ISSN 2308-8559 e-ISSN 2415-8224

https://doi.org/10.62763/ef/1.2025.93

Volume 15, No. 1, 2025

93-102

  • Read article

    • Linking working capital efficiency to profit maximisation: A conceptual analysis

    Iqbal Md Mazharul Islam

    Received 04.11.2024, Revised 02.02.2025, Accepted 19.02.2025

    Abstract

    The survival of a company is highly dependent on the management of its working capital. Effective working capital management can lead to greater profitability. Insufficient working capital or liquidity shortages can severely hinder profitability and operational sustainability. The primary objective of this research was to examine the relationship between efficient working capital management and profitability. To explore this connection, inventory, the cash conversion cycle, accounts receivable, and accounts payable were used as key indicators of working capital management. Profitability was evaluated using return on equity and return on assets, supported by a conceptual framework based on secondary data. The findings revealed a strong correlation between efficient working capital management and enhanced profitability. Effective management of cash inflows and outflows reduced financing costs and enhanced liquidity, leading to higher returns on equity and assets for companies with shorter cash conversion cycles. Companies with efficient accounts receivable processes significantly reduced their day’s sales outstanding, improving cash flow and operational flexibility. Maintaining optimal inventory levels enabled companies to increase turnover rates, improve profit margins, and lower inventory holding costs. Moreover, efficient accounts payable management, particularly through negotiated credit terms with suppliers, optimised payment schedules without damaging supplier relationships, further enhancing profitability. The results highlighted that businesses can achieve long-term profitability by aligning their working capital components with operational goals. Companies that actively manage their cash conversion cycle are better equipped to meet financial obligations without excessive debt, enabling them to invest in expansion opportunities. From a practical perspective, this study underscored the strategic importance of working capital management in driving profitability. Businesses can improve financial stability and strengthen their competitive position by adopting data-driven approaches to optimise cash flow, inventory, and credit management. These insights offer valuable guidance for managers aiming to enhance their company’s operational resilience and financial performance

    Keywords:

    firm performance; inventory management; liquidity management; profitability; working capital management

    Suggested citation
    Islam, I.M.M. (2025). Linking working capital efficiency to profit maximisation: A conceptual analysis. Economic Forum, 15(1), 93-102. https://doi.org/10.62763/ef/1.2025.93
    622 Views

    References

    [1] Abdeljawad, I., & Dwaikat, L. (2021). Working capital management and firm performance: The case of industrial corporations in Palestine. In The challenges of the Palestinian economy in the face of political pressure and the repercussions of the corona crisis. The Third conference of the faculty of economics and social sciences (pp. 1-14). Nablus: An-Najah National University.

    [2] Abebe, M.G. (2022). The effect of asset and liability management on the financial performance of microfinance institutions: Evidence from the sub-Saharan African region. Future Business Journal, 8, article number 29. doi: 10.1186/s43093-022-00134-8.

    [3] Agbi, E.S., & Yusuf, I. (2017). Short-term asset-mix accounting (STAMA) and profitability of manufacturing conglomerates in Nigeria. Journal of Management and Social Sciences, 6(1), 198-212. doi: 10.53704/jmss.v6i1.123.

    [4] Akindele, J.A., & Odusina, A.O. (2015). Working capital management and firm profitability: Evidence from Nigerian quoted companies. Research Journal of Finance and Accounting, 6(7), 148-153.

    [5] Almazari, A.A. (2014). The relationship between working capital management and profitability: Evidence from Saudi cement companies. British Journal of Economics, Management & Trade, 4(1), 146-157. doi: 10.9734/BJEMT/2014/5427.

    [6] Alsulayhim, N.A. (2019). The relationship between working capital management and profitability. International Business Research, 12(8), 142-152. doi: 10.5539/ibr.v12n8p142.

    [7] Aregbeyen, O. (2013). The effects of working capital management on the profitability of Nigerian manufacturing firms. Journal of Business Economics and Management, 14(3), 520-534.

    [8] Blatter, M., & Fuster, A. (2022). Scale effects on efficiency and profitability in the Swiss banking sector. Swiss Journal of Economics and Statistics, 158, article number 12. doi: 10.1186/s41937-022-00091-7.

