Optimizing Working Capital Management to Enhance Corporate Profitability: From an Emerging Market Perspective

Abstract

Efficient working capital management stands at the heart of corporate financial resilience, shaping a firm’s ability to sustain operations, manage liquidity, and generate profits in a volatile emerging market. This study examines the impact of working capital management on corporate profitability, focusing specifically on capital goods companies listed on the Colombo Stock Exchange (CSE). Utilizing panel data from 2015 to 2024, the study examines the impact of key working capital components, namely inventory efficiency, receivable period, payable period, and the overall cash conversion cycle on operating profit margin. The findings reveal cash conversion cycle has the negative significant effect on profitability which suggests that with a shorter cash conversion cycle tend to have higher operating profits as they efficiently manage their cash flow and reduce liquidity constraints. A detailed decomposed method revealed that longer inventory holding periods significantly reduce profitability, affirming global evidence that lean inventory enhances performance. Conversely, extending payables has a positive impact on profit, indicating delaying supplier payments within reasonable limits frees up cash for operations. Liquidity measured by current ratio also shows a strong positive effect on profitability, highlighting the importance of maintaining a sound short term financial position. Firm size is also positively impacting the profit, highlighting the advantages of scale. However, receivable collection period, firm age and leverage show no significant impact, suggesting that cost structures and internal operational efficiencies may play a more critical role in driving returns. This study contributes to financial management theory by reinforcing the trade off and resource-based views, emphasizing how efficient working capital management serves both as a strategic resource and a balancing act between liquidity and profitability. From a practical perspective, the results highlight the importance of vigilant working capital management practices in capital intensive sectors, providing actional insights for financial managers, investors and policymakers seeking to strengthen actional insights for financial resilience and optimize resource allocation in emerging market firms.