IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY: A STUDY OF NIFTY SMALLCAP 100 MANUFACTURING FIRMS

Abstract

The purpose of this study is to investigate the impact of Working Capital Management (WCM) on the profitability of manufacturing firms listed in Nifty Smallcap 100 Index. Working capital management, which entails managing a firm’s short-term assets & liabilities, is essential to sustain daily operations, ensuring liquidity, and driving profitability. In capital-intensive sectors like manufacturing, where significant resources are invested in raw materials, inventory, and receivables, effective WCM becomes not just a financial necessity but a strategic priority. This study focuses on understanding how different elements of working capital—namely inventory, receivables, and payables—affect key profitability indicators such as Return on Assets (ROA), Return on Equity (ROE), and Return on Capital Employed (ROCE) in small- cap manufacturing firms operating in India. The research adopts a quantitative approach, utilizing a sample of 40 manufacturing companies from the Nifty Smallcap 100 Index, with data collected over a 10-year period (2014–2024). This results in 368 firm-year observations, providing a comprehensive longitudinal dataset to assess the relationship between WCM efficiency and firm profitability. Data were sourced from credible and publicly available databases such as Screener.in, ProwessIQ, Trendlyne.com, and company annual reports. The study applies descriptive statistics, Pearson’s correlation, and multiple regression analysis (Ordinary Least Squares) to test the significance, direction, and strength of relationships between independent and dependent variables. Methodology and Analytical Framework To analyze the effect of WCM on profitability, the study identifies three dependent variables—ROA, ROE, and ROCE—as indicators of financial performance. The independent variables include the Cash Conversion Cycle (CCC), Debtor Days, Inventory Days, and Days Payables Outstanding, which serve as measures of working capital efficiency. Three control variables—Current Ratio, Debt-to-Equity Ratio, and Revenue—are also included in the regression models to isolate the net effect of working capital practices. vi Two distinct sets of regression models are developed: 1. The first model set uses the Cash Conversion Cycle (CCC) as a composite indicator of WCM. 2. The second model set disaggregates CCC into its individual components (Debtor Days, Inventory Days, and Payables) for a more granular analysis. This dual-model framework enables the study to evaluate both the overall and component-specific effects of WCM on profitability. The statistical analysis is conducted using SPSS and Microsoft Excel, ensuring methodological rigor and replicability. Summary of Key Findings The analysis reveals a strong and consistent inverse relationship between working capital efficiency and profitability in small-cap manufacturing firms. Specifically, a shorter Cash Conversion Cycle (CCC) is linked with higher profitability as reflected in Return on Assets (ROA), Return on Equity (ROE), and Return on Capital Employed (ROCE). Among individual working capital components, both Debtor Days and Inventory Days show statistically significant negative impacts on profitability, indicating that delays in collecting receivables and holding excess inventory reduce operational and financial efficiency. These findings underscore the importance of timely receivables collection and streamlined inventory management for enhancing firm performance. On the other hand, Days Payables Outstanding (DPO) did not show a significant impact on profitability, suggesting that payment delays to suppliers neither harm nor improve financial performance within the sample. Control variables such as the Current Ratio and Revenue demonstrated positive associations with profitability, highlighting the roles of liquidity and firm size in driving returns. In contrast, the Debt- to-Equity Ratio was negatively associated with ROA and ROCE, reinforcing the idea that excessive financial leverage can hinder profitability. Overall, the study confirms that efficient working capital management is a key driver of profitability for resource- constrained manufacturing firms in the small-cap segment.