Abstract:
A Working capital management ensures a company has sufficient cash flow in order to meet its
short-term debt obligations and operating expenses. The needs of efficient working capital
management must be considered in relation to other aspects of the firms’ financial and non-financial
performance. An efficient Working Capital Management is expected to contribute to the high
financial performance. The main purpose of this study was to investigate the working capital
management and its impact on firms’ financial performance. The efficiency of working capital
management was investigated through the cash conversion cycle. The research problem focused
here ―What extent the working capital management influences on financial performance of the
trading firms?‖ A strong significant relationship between working capital management and
profitability has been identified in previous research. It was assumed that ―The efficient working
capital management has strong impact on financial performance‖. The dependent variable Return on
Assets is used as a measure of profitability of financial performance and its’ relationship with
working capital management was investigated to find out the results. Samples of 9 trading firms
have been selected from the companies listed by the Colombo stock exchange using Statistical
Package for Social Sciences (SPSS) for the period of 2004 to 2009 to find out the results. The
regression analysis results show that the high investment in inventories and receivables is associated
with lower financial performance (ROA). For this analysis the inventories days, accounts receivable
days, accounts payable days and cash operating cycle have been used. The findings also revealed
that some firms have efficient working capital management and some have inefficient working
capital management in the trends of working capital according to the cash operating cycle.
