Working Capital Practices and Their Impacts on Firms' Financial Performances: Evidence from Sri Lankan Manufacturing Sector

Abstract

The efficient management of Working Capital is very vital for a business survival. This is premised on the fact having too much Working Capital signifies inefficiency, whereas too little Working Capital signifies that the survival of business is shaky. The purpose of this research is to investigate the impacts of the Working Capital Practices on financial performances of firms for 31 Public Limited Companies (PLCs) under the manufacturing sector listed in Colombo Stock Exchange (CSE) for the recent period of 2005-2009, so as to establish a relationship between Working Capital Practices and profitability; to find out the effects of different policies of Working Capital on profitability and to offer recommendations on possible ways of improving Working Capital practices. Literatures bordering on different areas of Working Capital practices were reviewed. Secondary data are used from sources such as annual reports of the PLCs under the manufacturing sector. The variables employed in this research were the current ratio as the independent variable, whereas the Earnings Before Interest and Tax as the dependent variable. Results strongly show that the PLCs have significantly different Working Capital Practices. The key variables as interpreted reinforce the validity of the result. The coefficient of correlation and Ordinary Least Square method of regression analysis provide a positive significant relationship between Working Capital Practices and firm's profitability. This study will help the policy makers and decision making authorities to better orient themselves towards considering and adopting efficient ways of managing Working Capital