IMPACT OF WORKING CAPITAL MANAGEMENT

ON PROFITABILITY OF MACEDONIAN
INDUSTRIAL COMPANIES

Aleksandar NAUMOSKI, PhD

Maja NAUMOVSKA, MSc

Abstract
Efficient and effective working capital management is crucial
given its impact on the company's profitability. The focus of the
research in this paper is the impact of individual components of working
capital on the profitability of industrial companies. The research was
conducted on a sample of industrial companies listed on the
Macedonian Stock Exchange using their accounting data for a period
covering ten years 2010 - 2019 by applying a panel regression
analysis. We found that corporate profitability increases with increasing
account receivable period, account payables payment period,
company size, sales growth, and volatility in net operating profit.
Additionally, profitability increases with decreasing in the cash
conversion cycle and financial leverage. Inventories conversion period
and fixed financial assets do not show a statistically significant
relationship with the company profitability.
Keywords: corporate finance, operating cycle, cash cycle,
panel data analysis, North Macedonia
JEL Classification: G31; G32; E32

1. Introduction
Working capital management (WCM), which covers the
management of current assets and current liabilities, is a very
important area in corporate finance because it has a direct impact on


Associate Professor, Faculty of Economics, Ss. Cyril and Methodius University in
Skopje, Republic of North Macedonia.

Financial Officer, TAV Macedonia DOOEL, Skopje, Republic of North Macedonia.

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the liquidity and profitability of the company. The current assets of a

typical manufacturing company or even a trading company make up
more than half of the total assets of the company. In the case of our
analyzed sample, the average is 43%, and in some companies, it
reaches up to 89%. Excessive levels of current assets can easily result
in low return on investment. Also, companies that have too few current
assets can jeopardize normal operating operations.
Profitability affects the achieved rate of return on investment.
Vishnani and Shah (2007) state that large investments in current
assets reduce the rate of return. The purpose of working capital
management is to manage the current assets of the company in a way
that will allow achieving a balance between return and risk (Ricci and
Vito, 2000). Shin and Soenen (1998) state that effective working capital
management is an integral component of the overall corporate strategy
aimed at creating additional value for shareholders.
The different components of working capital management are
the following: 1) account receivables period, which we take as a
representative of the debt collection policy; 2) inventories conversion
period, which is the representative of the inventory management policy;
3) account payables payment period, which we take as a
representative for the supplier management policy. The connection
between the three components can be represented in Figure 1.
Effective working capital management means planning and
controlling current assets and current liabilities in a way that will
eliminate the risk of the inability of the company to meet due short-term
liabilities, and on the other hand avoid investing in excess current level
of current assets (Eljelly, 2004). Managers spend significant time on
day-to-day problems involving working capital decisions (Raheman
and Nasr, 2007). One reason for this is that current assets are short-
lived investments that are continuously converted into other types of
assets (Rao, 1989). The company is responsible for the timely
settlement of current liabilities. Taken together, decisions about the
level of the various components of working capital become frequent,
repetitive, and time-consuming (Appuhami, 2008).
Working capital management is a very sensitive area in
financial management. It includes decisions at the level and
composition of current assets and how they are financed. Current
assets include all those assets that in the normal course of business
activities are converted into cash in a short period, usually up to one
year, as well as those temporary investments that can be immediately

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converted into cash if necessary. Among others, Smith (1980),

Raheman and Nasr (2007) show that working capital management is
important because of its effects on company profitability and risk, and
consequently, on company value.
Figure 1
Operating cycle and cash conversion cycle

Purchase of inventories Sale of inventories

Inventories conversion Account receivables

period collection period
Time
Account
payables Cash conversion cycle
payment period

Operating cycle

Source: Adapted from Ross, Westerfield, and Jordan (2022)

The way working capital is managed can have a significant
impact on a company's liquidity and profitability (Deloof, 2003). For
example, decisions that tend to maximize profitability tend to minimize
the prospect of adequate liquidity. Conversely, a full focus on liquidity
tends to reduce a firm's potential profitability. The traditional view of the
relationship between a company's cash conversion cycle and
profitability is that, while everything else is unchanged, a longer cash
conversion cycle adversely affects profitability (Deloof, 2003; Smith,
1980). This paper aims to investigate the impact of the components of
working capital management on the profitability of companies listed on
the Macedonian Stock Exchange.

