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Working capital management and profitability: evidence from Indian manufacturing companies

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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.

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Notes

  1. The initial sample of data comprised 172 manufacturing firms listed on the BSE 500 index. To analyze a balanced data set, firms with missing relevant financial information for this period were excluded. Hence, the final data sample consisted of 82 firms.

  2. For example: The critical value for a 1 % test with (3,646) degrees of freedom is 3.78. The F-value for model 1 is 18.1632. Hence, we select the unrestricted model with interactive dummies.

  3. For example: In the case of Model 1, the Chi-squared statistic is 37.5555 with a P value of 0.000.

  4. The results obtained for this model can be provided on request.

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Authors and Affiliations

  1. Faculty of Management Studies (FMS), University of Delhi, New Delhi, India

    Monica Singhania

  2. Electronics and Communications Engineering, Class of 2015, BITS Pilani, Hyderabad Campus, Hyderabad, Andhra Pradesh, India

    Navendu Sharma & J. Yagnesh Rohit

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  1. Monica Singhania
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  2. Navendu Sharma
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  3. J. Yagnesh Rohit
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Correspondence to Monica Singhania.

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Singhania, M., Sharma, N. & Yagnesh Rohit, J. Working capital management and profitability: evidence from Indian manufacturing companies. Decision 41, 313–326 (2014). https://doi.org/10.1007/s40622-014-0043-3

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