Working Capital Management and Its Impact On Profitability Evidence From Food Complex Manufacturing Firms in Addis Ababa

International Journal of Scientific and Research Publications, Volume 6, Issue 6, June 2016
ISSN 2250-3153
815
Working Capital Management and Its Impact on

Profitability Evidence from Food Complex
Manufacturing Firms in Addis Ababa
Dr. Arega Seyoum1, Tadele Tesfay2, Tadesse Kassahun3
1
Assistant Professor of Accounting and Finance, Jimma University

2
Lecturer of Accounting and Finance, Jimma University
Abstract- Working capital refers to the funds required to

undertake the day-to-day operations of a firm. To achieve
business objectives, an investment of the firms capital in current
assets and the use of current liabilities to fund part of the
investment are required. Therefore, sound working capital
management is required in order for the firm to remain
competitive in this information age. This study explores the
impact of working capital management on the profitability of
food complex manufacturing firms operating in and around
Addis Ababa. The efficiency of working capital management has
been measured by Inventory Turnover Period, Account
Receivable Collection Period, Days Payables Outstanding, Cash
Conversion Cycle, Current Ratio and Quick assets ratio; and
Return on Assets was considered as proxy for profitability.
Relevant data for this study has been collected from 10 food
complex manufacturing firms annual financial statements for the
period 2009-2013 and analyzed through descriptive statistics,
Pearson correlation and multiple regression analysis.
Accordingly, the findings revealed that Return on Assets was
found to be significantly and negatively related to average days
in inventory, average days payable and cash conversion cycle,
which would suggest that by shortening of cash conversion cycle
food complex manufacturing firms can increase their
profitability. The findings of the regression analysis show that
average days in inventory, average days receivable, and average
days payable have a significant impact on Return on Assets.
However, current ratio and quick asset ratio have insignificant
and positive relation with Return on Assets.
Therefore,
managers of food complex business can increase the profitability
of their firms by shortening the cash conversion cycle, inventory
conversion period, and receivables collection period. However,
they cannot increase profitability by lengthening the payables
deferral period.
I. INTRODUCTION
1.1 Justification of the Study

he very purpose of working capital management is to
preserve an ideal balance between each of the working capital
components, that is, cash, receivables, inventory and payables is
a fundamental part of the overall corporate strategy to create
value and is an important source of competitive advantage in
businesses (Deloof, 2003). In practice, it has become one of the
most important issues in organizations with many financial
executives struggling to identify the basic working capital drivers
and the appropriate level of working capital so as to minimize

risk, effectively prepare for uncertainty and improve the overall
performance of their businesses (Lamberson, 1995). Sound
working capital management involves diligent planning and
controlling. A balance should be struck between current assets
and current liabilities in order to avoid the risk of failure to meet
maturing obligations on one hand and avoid excessive
investment in these assets on the other hand (Eljelly, 2004). The
presence of sound working capital management practices can
make significant difference between the success and failure of a
firm. In todays business, the skill to exploit every opportunity
and to look for practical business tools and techniques to improve
the financial performance are of paramount importance for
success.
Working capital management is essential for the survival
of business organization because of its effect on a firms
profitability, risk and value. Cognizant of this fact, various
studies have analyzed the relationship of working capital
management (WCM) and firm profitability in developed markets
and economic situation. However, the results are quite mixed,
contradicting and confusing. The various studies reviewed have
used various variables to analyze the relationship, with different
methodology such as linear regression, panel data regression,
correlation and others. The investigator of the current study noted
that there are inconclusive and inconsistent results with regard to
the impact of working capital management on firms financial
performance. Further examination of these studies reveals that
evidence-based result that investigated the relationship between
working capital management and profitability of Food Complex
Manufacturing Companies operated in Ethiopia, Addis Ababa are
not found. Therefore, this study attempted to fill the research gap
by examining and analyzing the relationship between the most
important working capital management variables.
1.2 Statement of the Problem
Have working capital management a visible impact on
profitability of Food Complex Manufacturing Companies
operated in Addis Ababa?The financial managers of firms spend
most of their time and effort on day-to-day working capital
management. Due to the inability of financial managers to
properly plan and control the current assets and current liabilities
of their companies, the failure of a large number of businesses
can be attributed to the inefficient working capital management
(Smith, 1973). For instance, Egbide (2009) found that large
number of business failures in the past has been attributable to
the inability of the financial managers to plan and control the
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ISSN 2250-3153
working capital of their respective firms. These reported

inadequacies among financial managers are still practiced today
in many firms in the form of high bad debts; high inventory costs
etc., which poorly affect their operating performance (Egbide,
2009, p. 45). Moreover, some managers do neglect the firms
operating cycle thereby having longer debtors collection period
and shorter creditors payment period.
Inadequate working capital leads the firm to bankruptcy.
Inversely, unnecessary investment in working capital results in
wasting cash and ultimately leads to lower profitability or even
loss (Chakraborty, 2008). Management strategy aimed at
maintaining a balance between liquidity and profitability has farreaching consequences on the growth and survival of the firm.
Thus, the manager of a business entity is in a dilemma of
achieving desired tradeoff between liquidity and profitability in
order to maximize the value of a firm. Therefore, the issues
raised above vindicates the need to thoroughly investigate the
problem; and hence, the need to study the relationship between
measures of working capital management and firm performance
in selected food complex manufacturing industries in Addis
Ababa.
1.3 Objectives of the Study
The objective of the study is to examine and analyze the
impact of working capital management on the profitability of
Food Complex Manufacturing Companies operating around
Addis Ababa. Specifically, the study assumes the following
specific objectives:
To evaluate the impact of account receivable collection
days on the profitability of Food Complex
Manufacturing firms.
To examine the effect of inventory turnover days on
Food Complex Manufacturing Companies profitability
position.
To examine the impact of account payable turnover
days on Food Complex Manufacturing Companies
profitability position
To investigate the impact of cash conversion cycle on
Food Complex Manufacturing Companies profitability
position.
To measure the effect of current ratio on Food Complex
Manufacturing Companies profitability position.
To examine the effect of quick asset ratio on Food
Complex Manufacturing Companies profitability
position.
1.4 Hypotheses
One of the purposes of cash and liquidity management is to
sustain a minimum amount of idle cash holding in the firm, so as
management of accounts receivable (AR) and inventories, too,
assist keeping level of the invested funds in these assets as low as
possible. Conversely, management of accounts payable (AP)
tries to elongate the time of payment and to make the most of the
short-term funds which actually belong to others. The period
from the time of payment for the purchased materials or goods
until collection of sales cash proceeds is called Cycle of
Operation (Bozorgasl, 2005). Operating cycle has two parts: the
first part is the Inventory Sale Period, the period extending from
Asset Acquisition Period until Inventory Sale Period; and the
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second part is from Inventory Sale Period to the period of

receiving the sale proceeds known as Accounts Receivable
Collection Period. The Cycle of Operation in fact represents a
process which shows how a products moves through different
accounts of current assets; it is initiated in the inventory account,
then when it is sold, it turns into accounts receivable, and at last
when its cash proceeds are received, it is converted into cash or
liquid asset. In this process, the asset step by step gets closer to
cash (Ross, 2008).
The period from inventory acquisition until payment of the
price thereof is called payment period. Cash Conversion Cycle
refers to the process starting from cash payment for purchase of
inventory and ending up to collection of sale cash proceeds. Note
that cash conversion cycle (CCC) is the difference between cycle
of operation and payment period (Ross et al., 2008). In other
words, cash conversion cycle is the time period in which cash is
spent by the company operation on production of a product item.
Shortening this period means that for certain volume of
production, less amount of cash is spent. CCC can be shortened
by cutting down on either the average period in which cash is in
the form of inventory, or the average accounts receivable
collection period, or by lengthening the payment period
(Jahankhani, 2008). The change in CCC leads to alteration of
asset turnover and eventually affects profitability of the business
unit. Consequently, the following hypotheses are drawn:H1. The Food Complex Manufacturing Companies
profitability position is significantly negatively related to cash
conversion cycle.
H2. The Food Complex Manufacturing Companies
profitability position is significantly negatively related to the
account receivable turnover days.
profitability position is significantly negatively related to the
inventory turnover days
profitability position is significantly positively related to the
account payable turnover days.
Moreover, according to the economic theory, risk and
profitability are positively related (the more risky the investment,
the higher the profits it should offer), thus since higher liquidity
means less risk, it would also earn lower profits. According to
Assaf Neto (2003, p.22), the greater the amount of funds invested
in current assets, the lower the profitability, and by the same time
the less risky is the working capital strategy. In this situation, the
returns are lower in the case of a greater financial slack, in
comparison to a less liquid working capital structure. Conversely,
a smaller amount of net working capital, while sacrificing the
safety margin of the company, by raising its insolvencys risk,
positively contributes to the achievement of larger return rates,
since it restricts the volume of funds tied up in assets of lower
profitability. This risk-return ratio behaves in a way that no
change in liquidity occurs without the consequence of an
opposite move in profitability. This way each company should
choose an amount of net working capital that better fits its risk
accessibility and profit margins. Considering the above concepts
H5. The Food Complex Manufacturing Companies profitability
position is significantly negatively related to current ratio figure
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H6. The Food Complex Manufacturing Companies profitability

position is significantly negatively related to quick asset ratio
figure.
The study has significance importance for corporate
managers, researchers and students. First, managers of
companies, especially food complex manufacturing companies
will have insight on how best to optimize balance between
liquidity and profitability in their companies. The study will
equip managers with desirable working capital strategy that
maximizes shareholders interest and directs them in challenges
that the entity faces. Secondly, other researchers who are
interested in the working capital management of firms and its
impact on performance will find this work as beneficial.
II. LITERATURE REVIEW