2. Literature review
There are many papers and studies on this topic, which have
been made over the years. Most of them focus on the components of
working capital, primarily in terms of their impact on the profitability of
the surveyed company or companies in the sample. Given that this is
a very broad and important topic in terms of corporate finances, up to
the level of the national economy, the topic of working capital
management will be addressed in the future by many other authors,
and the results will contribute to maximizing the value of the company.

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In his work, The Wealth of Nations, Adam Smith (1776)

emphasized the importance of working capital, where he made a clear
distinction between "circulating capital" and "fixed capital". His
definition of "circulating capital" was like today's understanding of
working capital.
Mills (1996) found a relevant relationship between the
determinants of external factors and working capital. He studied the
impact of inflation on the budgeting process. He found that the impact
of inflation is greater if the amount of net working capital is higher.
Inflation has an impact on the behavior of the company, with inflation
forcing companies to try to reduce the level of net working capital,
changing their debt/asset ratio using more short-term debt, and
increasing short-term loans compared to long-term loans.
Research linking WCM to external factors is less dominant.
Most of the research so far is more focused on the impact of internal
determinants of net working capital on companies’ performance
(Kieschnick et al., 2006; Chiou et al., 2006).
Padachi (2006) found that high investment in inventories and
receivables is associated with lower profitability. In his research, he
used the return on total assets as a measure of profitability and the
relation between working capital management and corporate
profitability is investigated for a sample of 58 small manufacturing
firms, using panel data analysis for the 1998-2003 period.
Vishnani and Shah (2007) investigated the impact of working
capital management policies on the corporate performance of the
Indian consumer electronics industry case from 1994–95 to 2004–05.
They found that working capital components play a significant role in
corporate profitability. To this end, the managers concerned should pay
due attention to the formulation of the policy in this regard, as well as
to the implementation of such working capital policies. The corporate
value increases when the return on equity (ROE) exceeds the cost of
capital. Working capital management is equally important for large and
small companies, but is especially important for small company
managers.
The research of Raheman and Nasr (2007) and Naser et al.
(2013) emphasize the importance of efficient working capital
management in creating value for shareholders. In developing
countries, the call to start with optimal working capital management
practices is becoming increasingly pronounced, so the study on the
impact of working capital on profitability in companies in Ghana in the

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2005-2009 period shows some of the practices for WCM. Namely,

according to this research, there is a need to reduce the account
receivables period from customers to about 30 days. This paper
identifies a positive relationship between the cash conversion cycle
and the profitability of the surveyed companies in Ghana. The short
period of cash conversion cycle is ideal for increasing its profitability,
but also for creating shareholders’ value.
Gill et al. (2010) made an investigation on a sample of 88
American firms listed on the New York Stock Exchange for a period of
3 years from 2005 to 2007 and found a statistically significant
relationship between the cash conversion cycle and profitability,
measured through gross operating profit.
Afza and Nazir (2008) in the case of Pakistani firms found
significant differences in their working capital investment and financing
policies across different industries. The aggressive investment working
capital policies are accompanied by aggressive working capital
financing policies. Also, they found a negative relationship between the
profitability measures of firms and the degree of aggressiveness of
working capital investment and financing policies. Abbadi and Abbadi
(2013) in the case of the Palestinian companies found that the cash
conversion cycle, return on assets, and operating cash flow are a
significant determinant and positively related to the working capital
requirements, while leverage and firm size are significant but
negatively related to the working capital requirements. On the other
hand, economic variables such as the interest rate and real GDP
growth rate have no significant impact on the working capital.
Almazari (2013) found that the Saudi cement industry’s current
ratio is the most important liquidity measure which effected profitability,
therefore, the cement firms must set a trade-off between these two
objectives so that, neither the liquidity nor profitability suffers. It was
also found, that as the size of a firm increases, profitability increases.
In addition, when debt financing increased, profitability declined.
Tauringana and Afrifa (2013) investigated the effect of working
capital management on the performance of listed small and medium
enterprises by applying a panel data regression analysis on a sample
of 141 Alternative Investment Market listed SMEs for eight years
(2007–2014). The results show that for all SMEs, WCM components
(inventory holding period, accounts receivable period, and accounts
payable period) have concave relationships with performance.
However, when the SMEs are split into ‘small’ and ‘medium’ firms, the

