Working Capital Management Practices and Their Impact on Firm Profitability: Evidence from Emerging Market Economies

Sangitha Rama Krishnan,

Dr Madhubala

School of Management Studies

Sathyabama Institute of Science and Technology Chennai- 600 119

Abstract

Managing working capital is a vital component of corporate finance, significantly impacting a company’s profitability, liquidity, and sustainability. In emerging market economies, companies encounter distinct operational, financial, and macroeconomic challenges that heighten the necessity for effective working capital strategies. This research explores the connection between elements of working capital—such as accounts receivable, inventory, accounts payable, and the cash conversion cycle—and company profitability in selected emerging markets. By analyzing panel data from 2010 to 2023 for publicly traded companies in BRICS and Southeast Asian emerging economies, we utilize robust econometric methods to determine how working capital management practices affect profitability indicators like Return on Assets (ROA) and Return on Equity (ROE). Our results indicate that shorter cash conversion cycles, effective inventory management, and strategic management of payables positively influence company profitability, whereas excessive receivables and prolonged inventory holding periods have a negative impact. This study adds to the existing literature by providing empirical evidence from the perspective of emerging markets and offers managerial insights for optimizing working capital policies. These findings emphasize the crucial role of customized working capital policies in boosting company performance in emerging markets. Furthermore, the study highlights the necessity for managers to balance liquidity and profitability by optimizing the cash conversion cycle and closely monitoring receivables and inventory levels. Future research could investigate sector-specific dynamics and the effects of macroeconomic volatility on working capital efficiency in these regions.

Keywords: Management of Working Capital, Profitability of Firms, Developing Markets, Cycle of Cash Conversion, Receivables, Management of Inventory

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