A Critical Evaluation of Working Capital Management Strategies and Profitability

Abstract

The well-implemented working capital management strategies enhance profitability through various transmission mechanisms. On these theoretical grounds, this study analyses the association between working capital strategies and profitability in selected public limited companies in Trinidad and Tobago. We apply widely accepted gauges of working capital management strategies, including the average inventory turnover period, average receivables collection period, average payment period, and cash conversion cycle as the working capital management strategies. Applying statistical and non-statistical approaches, we perform aggregate and disaggregate analyses of the working capital management strategies. The results of the disaggregate analysis reveal mixed, and in one case, we could not find evidence of an association between working capital management strategies and profitability. However, the aggregate analysis shows a strong negative and significant association between working capital management and profitability. We further expand this analysis to the individual components of working capital. These results indicate a robust positive relationship between all individual working capital components and profitability, except for the average receivables collection period, where interestingly, there was a statistically weak association.