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Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year.
While excess amount of working capital results in the reduction of firm’s profitability, holding of inadequate amount of it leads to lower levels of the firm’s liquidity and stock outs resulting in difficulties in maintaining smooth operation (Krueger, 2002).
Business success, therefore, heavily depends on the ability of the financial managers to effectively manage accounts receivable, inventory and account payable (which are component of working capital) (Filbeck and Krueger, 2005).
ABSTRACT This study investigated the relationship between working capital management measured by account receivable period (ACRP), inventory period (INVP), cash conversion cycle (CCC) and sales Growth (SG) and profitability performance measured by returns on assets (ROA).
The study utilized secondary data obtained from the annual financial statements of Nigerian Manufacturing companies listed on the Nigerian Stock Exchange (NSE) for period 2008 – 2012.
Firm can reduce their financing costs and or increase the funds available for expansion of project by minimizing the amount of investment tied up in current assets (Home Van Wachowicz, 2004).
For this reasons, most of the financial manager’s time and efforts are spent in identifying the non-optimal levels of current assets and liabilities and bringing them to optimal levels (Lamberson, 1995). This importance is hinged on the fact that the amounts invested in working capital are often high in proportion to the total assets employed and therefore warrants a careful investigation (Smith, 1980).Working Capital therefore, should neither be more nor less, but just adequate for the smooth running of a firm.These results suggest that effective policies must be formulated for the individual components of working capital.Furthermore, efficient management and financing of working capital (current assets and liabilities) can increase the operating profitability of manufacturing firms.Deloot (2003: 573), states that “there is a significant relationship between gross operating income and number of days of account receivable, inventories and accounts payables”. The relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills. Pandey, (2005) classified working capital into gross and net concepts.He defined gross working capital as the firm’s investment in current assets.Shah and Sana (2006) concentrated on the oil and gas sector and estimated the relationship using small sample of 7 firms. Raheman and Masr (2007) analyzed profitability and Working Capital Management performance of 94 firms listed on Karachi Stock Exchange for the period 1999-2004 by using ordinary least square and generalized least square. “Working capital management in the paper industry”.