Abstract:
Efficient working capital management stands at the heart of corporate financial resilience, shaping
a firm’s ability to sustain operations, manage liquidity, and generate profits in a volatile emerging
market. This study examines the impact of working capital management on corporate profitability,
focusing specifically on capital goods companies listed on the Colombo Stock Exchange (CSE).
Utilizing panel data from 2015 to 2024, the study examines the impact of key working capital
components, namely inventory efficiency, receivable period, payable period, and the overall cash
conversion cycle on operating profit margin. The findings reveal cash conversion cycle has the
negative significant effect on profitability which suggests that with a shorter cash conversion cycle
tend to have higher operating profits as they efficiently manage their cash flow and reduce liquidity
constraints. A detailed decomposed method revealed that longer inventory holding periods
significantly reduce profitability, affirming global evidence that lean inventory enhances
performance. Conversely, extending payables has a positive impact on profit, indicating delaying
supplier payments within reasonable limits frees up cash for operations. Liquidity measured by
current ratio also shows a strong positive effect on profitability, highlighting the importance of
maintaining a sound short term financial position. Firm size is also positively impacting the profit,
highlighting the advantages of scale. However, receivable collection period, firm age and leverage
show no significant impact, suggesting that cost structures and internal operational efficiencies
may play a more critical role in driving returns. This study contributes to financial management
theory by reinforcing the trade off and resource-based views, emphasizing how efficient working
capital management serves both as a strategic resource and a balancing act between liquidity and
profitability. From a practical perspective, the results highlight the importance of vigilant working
capital management practices in capital intensive sectors, providing actional insights for financial
managers, investors and policymakers seeking to strengthen actional insights for financial
resilience and optimize resource allocation in emerging market firms.
