The Impact of Working Capital Management on the Profitability of Manufacturing Companies

This research focuses on the effect of working capital management on profitability among manufacturing organizations. In particular, it examines the adverse effects of an aggressive working capital management strategy on profitability among manufacturing organizations. This paper reviews the past literature related to the topic, taking into consideration professional journals and articles, including the advice for CFOs on how to improve their organizations' performance as well as econometric studies examining the relationship between working capital and profitability. This includes the use of data regarding inventory turnover, accounts receivable, accounts payable, and the cash conversion cycle compared to the ROA and ROE. The key findings show that there is a non-linear relationship between the aggressiveness of the working capital management strategy and profitability. While lower levels of inventories and receivables as well as a fast cash conversion cycle are associated with higher profitability, an extremely aggressive strategy might pose threats. An appropriately aggressive strategy in manufacturing companies leads to high profits and investment opportunities.