How Working Capital Management affects Profitability in Edible Oil Industry? – Case of Listed Companies on BSE

Abstract

Managing working capital is considered as one of most critical and
recurring decisions to be taken by finance manager as compared to
other like financing or investment which are non-recurring. A
company can improve its shareholders' wealth by allocating optimal
resources towards its working capital needs. The study is aimed to
anal yze how management of working capital determines
profitability of firm. To serve the purpose, balanced panel data of 12
edible oil companies listed on BSE has been taken. The timeframe is
7 years starting from 2009-10 to 2015-16. Profitability is measured
by Return on Asset (ROA). Debtors Collection Period (CP), Turnover
Period of Inventory (ITP), Creditors Payment Period (PP) and cash
cycle (CCC) are taken as representative of working capital policy of
the company. Besides, Growth (G), Firm Size (Sz), Leverage (Lev)
and Ratio of current assets and current liabilities (CR) are considered
as control variables. To analyze the data statistical tools like Pearson
correlation and multiple regression have been used. The study reveals
that CP and ROA are negatively related whereas ITP, PP and CCC
portrays positive relationship with ROA. But these relationships are
not statistically significant as many other variables affects
profitability of firms. Ratio of current assets and current liabilities
and growth are having significant positive relation with profitability
whereas leverage shows significant negative relation with profits.