Abstract:
Working capital management has maintained its significance in business through supporting companies in handling their day to day activities. But such support depends on how management has a proper insight of its relationship to profitability of the company so as to end up generating rational decisions. The study at hand enthralled attention on assessing as to whether working capital management had an impact on profitability, taking into account listed commercial service companies in East Africa community stock exchange markets. Specifically, the objectives of the study were to examine the relationship between average collection period and profitability, to examine the relationship between average payment period and profitability, to examine the relationship between cash conversion cycle and profitability and lastly to examine the relationship between inventories conversion period and profitability.
In the process of accomplishing the study, a longitudinal survey research design was applied. Whereby, secondary data were gathered from audited financial statements. The period undertaken was 10 years, with a range from 2008 to 2017. The study analysis was reinforced by SPSS in drawing out descriptive statistics, correlation analysis, and multiple regression analysis. The dependent variable of the study was Gross profit (GP) while independent variables were the Average collection period (ACP), Average payable period (APP), Cash conversion cycle (CCC) and Inventory conversion period (ICP). In making sure the study provided meaningful results, the control variables Current ratio (CR) and Firm size (FS) were involved.
Based on the analysis carried, it was concluded that both APP and ICP had a significant positive relationship to profitability of commercial service companies. While ACP and CCC, their relationship to profitability was insignificant. It was recommended that aggressive financing policy to be applied by commercial service companies so as to tighten their working capital components. Moreover, a separate study should be carried in respect of ICP, as to why a positive relationship was obtained, which was not as expected by normal working capital management theories and practices.
