Working Capital and Firm Financial Performance in Listed Manufacturing Firms in Nigeria

Abstract

The study’s goal is to investigate the impact of working capital policy on firm profitability using publicly traded manufacturing/industrial firms in Nigeria. The study specifically looked at the following working capital policy indicators: creditor payment period, debtor collection period, and cash conversion cycle. To address the potential effects of Endogeneity in the relationship, the Arellano and Bond dynamic panel data estimation methods were used in the analysis. The findings show that the cash conversion cycle has a positive and significant impact on financial performance, that the creditors payment period (CPP) has a positive impact on firm financial performance that is significant at 5%, that the debtor’s collection period has the expected negative sign and that the result confirms statistically that the longer allowable time for debtors’ receivable negatively affects profitability. Furthermore, cash flow margin (CFM) has a positive impact on financial performance that is also significant at 5%, and cash holding has a negative impact on financial performance that is also significant at 5%. Nonetheless, the study recommends that firms do not rely so heavily on debt, particularly in light of macroeconomic insecurity and rate volatility, but rather consider how to develop strategies to reduce their cash conversion cycles. Second, the study suggests that businesses seek long-term financing arrangements with longer payback periods, which will allow them to properly utilize these funds with more convenient investment timelines. Third, the study suggests that firms maintain a cash flow system and liquidity by ensuring a shorter debtors collection period.