikant Krupasindhu Panigrahi & Maryam Juma Al Farsi & Sumathi Kumaraswamy & Muhammad Waris Ali Khan & Faisal Rana, 2022. "Working Capital Management and Shareholder’s Wealth Creation: Evidence from Manufacturing Companies Listed in Oman," IJFS, MDPI, vol. 10(4), pages 1-16, September.
    14. Madhuri Saripalle, 2018. "Determinants of profitability in the Indian logistics industry," International Journal of Logistics Economics and Globalisation, Inderscience Enterprises Ltd, vol. 7(1), pages 13-27.
    15. Umar Abbas Ibrahim & Abdulqadir Isiaka, 2021. "Working capital management and financial performance of non financial quoted companies in Nigeria," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(3), pages 241-258, April.
    16. Pong, Christopher K.M. & Mitchell, Falconer, 2012. "Inventory investment & control: How have UK companies been doing?," The British Accounting Review, Elsevier, vol. 44(3), pages 173-188.
    17. repec:prg:jnlpep:v:preprint:id:681:p:1-17 is not listed on IDEAS
    18. Muhammad Aqil & Rizwan Raheem Ahmed & Jolita Vveinhardt & Dalia Streimikiene, 2019. "Factors Influencing the Profitability of Heavy Vehicle Industry: A Case of Pakistan," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 15(1), pages 61-72.
    19. Kwadwo Boateng Prempeh Godfred Peprah-Amankona, 2020. "Does Working Capital Management Affect Profitability of Ghanaian Manufacturing Firms?," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 23(1), pages 1-18, May.
    20. Yakubu, Ibrahim Nandom & Alhassan, Mohammed Mubarik & Fuseini, Abdul-Aziz, 2017. "The Impact of Working Capital Management on Corporate Performance: Evidence from Listed Non-Financial Firms in Ghana," MPRA Paper 95113, University Library of Munich, Germany.
    21. Chisti Khalid ASHRAF, 2012. "The relationship between working capital efficiency and profitability," The Journal of Accounting and Management, Danubius University of Galati, issue 3, pages 21-45, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rbs:ijbrss:v:9:y:2020:i:6:p:114-122. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Umit Hacioglu (email available below). General contact details of provider: https://edirc.repec.org/data/ssbffea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.