Working Capital Management and Profitability of the Firm - An Empirical Study on the FMCG Sector

Abstract

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The management of working capital is very important for the organisation. In the case of small organisations, its importance is very high. Current assets and current liabilities are the elements through which we can easily calculate working capital. In this study, debtors’ turnover ratio, inventory turnover ratio, creditors’ turnover ratio, and cash conversion cycle have been used to measure the influence of working capital management on profitability. In this study, the top three FMCG companies (Britannia, Dabur, and Godrej) have been selected for analysis. The data of the said companies have been analysed through descriptive statistics, ADF unit root test, and least square regression equation. DTR (debtors’ turnover ratio), ITR (inventory turnover ratio), and CTR (creditors’ turnover ratio) have a positive relationship with profitability; however, CCC (cash conversion cycle) is negatively associated with profitability. Based on the findings, we can say that efficient working capital management has an impact on firm’s profitability. We also recommend that there is need to review the debtors, creditors, and inventory periodically. Sales, purchase, and inventory departments are to work together as a united team so that optimum inventory level can be maintained and profitability can be increased.

Keywords: Working Capital Management, Profitability, Debtors, Creditors, Inventory Turnover Ratio, Return on Net-Worth, Cash Conversion Cycle

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