Working capital management and profitability: evidence from Indian manufacturing companies

Abstract

The purpose of this paper was to examine the relationship between working capital management strategies of a firm and its profitability. We also make an attempt to understand the impact of the global macroeconomic conditions on this relationship. We apply correlation analysis and fixed effects estimation on our sample of Indian manufacturing companies. Cash conversion cycle has been utilized as a measure of the working capital management, whereas gross operating profit is used as a proxy for a firm’s profitability. Furthermore, interactive dummies are utilized to investigate the impact of global macroeconomic conditions on the relationship under consideration. The results reveal that cash conversion cycle of a company has a negative correlation with its profitability. Our results also suggest that managers can improve the performance by decreasing the number of days receivables and increasing the number of days payables. Furthermore, our outcomes demonstrate that the working capital strategies should be formulated taking global macroeconomic conditions into consideration. The findings highlight the importance of efficient working capital management practices to improve the profitability of companies.