Working Capital Management, Cost Structure and Profitability of Manufacturing Firms in Sri Lanka

Abstract

Working Capital Management has its effect on liquidity as well as on profitability of the firm. Working capital management is one of the essential determinants of firms’ market value because it directly affects the profitability. This study investigates the relationship between working capital, cost structure and profitability. The objective of the study is to identify the relationship between the Working Capital, Cost Structure and Profitability. The research question is arisen, “To what extent the profitability affects the working capital?” and the cost structure affects the profitability? For this purpose 13 listed Manufacturing firms listed on Colombo Stock Exchange and 65 year observations have been selected for a period of 5 years from 2005-2009. The relationship among working capital, cost structure and profitability is investigated through the correlation and regression analysis by using Statistical Package for Social Science (SPSS). Working capital includes the debt turnover, inventory turnover, creditors’ payment in days, cost structure reported by administrative, selling and finance cost and the profitability represents the Return on Capital Employed (ROCE). The finding of the study focused on the significant relationship between Inventory turnover and Profitability and the finance cost influences on profitability than other costs.

Keywords: Working Capital, Cost Structure and Profitability