Working capital management and profitability: Evidence from Ghanaian listed manufacturing firms

Abstract

Working capital management plays a vital role in the success of businesses because of its effect on profitability and liquidity. The purpose of this study is to examine the relationship between working capital management practices and profitability of listed manufacturing firms in Ghana. The study used secondary data collected from all the 13 listed manufacturing firms in Ghana covering the period from 2005-2009. Using panel data methodology, the study finds a significantly negative relationship between profitability and accounts receivable days. However, the firms' cash conversion cycle, current asset ratio, size, and current asset turnover significantly positively influence profitability. The study suggests that managers can create value for their shareholders by creating incentives to reduce their accounts receivable to 30 days. It is further recommended that, enactments of local laws that protect indigenous firms and restrict the activities of importers are eminent to promote increase demand for locally manufactured goods both in the short and long runs in Ghana.