The impact of working capital management on profitability – An empirical analysis of fertilizer industry in India

Adequate working capital management is essential for successful running and growth of business. It aims at proper management of current assets along with identifying sources of financing them as well as ensuring liquidity and profitability trade-off. It also deeply affects the profitability of the firm. The present study focuses on empirically analyzing the impact of working capital management on profitability in fertilizer industry. For this purpose a sample of 10 fertilizer companies for a period of 10 years from 2001–2002 to 2010–11 was analyzed. The effect of different variables of working capital management viz. cash conversion cycle, average collection period, average inventory conversion period, average payables period, current ratio along with other variables such as size of firm, fixed financial assets ratio, financial debt ratio and growth of firm was studied. The results provided strong negative relationship of average inventory conversion period, average payables period, current ratio and financial debt ratio with profitability of the company. However, significant positive relationship between size of the firm and profitability came up during the study. Previous studies deduced strong negative relationship between cash conversion cycle and debt collection period with profitability but insignificant positive relationship was found in the current study. On the whole it was deduced that efficient working capital management helps in creating shareholders value and improving firm's performance.