Assessment of Working Capital Management On Profitability Of the Selected Listed Manufacturing Companies In Tanzania

Abstract

The objective of this study was to assess working capital management on the profitability of the selected listed manufacturing companies in Tanzania for a period of ten years from 2009 to 2018. In light of this objective the study adopts quantitative approaches to test research hypotheses, A sample of three (3) manufacturing companies listed on the Dar es Salaam Stock Exchange (DSE) was used for ten years (2008-2019) with a total of 30 observations. working capital management was examined as a cause of corporate survival and growth, to find out what makes up working capital, its theories, and its best combination and later provided suggestions on some measures to improve working capital management. Specific objectives were To examine the significance of working capital management that is Inventory turnover period, Accounts collection period, Accounts payable period and Current ratio on profitability. Panel data multiple regression models were employed to reveal the significance of the relationship between working capital management and profitability. Hausman test was employed in choosing between random-effects model and fixed effects model where random effect model was chosen at PValue of 0.9951 which is greater than 5% level of significance, therefore, the null was accepted, The study reveals that there is a significant negative relationship between working capital management and profitability, that is the return on assets (ROA) can be predicted by accounts payable period, accounts collection period, inventory turnover period, and Current ratio, hence profitability of the firm can be predicted by the working capital management given the regression model: ROA=(-35.16844 - 0.0406977ACP +0.055835APP + 4.615279CR + 8.281762ITP). The predicted model was assessed using the Shapiro Wilk test, Pesarans test for cross-sectional dependence, Wooldridge test for autocorrelation, and found to be a valid prediction model. The results showed the value of R² of 71.46% which is significant to explain our model. This means the variation in profitability (Return on Assets) can be affected by working capital management. The study recommends that the optimal allocation of working capital components should be prioritized to achieve company growth and profitability. Also recommended that there must be a proper inventory management system established to avoid overstocking inventory. The firm should look at those suppliers with a long credit collection period and If it doesn’t distract their relationship with debtors they can also find those customers who accept a short payment period.