    [9] Boisjoly, R.P., Conine, T.E., & McDonald, M.B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1-8. doi: 10.1016/j.jbusres.2019.09.025.

    [10] Chemis, K.P. (2015). Effects of working capital management on profitability of sugar manufacturing firms in Kenya. (Master’s thesis, School of Business, University of Nairobi, Nairobi, Kenia).

    [11] Chong, Y.L. (2016). The interaction effects of working capital management on the relationship between key determinants of working capital and firm performance. (Thesis, Universiti Utara Malaysia, Kedah Malaysia).

    [12] Dinku, T. (2013). Impact of working capital management on profitability of micro and small enterprises in Ethiopia: The case of Bahir Dar City administration. International Journal of Accounting and Taxation, 1(1), 15-24.

    [13] Enad, O.M.A., & Gerinda, S.M.A. (2022). Enhancing financial performance of the banks: The role of customer response and operations management. Journal of Innovation and Entrepreneurship, 11, article number 28. doi: 10.1186/s13731-022-00211-w.

    [14] Eshetu, G. (2020). The effect of working capital management on the performance of private commercial banks in Ethiopia. (Master’s thesis, Addis Ababa University, Addis Ababa, Ethiopia).

    [15] Fatimatuzzahra, M., & Kusumastuti, R. (2016). The determinant of working capital management of manufacturing companies. MIMBAR: Journal of Social and Development, 32(2), 276-281. doi: 10.29313/mimbar.v32i2.1872.

    [16] Fijabi, K., Ogunlalu, A.E., & Modupeola, A.M. (2023). Working capital management and performance metrics of quoted brewery firms in Nigeria. Open Journal of Social Sciences, 11(10), 442-468. doi: 10.4236/jss.2023.1110025.

    [17] García-Teruel, P.J., & Martínez-Solano, P. (2010). Determinants of trade credit: A comparative study of European SMEs. International Small Business Journal, 28(3), 215-233. doi: 10.1177/0266242609360603.

    [18] Gill, A. (2011). Factors that influence working capital requirements in Canada. Economics and Finance Review, 1(3), 30-40.

    [19] Habib, A.M. (2022). Does the efficiency of working capital management and environmental, social, and governance performance affect a firm’s value? Evidence from the United States. Financial Markets, Institutions and Risks, 6(3), 18-25. doi: 10.21272/fmir.6(3).18-25.2022.

    [20] Hardiansyah, M.D., & Trisnaningsih, S. (2025). Analysis of audit procedures on receivables at BHK foundation by KAP Djoko Soerjadi. International Journal Business, Management and Innovation Review, 2(1), 01-17. doi: 10.62951/ijbmir.v2i3.32.

    [21] Hossain, T. (2020). The effect of working capital management on profitability: A study on manufacturing companies in Bangladesh. International Journal of Research in Business and Social Science, 9(6), 114-122. doi: 10.20525/ijrbs.v9i6.872.

    [22] Ikechukwu, O.I., & Nwakaego, D.A. (2015). The effect of accounts payable ratio on the financial performance of food and beverages manufacturing companies in Nigeria. Journal of Research in Business and Management, 3(9), 15-21.  

    [23] Isaksson, O.H.D., & Seifert, R.W. (2014). Inventory leanness and the financial performance of firms. Production Planning & Control, 25(12), 999-1014. doi: 10.1080/09537287.2013.797123.

    [24] Ishikawa, T., Gemba, K., & Oda, T. (2025). The influence of cash conversion cycle on profitability: A quantitative analysis of Japanese software firms. Access Journal, 6(1), 84-102. doi: 10.46656/access.2025.6.1(5).

    [25] Islam, I.M., Al-Masum, A., & Azad, S. (2022). Nexus between working capital management and firm profitability: Evidence from the cement industry in Bangladesh. EBAUB Journal, 4, 96-104. doi: 10.5281/zenodo.10604146.

    [26] Jindal, D., Jain, S., & Vartika. (2017). Effect of receivables management on profitability: A study of commercial vehicle industry in India. International Journal of Applied Science and Management, 2(2), 246-255.

    [27] Khalid, R., Saif, T., Gondal, A. R., & Sarfraz, H. (2018). Working capital management and profitability. Mediterranean Journal of Basic and Applied Sciences (MJBAS), 2(2), 117-125.

