Impact of working capital management on the profitability of SMEs in Tanzania

Abstract

A well designed and implemented working capital management is expected to contribute positively to the SMEs profitability. The purpose  of this paper is to examine the relationship between working capital management and SMEs profitability and determine the  impact of working management on SMEs profitability. The dependent variable, gross operating profit is used as a measure of profitability  and the relation between average collection period, inventory conversion period, cash conversion cycle and average  payment period to the SMEs profitability is investigated for a sample of 38 Tanzanian SMEs, using annual financial statements data analysis for the period 2006 – 2011. This study employs Regression analysis to determine the impact of average collection period,  inventory conversion period, cash conversion cycle and average payment period on gross operating profit taking current ratio, size of the  firm, financial debt ratio as control variables. The results indicate that there is a significant negative linear relationship between  average collection period, inventory conversion period and cash conversion cycle on one hand and profitability on the other hand. There  is also negative correlation between average payment period and gross operating profit. The relationship between two control variables  viz; current ratio, financial debt ratio and gross operating profit indicate the expected negative relationship whereas the firm size indicate  unexpected negative relationship.