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results suggest that WCM is relatively more important to the

performance of ‘small’ firms than ‘medium’ firms. Previously, Garcia-
Teruel and Martinez-Solano (2007) made an investigation on SMEs,
and conclude that managers can create value by reducing their
inventories and the number of days for which their accounts are
outstanding. Moreover, shortening the cash conversion cycle also
improves the firm's profitability
Preve and Sarria-Allende (2010) summarize two approaches
that define working capital. The first approach they call the "traditional
definition of working capital" is that "working capital shows how much
money (or liquid assets) is available to meet the short-term cash needs
imposed by current liabilities." The other approach does not include
short-term components and is defined as "working capital is the
amount of capital committed to financing a firm's current assets". In this
approach, the definition of working capital has no short-term
components, but by incorporating strategic elements such as capital
and fixed assets, they were intended to be linked to other alternative
meanings and applications for working capital management.
Zariyawati et al. (2010) explain that the determinants of working
capital are divided into internal and external. The internal factor is
focused on solid features and specific factors while the external factor
consists of macroeconomic factors. Effective working capital
management should pay attention to internal and external factors, or
both.
Makori and Jagongo (2013) investigating the impact of the
WCM on the profitability of manufacturing and construction companies
in Kenya, concluded that most Kenyan manufacturing companies have
large amounts of cash invested in working capital. It can therefore be
expected that the way working capital is managed will have a
significant impact on the profitability of those firms. The study found
that there was a negative relationship between ROA and the average
account receivables collection period and cash conversion cycle.
There is a positive correlation between the inventories conversion
period and the account payables payment period. These results
suggest that managers can create value for their shareholders by
reducing the account receivable collection period and increasing the
account payables payment period, as well as an inventories conversion
period to a reasonable time.
Using more recent studies on this issue, Syeda (2021)
conducted a random analysis of a sample of 15 listed companies on

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the New York Stock Exchange, for a period of five years from 2015 to
2019. He found that there is a strong link between working capital
management and corporate profitability. This means that if financial
managers pay attention to liquidity it will lead to profitability. It is
recommended that companies always maintain a sound debt collection
policy and it is further suggested that managers be able to create value
for their shareholders by reducing the account receivables collection
period, increasing the account payables payment period and inventory
period to a reasonable minimum. Also, the results of the analysis
showed that companies can further strengthen their results if they
manage their working capital in more efficient ways. Working capital
management means managing current assets and current liabilities. If
these companies effectively manage the cash, receivables, liabilities,
and inventories, this will ultimately increase the profitability of these
companies.
Mache and Omodero (2021) conducted a study, on the case of
selected companies that produce consumer goods in Nigeria. They
found that working capital management strategies have a significant
impact on the financial performance of retailers. Thus, it can be
concluded that the financial performance of South African retailers is a
result of their working capital management components. South African
companies can improve their financial performance by optimizing their
working capital components, such as account receivables period,
inventories conversion period, and account payables payment period,
as much as possible without risking losing customers or suppliers.