2.1 Theoretical Literature
2.1.1 Components of Working Capital
Working capital management concern companies
management of their short-term capital. The short-term capital
refers to the capital that companies use in their daily operations
and it consists of companies current assets and current liabilities.
A well-managed working capital promotes a companys
wellbeing on the market in terms of liquidity and it also acts in
favor for the growth of shareholders value (Jeng-Ren, et al.,
2006).
Current assets consist of capital tied up in cash, short-term
financial investments, inventories, account receivables and other
current assets (Brealey, Myers & Allen, 2006, p. 813). Current
liabilities include short-term loans, the debts to suppliers as
account payables, accrued income taxes, and interest payments
on long-term debts, dividend and other current liabilities.
Consistent and systematic examination of a firm's current assets
and liabilities is important to maintain sound and effective
working capital management strategy.
2.1.2 Working Capital Management and Its Importance
Working capital management involves regulating the
various types of short-term assets and short-term liabilities.
Working capital management also requires decisions with regard
to how short-term assets should be financed. The firm can
finance its current assets through various means like short-term
debt, long-term debt, or equity. All else constant, working capital
of the firm increased when it finances short-term assets through
noncurrent sources. Review of literature discloses four greatly
interrelated objectives of working capital management, viz.,
liquidity, profitability, risk reduction and value maximization.
The very purpose of any business organization is to increase the
market value. Sound management of working capital is an
integral component of the overall corporate strategy in creating
the shareholders value.
The main objective of working capital management is to
maintain an optimal balance between each of the working capital
components. Business success heavily depends on the financial
executives ability to effectively manage receivables, inventory,
and payables (Filbeck and Krueger, 2005). Firms can minimize
the cost of financing and/or increase the funds available for
expansion projects by minimizing the amount of investment tied
up in current assets. Most of the financial managers time and
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efforts are allocated towards bringing on-optimal levels of

current assets and liabilities back to optimal levels (Lamberson,
1995).
The major benefits of holding adequate working capital
include among others, keeping of the affluence of the firm or
averting of its commercial indebtedness through continuing
production, maintenance of credit by early payment to supplies
of raw materials and others. Favorable opportunities can also be
exploited, e.g., a firm may make off seasonal purchases resulting
in significant savings or it can fetch big supply orders,
availability of emergency capital on soft terms is ensured, regular
payment of dividend can also be assured due to the availability of
sufficient liquidity, productivity is enhanced by making
expenditures on research, innovation and technical development
and by maintaining incessant flow of materials, etc.
Also, Working capital management is essential because of
its effects on the firms risk and return, and consequently its
value. Usually, the larger the firms investment in liquid assets,
the lower will be its risk and return alike. Referring to theory of
risk and return, high-risk investment will result in high return.
Therefore, firms with high liquidity of working capital may have
low risk then low profitability. Inversely, a firm that has low
liquidity of working capital, facing high risk results to high
profitability. The central point here is that when managing
working capital, the firm should carefully consider all the items
in both accounts and try to balance the risk and return (Moradi et
al., 2012).
2.1.3 Working Capital Policy
Deciding on the firms basic policy decisions regarding the
target levels for each category of current assets, how current
assets will be financed, and is formulated by the finance
management in order to manage and handle the firms working
capital efficiently refers to working capital policy (Brigham &
Houston, 2003; Paramasivan & Subramanian, 2009). Working
capital policy refers to the level of investment in current assets
for safeguarding the targeted sales and growth. Ideally, a firm
can implement different working capital management policies as
Aggressive or restricted working capital policy, Conservative or
relaxed working capital policy, and/or Moderate working capital
policy based on its investment and financing strategies. These
different practices affect the profitability, liquidity, risk, and
finally the value of the firm in different ways. A firm may adopt
an aggressive working capital management policy with a low
level of current assets as a percentage of total assets, or it may
also be used for the financing decisions of the firm in the form of
high level of current liabilities as a percentage of total liabilities.
Excessive investment in short-term assets may have adverse
effect on the firms profitability, whereas paucity of current
assets may lead to a lower level of liquidity and stock outs,
resulting in difficulties in maintaining smooth operations (Van
Horne & Wachowicz, 2004). More aggressive working capital
policies are related to higher risk and return while conservative
working capital policies are associated with lower risk and return
(Gardner et al., 1986; Weinraub & Visscher, 1998). In restricted
policy, the estimation of current assets for achieving targeted
revenue is done very aggressively without considering for any
contingencies and provisions for any unforeseen event. On the
other hand, relaxed policy is just the reverse of restricted policy
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in that assessment of liquid assets for realizing the targeted

revenue is prepared after careful consideration of uncertain
events such as seasonal fluctuations, sudden change in level of
activities or sales etc.
2.1.4 Measures of Working Capital
There are two terms called gross working capital and net
working capital that are also used commonly for measuring
working capital level of a company. Working capital refers to its
financial health and is computed by deducting current liabilities
from current assets. If it is positive, it indicates that the company
is in good financial health and can pay its short term debts by
selling its current assts. If it is negative, the company cannot
meet its debt liabilities even if it sells its current assets such as
cash, accounts receivables and inventory. When working capital
is in red, it is a signal that companys operational efficiency is
going down or it is not generating enough sales and in the worst
case scenario, negative working capital may result in bankruptcy
for a company. As such, working capital is a good indicator for
investors to invest or shy away from a company.
The two commonly known measures of working capital are net
working capital and the gross working capital. The gross working
capital is referred as working capital and it includes the total
current assets of the firms, whereas net working capital is the
excess of current assets over current liabilities. On the other
hand, net working capital being the difference of current assets
and current liabilities reflects operational efficiency and ability to
generate more sales (Zubair and Mohmed (2013)
2.1.5 Profitability and Liquidity Measures
Profitability is the net result of a number of policies and
decisions (Brigham & Daves, 2007). Profitability can be
measured in many ways. Often these measures permit financial
analysts to appraise the firms profits with respect to a given
level of sales, a certain level of assets, or the owners investment.
A firm could not attract outside capital without realizing
adequate level of profit from its operation. Creditors,
shareholders, and management give due consideration in
increasing the earnings of the firm because of the great
importance the market places on earnings (Gitman & Zutter,
2012). Among the measures, profitability ratio helps to measure
the profitability position of the firm (Paramasivan &
Subramanian, 2009) and go on to show the overall effects of
liquidity, asset management, and debt on operating results. They
also enable the investor measure how well a firm is managing its
expenses. Profit margin ratios compare components of income
with sales. They give the investor an idea of which factors make
up a firms income and are usually expressed as a portion of each
dollar of sales (Fabozzi & Drake, 2009). Some of the measures
of profitability include Return on Assets, Profit margin before
income tax, Total asset turnover, Profit margin after income tax,
Return on equity after income taxes, Return on equity before
income taxes, etc. While measures of liquidity include Current
ratio, Quick ratio, Net sales to working capital, Receivables
turnover and Inventory turnover.
2.2 Empirical Evidence
The pervious section presented the theories of Working
Capital Management and other related topics. This section is
devoted to review the empirical studies on Working Capital
Management and its effect on Profitability. Daniel and Ambrose
818
(2013) analyzed the effect of working capital management on

