Effects of working capital management on the profitability of Croatian companies

Working capital management is an important component of the broader area of financial management because it affects both the liquidity and the profitability of the company. The purpose of this paper is to provide empirical evidence on the relationship between working capital management and profitability on the sample of Croatian public joint stock companies in the period 2000-2005. Working capital management is analyzed through the cash conversion cycle (CCC) - an aggregate measure of working capital efficiency, and also through its components - number of days accounts receivable, number of days accounts payable and number of days inventories as measures of trade credit and inventory policies. Applying correlation and regression analysis, the results of the research revealed that there is statistical significance between profitability and the cash conversion cycle, and between profitability and the component variables of the CCC, which is consistent with similar studies conducted so far. The findings confirm the important role of working capital management in profit creation of the company.