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The impact of working capital management on profitability a comparative analysis between two industries

Publisher : Journal of Advanced Research in Dynamical and Control Systems

Campus : Coimbatore

School : School of Business

Year : 2019

Abstract : The study examines the impact of working capital management (WCM) on the profitability of BSE listed manufacturing firms and also aims to understand how the impact is different for different industries by studying two different industries namely, ferrous and non-ferrous industries in India. The secondary data is collected from CMIE Prowess database for a 6-year period of 2011-2016. The final sample data consists of 699 firm-year observations, which comprise of data from 874BSE listed firms in the manufacturing sector. For the comparative analysis of two industries, 598 firm-year observations of 210 ferrous firms and 151 firm-year observations of 49 non-ferrous firms are used. This paper uses cash conversion cycle, accounts receivable period, accounts payable period and inventory conversion period as proxies for working capital management and uses gross operating profit to measure a firm’s profitability. The results suggest that working capital must be handled efficiently as there is a trade-off between liquidity and profitability. We find that the decision to manage working capital should be industry specific. The results are different for different industries. This paper does a comparative analysis to understand the variation in the effect of WCM on profitability in two different industries. The focus is on India and two specific industries. © 2019, Institute of Advanced Scientific Research, Inc.. All rights reserved.

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