Effects of working capital management on profitability : evidence from Croatia

Working capital management includes managing the relations between firm’s short-term assets and liabilities in order to obtain the optimum level of both. The objective of this paper is to empirically investigate the impact of working capital management on the profitability on the sample of trading firms, because the trade industry is the most common type of activity in Croatia. The effects of different variables of working capital management including the average collection period, inventory turnover in days, average payment period and cash gap are researched. Variables of return on assets (ROA) and return on equity (ROE) are employed as measures of company's profitability. The variables of debt ratio, sales growth, size of the company and working capital to total assets ratio have also been used for controlling the working capital management policy. Our findings are not consistent with the view of the traditional working capital theory and previous research results. Obtained results show that only the number of days accounts receivable is statistically significant correlated with the return on equity while statistically significant relation between other variables examined have not been found. Finally, statistically significant difference in working capital management policy between wholesale and retail trading companies is found.