The Impact of Working Capital Management on Profitability Evidence from Medium-Sized Enterprises in Lusaka, Zambia

Abstract

This study examined working capital management and its effects on profitability: Evidence from Medium-Sized Enterprises in Lusaka, Zambia. The aim of this study was to examine the effect of working capital management on the profitability of medium businesses in order to efficiently implement best practices. Its objectives were to investigate working capital management practices among medium-sized businesses and to evaluate the relationship between working capital management practices and profitability among medium-sized businesses. The findings of this study contribute to knowledge and understanding of the relationship between WCM and profitability in fast-growing companies in developing countries.  This study used causal/explanatory research; data were collected from 40 randomly selected employees using interviews and semi-structured questionnaires. The research methodology was based on the collection of both primary and secondary data, which was processed and analysed by the researcher. Linear regression was used to determine the relationships between working capital management and its components and the profitability of a medium-sized business. The key findings from the study indicate the following. About 97.5% of the medium-sized businesses had a working capital management practice in place; the most common working capital management practice in place in the medium-sized businesses was inventory management (37.5%) followed by cash conversion efficiency (22.5%); close to half (78.1%) of the medium-sized business reported that their working capital management practice in place has led to profit. It was discovered that there is a significant relationship between inventory management, operating cycle and profit when in place. The results indicate that the most prevalent working capital management practices used by companies are accounts receivables, cash conversion cycle, accounts payable and inventory turnover days and the study found a negative relationship between working capital management and profitability of the company. Though, it was discovered that there is a significant relationship between inventory management, operating cycle and profit when in place. The study recommends that: There is a need for medium-sized business to expand their knowledge and understanding of the various types of working capital management practices they know so that the chances of profit maximization are increased.