The relationship between working capital management and profitability

Most of the firms make high amount of investments on working capital and use short term liabilities to finance. Therefore it can be expected that working capital management effects firm profitability. This relationship makes working capital management as one of the core issue of financial management. On the other hand, in high inflationary countries such as Turkey, the effect of inflation on working capital items and their effect on profitability is crucial. For this pupose, using the financial stements of 31 firms quoted in food and beverage sector for the years between 1991 – 2014, the effect of receivables payback period, payables period and inventory period on profitability has been anlysed by dividing the sample into two sub periods as high inflation and decresing inflation periods. Unbalanced panel data methodology is employed to see the effect of cash management and active structure cash ratio and fixed asset turnover ratios are also included as independent variables. Findings suggest that for the inflatinary environments inventory period is the main profit driver and for the decreasing inflation period receivables payback period and payables period are the main profit dirvers. It has been showed that cash and marketable securities have positive effect on profitability during high inflation and negative effect during decreasing inflation.