Vol. 2, Issue 1, Part J (2016)

Abstract
Working capital management plays an important role in success and failure of firm in business because of its effect on firm’s profitability as well as on liquidity. Profitability and working capital relationship is frequently emphasized for deciding on the level of investment in working capital. All manufacturing firms need to understand the association between these two variables to arrive at optimal financial decisions. Though theories exist on the topic, empirical methods are inadequately focused in arriving at conclusions. Use of statistical methods in understanding the relationship is systematic and scientific, which may provide better insight for decision making. This paper is an endeavor to understand the relationship between working capital and profitability in a detailed manner. The results show that longer accounts receivable and inventory holding periods are associated with lower profitability. Thus, managers can create value by reducing their firm’s number of days accounts receivable and inventories. Equally, shortening the cash conversion cycle also improves the firm’s profitability.