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RELATIONSHIP BETWEEN WORKING CAPITAL MANAGEMENT AND PROFITABILITY – EMPIRICAL EVIDENCE FROM VIETNAMESE LISTED FIRMS Thoa T.K Tu, MA Thoa T.K. Tu* and Uyen T.U. Nguyen* * School of Finance, University of Eonomics – Ho Chi Minh City Ho Chi Minh City, VIETNAM E-mail: [email protected] Abstract. This paper is aimed at investigating relationship between working capital management and profitability by using Generalized Least Square (GLS) and Fixed Effect Model (FEM) on a panel data of 208 companies listed on the both Ho Chi City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) for the period from 2006 to 2012. We found significant negative relationships between cash conversion cycle, receivable period, inventory period and payable period and gross operating profit. This means that board of management can improve the firm profitability by shortening receivable period, inventory period or cash conversion cycle to an optimal level. The results of industry analysis suggested the effect of economic sector on relationship between working capital management and profitability. Key words: working capital management, cash conversion cycle, profitability, Vietnam. 1 INTRODUCTION Net working capital is defined as difference between current assets and current liabilities. In any operating cycle, working capital transforms from the form of cash to inventory, account receivable and then back to the form of cash. With that transformation, net working capital management takes a lot of time and efforts of the firm managers. Main objectives of net working management is to maintain normal daily operational activities for the firms in order to increase the firm’s performance and to reduce the firm’s liquidity risk. A shortage of working capital can cause problems on the firm daily activities which will inversely affect to the firm’s profitability while overinvestment on working capital can increase opportunity cost, especially when the firm has to use external funds to finance its working capital. Managing working capital management, which includes of current asset and current liability management is one of important functions of corporate financial management, and company executives have to make this decision on a daily basis (Ross, Westerfield, Jordan, 2010). Working capital relate to account receivable, inventory, account payable, which are key components of operating activity. The direct effect of working capital management on profitability and liquidity position of firms also refers the importance of working capital management (Nobanee, Abdullatif, & Al Hajjar, 2011). Managers can improve firms’ profitability by shortening receivable conversion period and inventory conversion period (Mansoori and Muhammad, 2012). Besides, firms may face to bankruptcy if they select and use improper working capital strategies, even though they experience positive profitability (Samiloglo & Demirgunes, 2008).
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