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Linking working capital efficiency to profit maximisation: A conceptual analysis

Author

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  • Iqbal Md Mazharul Islam

Abstract

The survival of a company is highly dependent on the management of its working capital. Effective working capital management can lead to greater profitability. Insufficient working capital or liquidity shortages can severely hinder profitability and operational sustainability. The primary objective of this research was to examine the relationship between efficient working capital management and profitability. To explore this connection, inventory, the cash conversion cycle, accounts receivable, and accounts payable were used as key indicators of working capital management. Profitability was evaluated using return on equity and return on assets, supported by a conceptual framework based on secondary data. The findings revealed a strong correlation between efficient working capital management and enhanced profitability. Effective management of cash inflows and outflows reduced financing costs and enhanced liquidity, leading to higher returns on equity and assets for companies with shorter cash conversion cycles. Companies with efficient accounts receivable processes significantly reduced their day’s sales outstanding, improving cash flow and operational flexibility. Maintaining optimal inventory levels enabled companies to increase turnover rates, improve profit margins, and lower inventory holding costs. Moreover, efficient accounts payable management, particularly through negotiated credit terms with suppliers, optimised payment schedules without damaging supplier relationships, further enhancing profitability. The results highlighted that businesses can achieve long-term profitability by aligning their working capital components with operational goals. Companies that actively manage their cash conversion cycle are better equipped to meet financial obligations without excessive debt, enabling them to invest in expansion opportunities. From a practical perspective, this study underscored the strategic importance of working capital management in driving profitability. Businesses can improve financial stability and strengthen their competitive position by adopting data-driven approaches to optimise cash flow, inventory, and credit management. These insights offer valuable guidance for managers aiming to enhance their company’s operational resilience and financial performance

Suggested Citation

  • Iqbal Md Mazharul Islam, 2025. "Linking working capital efficiency to profit maximisation: A conceptual analysis," E-Forum Working Papers, Economic Forum, vol. 15(1), pages 93-102, February.
    • Handle: RePEc:cuc:eforum:v:15:y:2025:i:1:p:93-102
    DOI: https://doi.org/10.62763/ef/1.2025.93
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