The Impact of Working Capital Management on Firm Profitability and Value

Management of working capital is one of the key functions in financial management. Working capital management has its impact on the liquidity and profitability of the firm. Because of its importance, this study examines the impact of working capital management on firms’ profitability and firms’ value in listed companies of Sri Lanka. Financial data from forty-one companies listed in the Colombo Stock Exchange for the period of four years, which comprises 205 firm-year observations were analysed using panel data regression analysis. It is revealed that the cash conversion cycle, days of accounts payable, and working capital financing policy has a significant negative impact on return on assets. Meanwhile, a significant positive effect is found between days of accounts receivable and return on assets. Further, there is a significant positive impact of firm size on both firms’ profitability and firms’ value. Evidence implies that firms could improve their profitability through efficient working capital management. The evidence implies that firms may improve their profitability through efficient working capital management and that would be useful to consider on maintaining optimal working capital management components and policies to ignore corporate collapse in Sri Lanka.