A Research Dissertation Submitted in Partial Fulfillment of the Requirements for the
Award of the Degree of Master of Science in Accounting and Finance (MSc-A&F)
of Mzumbe University Dar es Salaam Campus College
This research has examined the effect of working capital management on
profitability of manufacturing companies
Working capital management is a very important component of corporate finance
because it directly affects the liquidity and profitability of the company. It’s not
enough with high profitability to be a successful company but an effective managed
working capital is also important to success. Neglecting working capital management
can in the worst case lead to the downfall of a company even if it has profitability.
In this study, the Researcher selected a sample of 4 Tanzania manufacturing
companies listed on Dar es Salaam Stock Exchange and collected data for a period of
4 years from 2008 to 2011. The Researcher studied the effect of different variables of
working capital management including accounts receivable days, accounts payable
days, inventories days and cash conversion cycle on the net operating profit of
Tanzania manufacturing firms. Financial data were extracted from companies
audited annual reports from respective company’s websites. Pooled ordinary least
square (OLS) regression analysis has been used to analyse financial data.
The results show that accounts receivable days and cash conversion cycle have a
positive relation with profitability but with no significance. Accounts payable days
and inventories days have a positive relation with profitability and are highly
significant.
Working capital management directly affects the firm’s profitability. Managers
responsible for value creation and wealth maximization can achieve their objective,
by managing working capital effectively. The policy implication of this study is that
accounts payable days need more consideration. Also this research indicates that
companies should have proper inventory management system to avoid overstocking.
Accounts receivable days and cash conversion cycle also need to be taken into
consideration as they have been ignored.