Working capital management efficiency and corporate profitability: Evidences from quoted firms in Nigeria

Michael Nwidobie Barine

Journal of Applied Finance & Banking, 2012, vol. 2, issue 2, 8

Abstract: Decisions relating to working capital involve managing relationships between a firm’s short-term assets and liabilities to ensure a firm is able to continue its operations, and have sufficient cash flows to satisfy both maturing short-term debts and upcoming operational expenses at minimal costs, increasing corporate profitability. Research results from compared working capital costs and returns of 22 quoted firms on the Nigerian Stock Exchange evidencing improved gross working capital positions using the difference between means show that costs of working capital exceed returns on working capital investments affecting their profitability. To redress this anomaly and improve net returns and corporate profitability from the use of working capital, quoted firms in Nigeria should optimize working capital investments to avoid over investment with its attendant inventory costs, lost returns on excess cash holdings and receivables; and under investment with its attendant stock-out, illiquidity and bad debts costs; determine its working capital policies ensuring it improves corporate profitability; appraise investments in working capital using capital investment models, determining ahead the viability of such investment; and ascertain and compare working capital costs and benefits to determine the existence of gains if any before investment in the proposed working capital.

Date: 2012
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