Working Capital Management and Firms' Performance: An Analysis of Sri Lankan Manufacturing Companies

Abstract

Management of working capital refers to management of current assets and of current liabilities. Firms may have an optimal level of working capital that maximizes their value. Prior evidence has determined the relationship between working capital and performance. This study extends the literature. The working capital was determined by the cash conversion cycle and position of working capital, indicated by the current ratio, quick ratio, and stock to current assets. The performance was measured in terms of profitability by return on total assets, and relationship between working capital management and profitability was investigated by using panel data analysis for a sample of 30 listed manufacturing companies for the period of 2006 ? 2010. Estimated equation by the panel data method to obtain the estimates of the parameters of pooled model was applied for explanatory variables to measure their effect on firm performance. Results indicate that high investment in inventories and receivables lead to lower profitability and current assets to total assets lead to higher profitability. The results conclude that a strong relationship between working capital management and performance.