Evaluating the Relationship Between Working Capital Management and Profitability: Insights from Nepal

Abstract

Working capital management plays a vital role in determining a company's profitability. Properly managing the components of working capital, such as inventory, receivables, and payables, helps firms optimise cash flow, reduce financing costs, and improve operational efficiency. Based on this understanding, the present study investigates the relationship between working capital management and profitability in selected companies in Nepal. The study uses widely accepted measures of working capital management, including the average inventory turnover period, average receivables collection period, average payment period, and the cash conversion cycle. To provide a comprehensive analysis, both statistical and descriptive methods are applied to examine the data. Analyses are conducted at two levels: aggregate, which considers the overall working capital management, and disaggregate, which examines individual components separately. The process produces mixed results. While most individual components show a positive impact on profitability, in one case, no significant association is found. In difference, the aggregate analysis indicates a strong negative and significant relationship between overall working capital management and profitability. Further exploration of the individual elements of working capital reveals that most components, such as inventory management and payment period, have a robust positive effect on profitability. The analysis found a strong negative correlation between the Working Capital Ratio (WCR) and profitability for BNBL (r = –0.909). The exception is the average receivables collection period, which shows a weak statistical association with profitability. These findings suggest that while efficient working capital management generally enhances profitability, the impact of specific components can vary. Overall, the study emphasises the importance of a balanced approach to managing working capital to ensure sustainable financial performance in Nepalese public listed companies.