Abstract:
Working capital is a company’s surplus of current assets over current
liabilities, and it measures the extent to which it can finance any increase in
turnover from other fund sources (Hill, 2013). Working capital management
is relating to maintain a balance between current assets and current liabilities.
It ensures the proper liquidity position of the company in order to settle the
short term obligations and operating expenses. This study examines whether
there is any impact of working capital management on profitability for the
selected manufacturing companies and hotels listed on Colombo Stock
Exchange (CSE) in Sri Lanka. Profitability measures by using Return on Asset
(ROA) and working capital management measures by using Inventory Control
Period (ICP), Average Collection Period (ACP), Average Payment Period
(APP) and Cash Conversion Cycle (CCC). And also debt ratio, credit ratio and
firm size used as control variables. Data collected from the annual reports of
selected companies for 5 year period from 2010 to 2014. Data analyzed by
using both correlation analysis and panel data regression models. This study
compared the manufacturing sector and hotel & travel sector based on the
result of the analysis. Based on the findings of this study, ACP has significant
impact on profitability for the selected manufacturing firms. That means if a
firm spend more time for collect money from its customers, then companies
can increase their profits. For the hotel sector, ACP and APP have negative
relationship with the Return on Asset and ICP has positive relationship with
the ROA. This study suggests that manufacturing companies in Sri Lanka can
maximize their profit by increasing the average collection period.
