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The impact of working capital management on firm profitability in different business cycles
The main objective of the present study is to investigate the relationship between working capital management and company profitability and the impact of business cycles (downturns and booms) on the relationship between these two variables. In this study, in order to measure the working capital management, the four criteria of cash conversion cycle, payable period, receivables collection period and inventory turnover period, and in order to measure the profitability, the two criteria of return on assets and return on financial element assets have been used. To investigate the effects of different business cycles on the relationship between working capital management and profitability; where D1 and D2 are dummy variable of downturns period and booms period, respectively. To control other factors affecting the model, the variables of current ratio, debt ratio and company size have also been entered into the model as control variables. To test the hypotheses, 107 companies were selected from the listed companies in Tehran Securities Exchange by systematic method during the years of 1385 to 1392 and the research variables were analyzed using Excel and Eviews software and Panel data model. The results of obtained from investigating the hypotheses confirm the negative relationship between cash cycle and receivables collection period with profitability. Inventories relationship was significant and positive with profitability and was different from the expected result (negative relationship) which led to the rejection of the hypothesis. There was no significant relationship between payable periods and profitability. The results also showed that business different cycles have no effect on the relationship between these variables and only in the Great Depression, the relationship between goods inventory turnover period and goods profitability is important.
Keywords: working capital management, cash conversion cycle, payable period, receivables collection period, inventories conversion period, profitability, business different cycles