3. Data and measurement

3.1 Data
The data for this research refer to companies listed on the
Macedonian Stock Exchange for the 2010-2019 period. Data are
collected from publicly available audited financial statements. Relying
exclusively on listed companies is due to the greater reliability and
accuracy of the data given that these companies have special reporting
obligations, by the rules and conditions of the stock exchange. The
sample of companies is from the domain of industry. According to
Deloof (2003), all financial institutions, such as banks and other
financial institutions, insurance, but also some commercial and service
companies, as well as some other non-manufacturing companies are
excluded from the analysis. The reason for their exclusion from the

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analysis is their definition of working capital (Lazaridis and Tryfonidis,

2006). According to the criteria, the sample consists of 63 companies.
Several filters were applied to refine the data. First, all those companies
that have operating anomalies over the years, such as companies that
have negative total assets, negative capital, and negative operating
cycle, were removed from the analysis.
3.2 Measuring profitability
Different researchers use different measures of profitability. In
this research, profitability is defined following Deloof (2003) as Gross
Operating Profit Ratio, which we calculated as:

Gross Operating Profit Ratio =

Sales Revenue – Cost of Goods Sold + Depreciation and Amortization
Total Assets – Financial Assets

3.3 Exogenous variables

Table 1
Exogenous variables measurement
Measurement
Independent variables
Account receivables collection
Account receivables net / Sales revenues х 365
period
Inventories conversion period Inventories / Cost of goods sold x 365
Account payables payment
Account payables / Purchases х 365
period
Account receivables collection period +
Cash conversion cycle Inventories conversion period – Account
payables payment period
Control variables
Company size ln (Sales)
Sales revenue growth (Salest – Salest-1) / Salest-1.
(Short term loans + Long term loans) / Total
Financial leverage
assets
Fix financial assets Fix financial assets / Total assets
Standard deviation of the net operating profit in
Volatility of net operating profit
the analyzed 2010–2019 period
Source: Authors’ presentation

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4. Results of the analysis

4.1 Summary statistics
The average Gross Operating Profit Ratio for the 10 years of
the selected companies in the sample is 23% and a median of 22%.
Most of the companies in the sample were continuously profitable. The
average account receivable collection period was 101.1 days on
average, and the maximum of 1,620.50 days was realized by only one
company. If we ignore it in this case and observe the other companies,
we can notice that there is a relatively high correlation between the
account receivable collection period and the account payables
payment period.
The average account payables payment period is 151.4 days.
Again, the extreme of the maximum of 4,419.1 days applies to the
same company, which is to be expected given the rather long account
receivables collection period.
Table 2
Descriptive statistics
Standard
Mean Median Maximum Minimum
deviation
Gross operating profit 0.23 0.22 1.04 -0.86 0.22
Account receivables
101.1 76.8 1.620.5 2.8 162.0
period
Inventories period 225.1 101.8 4.264.6 5.7 432.0
Account payables
151.4 98.2 4.419.1 5.4 422.3
payment period
Cash conversion cycle 174.8 131.3 3.875.0 -2.311.8 457.8
Company size 21.2 20.93 24.31 17.85 1.29
Sales growth 0.16 0.02 16.04 -0.96 1.56
Financial leverage 0.33 0.33 0.93 0.00 0.24
Fixed financial assets 0.02 0.01 0.32 -0.13 0.06
Volatility in net
0.10 0.04 0.64 0.01 0.15
operating profit
Source: Authors' own calculations
The inventories conversion period covers the period from the
purchase of the stock of raw materials to the moment of the sale of the
stock of finished products and their exit from the company, and on
average it is 225.13 days. The cash conversion cycle averages 174.85
days, resulting from the previous three variables. In the control
variables, the size of companies presented as a natural logarithm of

