Impact of Working Capital Management on Profitability of Micro and Small Enterprises in Ethiopia: The Case of Bahir Dar City Administration

Abstract

Working capital management is one of the most important and challenging aspect of the overall financial management that needs a series consideration in firm’s financial decision. Efficient management of WC is a fundamental part of the overall corporate strategy in creating value. In light of this the purpose of this study is to examine impact of working capital management on profitability of micro and small enterprises with special reference to Bahir Dar city administration using a sample of 67 micro and small enterprises. Data for this study was collected from the financial statements of the enterprises listed on Bahir Dar city micro and small enterprises agency for the year 2003. Variables entered in this study were number of days accounts receivable, number of days inventory, number of day’s accounts payable, cash conversion cycle controlling for CATA ratio, CLTA ratio GEAR and enterprise size. This study applied Pearson’s correlation and OLS regression with a cross sectional analysis. The result shows that there is a strong positive relationship between number of days accounts payable and enterprises profitability. However, number of days accounts receivable, number of days inventory and cash conversion cycle have a significant negative impact on profitability. By shortening cash conversion cycle an enterprise’s profitability be increased.

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