Working Capital Management and Firm Profitability: An Empirical Investigation Using Panel Data

This paper provides comprehensive empirical evidence that working capital management is a significant and robust determinant of firm profitability. Using an unbalanced panel of 520 firm-year observations and a multi-model estimation strategy that includes fixed effects, random effects, and two-step system GMM, the study finds that shorter cash conversion cycles, reduced accounts receivable periods, and minimised inventory holding periods all significantly enhance profitability, while extended accounts payable periods have a positive profitability effect. These findings are robust to alternative profitability proxies (ROA, ROE, and Gross Operating Profit), sector sub-samples (manufacturing and SMEs), and multiple robustness specifications including winsorisation and GMM endogeneity correction. The partial mediation of the CCC–profitability relationship through firm liquidity reveals that the mechanism of WCM's effect on profitability is two-pronged: direct efficiency improvements and indirect liquidity preservation effects. For firm managers, the findings provide a clear practical mandate: investing in receivables management, inventory discipline, and strategic supplier payment scheduling can generate tangible profitability improvements without requiring capital expenditure. The especially large WCM effects documented for SMEs underscore the strategic importance of working capital discipline for smaller, capital-constrained firms.

Abdullah, M., & Iqbal, A. (2022). Family ownership, working capital management, and firm profitability: Evidence from Pakistan Stock Exchange. Corporate Governance: An International Review, 30(4), 456–474. https://doi.org/10.1111/corg.12412 Aldubhani, M., Wang, J., Gong, T., & Muthanna, G. (2022). Impact of working capital management on firm profitability: Empirical evidence from listed firms in Qatar. Journal of Money and Business, 2(1), 70–81. https://doi.org/10.1108/JMB-07-2021-0024 Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297. Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2020). Net operating working capital and firm value: Growing or not growing? The European Journal of Finance, 26(6), 544–566. https://doi.org/10.1080/1351847X.2019.1681087 Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. CECCAR Business Review. (2023). Impact of cash conversion cycle on profitability: An empirical study on the listed hotel companies in Sri Lanka. CECCAR Business Review, 4(10). https://doi.org/10.37945/cbr.2023.10.04 Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance and Accounting, 30(3–4), 573–588. https://doi.org/10.1111/1468-5957.00008 García-Teruel, P. J., & Martínez-Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 164–177. https://doi.org/10.1108/17439130710738718 Garg, A., & Meentu. (2022). Working capital management and profitability: Evidence from Bombay Stock Exchange listed firms. Finance India, 36(2), 601–620. Gill, A., Biger, N., & Mathur, N. (2010). The relationship between working capital management and profitability: Evidence from the United States. Business and Economics Journal, 10, 1–9. Hassan, M. K., Aysan, A. F., Kayani, U. N., & Choudhury, T. (2023). Working capital as a firm performance savior? Evidence from Scandinavian countries. Research in International Business and Finance, 64, 101872. https://doi.org/10.1016/j.ribaf.2022.101872 Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271.