firms profitability in Kenya for the period 2003 to 2012.They
used, balanced panel data of five manufacturing and construction
firms each of which were listed on the Nairobi Securities
Exchange (NSE). Pearsons correlation and Ordinary Least
Squares regression models were used to establish the relationship
between working capital management and firms profitability.
They found a negative relationship between profitability and
number of days accounts receivable and cash conversion cycle,
while a positive association between profitability and number of
days of inventory and number of days payable. Moreover, the
financial leverage, sales growth, current ratio and firm size also
have significant effect on the firms profitability. Similarly, using
a sample of 88 American firms listed on New York Stock
Exchange for a period of 3 years from 2005 to 2007, Amarjit
Gill, et al. (2010) examined the relationship between working
capital management and profitability. They found statistically
significant relationship between the cash conversion cycle and
profitability, measured through GOP. They concluded that
managers can create profits for their firms by properly managing
the cash conversion cycle and by keeping accounts receivables at
an optimal level.
Using panel data methodology, Richard Kofi Akoto, et al.
(2013) studied the relationship between working capital
management practices and profitability of listed manufacturing
firms in Ghana. They used secondary data collected from 13
listed manufacturing firms in Ghana covering the period from
2005-2009. They revealed a significantly negative relationship
between profitability and accounts receivable days. However, the
firms cash conversion cycle, current asset ratio, size, and current
asset turnover significantly and positively influence profitability.
Hence, the authors suggested that managers can create value for
their shareholders by creating incentives to reduce their accounts
receivable to 30 days. It is further recommended that, enactments
of local laws that protect indigenous firms and restrict the
activities of importers are eminent to promote increase demand
for locally manufactured goods both in the short and long runs in
Ghana.
Abbasali P, et al. (2012) empirically tested the impact of
working capital management on profitability and Market
evaluation of the companies listed in Tehran Stock Exchange.
They collected data from a sample of companies listed in Tehran
Stock Exchange during the years 2006 to 2010. To measure
firms profitability, they used return on assets and return on
invested capital ratios. To measure the market value of
companies Tobin Q ratio was used; and variables of cash
conversion cycle, current ratio, current assets to total assets ratio,
current liabilities to total assets ratio and total debt to total assets
ratio as working capital management Criteria. The results
indicated that there is a significant relationship between the
working capital management and profitability criteria of
company but there is no significant relationship with the criterion
of market value of company. The authors concluded that
management can increase the profitability of firms by reducing
the cash conversion cycle and total debts to total assets ratio.
On the other hand, Lyroudi and Lazaridis (2000)
conducted a study on the cash conversion cycle and liquidity
analysis of food industry in Greek using data from the major
companies in the food and beverage industry of Greece, by
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adopting regression and correlation analysis, as well as t-tests of

two independent sample means, indicated that there is a
significant positive relationship between the cash conversion
cycle and the traditional liquidity measures of current and quick
ratios. The cash conversion cycle was positively related to the
return on assets and the net profit margin but had no linear
relationship with the leverage ratios. On the other hand, the
current and quick ratios had negative relationship with the debt to
equity ratio, and a positive one with the times interest earned
ratio. Finally, there was no difference between the liquidity ratios
of large and small firms.
Sharma and Kumar (2011) examined the effect of working
capital on profitability of Indian firms. They collected data about
a sample of 263 non-financial BSE 500 firms listed at the
Bombay Stock (BSE) from 2000 to 2008 and evaluated the data
using OLS multiple regression. Hence, their findings were
significantly departed from the various international studies
conducted in different markets. The results revealed that working
capital management and profitability is positively correlated in
Indian companies. The study further revealed that inventory of
number of days and number of days accounts payable is
negatively correlated with a firms profitability, whereas number
of days accounts receivables and cash conversion period
exhibited a positive relationship with corporate profitability.
Also, Adolphus J. Toby (2010) examined the association
between working capital management policy and corporate
profitability in Nigerian quoted companies. Based on the data of
107 quoted companies spread across 23 sectors for the 20032007 period, averages and product-moment correlation
coefficients were computed based on measures of return on
assets (ROA), net profit margin (NPM) and net current assets
ratio (NCAR). The Love day Likelihood Test was adopted to
establish the minimum value for the correlation to be most likely
using sectoral data points. On the average all the sectors adopted
an aggressive working capital management strategy by relying
heavily on current liabilities for financing their working capital
needs. Accordingly, the study identified that the adoption of this
strategy produced negative profitability in most of the sectors.
Also, the result showed strong positive correlation between
NCAR and selected measures of profitability. Finally, the author
suggested that companies would maximize profitability and add
value by adopting the conservative working capital management
strategy (i.e. investing more in current assets) as long as the
operating environment and money markets are vigorous.
Kesseven Padachi (2006) examined the trends in working
capital management and its impact on firms performance for a
sample of 58 Mauritian Small Manufacturing Firms operating in
five major industry groups (food and beverages, leather
garments, paper products, prefabricated metal products and wood
furniture) which were both registered and organized as
proprietary/private companies. Using panel data analysis for the
period 1998 2003, the association between working capital
management and corporate profitability was examined. The trend
in working capital needs and profitability of firms are examined
to identify the causes for any significant differences between the
industries. The return on total assets defined as profit before
interest and tax divided by total assets was used as a measure of
profitability. The efficiency ratios, namely inventory period,
accounts payable period and accounts receivable period, were
819
used as measures of working capital. The Cash Conversion Cycle

(CCC) was used as a comprehensive measure of working capital.
To measure the extent of aggressive financing policy, the
regressions were also included the ratio of current liabilities to
total assets with a high ratio being relatively more aggressive.
Sales a proxy for size (the natural logarithm of sales), the gearing
ratio (financial debt/total assets), the gross working capital
turnover ratio (sales/current assets) and the ratio of current assets
to total assets were included as control variables in the
regressions. Accordingly, the regressions result indicated that
high investment in inventories and receivables is associated with
lower profitability. An analysis of the liquidity, profitability and
operational efficiency of the five industries showed significant
changes and how best practices in the paper industry have
contributed to performance. Also, the results discovered an
increasing trend in the short-term component of working capital
financing.
On the other hand, using a sample of Japanese and
Taiwanese firms Wang (2002) found that a shorter cash
conversion cycle would lead to a better firms operating
performance. Similarly, Teruel and Solano (2007) using samples
of small to medium sized Spanish firms for the 1996-2002
periods revealed that firms can create value by reducing the days
in inventory period and the debtors collection period, thus
leading to the reduction in the cash conversion cycle. Deloof
(2003), Samiloglu & Demirgunes (2008) and Uyar (2009), in
their respective Belgium, Japan and Turkey found that there exist
inverse relationship between working capital management
measured by the CCC and firms financial performance. The
implication is that by adopting a working capital policy which
results in low investment in inventories and account receivables
and the highest value of account payables, management could
maximize the firms earnings. This has been reported earlier by
Blinder and Maccini, 1991, that investing more in cash
conversion cycle (conservative policy) could lead to improved
profitability since retaining high inventory levels is expected to
increase sales, reduce supply costs, reduce cost of possible
interruption in production and protect against price fluctuations
caused by macro and micro economic factors. A longer
receivable collection period could reinforce the relationship with
customers and hence may lead to an increase in sales revenue
(Ng et al., 1999). Likewise, Gill et al. (2010), in their study of
US firms identified a positive relation between CCC and firm
profitability; however, they did find a highly significant negative
relation between account receivables and firm profitability. They
suggested that management can improve the earnings of the firm
by maintaining the investment in working capital to a minimum
level.
As can be observed from the foregoing empirical evidence,
a lot of studies have been made on the subject of working capital
management and its effect on firm profitability. However,
majority of the studies were case study driven which results in
contradicting and inconclusive outcomes regarding the effect of
working capital management on firms financial performance.
Hence, the investigator s of the current study is highly motivated
to extend the studies in Ethiopia, Addis Ababa market with
reference to food complex manufacturing companies as there are
no adequate studies on the subject.
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III. RESEARCH METHODOLOGY