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sales revenue has an average value of 21.23, while the average growth
of sales revenue is 16% per year. If we make a comparison with the
average GDP growth which is 4.9%, then it indicates that the
manufacturing companies in the sample have achieved much higher
growth than the economy as a whole. The sample companies are not
very indebted. Total debt (short-term plus long-term) is 33% of total
assets. The fixed financial assets indicator shows that the share of
fixed assets in total assets is on average 2%. The volatility of the net
operating profit is 10%.
The companies from the analysed sample have ineffective
working capital management, which ultimately contributes to moderate
growth of companies and relatively low profitability. The companies on
average have a very long account receivables period, which could
have an economically logical justification only if the companies
liberalized their credit policies to increase the credit sales, but in the
case of the analysed companies, this period is long due to low current
liquidity and the difficulty for timely collection of receivables, negatively
impacting the profitability. Companies also show inefficient inventory
management, measured by inventories period which is very long.
Holding large volume of inventory may be justified to ensure growth in
production and sales, but too much inventory leads to increased
holding costs and other related operating costs, leading to reduced
profitability. What's more, the long inventory conversion period may be
due to the storage of outdated stocks. The operating cycle, which is
the sum of account receivables period and inventory period, is quite
long and amounts to 326.2 days. The long operating cycle affects
companies to have lower turnover and lower profitability (according to
the DuPont formula). As a result, the cash cycle, which is the difference
between the operating cycle and the account payables period, is long
and amounts to 174.8 days. It is actually the period from the moment
of payment for purchases to the moment of collection of receivables. It
is actually the period in which the company uses money to finance
business operations from certain sources, which leads to costs for that
financing and additionally has a negative impact on profitability. All
elements of the working capital are not efficiently managed and all of
them individually do not have a satisfactory impact on growth and
profitability, although account payables period is longer than account
receivables period. Corporate managers need to redesign their
operating policies and improve working capital management practices
to ensure greater profitability and greater corporate growth.

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4.2 Correlation analysis

The correlation analysis, as the second segment of this
research, consists of determining whether there is a correlation
between the variations of the observed phenomena and if so, to what
degree or intensity. Table 3 in the Appendix shows the Prison
correlation coefficients between the observed variables. From the
results obtained in the correlation analysis, we can see that there is a
very low negative correlation between gross operating profit and part
of the components of working capital, i.e., account receivables period,
account payables period, but also to some of the control variables,
such as financial leverage, fix financial assets and the volatility of net
operating profit. The results of the correlation analysis are completely
consistent with those obtained by Deloof (2003) in the case of Belgian
companies.
4.3 Regression analysis
In further research, we will apply panel regression analysis. To
determine which model is most appropriate for the analysis (pooled
regression model, fixed effect model, or random effect model), it is
necessary to perform a Hausman test. The test assesses the
consistency of the assessor when compared to an alternative, less
efficient assessor already known to be consistent. It helps to assess
whether the statistical model corresponds to the data. The basis of the
Hausman test consists of starting from the linear model y = Xb + e,
where y is the dependent variable and X is the regressor vector, 𝑏 is a
vector of coefficients and e is a random error. Here are both estimators
for 𝑏: 𝑏0 и 𝑏1 . The two hypotheses are:
H0: Random effect model is appropriate
H1: Fixed effect model is appropriate
According to the results obtained from the Hausman test, we
accept the null hypothesis, i.e., the fixed effect model is appropriate
and accepted for further research.
The next step is to examine which variables are statistically
significant and how they affect a company's profitability. For that
purpose, we will set up several models that will represent a different
combination of independent variables and will show us which of them
is and which is not, statistically significant for the profitability of the
examined companies. To answer the question of how working capital
management affects the company's profitability, gross operating profit

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is shown as a function of the three basic measures of working capital

