IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY: EMPIRICAL EVIDENCE FROM MANUFACTURING INDUSTRIES IN BANGLADESH

Abstract

Effective management of working capital is crucial for the profitability of a company since it affects the efficiency of cash flow, performance, and financial stability. The purpose of this study is to examine the relationship between inventory conversion period (ICP), receivable collection period (RCP), payable payment period (PPP), and cash conversion cycle (CCC) and profitability. The study also examines the effects of firm size (SIZE) and liquidity (CR) on profitability. To analyse the working capital practices and their relationship with profitability, descriptive statistics and multiple regression analysis were used. The regression model has high explanatory power, with an R value of 0.911 and an R-square value of 0.830, meaning the selected variables explain 83% of the variation in profitability. The empirical results show that ICP has a positive but non-significant relationship with profitability (β = 0.070, t = 0.297), and RCP has a negative but non-significant relationship with profitability (β = -0.033, t = -0.106). On the other hand, profitability is significantly and negatively affected by PPP (β = -0.893, t = -2.933, p < 0.05), meaning that the longer the payment, the more negative the impact on firm performance. Likewise, there is a strong negative relationship between CCC and profitability (β = -1.138, t = -2.825, p < 0.05), indicating that companies with higher CCC have lower profitability. The results further show that firm size positively affects profitability (β = 0.241, t = 3.145, p < 0.10), while current ratio liquidity also has a positive influence (β = 0.214, t = 2.25, p < 0.10). The study concludes that efficient working capital management, specifically cash conversion cycle reduction and the implementation of effective payable policies, is critical to improving profitability.