Working capital management and firm performance in Ghana

Abstract

Working Capital Management is necessary to achieve success in the operation of businesses as a result of its important effect on profitability and liquidity. The purpose of this study is to examine the impact of the various components of working capital management on firm profitability of non-financial firms in Ghana during the period 2005-2015. Previous studies on working capital in Ghana examined the relationship between working capital management and profitability for only one industry (out of nine industries) for less than six years. This paper used secondary data collected from 21 non-financial firms in Ghana covering the period from 2005-2015. Using Pearson’s correlation and regression analysis, the significant result of the study was that, profitability of non-financial firms in Ghana as measured by return on asset is influenced by firm age, current ratio and firm growth. These results imply that firms which hold adequate current assets will be able to kickoff their current liabilities leading to increase in profitability. Also, firms that have advanced in years of experience can adopt appropriate strategies to make them achieve higher profitability. Moreover, the ability to obtain an alternative or external source of funding can increase a firm’s profitability. Besides, the study recommended that proper management of working capital by managers could ensure that firms survive since it enables firms to overcome liquidity crisis and boost their profitability. Non-financial firms in Ghana can explore the opportunities of increasing profitability through their firm age, firm growth and current ratio. Therefore, a prudent working capital policy by managers of firms is crucial.