management in addition to other characteristics of the company.
In the analysis itself, five fixed-effect regression models were
modelled, as follows:
GOP = f {ARCP, ICP, APP, CCC, Size, Rev.increase, LEV, FXA, VAR}
Model 1
GOPit = α0 + β1ARCPit + β2Sizeit + β3Rev.Increaseit + β4LEVit + β5FIXit (1)
+ β6VARit
Model 2
GOPit = α0 + β1ICPit + β2Sizeit + β3Rev.Increaseit + β4LEVit + β5FIXit (2)
+ β6VARit
Model 3
GOPit = α0 + β1APPit + β2Sizeit + β3Rev.Increaseit + β4LEVit + β5FIXit (3)
+ β6VARit
Model 4
GOPit = α0 + β1CCCit + β2Sizeit + β3Rev.Increaseit + β4LEVit + β5FIXit (4)
+ β6VARit
Model 5
GOPit = α0 + β1ARCPit + β2ICPit + β3APPit + β2Sizeit + β3Rev.Increaseit (5)
+ β4LEVit + β5FIXit + β6VARit
where GOP е Gross operating profit ratio, ARCP is account
receivables collection period, ICP is inventories conversion period,
APP is account payables payment period, Size is company size,
Revenue Increase is an annual increase in sales revenue, LEV is
financial leverage, FIX is fix financial assets ratio; and VAR is the
volatility in net operating profit.
In all five models, the dependent variable is the gross operating
profit as a representative of profitability. The other variables are
independent and control variables of analysis. The analysis was made
with the Fixed Effect Model using the Ordinary Least Squares method.
In the first model, a regression of the account receivables
collection period about the gross operating profit was performed. The
second is the inventories conversion period. In the third is the account
payables payment period. In the fourth is the cash conversion cycle. In
the fifth, the three measures of working capital management (ARCP,
ICP, and APP) are set back. CCC is omitted here to avoid the problem

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of multicollinearity between variables displayed via variance inflation

factors VIFs.
Control variables included in the analysis are: company size,
sales revenue growth, financial leverage, fix financial assets, and
volatility of net operating profit.
Table 4 in the Appendix presents the results of the regression
analysis using the Fixed effect model that provides more detailed
information on the relationship between management with working
capital and profitability.
In the first model, where the account receivables collection
period is taken as an independent variable, we can see that statistically
significant variables are all variables included in the model, except the
control variable fixed financial assets.
In the second model, where the inventories conversion period
is taken as a dependent variable, has four statistically significant
variables, namely: company size, sales revenue growth, financial debt,
and the variability of net operating profit.
In the third model, where the account payables payment period
is taken as an independent variable where except for the control
variable fixed financial assets, all other examined variables are
statistically significant.
In the fourth model, where the independent variable is the cash
conversion cycle and has the same construction of statistically
significant variables as the previous statistically significant independent
variable and three of the control variables.
Finally, the fifth model, which is in a way a summary model that
incorporates all three components of working capital, shows that no
independent variable is statistically significant, except for four
statistically significant control variables: company size, growth of sales
revenues, financial leverage, and volatility of net operating profit.
The account receivables collection period has a statistically
significant positive relationship with the company's profitability. That is,
for a 1-day increase of the collection period, the profitability increases
by 0.0276%. This is contrary to financial logic which suggests that
receivables should be collected faster and liabilities paid off as late as
possible. Faster collection of receivables will allow us to get to the cash
faster than we can invest in a new production cycle. Therefore, we
would expect a negative relationship with profitability. The detected
positive relationship is explained by the fact that the companies in the
Macedonian economy have a practice of selling with deferred payment,

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i.e., credit sales, to stimulate sales. Greater sales lead to greater

profitability. At the same time, the account receivables collection period
is much shorter than the account payables payment period.
The inventories conversion period is not a statistically
significant variable in the regression analysis of the particular sample
examined, however, it shows a negative correlation with the profitability
of the company. The negative correlation between GOP and
inventories conversion period is consistent with most research as in
Deloof (2003), Lazaridis and Tryfonidis (2006), Padachi (2006), and
Naumoski (2019). The negative relationship indicates the fact that the
shorter the inventory days (of raw materials, production in progress and
finished products) the higher the profitability would be, as a result of
the reduced cost of holding inventories.
In model 3 there is a statistically significant positive relationship
between account payables payment period and the company's
profitability. For each increase in the account payables payment period
for 1 day, the profitability of the companies increases by 0.0078%. This
is a logical relation and is explained by the fact that more profitable
companies wait longer to pay their obligations to suppliers. Thus, they
have at their disposal the cash to finance new inventories that will lead
to new sales and GOP growth. The results obtained for the account
payables payment periods are consistent with the crucial rule that
companies should strive to delay the payment of liabilities to suppliers
as much as possible, while taking care not to jeopardize good business
relations with them.
The cash conversion cycle in model 4 shows a negative
relationship with the company's profitability. Shin and Soenen (1998)
and Naumoski (2019) also found a negative relationship. A negative
relationship is expected. Namely, the size of the CCC depends on the
operating cycle (inventory period plus account receivables period) and
account payables payment period. The shorter the operating cycle, the
higher the turnover and the higher the profitability of the company
(according to the DuPont equation). Furthermore, CCC is the period in
which we use money provided from other sources, and this causes
costs to the company. For example, if the money is secured by a loan,
we will have to pay interest. A lower CCC would mean less working
capital investment, and if the CCC were zero, it would mean that
suppliers fully fund current assets.
According to Shin and Soenen (1998), the negative relationship
between CCC and profitability can be explained by market power, i.e.,