3.1 Research Design
The aim of this research is to investigate and analyze the
relationship between working capital management & profitability
of food complex manufacturing firmscurrently operating in
around Addis Ababa, Ethiopia. The impact of working capital
components, which are the days sales outstanding (DSO), Days
inventory outstanding (DIO), Days payment outstanding (DPO)
and cash conversion cycle (CCC), current ratio (CR) and quick
asset ratio(QAR) on profitability of Food Complex
Manufacturing Companies in Ethiopia, Addis Ababa, was
analyzed. The research design, used is a pooled panel data
analysis of cross-sectional and time series data. Moreover,
explanatory research designs with quantitative approach through
which cause and effect relationship of one dependent and one or
more independent variables were employed.
3.2 Sample Design and Sample Size Determination
The target population for this study was all Food Complex
Manufacturing Companies currently operating in Addis Ababa.
Thus, the sample comprises of Food Complex Manufacturing
Companies operating in around Addis Ababa only. Specifically,
the authors selected those firms meeting the following basic
criteria (a) in the line of business for more than five years; (b)
maintain book of records using Accepted Accounting Standards,
and developed the habit of preparing financial statements
annually and whose book of accounts are examined by
independent Auditors. These criteria make the data more reliable
and dependable. To obtain the required data, purposive sampling
was applied to make the sample best fitted for the designed
model. The study consist of ten (10) purposively selected food
complex manufacturing firms from a population of fifty (50)
companies operating at around Addis Ababa. List of
manufacturing companies included in the sample were Kojj food
complex manufacturing Co., Sarem food complex manufacturing
Co., Helina enrich food Complex manufacturing Co., Astco food
complex manufacturing Co., Simachew food complex
manufacturing Co., Ahfa food complex manufacturing Co.,
Health care food Plc., Universal food complex manufacturing
Co., Meshobia food complex manufacturing Co., and NAS Foods
Plc.
3.3 Data Source and Collection Methods
Data refers to known facts or things used as a basic for
inferring.
Data can be described either qualitative or
820
quantitative. In this study the authors used quantitative data to

perform quantitative research so as to examine the phenomena by
analyzing the numerical data, using mathematical based methods,
particularly statistics. The quantitative data was secondary data
collected from Annual Financial Statements of the sample firms
for consecutive five years period from 2009 to 2013. The
researchers considered five years as a study period, because of
limited number of firms having an operating life of more than
five years that can placate the basic criteria established above.
3.4 Data Analysis Techniques
The authors applied three main data analysis techniques.
Firstly, descriptive statistics was used to describe the sample data
collected. This statistical technique helps to overview the sample
characteristics. Secondly, Pearson correlation analysis was used
to define whether working capital management is associated with
firm profitability. Thirdly, regression analysis was employed to
test the research hypotheses. Finally, the analysis is presented by
using figures and tables.
3.5 Variables Identification
3.5.1 Independent Variables
To measure the working capital management efficiency of
a company, the study used Account Receivable Collection period
(ARCP/DSO), Inventory turnover day (ITD/DIO), and Account
payable day (APD/DPO), Cash Conversion Cycle (CCC),
current ratio (CR), quick asset ratio (QAR) as independent
variables. These variables are considered as ratios that measures
working capital management efficiency of firms.
3.5.2 Dependent Variable
To measure the selected firms financial performance
position ROA was selected as dependent variable. Return on
Assets measures how efficiently the company uses its assets to
realize profits. Return on assets = Net income before taxes
Total assets
3.5.3 Control Variables
Firm size, firm sales growth and the leverage ratio
considered in this study as control variables because they all are
inherent firms characteristics which may also affect company
operational profitability in addition to the effect of independent
variables. Hence, firm Size is measured by natural logarithm of
sales; Firm Sales Growth rate is measured by change in sales
while debt ratio is computed by dividing total debt by total
Assets.
Table 1: Variables, Their Types, Abbreviations and Measurements

Variable
Return on Assets
Inventory Conversion Period
(Days Inventory Outstanding)
Receivables Collection Period
(Days Sales Outstanding)
Payables Deferral Period
(Days Payment outstanding)
Current Ratio
Quick Asset Ratio
Abbreviation
RoA
DIO
Type
Dependent
Independent
Measurement
Net income before taxes Total assets
Average Inventory X 365 / COGS
DSO
Independent
Accounts Receivables X 365/ Sales
DPO
Independent
CR
QAR
Independent
Independent
Total Purchases/Average Accounts

Payable
Current Assets/Current Liabilities
Current Assets Inventories/Current
www.ijsrp.org
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Cash Conversion Cycle

Firm Size
Debt Ratio
Growth in Sales
CCC
LnSales
DtR
GiS
Independent
Control
Control
Control
Liabilities
DIO + DSO - DPO
Natural Logarithm of Sales
Total Debt / Total Assets
This Years Sales Previous Years
Sales / Previous Years Sales
3.5.4 Model Planning

In the foregoing section, the authors described that ROA depend upon days sales outstanding (DSO), Days inventory
outstanding (DIO), Days payables outstanding (DPO), cash conversion cycle (CCC), current ratio (CR) and quick asset ratio
(QAR). After reviewing theoretical literature, the following best fitted multiple regression models were developed to measure
the effect of working capital management on financial performance (profitability); this model was employed by most of the
previous researchers.
ROA= f (DSO, DIO, DPO, CCC, CR, QAR)............ Equation
When the least square model has been converted into specified variables as follows;
ROA = 0 + 1(ITD) +2(ARCP) + 3(DPO) + 4(CCC) + 5(CR)+ 5(QAR)+ 5(FS)+5(FGR)+ 5(DR)+
Where;
ROA = Return on Assets
ARCP/DSO = Account receivable collection period (Days
sales outstanding)
ITD/DIO = Inventory turnover day (Days inventory
outstanding)
DPO
= Days payables outstanding
CCC
= Cash conversion cycle
CR
QAR
FS
FGR
DR
= Current ratio
= Quick Asset ratio
= Firm Size
= Firm growth rate
= Debt ratio
= the error term
=
Coefficients
Specifically, when the above general model is converted into the specified Variables of this study the following multiple
regression model equations were run to estimate the effect of working capital policies on the profitability of selected companies:
Inventory turnover day and Profitability Measure (ROA):
ROA i = 0 + 1ITDi) + 2(FSi) + 3(FGRi) + 4(DRi) + ...
(1)
Accounts Receivable Collection period and Profitability Measure (ROA):
ROA i = 0 + 1(ARPi) + 2(FSi) + 3(FGRi) + 4(DRi) + . (2)
Days payable Outstanding and Profitability Measure (ROA):
ROA i = 0 + 1(DPOi) + 2(FSi) + 3(FGRi) + 4(DRi) + .
(3)
Cash Conversion Cycle and Profitability Measure (ROA):
ROA i = 0 + 1(CCCi) + 2(FSi) + 3(FGRi) + 4(DR) + ..
(4)
Current ratio and Profitability Measure (ROA):
ROA i = 0 + 1(CRi) + 2(FSi) + 3(FGRi) + 4(DRi) + ....
(5)
Quick Asset ratio and Profitability Measure (ROA):
ROA i = 0 + 1(ARPi) + 2(FSi) + 3(FGRi) + 4(FLi) + ..
(6)
IV. DATA ANALYSIS AND FINDINGS

In this part of the study, the panel data, which is prepared from the financial statements of sample firms, are analyzed using
descriptive statistics, correlation analysis and linear regression analysis.
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4.1 Descriptive Statistics

Table 2: Descriptive Statistics
ITD
ARCP
APD
CCC
CR
QAR
DR
FGR
FS
ROA
Minimum
Maximum
Mean
Std. Deviation
50
50
50
50
50
50
50
50
50
12.84
8.91
25.16
-224.11
0.54
0.06
0.10
-0.68
3.32
664.29
330.65
892.05
271.45
7.34
5.64
0.92
3.98
5.39
129.8
74.57
172
32.34
1.89
0.86
0.54
0.34
4.71
114.15
74.32
177.24
94.94
1.37
0.88
0.20
0.92
0.43
50
-0.13
0.40
0.17
0.12
Source: SPSS Output from Financial Statements of Sample Firms, 2009-2013

