Advanced International Journal for Research

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A Study on the Impact of Working Capital Management on Profitability

Author(s) Mr. Sai Kiran Rao S S, Dr. Karthik J P
Country India
Abstract ABSTRACT The study titled “A Study on the Impact of Working Capital Management on Profitability” focuses on analysing how effectively managing short-term assets and liabilities influences the financial performance of firms. Working capital management is a critical aspect of financial management that ensures the smooth functioning of day-to-day business operations. It involves maintaining an optimal balance between liquidity and profitability by efficiently managing components such as cash, inventory, accounts receivable, and accounts payable. The study emphasizes that improper management of working capital can lead to financial distress, whereas efficient management enhances profitability and operational efficiency. The main objective of this research is to examine the relationship between working capital management and profitability indicators such as Return on Assets (ROA), Return on Equity (ROE), and Net Profit Margin. The study also aims to evaluate the efficiency of various working capital components, including inventory turnover, receivables collection period, and payables deferral period, and their effect on the overall performance of firms. In addition, the study attempts to determine the optimal level of working capital that firms should maintain to ensure both liquidity and profitability. This research is based on a quantitative approach, using secondary data collected from the financial statements of selected companies over a defined period. The key variables analyzed in this study include the cash conversion cycle (CCC), which measures the time taken by a firm to convert its investments in inventory and receivables into cash flows. A shorter cash conversion cycle indicates efficient working capital management and is generally associated with higher profitability. The study uses statistical tools such as correlation and regression analysis to identify the strength and direction of the relationship between working capital management variables and profitability. The findings of the study reveal that there is a significant relationship between working capital management and profitability. Efficient management of inventory and receivables has a positive impact on profitability, as it reduces holding and opportunity costs while improving cash flows. On the other hand, excessive investment in working capital leads to idle resources and negatively affects profitability. The study also finds that managing payables effectively, without harming supplier relationships, can enhance liquidity and improve financial performance. Furthermore, the study highlights the importance of maintaining a balance between liquidity and profitability. Firms that maintain excessive liquidity may experience lower returns due to underutilized resources, while firms with insufficient liquidity may face difficulties in meeting short-term obligations.
Published In Volume 7, Issue 3, May-June 2026
Published On 2026-05-12
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E-ISSN 3048-7641
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