    [28] Kurawa, J.M., & Abubakar, A. (2014). An evaluation of the impact of liquidity on the profitability of Nigerian banks. Researchjournali’s Journal of Management, 2(7), 1-10.  

    [29] Kušter, D. (2022). The impact of working capital management on profitability: Evidence from Serbian listed manufacturing companies. Economic Themes, 60(1), 117-131. doi: 10.2478/ethemes-2022-0007.

    [30] Kusuma, H., & Bachtiar, A.D. (2018). Working capital management and corporate performance: Evidence from Indonesia. Central European Management Journal, 26(2), 76-88. doi: 10.7206/jmba.ce.2450-7814.229.

    [31] Makarchuk, І., Perchuk, O., & Korkach, I. (2022). Liquidity: The genesis of the concept, structure and its role in the financial relations of economic entities. University Economic Bulletin, 17(1), 113-122. doi: 10.31470/2306-546X-2022-52-113-122.

    [32] Mathuva, D.M. (2010). The influence of working capital management components on corporate profitability. A survey on Kenyan listed firms. Research Journal of Business Management, 4(1), 1-11. doi: 10.3923/rjbm.2010.1.11.

    [33] Mittal, S., Mittal, R.K., Singh, G., & Gupta, S. (2014). Inventory management in fertiliser industry of India: An empirical analysis. Asia-Pacific Journal of Management Research and Innovation, 10(4), 291-303. doi: 10.1177/2319510X14553699.

    [34] Mohammad, M.M., & Elaheh, M. (2014). The effect of business process re-engineering factors on organizational agility using path analysis: Case study of ports & maritime organization in Iran. Asian Economic and Financial Review, 4(12), 1849-1864.

    [35] Nastiti, P.K.Y., Atahau, A.D.R., & Supramono, S. (2019). Working capital management and its influence on profitability and sustainable growth. Business: Theory and Practice, 20, 61-68. doi: 10.3846/btp.2019.06.

    [36] Nguyen, A.H., Pham, H.T., & Nguyen, H.T. (2020). Impact of working capital management on firm’s profitability: Empirical evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 7(3), 115-125. doi: 10.13106/jafeb.2020.vol7.no3.115.

    [37] Nzitunga, J.B. (2019). Impact of working capital management practices on profitability in State-Owned Enterprises (SOEs). Management, 9(2), 37-47. doi: 10.5923/j.mm.20190902.01.

    [38] Ojeani, N.R. (2014). Working capital management and profitability of listed pharmaceutical firms in Nigeria. (Master’s thesis, Ahmadu Bello University, Kaduna, Nigeria).

    [39] Ojha, P.R. (2019). Working capital management and its impact on the profitability of Pukar International Co. Ltd. NCC Journal, 4(1), 141-147. doi: 10.3126/nccj.v4i1.24747.

    [40] Olaoye, F.O., Adekanbi, J.A., & Oluwadare, O.E. (2019). Working capital management and firms’ profitability: Evidence from quoted firms on the Nigerian stock exchange. Intelligent Information Management, 11(3), 43-60. doi: 10.4236/iim.2019.113005.

    [41] Pandey, I.M. (2015). Financial management. New Delhi: Vikas Publishing.

    [42] Pham, K.X., Nguyen, Q.N., & Nguyen, C.V. (2020). Effect of working capital management on the profitability of steel companies on Vietnam stock exchanges. The Journal of Asian Finance, Economics and Business, 7(10), 741-750. doi: 10.13106/jafeb.2020.vol7.n10.741.

    [43] Ponsian, N., Chrispina, K., Tago, G., & Mkiibi, H. (2014). The effect of working capital management on profitability. International Journal of Economics, Finance and Management Sciences, 2(6), 347-355. doi: 10.11648/j.ijefm.20140206.17.

    [44] Prempeh, K.B., & Peprah-Amankona, G. (2020). Does working capital management affect profitability of Ghanaian manufacturing firms? Zagreb International Review of Economics & Business, 23(1), 1-18. doi: 10.2478/zireb-2020-0001.