Table 2 above shows some of selected descriptive statistics
of the sample firms including the mean, standard deviations,
minimum and maximum values of study variables for the study
period. The research has used a total of 10 variables for the
analysis purpose and the total 10 variables were broadly
classified in to three categories, that is, 6 independent variables,
1 dependent variable and 3 control variables. Out of the 6
independent variables, 4 are proxies for working capital
management measures of the sample firms, while the rest two
independent variables are used to measure liquidity. Three
variables are considered as control variables, which are firm size
as measured by the natural logarithm of sales, firm growth rate
measured by the relative change in sales as compared to previous
year and leverage of the firms.
The mean value of return on asset is 0.17 percent and it
deviates 0.13 percent to the left and right side of the mean value.
This indicates that the data points are very close to the mean. Its
minimum value is -0.13 percent while its maximum value is 0.4
percent. This suggests that the profitability position of the food
complex manufacturing business in Addis Ababa is not found
satisfactory.
The average current ratio for the sampled food
Manufacturing Private Limited Companies is 1.89, which is
almost approached to the preferred current ratio (as a rule of
thumb it is good for the firm to have current ratio of 2).The
standard deviation is 1.37. The standard deviation shows little
variability in current ratio among the sampled companies. The
minimum and the maximum values of current ratio is 0.54 and
7.34 respectively. The table further depicts, the mean value of
Quick asset ratio is 0.87, which is slightly less than the standard
quick ratio of 1 (as a rule of thumb the preferred quick ratio is 1).
The value of quick asset ratio can vary to both sides of the mean
value by 0.89. The minimum and the maximum value of quick
ratio is 0.06 and 5.64 respectively.
Similarly, descriptive statistics for the three measures of
efficiency of working capital management, namely, accounts
receivable collection period, inventory turnover period and
accounts payable period was computed. Accounts receivable
collection period, a measurement for collection policy of the
firm, is averaged to 75 days for the sampled firms. This indicates

that, firms in the sample wait 75 days on average to collect cash
from credit sales. The Account receivable period shows the
sampled firms wait a minimum of 8 days and a maximum of 330
days to collect credit sales and deviates by 73.81 days to both
sides of the mean value. The variance shows the existence of
large difference in accounts receivable period among the sampled
firms.
The average value of Inventory turnover period as a proxy
for inventory policy is 130 days. This means, firms in the sample
needs on average 130 days to sell inventory. As it is shown in the
above table, the standard deviation of inventory holding period is
114 days. To the sampled firms the inventory holding period
ranges between 12 and 664 days as minimum and maximum
values respectively. The maximum value of 664 days to convert
inventory into sales is a very long period. The average value of
Accounts payable period as a proxy for payment policy is 172
days. The standard deviation of account payable period for the
sample firms is 177 days. The period ranges between 25 days and
892 days. The minimum value of account payable period, 25
days, indicates that the firm needs 25 days to effect payment of
credit purchases.
Average cash conversion cycle, one of the comprehensive
measures of working capital, days for the sampled firm is 30
days and the standard deviation is 96 days. The minimum value
of -224 days shows that a firm records a large inventory turnover and/or cash collections from credit sales before making a
single payment for credit purchases. It means that the accounts
receivable period and/or the inventory holding period are very
short and/or the accounts payable period of the firm is very long.
On the other hand, the maximum time for cash conversion period
of 271 days is considered a very long period.
In addition, the above table includes the descriptive
statistics of control variables that was used in the study. The first
control variable, firm size, as measured by the natural logarithm
of annual sales, is averaged to 4.72 for the sampled firms and it
can deviate to both sides of the mean value by 0.43. The
minimum and maximum values of the firm size measured by the
natural logarithm of the firms annual seals are 3.32 and 5.79
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respectively. The second control variable, firm growth rate

average value is 34 percent, as measured by changes in annual
sales. This indicates that there was moderate sales growth rate
among the sampled firms. However, there is a deviation of 92
percent, from mean value of sales growth to both directions. The
minimum and maximum sales growth among the sampled firms
is -68 percent and 398 percent respectively. The third control
variable, financial leverage is 54 percent on average and vary by
20 percent to both sides of the mean value. The minimum and
maximum values of financial leverage are 10 percent and 92
percent respectively.
4.2 Correlation Analysis on Working Capital Management
and Profitability
Pearson correlation coefficient is the most common tool to
measure the relationship between two variables. It measures the
linear dependence between two variables. The coefficient is a
value between +1 and 1 inclusive. A value of 1 implies that a
linear equation describes the relationship between the two
variables perfectly, i.e. the first variable increases in the same
823
proportion as the second one. A value of 1 implies that all data

points lies on a line for which if the first variables increases the
second have a perfectly proportional decrease. A value of 0
implies that there is no linear correlation between the variables.
The other values are a mean term between these results. E.g. a
coefficient of 0.4 means that there is a positive but not perfect
relationship between the variables, a coefficient of 0.8 means the
same thing however a 0.8 means a stronger relationship than a
0.4 coefficient.The interpretation of the correlation result is
subjective. An important aspect to be considered is that the
Pearson correlation coefficient presupposes that the variables are
normally distributed. So in order to verify if this is valid for the
studied sample test for normality was made for each of the
variables.
4.2.1 Correlation Analysis of ARCP/DSO and ROA
Correlation Analysis has been performed to examine the
relationship between Account receivable collection period and
profitability and the result is shown in the following table.
Table 3: Correlation Analysisof ARCP/DSO and ROA
ROA
Pearson
Correlation
ROA
ARCP
APD
CCC
-.311*
-.274
-.566**
.028
.054
.000
Sig. (2-tailed)
ARCP
50
50
50
50
Pearson
Correlation
-.311*
.664**
.669**
.000
.000
Sig. (2-tailed) .028

APD
CCC
50
50
50
50
Pearson
Correlation
-.274
.664**
.691**
.000
50
50
50
50
Pearson
Correlation
-.566**
.669**
.691**
.000
.000
50
50
50
.000
50
*. Correlation is significant at the 0.05 level (2-tailed).

**. Correlation is significant at the 0.01 level (2-tailed).
Source: SPSS Output from Financial Statements of Sample Firms, 2009 - 2013
Results from the Pearson correlation analysis reveal that
ROA has a significant negative relationship with receivable
collection day. This would suggest that better returns may be
associated with fast collection of receivables and undue length of
receivable days negatively affect ROA. However, such an
assumption further investigated in this study by using linear
regression analysis to confirm any economic impact of Account
Receivables collection days on return on assets.
In the previous chapter of this study, it was hypostasized

that, there is strong negative correlation between accounts
receivable period and profitability as measured by return on
asset. In line with the research hypothesis, the above correlation
Table showed strong negative correlation coefficient between
accounts receivable period and profitability measured by return
on asset. From the table, the correlation coefficient of accounts
receivable period with return on assets is -0.311 and significant
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at the 0.05 level. It indicates that the shorter account receivable

period is strongly linked with high profitability and/or longer
accounts receivable period is associated with lower profitability.
4.2.2. Correlation Analysis of APD/DPO and ROA
Table 3 also shows the correlation between Account
payable days and profitability measured by return on asset. The
result showed that ROA has a negative correlation with Account
payable days. In the first chapter of this study, it was
hypothesized that there is a strong positive relationship between
accounts payable period and profitability as measured by return
on assets. In contrary with the research hypothesis, the above
correlation matrix indicates negative relationship between
account payable period and profitability measure. Account
payable period has correlation coefficients of -0.27 with return
on assets and the relationship is not found significant. However,
the prevailed negative relationship between accounts payable
period and profitability goes with the view that less profitable
firms wait longer to pay their bills.
4.2.3. Correlation Analysis of CCC and ROA
Pearson correlation analysis between CCC and ROA is
also processed in the above table. The result suggested that ROA
824
has a significant negative correlation with CCC. This means that

better returns may be associated with shortest CCC and lengthy
CCC negatively affects ROA. However, such a conclusion
further investigated in this study by using linear regression
analysis to confirm any economic impact of CCC on return on
assets.
In the previous chapter of this study, it was hypostasized
that, there is strong negative correlation between CCC and
profitability as measured by return on asset. In line with the
research hypothesis, the above correlation Table showed strong
negative correlation coefficient between CCC and profitability
measured by return on asset. From the table, the correlation
coefficient of CCC with return on assets is -0.566 and significant
at the 0.01 level. It indicates that the shorter the CCC is highly
associated with higher profitability and/or longer the CCC is
highly associated with lower profitability.
1.2.4. Correlation Analysis of ITD/DIO and
ROA
Pearson correlation analysis between inventory conversion
period and profitability as measured by ROA has been computed
and the result is summarized in the following table:-
Table 4: Correlation Analysis of ITD/DIO and ROA
ROA
ROA
1
ITD
-.530**
.000
50
1
Pearson Correlation
Sig. (2-tailed)
N
50
ITD
Pearson Correlation
-.530**
Sig. (2-tailed)
.000
N
50
50
DR
Pearson Correlation
.322*
.098
Sig. (2-tailed)
.023
.497
N
50
50
FGR
Pearson Correlation
.127
-.122
Sig. (2-tailed)
.380
.397
N
50
50
FS
Pearson Correlation
.274
-.490**
Sig. (2-tailed)
.054
.000
N
50
50
*. Correlation is significant at the 0.05 level (2-tailed).
Results from the correlation analysis revealed that ROA
has a significant negative correlation with inventory turnover
day. This would suggest that better returns may be associated
with fast production and selling activities. However, the result
further investigated in this study by using linear regression
analysis to confirm any economic impact of inventory turnover
days on return on assets.
DR
.322*
.023
50
.098
.497
50
1
50
-.136
.347
50
.142
.324
50
FGR
.127
.380
50
-.122
.397
50
-.136
.347
50
1
50
-.135
.349
50
FS
.274
.054
50
-.490**
.000
50
.142
.324
50
-.135
.349
50
1
50
In the first chapter of this study, it was hypothesized that

