The Impact of Working Capital Management on Profitability: Expolanka Case Study

Abstract

Commercial Organizations operate with the motive of improving shareholder wealth. Organizations are expected to manage their long term and short term financial resources to achieve the objective of shareholder profit maximization which is in line with maximization of wealth. In the backdrop of competitive landscape and scarcity of financial resources, the effective and efficient management of working capital is of paramount importance. This leads to companies giving priority in managing their working capital. The purpose of this study is to examine the Impact of Working Capital Management (WCM) on Profitability. To unearth answers for this question, 183 firm year observations covering 4 industry segments of Expolanka subsidiaries were investigated. The study covered five financial years from 2009 to 2014. Days sales outstanding, days payables outstanding, days inventory outstanding and cash conversions cycle were used as independent variables to measure WCM while gross profit margin, net profit margin, return on total assets and return on total equity were used as dependent variables to measure profitability. Pearson’s correlation analysis and regression analysis was used to analyst the relationship between these variables. According to results, it was evidenced that there is statistically significant positive relationship between Days sales outstanding and the Gross profit and Net Profit in Expolanka subsidiaries. Further there is statistically significant positive relationship between days payable outstanding and gross profit. Inventory days outstanding with gross profit has recorded statistically significant positive relationship. Cash conversion cycle has recorded significantly negative relationship with Gross profit and Net profit. Accordingly it was evidenced that shorter cash conversion cycle increases the profitability in Expolanka subsidiaries.