Abstract:
Decisions relating to working capital and short term financing are
referred to as working capital management. These involve managing the
relationship between a firm's short-term assets and its short-term liabilities.
The goal of working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both
maturing short-term debt and upcoming operational expenses. 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 management and profitability of
Colombo Stock Exchange (CSE) listed commercial banks in Sri Lanka. The
objective of the study is to identify the linkage between the working capital
management and profitability and its impact on profitability. The relation
between the working capital management and profitability is examined
using Pearson’s correlation analysis and the effects on profitability is found
out using the regression analysis by using a sample of 07 annual financial
statements of listed commercial banks in Sri Lankan covering period 2007-
2011. The working capital management consists of the variables of current
ratio (CR), loan to deposit ratio (LDR) and cash ratio (CSR) and the
profitability represents the net profit margin (NPM), return on assets (ROA)
and return on capital employed (ROCE). According to Pearson’s correlation
analysis, the dependent variables; NPM & ROA has a positive insignificant
relationship with all independent variables where as the dependent variable
ROCE has positive relationship with LDR & CSR and has a negative
relationship with CR. According to the Regression analysis, the CSR has
great impact on NPM and ROA than other components which are influenced
by other factors such as savings, interest rates other than current ratio and
Loan to Deposit ratio. Therefore, working capital management has a great
impact on the profitability with keeping an optimal level of liquidity of the
Sri Lankan listed commercial banks and the value of the managers of
commercial banks will have to increase value of the firm thereby controlling
the level of optimal working capital position.
