Working Capital Management and Profitability: Evidence from Indian Manufacturing Firms

Abstract

Despite the post-COVID-19 period being characterized by liquidity strains and disruptions to the supply chain process, proper working capital management remains vital in ensuring profitability among firms. This study focuses on the impact of working capital management on profitability among manufacturing firms operating in India and listed at the National Stock Exchange (NSE). It uses data of 135 firms across the period of 2022-2024 (405 firm-year observations). The research considers the component-based approach of analyzing working capital management through examining separately accounts receivable turnover, inventory turnover, and accounts payable turnover. In this way, it becomes possible to understand better the influence of particular components of the working capital on profitability under the given conditions. With the help of panel regression analysis taking into account fixed effects at the firm level and lagged variables, the study reveals that receivables and payables management have a significant effect on the profitability of firms, mainly shareholders' measures of profitability. Inventory turnover does not show the significant impact on profitability directly. Furthermore, the research finds that there is a negative correlation between firm size and sales growth and profitability, which might imply some inefficiency when the firm expands.