there is strong negative correlation between inventory turnover
days and profitability as measured by return on asset. In line with
the research hypothesis, the above correlation Table shows
strong negative correlation coefficient between inventory
turnover day and return on asset. From the table, the correlation
coefficient of inventory turnover days with return on assets is -
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0.53 percent and significant at the 0.01 level. It indicates that the
shorter the inventory turnover day is strongly associated with
high profitability and/or longer inventory turnover days is
associated with lower profitability.
4.2.5. Correlation of Control Variables with ROA
In addition, as it can be clearly reflected in Table 4 there is
a positive correlation coefficient between firm size and
profitability as measured by return on assets. The Pearson
coefficient of 0.27 means firm size has weak positive relationship
with return on assets. Moreover, the above correlation table
825
showed that firm growth rate is also weakly and positively

related with Return on asset with a correlation coefficient of
0.12. On the other hand, financial leverage has strongly and
positively correlations with return on assets with a correlation
coefficient of 0.322.
4.2.6. Correlation Analysis of CA, QAR and ROA
Pearson between liquidity measures (Current assets ratio
and quick asset ratio) and profitability as measured by ROA has
been performed and the result is summarized in the following
table
Table 5: Correlation analysis of CA, QAR and ROA
ROA
ROA
1
Pearson Correlation
Sig. (2-tailed)
N
50
CR
Pearson Correlation
-.237
Sig. (2-tailed)
.097
N
50
QAR
Pearson Correlation
-.071
Sig. (2-tailed)
.624
N
50
In finance theories there is a trade-off between profitability
and liquidity. In line with this theoretical framework, it was
hypothesized that there is a strong negative relationship between
profitability measures and the traditional measures of liquidity.
However, the above table showed that, there is negative
relationship between liquidity, as measured by both current ratio
and quick assets ratio, and the profitability measures but the
correlation is not found significant. As indicated in the above
table the correlation coefficients for current ratio and quick asset
ratio with return on assets are -0.237 and -0.071 respectively.
Although, the pair wise correlations give evidence for
relationship between two variables; it says nothing about cause
and effect relationships between the variables. So that, from the
results of correlation analysis, it is difficult to say that shorter
accounts receivable period leads to higher profitability or shorter
inventory turnover period is a result of the higher profitability.
Likewise, it is difficult to interpret the CCC and profitability
variables by stating that a higher profit is the result of shorter
CCC or lower profit is the result of longer CCC.
The limitation of correlation analysis is it shows the
coefficient and the direction of relationship (weather it is positive
or negative) between two variables. Another additional
shortcoming of correlation analysis is that, it does not provide
reliable indicators or coefficients of association in a manner
which control for additional explanatory variables. This means
care must be exercised when interpreting the pair wise
correlation coefficients. In examining effect of some variables on
the other variables, additional analysis will be carried out using
CR
-.237
.097
50
1
50
.820**
.000
50
QAR
-.071
.624
50
.820**
.000
50
1
50
linear regression analysis so as to overcome the problems of

correlation analysis.
4.3. Regression Analysis of WCM and ROA
To further investigate the relationship between working
capital management and firms profitability and also to analyze
the impact of independent variables on firms profitability
measured by return on assets multiple regression model were
carried out. Moreover, two additional regressions analysis were
done to examine the relationship between firms profitability
measure (return on asset) and the traditional measures of
liquidity (current asset and quick asset).
Before running each of the following regression models,
the basic eight assumptions of multiple Regression Models
(MRM) has been tested. The first assumption says dependent
variable should be measured on a continuous scale. The second
assumption says there must be two or more independent
variables which can be either continuous and/or categorized. The
third assumption is about the independence of observation and
independence of residuals. The forth assumption says there need
to be a linear relationship between the dependent variable and
each of the independent variables and the dependent variable and
the independent variable collectively. The fifth assumption says
the data need to show homoscedestically. The sixth assumption
says the data must not be multi co-linearity. The seventh
assumption says there should be no significant outlier. Finally,
the last assumption said that the residual error appropriately
normally distributed.
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4.3.1. Regression Analysis of ITD and ROA

Regression analysis has been performed to analyze the
effect of inventory turnover day on return on assets and the result
826
is shown in the following table. The data were tested for all the
MRM assumptions and the result is shown in the appendix.
Table 6: Regression analysis of ITD and ROA

Model Summary
Model
R
R Square
Adjusted
Square
.661a
.437
.387
R Std. Error of the

Estimate
.10008
a. Predictors: (Constant), FS, FGR, DR, ITD

ANOVA
Model
Sum of
Squares Df
Mean
Square
Sig.
1Regression
.350
.088
8.738
.000a
Residual
.451
45
.010
Total
.801
49
a. Predictors: (Constant), FS, FGR, DR,
ITD
b. Dependent Variable: ROA
Coefficients
Unstandardized
Coefficients
Model
B
Std. Error
1(Constant
.535
.322
)
ITD
-.123 .028
DR
.251
.072
FGR
.014
.016
FS
-.167 .401
a. dependent variable ROA
From the model summary table, we have seen that the
coefficient of determination value is 0.437, which indicates
43.7% of the variability in the return on assets is well explained
by the changes in the independent variables used in the model.
However, the remaining 56.3 percent change in the return on
asset is caused by other factors that are not included in the
models. Moreover, the overall significance of the model, when
measured by F statistics of 8.738 with P-values of 0.000 on the
ANOVA table, indicate that the model is well fitted at 1 percent
significance level. The result of the regression analysis in the
above table indicates that inventory turnover day has a
significant negative impact on profitability. The t-significant
value of -4 and 0.000 indicates that the impact of inventory
turnover days on ROA is very strong and significant. This
finding is in line with the hypothesis that there is strong negative
relationship between inventory turnover day and profitability of
firms. This means that inventory turnover period significantly
and negatively affect return on asset. That is, as the inventory
Standardized
Coefficients
Beta
T
-.585
.402
.102
-.056
Sig.
1.663
.103
-4.380
3.474
.882
-.417
.000
.001
.382
.678
turnover period increases, profitability will decrease in the food

complex manufacturing firms operated in around Addis Ababa
and vice versa. This does make economic sense; the longer the
inventory is held, the more working capital is tied up, and firms
thus have less opportunity to invest this capital in profitable
projects. Therefore, the firms profitability can be enhanced by
speeding up the inventory conversion period. This result is
similar with the previous study of Tiringo Dinku (2013), Sharma
and Kumar (2011),Ponsian N.et.al. (2014) Shin and Soenen
(1998), Lazaridis & Tryfonidis (2006), Raheman and Nasr
(2007), Teruel and Solano (2007) while, it is contrary to the prior
study findings of Daniel M. and Ambrose J. (2013),Shahid Ali
(2011) and Mathuva (2010).
4.3.2. Regression Analysis of ARCP and ROA
Regression analysis has been done to analyze the effect of
receivable collection day on return on assets and the result is
shown in the following table. The data is tested for all
assumption of multiple regression models.
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827
Table 7: Regression analysis of ARCP and ROA

Model Summary
Model
R
Adjusted
Square
R Square
.469a
.220
a. Predictors: (Constant), FS, FGR, DR, ARCP
ANOVA
.151
R Std. Error of the

