Impact Of Working Capital Management On Profitability Of Wheat Flour Factories In Adama City

Abstract

The aim of this paper was to examine the impact of working capital management on profitability of wheat flour factories in case of Adama city. The study employed explanatory research design to assess the impact of working capital management on profitability of selected wheat Flour Factories. Judgmental sampling method was used to select six sample wheat flour factories. Balanced panel data was analyzed by using descriptive statistics and correlation analysis. Fixed effect model in the form of multiple regression analysis was applied to analyze the annual data generated from the annual statements of the selected flour factories and annual reports of Ministry of Finance and Economic Development covering a period of 2007 to 2014 G.C. In this study ROA was used as the measure of profitability performance. The paper includes average payment period, debt ratio , liquidity ,inventory conversion ratio and size of the firm as internal independent variables and food inflation rate and real GDP growth rate as external independent factors that determine the impact of working capital management on profitability of wheat flour manufacturing firms of Adama town. The study found that from the company specific variables size the firm, Liquidity and inventory conversion ratio have positive significant impact on profitability performance of wheat flour manufacturing firms. Average payment period and debt ratio of the firm have negative impact on profitability performance. From macroeconomic variables food inflation rate has a positive significant impact on profitability. Whereas, real GDP growth rate has a positive impact on profitability performance of wheat flour manufacturing’s in Adama town.The explanatory variables in the model are able to explain about 69% of the variation in the dependent variable(R-squared=0.69) and the overall model is jointly significant (F-statistic). The study also conducted post estimation residual diagnostic tests and found that the residuals are normally distributed, free from the problem of heteroskedasticity, autocorrelation and multicollinearity.The researcher recommend that managers of selected wheat flour factories operating in Adama city should concentrate on empact of working capital management on profitabilities in general.