Influence of Working Capital Management on Profitability: A Study on Indian FMCG Companies

The paper aims to explore the effects of components of working capital management like cash conversion cycle (CCC), age of inventory (AI), age of debtors (AD), age of creditors (AC), debt to total assets (DTA) and debt equity ratio (DER) on profitability of FMCG firms. The profitability of firms is measured in terms of return on total assets (ROTA) and return on investment (ROI). Working capital management is considered to be a vital issue in financial management decision and it affects both liquidity and profitability of the firm. The secondary data for analysis is retrieved from Prowess Database of CMIE for ten year period from 2000-01 to 2009-10. Apart from using Pearson’s correlation analysis, panel data regression analysis like pooled OLS model and fixed effect LSDV model are employed in the study. Like previous authors, our study results show a sturdy negative association between working capital management variables and firms’ profitability. The results of our study also indicate the better explanatory power of fixed effect LSDV model than that of pooled OLS model.