    [45] Rey-Ares, L., Fernández-López, S., & Rodeiro-Pazos, D. (2021). Impact of working capital management on profitability for Spanish fish canning companies. Marine Policy, 130, article number 104583. doi: 10.1016/j.marpol.2021.104583.

    [46] Salman, A.Y., Folajin, O.O., & Oriowo, A.O. (2014). Working capital management and profitability: A study of selected listed manufacturing companies in Nigerian stock exchange. International Journal of Academic Research in Business and Social Sciences, 4(8), 287-295. doi: 10.6007/IJARBSS/v4-i8/1097.

    [47] Şamiloğlu, F., & Akgün, A.I. (2016). The relationship between working capital management and profitability: Evidence from Turkey. Business and Economics Research Journal, 7(2), 1-14. doi: 10.20409/berj.2016217492.

    [48] Sastararuji, D., Hoonsopon, D., Pitchayadol, P., & Chiwamit, P. (2022). Cloud accounting adoption in Thai SMEs amid the COVID-19 pandemic: An explanatory case study. Journal of Innovation and Entrepreneurship, 11, article number 43. doi: 10.1186/s13731-022-00234-3.

    [49] Sensini, L. (2020). Working capital management and performance: Evidence from Italian SME’s. International Journal of Business Management and Economic Research (IJBMER), 11(2), 1749-1755.

    [50] Shah, B., Gujar, M.A., & Sohu, N.U. (2018). The impact of working capital management on profitability: Case study of pharmaceutical and chemical firms listed on Karachi stock exchange. International Journal of Economics, Commerce and Management, 6(3), 200-220.

    [51] Shahid, H., & Saad, A. (2016). The effects of working capital management on profitability of firms: Evidence from agriculture and food industry of Kingdom of Saudi Arabia. Journal of Emerging Issues in Economics, Finance & Banking, 1(1), 1684-1698.

    [52] Sharma, A.K., & Kumar, S. (2011). Effect of working capital management on firm profitability: Empirical evidence from India. Global Business Review, 12(1), 159-173. doi: 10.1177/097215091001200110.

    [53] Sharma, M., Dhakal, S.C., Adhikari, R.K., & Tiwari, U. (2021). Profitability, productivity and resource use efficiency of banana production in Hetauda-Dumkibas road corridor, Nepal. Cogent Food & Agriculture, 7(1), article number 1917134. doi: 10.1080/23311932.2021.1917134.

    [54] Singhania, M., & Mehta, P. (2017). Working capital management and firms’ profitability: Evidence from emerging Asian countries. South Asian Journal of Business Studies, 6(1), 80-97. doi: 10.1108/SAJBS-09-2015-0060.

    [55] Siraj, M., Mubeen, M., & Sarwat, S. (2019). Working capital management and firm performance: Evidence from non-financial firms in Pakistan. Asian Journal of Empirical Research, 9(2), 27-37. doi: 10.18488/journal.1007/2019.9.2/1007.2.27.37.

    [56] Sitienei, E., & Memba, F. (2016). The effect of inventory management on profitability of cement manufacturing companies in Kenya: A case study of listed cement manufacturing companies in Kenya. International Journal of Management and Commerce Innovations, 3(2), 111-119.

    [57] Tauringana, V., & Afrifa, G. (2013). The relative importance of working capital management and its components to SMEs profitability. Journal of Small Business and Enterprise Development, 20(3).

    [58] Tran, H., Abbott, M., & Yap, C.J. (2017). How does working capital management affect the profitability of Vietnamese small- and medium-sized enterprises? Journal of Small Business and Enterprise Development, 24(1), 2-11. doi: 10.1108/JSBED-05-2016-0070.

    [59] Uguru, L.C., Chukwu, U.C., & Elom, J.O. (2018). Effect of working capital management on the profitability of brewery firm in Nigeria. Journal of Economics and Finance, 9, 9-20.

    [60] Ukaegbu, B. (2014). The significance of working capital management in determining firm profitability: Evidence from developing economies in Africa. Research in International Business and Finance, 31, 1-16. doi: 10.1016/j.ribaf.2013.11.005.

    [61] Umar, I.A., Hussaini, I., & Halad, A.Y. (2023). Working capital management and firm profitability: An empirical review. Management Journal for Advanced Research, 3(3), 10-18. doi: 10.54741/mjar.3.3.2.

    en