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market share. This would mean that the shorter CCC period is due to
the bargaining power of suppliers and/or buyers, but also greater
profitability due to market dominance. In addition, the negative
relationship between these variables can also be explained by the fact
that minimizing working capital investment can increase profitability.
This means that cash in the form of money is not kept in business for
too long and that free cash is used to invest and increase the
company's profitability. In this case, to reduce one day of the cash
conversion cycle, the company would have higher profitability of
0.014%.
All control variables of the analysis, except fixed financial
assets, are statistically significant in all five models.
In all five models, there is a positive statistically significant
relationship between company size and profitability. Large companies
are usually companies in a mature stage, with established market
power and an established reputation with customers. On the other
hand, they have easier access to the market for the supply of raw
materials, but also to the financial markets where they provide funds
for financing at lower costs, both due to greater creditworthiness and
also due to the economy of scale in purchases and borrowing. Here,
the costs of issuing debt or equity that are fixed, are lower for larger
issues. All of these circumstances lead to a range of cost-effectiveness
for large companies and greater profitability.
The next control variable, which in all regression models has a
positive statistically significant relationship with profitability, is the
growth of sales revenue. This positive relationship is very logical
because the profitability of the company is represented by the gross
operating profit, which is also represented by the following formula:
(sales revenue – the cost of goods sold + depreciation and
amortization)/(total assets - financial assets), so hence it can be seen
that any increase in sales revenue will mathematically increase the
company's profitability.
The third control variable, financial leverage has a pronounced
negative statistically significant relationship with the profitability of
companies. That is, this statement is logical because the more
indebted a company is, the lower its profitability will be. Debts cause
interest costs and low profitability. Unlike financial debt, the volatility of
net operating profit has a statistically significant but positive
relationship with the company's profitability in all models of analysis.

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The only control variable that is not statistically significant is

fixed financial assets, but in most cases, it still has a negative
relationship with profitability. The reason for this lies in the fact that a
company's fixed assets represent a higher cost for it because they aim
to be used longer than working capital. To this end, any increase in
them will result in a decrease in the company's profitability.
In the conducted regression analysis, we can see that in all five
models, F-statistics is significant which indicates a good specification
of the model, and the adjusted coefficient of determination is 62%,
which indicates that the working capital variables largely explain the
profitability of the company.

5. Conclusion
Working capital management is one of the crucial issues in
corporate finance. The managers of the company, who are agents
appointed by the shareholders, have the task to generate the required
returns for their shareholders and increase the value of the company's
share. In this context, effective and efficient management of working
capital is an essential issue that should contribute to achieving the
ultimate goal of the company.
Working capital is a complex category that consists of several
components such as inventories, and receivables, but also liabilities to
suppliers. To show the relationship between them and profitability, in
this paper, we have used a sample of 33 manufacturing companies
listed on the Macedonian Stock Exchange, for a period of ten
consecutive years (2010-2019). To answer the question of whether
and how working capital affects the profitability of selected companies,
we conducted a panel regression analysis.
The result shows that working capital affects the profitability of
the company through the following variables: account receivables
period, inventories conversion period, account payables payment
period, cash conversion cycle, company size, and sales revenue
growth. Statistically significant results were obtained for the specific
variables in this paper and for that reason, the specific companies
should actively focus on managing all components of working capital,
but with special emphasis on the listed variables.
This analysis was conducted on a sample of industrial
companies. The same analysis can be performed on individual sectors,
or at the level of all companies, to get a different view of WCM's impact