Estimate
.11781
Model
Sum of Squares
Df
Mean Square
Sig.
1 Regression
.176
.044
3.174
.022a
Residual
.625
45
.014
Total
.801
49
a. Predictors: (Constant), FS, FGR, DR, ARCP
Unstandardized Coefficients
Model
B
Std. Error
1 (Constant)
-.082
.425
ARCP
-.126
.110
DR
.192
.084
FGR
.018
.020
FS
.520
.453
a. Dependent Variable: ROA
The coefficient of determination in the model summary is
0.22. This suggests that 22 percent of variability in the return on
assets is explained by the changes in the independent variable
used in the model. Moreover, the overall significance of the
model in the ANOVA table, when measured by their respective F
statistics of 3.08 with P-values of 0.022, indicate that the model
is well fitted at 5 percent significance level. The result of the
regression analysis in the above table indicates that receivable
collection day negatively related to profitability but it is not
significant as the t-significant value is less than 2. This result is
not 100% in line with the hypothesis that there is strong negative
relationship between receivable collection day and profitability
of firms. However, receivable collection day negatively affects
return on asset but not significantly. This implies that managers
to some extent can increase return on assets by reducing
receivable collection day. As Mathuva (2010) explained that the
sooner customers make payment, the more cash the companies
get to reinvest in inventory, consequently they get higher sales
Coefficients
Standardized
Coefficients
Beta
T
-.193
-.182
-1.148
.307
2.288
.133
.901
.174
1.147
Sig.
.848
.257
.027
.373
.257
which leads to higher profit. This result is consistent with the

prior study findings of Gamze V. et.al (2012), Daniel M. and
Ambrose J. PhD (2013),Tirngo Dinku (2013), Shahid Ali
(2011),Sharma and Kumar (2011) ,Ponsian N.et.al. (2014), Shin
& Soenen (1998), Lazaridis & Tryfonidis (2006), Raheman &
Nasr (2007). However, positive relationship between account
receivable collection period and earnings before interest tax did
found by Ramachandran, A & Janakiraman, M (2009) as
explained in the literature review of the study of N.Venkata
Ramanan (2013). In addition, contradicting evidence found by
Sharma and Kumar (2011), who found positive relation between
ROA and accounts receivables.
4.3.3. Regression Analysis of DPO and ROA
In the same fashion, regression analysis has been
computed to investigate the effect of account payable period on
returns on assets. The data is tested for all the assumption of
multiple regression models.
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828
Table 8: Regression Analysis of DPO and ROA

Model Summary
Model
R
R Squared
Adjusted
Square
R Std. Error of the

Estimate
1
.570a
.324
.264
.10964
a. Predictors: (Constant), FS, FGR, DR, APD
ANOVAb
Model
Sum of Squares
df
Mean Square F
Sig.
1 Regression .260
4
.065
5.403 .001a
Residual
.541
45
.012
Total
.801
49
a. Predictors: (Constant), FS, FGR, DR,APD
Coefficients
Unstandardized
Standardized
Coefficients
Coefficients
Model
B
Std. Error Beta
T
Sig.
1 (Constant)
.488
.410
1.190
.240
APD
-.311
.107
.473
-2.911 .006
DR
.336
.092
.537
3.666
.001
FGR
.014
.018
.103
.800
.428
FS
.095
.438
.032
.216
.830
The value of R squared, which is the coefficient of relationship between accounts payable period and profitability
determination, in the model summary table is 0.324. This can be explained by the benefits of early payment discounts.
indicates that 32.4 percent of the changes in return on asset are Such findings were also supported by Tenda i Zawaira; Shahid
explained by the variables used in the model. On the other hand, Ali (2011), Shin and Soenen (1998), Lazaridis and Tryfonidis
the remaining 67.6 percent change in return on assets is caused (2006), Raheman and Nasr (2007). Nevertheless, some studies
by other factors that are not included in the model. The overall have found that firm profitability is significantly and positively
significance of the model in the ANOVA table when measured related to days payable outstanding. Such studies includeDaniel
by F statistics of 5.403 with P-values of 0.0000 suggests that the M. and Ambrose J. PhD (2013)Tirngo Dinku (2013) Sharma and
model is well fitted at the 1 percent significance level. The above Kumar (2011) Ponsian N .et al. (2014), Mathuva (2010).
table further manifest that Accounts payable period has a
significant negative impact on firms profitability as measured by 4.3.4. Regression Analysis of CCC and ROA
return on assets at the 1 percent significance level. A negative
Regression analysis has been run to analyze the effect of
relationship of ROA and the accounts payables deferral period, CCC, the comprehensive measures of working capital
contradicts the notion that the longer a firm delays its payments, management, on the return on assets. Tests for the assumptions
the higher the level of working capital it stores and uses with the of MRM have been done. Table 7 below; present the result of the
intent of increasing profitability. This difference may exist regressions analysis of cash conversion cycle and firms
because less profitable firms take longer to pay their obligations. profitability. As it is clearly shown in the table cash conversion
To the contrary of the hypothesis, the regression analysis showed cycle has significant negative relationship with return on assets at
that there is strong negative relationship between accounts the 1 percent significance level.
payable and profitability of firms. A negative significant
828
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829
Table 9: Regression Analysis of CCC and ROA

Model Summary
Model
R
Adjusted
Square
R Square
1
.642a
.412
.360
a. Predictors: (Constant), FS, FGR, DR, CCC
ANOVA
Mean
Model
Sum of Squares Df
Square
1 Regression
.330
4
.083
Residual
.471
45
.010
Total
.801
49
a. Predictors: (Constant), FS, FGR, DR, CCC
Coefficients
Unstandardized
Coefficients
Model
B
1 (Constant)
.543
CCC
-.125
DR
.192
FGR
.010
FS
-.155
R Std. Error of the

Estimate
.10225
F
7.898
Sig.
.000a
Standardized
Coefficients
Std. Error
.339
.031
.073
.017
.414
The value of R squared in the model summary table is

0.412. This indicates that 41.2 percent of the changes in return on
asset are explained by the variables used in the model. On the
other hand, the remaining 58.8 percent change in return on assets
is caused by other factors that are not included in the model. The
overall significance of the model when measured by F statistics
of 7.898 with P-values of 0.0000 in the ANOVA table, suggests
that the model is well fitted at the 1 percent significance level.
The value of standardized and un-standardized coefficient in the
table indicates that CCC has significant negative impact on the
profitability of the firm as measured by ROA. This means as the
CCC increase, profitability will decreases and vice versa. This
result is in agreement with the hypothesis which was explained in
the previous chapter, that there is a significant negative
relationship between cash conversion cycle and profitability of
firms. This confirms the notion that a decrease in the cash
conversion cycle will produce more profits for a firm. This
relationship has been confirmed in a number of studies, including
Daniel M. and Ambrose J. (2013); Gamze V. et al. (2012) Tirngo
Dinku (2013) Raheman and Nasr (2007) Shin and Soenen
(1998), Lazaridis and Tryfonidis (2006); Raheman and Nasr
(2007), Deloof (2003), Uyar (2009), Samiloglu and Demirgunes
(2008). Contrary to this finding Richard K.et al. (2013); Lyroudi
and Lazaridis (2000); Shahid Ali, Sharma and Kumar (2011)
Ponsian N.et al. (2014); Ng et al.(1999);.Gill et al. (2010found
positive relationship between CCC and profitable.
Beta
-.564
.307
.071
-.052
T
1.601
-4.060
2.639
.587
-.375
Sig.
.116
.000
.011
.560
.710
4.3.5. Regression Analysis of CR and ROA

To analyze effect of current ratio on return on assets,
regressions analysis has been performed. The model was tested
for the assumptions of MRM. While testing the assumptions,
multi co linearity problem were identified as the two independent
variables (current ratio and quick asset ratio) are perfectly
correlated with each other. However, variable inflation factor in
excess of 5 is considered as an indication of harmful multi co
linearity for a sample of 50 or less observation (Zikmund et al.,
2010). In this particular study, all the VIF are much less than 5
and treated as the multi co linearity effect is not harmful. See
Table 9.
The result of the regression analysis can therefore be interpreted
with a greater degree of confidence. The Durbin Watson statistics
was also used to test for the auto correlation. The Durbin Watson
value of 1.4 indicates that the data has no serial correlation or
auto correlation.
The value of R square in the model summary is 0.20,
which means that 20% of the variation in dependent variables
(ROA) is explained by variation in the independent value. Table
9 shows that current ratio has no significant impact on the
profitability of the firm as measured by ROA. Current ratio
coefficient is positive but very small and it means that if the
current assets are growing or current liabilities are decreasing
than the ratio is growing and then ROA is slightly growing, too.
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ISSN 2250-3153
This result is consistent with the previous study of Hina Agha

(2014); Amit et al. (2005), as explained in the literature review of
the study of Ehiedu, Victor Chukwunweike (2014); Richard K.et
al (2013); Lyroudi and Lazaridis (2000) and J. Aloy Niresh
(2012). Conversely, strong negative relationship between ROA
830
and liquidity ratio did found by Qasim Saleem and Ramiz Ur

Rehman (2011). In another hand significant positive correlation
between current ratio and profitability did found by Ehiedu,
Victor Chukwunweike (2014).
Table 10:Regression Analysis of CR and ROA

