The Impact of Working Capital Management on Profitability A Comparative Analysis between Two Industries

Bhawana Jain andf

The study examines the impact of working capital management (WCM) on the profitability of BSE listed manufacturing firms and also aims to understand how the impact is different for different industries by studying two different industries namely, ferrous and non-ferrous industries in India. The secondary data is collected from CMIE Prowess database for a 6-year period of 2011-2016. The final sample data consists of 699 firm-year observations, which comprise of data from 874BSE listed firms in the manufacturing sector. For the comparative analysis of two industries, 598 firm-year observations of 210 ferrous firms and 151 firm-year observations of 49 non-ferrous firms are used. This paper uses cash conversion cycle, accounts receivable period, accounts payable period and inventory conversion period as proxies for working capital management and uses gross operating profit to measure a firm’s profitability. The results suggest that working capital must be handled efficiently as there is a trade-off between liquidity and profitability. We find that the decision to manage working capital should be industry specific. The results are different for different industries. This paper does a comparative analysis to understand the variation in the effect of WCM on profitability in two different industries. The focus is on India and two specific industries.

Volume 11 | 01-Special Issue

Pages: 121-128