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Does Working Capital Management Affect Profitability of Ghanaian Manufacturing Firms?

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  • Prempeh, Kwadwo Boateng
  • Peprah – Amankona, Godfred

Abstract

This paper analyses the relationship between working capital management and profitability of firms in the context of developing economies. A balanced panel of 11 manufacturing companies quoted on the Ghana Stock Exchange was used. The study covered the period 2011 to 2017. The relationship between working capital management and profitability was tested using dynamic panel regression (Arellano-Bond Estimation) technique. The study revealed that there is a significant positive linear relationship between working capital management and firms’ profitability. The findings also reveal the existence of a concave quadratic relationship between working capital management and firms’ profitability. Hence, an optimal level which maximises the profitability of manufacturing firms in Ghana exists. This implies that, there is an optimal level at which working capital management maximises firm’s profitability, therefore, managers need to ensure that they operate within the limits of the optimal level by implementing an effective and efficient working capital management policy. Also, the practice of an aggressive working capital management policy maximises a firm’s profitability.

Suggested Citation

  • Prempeh, Kwadwo Boateng & Peprah – Amankona, Godfred, 2018. "Does Working Capital Management Affect Profitability of Ghanaian Manufacturing Firms?," MPRA Paper 90183, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:90183
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    References listed on IDEAS

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    1. Afrifa, Godfred & Tingbani, Ishmael, 2017. "Working Capital Management, Cash Flow and SMEs’ Performance," MPRA Paper 82894, University Library of Munich, Germany, revised Oct 2017.
    2. Ani, Wilson Uchenna & Okwo, Ifeoma Mary & Ugwunta, David Okelue, 2012. "Effects of Working Capital Management on Profitability: Evidence from the Topfive Beer Brewery Firms in the World," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(8), pages 966-982, December.
    3. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
    4. A.K. Sharma & Satish Kumar, 2011. "Effect of Working Capital Management on Firm Profitability," Global Business Review, International Management Institute, vol. 12(1), pages 159-173, February.
    5. Sarbapriya Ray, 2012. "Evaluating the Impact of Working Capital Management Components on Corporate Profitability: Evidence from Indian Manufacturing Firms," International Journal of Economic Practices and Theories, Academy of Economic Studies - Bucharest, Romania, vol. 2(3), pages 127-136, July.
    6. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    7. Enqvist, Julius & Graham, Michael & Nikkinen, Jussi, 2014. "The impact of working capital management on firm profitability in different business cycles: Evidence from Finland," Research in International Business and Finance, Elsevier, vol. 32(C), pages 36-49.
    8. Maria Amélia Pais & Paulo Miguel Gama, 2015. "Working capital management and SMEs profitability: Portuguese evidence," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 11(3), pages 341-358, June.
    9. Walter Gachira & Washington Chiwanzwa & Dingilizwe Nkomo & Runesu Chikore, 2014. "Working Capital Management and the Profitability of Non- Financial Firms Listed on the Zimbabwe Stock Exchange (ZSE)," European Journal of Business and Economics, Central Bohemia University, vol. 9(2), pages 5171:9-5171, November.
    10. Prempeh, Kwadwo Boateng, 2015. "The impact of efficient inventory management on profitability: evidence from selected manufacturing firms in Ghana," MPRA Paper 67889, University Library of Munich, Germany.
    11. Omo Aregbeyen, 2013. "The effects of working capital management on the profitability of Nigerian manufacturing firms," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(3), pages 520-534, June.
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    Cited by:

    1. Grzegorz Zimon & Hossein Tarighi & Mahdi Salehi & Adam Sadowski, 2022. "Assessment of Financial Security of SMEs Operating in the Renewable Energy Industry during COVID-19 Pandemic," Energies, MDPI, vol. 15(24), pages 1-18, December.
    2. Grzegorz Zimon & Hossein Tarighi, 2021. "Effects of the COVID-19 Global Crisis on the Working Capital Management Policy: Evidence from Poland," JRFM, MDPI, vol. 14(4), pages 1-17, April.
    3. Williams Kwasi Peprah & Isaac Anowuo & Daniel Adofo Kwakye Ameyaw, 2019. "The Relationship between Working Capital Management and Financial Sustainability of Selected Christian Denominations in Ghana," Applied Finance and Accounting, Redfame publishing, vol. 5(2), pages 20-25, August.

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    More about this item

    Keywords

    working capital management; cash conversion cycle; dynamic panel regression; manufacturing firms; Profitability.;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G00 - Financial Economics - - General - - - General
    • G3 - Financial Economics - - Corporate Finance and Governance

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