Model Summary
Model
R
R Square
Adjusted
Square
R Std. Error of Durbinthe Estimate Watson
1
.447a .200
.129
a. Predictors: (Constant), FS, FGR, CR, DR
.11933
1.428
Coefficientsa
Unstandardized
Coefficients
Model
Standardized
Coefficients
Std. Error Beta
1 (Constant)
-.498
.289
CR
.037
.097
DR
.235
.133
FGR
.029
.019
FS
.781
.406
a. Dependent
Variable:
ROA
.081
.376
.208
.262
Sig.
Collinearity
Statistics
Toleranc
e
VIF
-1.727
.384
1.774
1.529
1.921
.091
.702
.083
.133
.061
.398
.396
.963
.958
2.510
2.524
1.038
1.044
ANOVAb
Sum
of
Model
Squares
1
Regression
.160
Residual
.641
Total
.801
a. Predictors: (Constant), FS, FGR, CR, DR
4.3.6. Regression Analysis of QAR and ROA
To analyze the effect of quick assets ratio on return on
assets, regression analysis has been carried out. In the same
fashion, the fulfillment of all the assumption of LRM was
checked and found multi co linearity problem as the two
independent variables (current ratio and quick asset ratio) are
perfectly correlated with each other. However, in this particular
study, all the VIF are less than 5 and it is assumed that the multi
co linearity effect is not harmful. The result of the regression
analysis can therefore be interpreted with a greater degree of
confidence. The Durbin Watson statistics was also used to test
for the auto correlation. The Durbin Watson value of 1.3
Df
4
45
49
Mean
Square F
.040
2.809
.014
Sig.
.036a
indicates that the data has no serial correlation or auto

correlation.
The value of R square in this model is 0.19, which
indicates that 19 percent of the variation in the value of the return
on asset is explained by the model. This figure is also confirmed
by the analysis of variance table. The results of the regression
table suggest that quick asset ratio has no significant impact on
return on asset as the t significant value is less than 2. This result
is similar with the previous study of,Ehiedu,Victor
Chukwunweike (2014),Ehieu, Victor Chukwunweike (2014) and
Amit et al. (2005). Conversely, strong negative relationship
between ROA and liquidity ratio did found by Qasim Saleem and
Ramiz Ur Rehman (2011).
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831
Table 11: Regression Analysis of QAR and ROA

Model Summary
Model
R
Adjusted R Std. Error of DurbinSquare

the Estimate Watson
R Square
1
.506a
.256
.190
a. Predictors: (Constant), FS, QAR, FGR, DR
.11503
ANOVAb
Model
Sum of Squares Df
1 Regression
.205
4
Residual
.595
45
Total
.801
49
a. Predictors: (Constant), FS, QAR, FGR, DR
Coefficients
Mean Square
.051
.013
Standardiz
ed
Coefficient
Unstandardized Coefficients s
Model
B
1 (Constant)
-.546
QAR
.112
DR
.346
FGR
.031
FS
.810
Std. Error
.265
.059
.114
.018
.391
V. CONCLUSIONS AND RECCOMENDATIONS

5.1. Conclusions
This paper examined the impact of working capital
management on profitability of 10 food complex manufacturing
companies operating in and around Addis Ababa from 2009 to
2013. The results provided evidence that the Cash Conversion
Cycle, as a measure of working capital management, negatively
affects Return on Assets. A negative relationship between the
Receivables Collection Period, strong negative relation of
Inventory Conversion Period, Payment Deferral Period and
profitability was also found. This indicates that companies can
increase their profitability by shortening receivables, inventory
and payables periods. This finding is in line with many previous
studies, namely with those of Raheman and Nasr (2007) and
Deloof (2003).
In general, the results from the analysis suggest that food
complex manufacturing companies can rethink their corporate
financial management in order to boost their growth and
subsequently the creation of value for shareholders. Such
companies can direct their efforts towards their ownresources
and circumvent certain financial problems. By optimizing the
1.383
Beta
.341
.552
.225
.272
F
3.881
Sig.
.009a
Collinearity
Statistics
Toleranc
T
Sig. e
VIF
-2.058 .045
1.894 .065 .509
1.965
3.039 .004 .501
1.997
1.716 .093 .961
1.041
2.073 .044 .963
1.039
time span duringwhich working capital is tied up the company

can improve profitability. Moreover, working capital
management facilitatesother forms of financing because those
financiers who focus on balance sheet structuresare interested to
invest on companies with solid financial positions.Concerning
therelationship between company current asset ratio and quick
asset ratio on profitability as measured by return on assets, there
is no significant effect of increasing or decreasing the current
ratio and quick asset ratio on profitability.Therefore, the results
of the research indicate that through proper working capital
management, the company can increase its profitability.
5.2 Recommendations
Managers of food complex manufacturing companies in
Addis Ababa should continuously monitor their
inventory levels with a view to reducing the number of
days inventory are held in store before they are sold.
This will not only enhance their profitability positions
but also maximize returns to shareholders and firm
value in general.
Before struggling to secure funds from the traditional
sources of finance such as banks and other lending
institutions, companies should consider effective
831
ISSN 2250-3153
working capital management as an inward option for

source of financing
Effective working capital management can attract
financing channels because creditors, who look at and
appraise the structure of balance sheet to make
financing decision, will further invest in financially
healthy companies.
The policy implications of this finding is that financial
managers of food complex manufacturing companies
can improve the companys performance by reducing
cash conversion cycle. Moreover, reducing inventory
period, payable period and receivable period will
enhance companys profitability and consequently bring
positive effect on the firm financial position. Hence,
they should develop and implement effective,
interrelated and coordinated CCC management strategy,
Inventory management strategy, Account receivable
management strategy and Account payable management
strategy.
In addition, the inventory management strategy of the
company should focus on avoidance of over stocking of
inventory resulting efficient outcome of investment. It
has to make sure certain standards and levels which will
stop pilling up of inventory. Moreover, the companies
should engage in developing dependable and strong
relationship with suppliers through quick settlement of
outstanding liabilities
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AUTHORS
First Author Dr. Arega Seyoum, Assistant Professor of
Accounting and Finance, Jimma University
Second Author Tadele Tesfay, Lecturer of Accounting and
Finance, Jimma University
Third Author Tadesse Kassahun, Lecturer of Accounting and
Finance, Jimma University
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International Journal of Scientific and Research Publications, Volume 6, Issue 6, June 2016

Working Capital Management and Its Impact on

Assistant Professor of Accounting and Finance, Jimma University

Abstract- Working capital refers to the funds required to

1.1 Justification of the Study

and the appropriate level of working capital so as to minimize

working capital of their respective firms. These reported

second part is from Inventory Sale Period to the period of

H6. The Food Complex Manufacturing Companies profitability

II. LITERATURE REVIEW

efforts are allocated towards bringing on-optimal levels of

in that assessment of liquid assets for realizing the targeted

(2013) analyzed the effect of working capital management on

adopting regression and correlation analysis, as well as t-tests of

used as measures of working capital. The Cash Conversion Cycle

III. RESEARCH METHODOLOGY

quantitative. In this study the authors used quantitative data to

Table 1: Variables, Their Types, Abbreviations and Measurements

Accounts Receivables X 365/ Sales

Total Purchases/Average Accounts

Cash Conversion Cycle

3.5.4 Model Planning

IV. DATA ANALYSIS AND FINDINGS

4.1 Descriptive Statistics

Source: SPSS Output from Financial Statements of Sample Firms, 2009-2013

firm, is averaged to 75 days for the sampled firms. This indicates

respectively. The second control variable, firm growth rate

proportion as the second one. A value of 1 implies that all data

Table 3: Correlation Analysisof ARCP/DSO and ROA

Sig. (2-tailed) .028

Sig. (2-tailed) .054

Sig. (2-tailed) .000

*. Correlation is significant at the 0.05 level (2-tailed).

In the previous chapter of this study, it was hypostasized

at the 0.05 level. It indicates that the shorter account receivable

has a significant negative correlation with CCC. This means that

Table 4: Correlation Analysis of ITD/DIO and ROA

In the first chapter of this study, it was hypothesized that

showed that firm growth rate is also weakly and positively

Table 5: Correlation analysis of CA, QAR and ROA

linear regression analysis so as to overcome the problems of

4.3.1. Regression Analysis of ITD and ROA

Table 6: Regression analysis of ITD and ROA

R Std. Error of the

a. Predictors: (Constant), FS, FGR, DR, ITD

turnover period increases, profitability will decrease in the food

Table 7: Regression analysis of ARCP and ROA

R Std. Error of the

which leads to higher profit. This result is consistent with the

Table 8: Regression Analysis of DPO and ROA

R Std. Error of the

Table 9: Regression Analysis of CCC and ROA

R Std. Error of the

The value of R squared in the model summary table is

4.3.5. Regression Analysis of CR and ROA

This result is consistent with the previous study of Hina Agha

and liquidity ratio did found by Qasim Saleem and Ramiz Ur

Table 10:Regression Analysis of CR and ROA

R Std. Error of Durbinthe Estimate Watson