Impact of Working Capital Management on Financial Performance of Listed Materials Sector Companies in the Colombo Stock Exchange

Abstract

Effective working capital management (WCM) is critical for ensuring liquidity, operational efficiency, and sustained profitability, particularly in volatile economic environments. This study examines the relationship between working capital management and profitability in the materials sector companies listed on the Colombo Stock Exchange (CSE) amidst the challenges posed by the COVID-19 pandemic and Sri Lanka’s economic downturn. Utilizing a quantitative methodology, the research analyses data from 18 companies over the period 2020–2024, employing regression and correlation analysis to identify key patterns. The findings reveal that efficient management of accounts payable, accounts receivable, and inventory positively influences profitability. Specifically, a positive correlation exists between accounts payable days and gross operating profit (GOP), while the relationship between accounts payable and return on assets (ROA) is insignificant. Similarly, accounts receivable days exhibit a positive impact on profitability, suggesting that accommodating customers with extended credit periods can drive future sales. Effective inventory management also enhances profitability, emphasizing the need to maintain optimal stock levels. Key recommendations include adopting robust credit policies, leveraging integrated inventory and financial management systems, and optimizing the cash conversion cycle. Furthermore, the study highlights the necessity of aligning working capital strategies with broader financial goals to ensure resilience and growth in challenging economic conditions.