Relationship between Working Capital Management and Profitability: A Study of Selected FMCG Companies in India

The purpose of this paper is to investigate the relationship between working capital management and firm profitability and to identify the variables that most affect profitability. Working capital management is considered to be a vital issue in financial management decision and it has its effect on liquidity as well as on profitability of the firm. Moreover, an optimal working capital management positively contributes in creating firm value. In this study, we have selected a sample of 10 FMCG (Fast Moving Consumer Goods) companies in India from CMIE database covering a period of 10 years from 2000–01 to 2009–10. Profitability has been measured in terms of return on assets (ROA).Cash conversion cycle (CCC), interest coverage ratio, age of inventory, age of creditors, age of debtors and debt-equity ratio have been used as explanatory variables. Pearson’s correlation and pooled ordinary least squares regression analysis are used in the study. The study results confirm that there is a strong negative relationship between variables of the working capital management and profitability of the firm. As the CCC increases,profitability of the firm decreases, and managers can create a positive value for the shareholders by reducing the CCC to a possible minimum level. There is also a stumpy negative relationship between debt used by the firm and its profitability.