The Effect of Working Capital Management on Firm Financial Performance:

Abstract

The study assessed the impact of working capital on the profitability of manufacturing companies listed on Tanzania's DSE. Cash conversion cycle, working capital turnover, debt ratio, cash ratio, and inventory turnover were the independent variables. Return on sales was taken as a measure of profitability and was considered a dependent variable for the 12-year period between 2010 and 2021. Agency theory, pecking order theory, and transaction cost theory are the theories that served as the study's guiding principles. A random effect regression model was used to undertake statistical testing of parameter estimations. The research design incorporated both case study design and quantitative approaches. The study's participants were chosen through purposive sampling from among all manufacturing listed enterprises, which constituted the study's target population. The secondary data, which was taken from the annual reports of the companies under study, was analysed using panel data. Stata 15 was used to analyse the data. The findings indicate that cash conversion cycle had an insignificant positive impact on the profitability of the manufacturing firms listed at DSE; working capital turnover had an insignificant positive impact on the profitability of the manufacturing firms listed at DSE; debt had a negative significant impact on the firm's profitability; cash ratio had a positive significant impact on the firm's profitability; and inventory turnover had a significant impact on the profitability of the manufacturing firms listed at DSE. The study concludes that firms should have a cash ratio that has a high impact on profitability so as to maintain profitability. The study recommends that firms maintain optimal debt levels to avoid insolvency risk. Further studies can be conducted for the unlisted manufacturing firms in Tanzania