The Effects of Working Capital Management on a Firm's Performance: Evidence from Selected Food Manufacturing Companies in Lag Tafo Laga Dadi Town, Oromia Region

ABSTRACT:

The purpose of this study was to investigate the effects of working capital management on manufacturing firms’ performance: The evidence came from selected food manufacturing companies in Laga Tafo Laga Dadi town. The study employed a quantitative research approach to test the research hypothesis. A sample of seven (7) food manufacturing companies was purposively selected through purposive sampling, and the sample firms’ financial statements were collected for the period of five years from 2016 to 2020 and a total of 35 observations were made. In this study, the firm’s performance was measured by return on assets (ROA) and return on equity (ROE). Furthermore, the cash conversion cycle (CCC), average collection period (ACP), inventory conversion period (ICP), and average payment period (APP) were used as independent variables to measure working capital management efficiency. Moreover, some control variables such as current ratio (CR), quick ratio (QR), and debt ratio (DR) are used in this study. Data was analyzed on a quantitative basis using the descriptive, correlation, and regression analysis (ordinary least square) methods by the Statistical Package for Social Science (SPSS) version 25 software programs. Results show that working capital management has a statistically significant effect on the firms’ performance on average collection period (ACP), inventory conversion period (ICP), and cash conversion cycle (CCC). It means managers can enhance their performance by handling the cash conversion cycle (CCC) correctly and keeping the average collection period (ACP), and inventory conversion period (APP) at their possible optimum level. The study concluded that, paying suppliers longer, collecting payments from customers earlier and keeping products in stock for less time are all associated with an increase in the firm's performance. Therefore, managers can increase firms’ performance by improving the performance of the management of working capital components.

Keywords: Working Capital, Working Capital Management, Cash Conversion Cycle, Firm Performance, Liquidity.