Working Capital Management and ItsImpact on Firm Profitability

Working capital management (WCM) sits at the intersection of operational efficiency and financial performance, determining a firm's capacity to meet short-term obligations while generating returns for shareholders.This study investigates the relationship between key working capital components and firm profitability using an unbalanced panel dataset of 386 listed firms drawn from manufacturing and retail sectors across India, Indonesia, and South Africa over 2015-2024.Profitability is measured using Return on Assets (ROA), Return on Equity (ROE), and Gross Operating Profit (GOP).Working capital efficiency is operationalized through the Cash Conversion Cycle (CCC), Accounts Receivable Days (ARD), Inventory Conversion Period (ICP), and Accounts Payable Days (APD).Employing two-way fixed-effects panel regression with robust standard errors, supplemented by dynamic panel GMM estimation to address reverse causality, the study finds that a ten-day reduction in CCC corresponds to a 0.38 percentage-point increase in ROA (β = -0.038,p < 0.001).Inventory management efficiency exerts the strongest individual effect; the CCC-profitability relationship is non-linear, with an estimated optimal CCC of approximately 146 days.Sector-specific and firm-size moderating effects are documented.Findings provide actionable guidance for financial managers and regulators in emerging market contexts where liquidity constraints and supply chain complexities amplify the importance of working capital discipline.