THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE FINANCIAL PERFORMANCE

Abstract

Working capital management has an important role in the firm’s success or failure because of its effect on its performance and liquidity. The performance of manufacturing firms is paramount to achieving the national goal of industrialization by 2025 as manufacturing firms constitute the industrial sector largely. This study examines the effect of working capital management on the financial performance of five (5) listed manufacturing firms in Tanzania for a period of twelve (12) years (2008-2019). Data for the study were quantitatively retrieved from the published audited annual reports and accounts of the studied firms. The study employed descriptive statistics to describe the variable while the relationships among the variables were established via correlation. Variable Inflation Factor was used to determine the existence or otherwise of multicollinearity, while Ordinary Least Square regression was used to analyse the data. The study found that both accounts receivable days, accounts payable days and inventory days are positively related to the financial performance of the studied companies with significant test statistics. Therefore, it is concluded that the financial performance of selected manufacturing firms is influenced by working capital components and hence objective of the study has been achieved. The study, however, recommends that the management increase and/maintain their account receivable period and account payable period and invest more in inventory as all these will have an overall positive effect on the financial performance of listed manufacturing firms in Tanzania. It is further recommended that scholars and researchers conduct further studies on other factors apart from working capital components that significantly impact the profitability of Tanzania’s listed manufacturing firms to achieve industrial success and development