Impact of working capital management practices on profitability

This study aims to investigate the relationship between working capital management and its impact on the corporate profitability of Malaysian companies. The Net Trade Cycle (NTC) is used as a tool to measure working capital management. A shorter net trade cycle signifies efficient management of working capital, thereby enhancing company profitability. Income to total assets (IA) and income to sales (IS) are used to measure corporate profitability. The final sample of the study consists of 198 companies with 990 observations from five main industries on the Main Market (formerly the Main and Second Boards) of Bursa Malaysia over a period of five years (2004 to 2008). Linear regression analysis was used to test the relationship between working capital management and corporate profitability. The results show that there is a significant negative relationship between working capital management and corporate profitability. Furthermore, the results indicate that companies with shorter net trade cycles are associated with higher profitability. Overall, it can be inferred that working capital management is one of the important components of companies' financial management that affects corporate profitability.