The effect of working capital management on the profitability of selected manufacturing firms listed on the Ghana stock exchange between 2016 to 2021

Abstract

Working capital management (WCM) is a crucial component of financial analysis in organizations. This study investigates how working capital management (measured by accounts receivable management, account payable management, inventory management and cash management) impacts the profitability of industrial enterprises listed in Ghana. Several studies have been conducted in this country regarding the effect of working capital on profitability, and the findings point to different conclusions. Therefore, it is necessary to conduct more studies to obtain a clearer understanding of this situation. This study utilized a quantitative causal research design, focusing on a balanced panel of 15 Ghanaian manufacturing firms listed on the Ghanaian Stock Exchange from 2016 to 2021. The findings of the study show that accounts payable management, accounts receivable management, and inventory management have higher means than cash management. ROA has a negative mean of 0.35%. Further, the results show a significant and positive relationship between the following working capital management elements: accounts payable management, inventory management, and cash conversion cycle on one hand, and return on assets on the other hand. However, account receivable management and return on assets were not significantly correlated. Regression analysis showed that working capital management had a significant effect on ROA, with an r2 of 36.5%. Further, the findings indicate that firms’ years of existence do not seem to moderate the relationship between working capital management and profitability. The recommendations focused on boosting profitability through the effective management of working capital to reduce short-term borrowing.