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 Financial Studies – 2/2022

on profitability. The same analysis can be repeated for a shorter period

and the observations can give us a deeper knowledge of what is
specifically happening from year to year and how the measures taken
to manage working capital have contributed to the increase of the
company's profitability. In this way, companies will receive information
on business decisions regarding more efficient and effective
management of working capital with the ultimate goal of increasing the
profitability of companies.
Specifically, we found that the profitability of Macedonian
industrial companies grows with the increase in account receivable
collection period, account payables payment period, company size,
sales growth, and volatility in net operating profit. Additionally,
profitability increases with decreasing cash conversion cycle and
financial leverage. The inventories conversion period and fixed
financial assets do not affect the profitability of the company. From all
the above, we can conclude that, by means of the effective and efficient
management of the components of working capital, we can contribute
to improving the profitability of companies.

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 Appendix
Table 3
Correlation analysis
Account
Gross Account Cash Fixed Volatility in
Inventories payables Company Sales Financial
operating receivables conversion financial net operating
period payment size growth leverage
profit period cycle assets profit
period
Gross operating profit 1
Account receivables
0.02 1
period
Inventories period 0.01 0.04 1
Account payables
-0.02 0.91 0.17 1
payment period
Cash conversion cycle 0.03 -0.45 0.80 -0.44 1
Company size 0.16 -0.24 -0.09 -0.09 -0.09 1
Sales growth 0.04 -0.08 0.90 0.05 0.78 -0.01 1
Financial leverage -0.05 -0.12 0.24 -0.05 0.22 -0.15 0.21 1
Fixed financial assets -0.06 -0.06 -0.04 -0.03 -0.04 -0.11 -0.01 0.38 1
Volatility in net operating
-0.10 -0.03 0.36 -0.01 0.33 -0.23 0.29 0.10 0.06 1
profit
Source: Authors' own calculations
 Table 4
Results of the regression analysis
Dependent variable: Gross operating profit
Independent variable
Model 1 Model 2 Model 3 Model 4 Model 5
-8.7604* -6.8019* -7.9926* -7.3894* -8.2082*
C
(1.1591) (1.0975) (1.0682) (1.0091) (1.4314)
Account receivables collection 0.0003* 0.0003
period (0.0001) (0.0003)
-0.0002 -0.0002
Inventories conversion period
(0.0001) 0.0001
0.00008* -0.0001
Account payables payment period
(0.00004) (0.0001)
-0.0001*
Cash conversion cycle
(0.0001)
0.4190* 0.3333* 0.3845* 0.3574* 0.3948*
Company size
(0.0529) (0.0505) (0.0490) (0.0467) (0.0651)
0.0345* 0.0911* 0.0337* 0.0662* 0.0897*
Sales growth
(0.0101) (0.0367) (0.0103) (0.0160) (0.0385)
-0.3332* -0.3725* -0.3466* -0.3247* -0.3070*
Financial leverage
(0.1216) (0.1221) (0.1230) (0.1234) (0.1229)
-0.0632 0.0236 -0.0637 -0.0509 -0.0216
Fix financial assets
(0.3646) (0.3724) (0.3696) (0.3659) (0.3642)
1.80212* 1.1689* 1.6482* 1.6046* 1.7068*
Volatility in net operating profit
(0.3607) (0.2981) (0.3509) (0.3218) (0.3671)
R2 0.6789 0.6659 0.6708 0.6763 0.6892
Adjusted R2 0.6202 0.6048 0.6106 0.6171 0.6232
F-statistics 11.563 10.900 11.1402 11.4245 10.4381
Note: Standard errors in parenthesis; * indicates the coefficients that are statistically significant with a confidence level of 5%
Source: Authors' own calculations