The Impact of Working Capital Management on Profitability of Nigerian Firms: A Preliminary Investigation

Abstract

This study investigated the impact of working capital policies of Nigerian firms on profitability for the period, 2004-2008. Adopting the aggressive investment working capital policies and aggressive financing policies as independent variables and return on assets as dependent variable and controlling for size and leverage, the study revealed that aggressive investment working capital policies of Nigerian firms have a positive significant impact on profitability while aggressive financing policies have a positive non-significant impact on profitability. The findings from this study indicate that firms pursuing aggressive investment working capital policy will become risky in the long-run because as profitability increases; the firm grows and the amount of outsiders’ contributions also increases. The result also indicates that as the firm grows and outsiders’ contribution increases; the use of aggressive financing working capital policy decreases the profitability of the firm. Appropriate management of working capital is therefore essential if the firms are to achieve their objective of improved profitability and value creation for shareholders.

Keywords: Working Capital Management, Profitability, Nigerian Firms.