The Effects of Working Capital Management on Profitability of Manufacturing Companies: The Case of Dire Dawa City

Abstract

In every organization, corporate finance deals with three decisions: capital structure decisions, capital budgeting decision, and working capital management decisions. Among these three decisions, working capital management is recognized as an important concern of the financial manager. The study examines the effects of working capital management on profitability of manufacturing companies in Dire Dawa city and have the following research objectives: Examine the effect of number of days account receivable (NDAR) on profitability of manufacturing companies, Examine the effect of number of days inventories (NDI) on profitability of manufacturing firms, To investigate the effect of no of days account payable (NDAP) on profitability of manufacturing firms and Examine the effect of cash conversion cycle (CCC) on profitability of manufacturing firms. The research was quantitative that utilizes secondary data of companies from 2011 – 2015 for sample of 14 companies to address the objectives. The study purposively selected Dire Dawa city this is because of the majority of the Eastern region industries found in this city. The secondary data was collected from different company’s records about from audited balance sheet and income statement that was submitted to Ethiopian revenue and custom authority Dire Dawa branch and Dire Dawa Administration Revenue Authority for tax purpose. The result of the study shows that there is significantly negative relationship between number of date account receivable, number of day’s inventory holding and company’s profitability. The study reveals that there is no significant relationship between number of days account receivable and profitability. But cash conversion cycle has significant negative relationship with profitability. Moreover debt ratio has statistically negative relationship with company’s profitability.