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THE IMPACT OF WORKING CAPITAL MANAGEMNT ON FIRMS’ PROFITABILITY

BY

Mulualem Mekonnen

GSR/0426/02

ADDIS ABABA UNIVERSITY GRADUATE STUDY SCHOOL OF PUBLIC AND BUSINESS ADMINISTRATION DEPARTMENT OF ACCOUNTING AND FINANCE

June, 2011 Addis Ababa
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THE IMPACTS OF WORKING CAPITAL MANAGEMNT OF FIRMS PROFITABILITY

BY

Mulualem Mekonnen

A THESIS SUBMITTED TO THE SCHOOL OF GRADUATE STUDIES OF ADDIS ABABA UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTERS OF SCIENCE IN ACCOUNTING AND FINANCE

Advisor: Wollela Abehodie Yesegat (PH.D)

ADDIS ABABA UNIVERSITY GRADUATE STUDY SCHOOL OF PUBLIC AND BUSINESS ADMINISTRATION DEPARTMENT OF ACCOUNTING AND FINANCE

June, 2011 Addis Ababa
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APPROVED BY BOARD OF EXAMINERS __________________________________ Chairperson (Graduate Committee) __________________________________ Advisor ___________________________________ Examiner ___________________________________ Examiner _____________________ Signature ______________________ Signature ____________________ Signature ___________________ Signature

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Statement of declaration

I, Mulualem Mekonnen Admasu, have carried out independently a research work on “The impacts of working capital management on firms’ profitability in Addis Ababa city manufacturing share companies” in partial fulfillment of the requirement of the M.SC program in Accounting and Finance with the guidance and support of the research advisor. This study is my own work that has not been submitted for any degree or diploma program in this or any other institution.

Mululalem Mekonnen

June, 2011

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Statement of certification This is to certify that Mulualem Mekonnen Admasu has carried out his research work on the topic entitled “the impacts of working capital management of firms’ profitability of Addis Ababa city manufacturing share companies”. The work is original in nature and is suitable for submission for the reward of the M.Sc. Degree in Accounting and Finance.

Advisor: Wollela Abehodie Yesegat (PHD): ______________________________

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Abstract The purpose of this study is to investigate the impact of working capital management on firms’ profitability. The study aims to examine the statistical significance between firms’ working capital management and profitability. In light of this objective the study adopted quantitative method of research approaches to test a series research hypothesis. Specifically, the study used survey of documentary analysis of companies’ audited financial statements. Stratified sampling design was employed based on nature and turnover of companies. Then companies were selected based on simple random sampling method from each stratum’s to avoid biases and represent firms from each subclassification (stratum’s) within manufacturing companies. Consequently, the study selected a sample of thirteen (13) companies for the period of five years (2005-2009) with the total of 65 observations. Data was then analyzed on quantitative basis using Pearson’s correlation and OLS regression analysis. The results showed that there is statistical significance negative relationship between profitability and working capital management. It means that, companies managers can create profits or value for their companies and share holders by handling correctly the cash conversion cycle and keeping each different component of working capital to a possible optimum level. The researcher found that there is a significant negative relationship between liquidity and profitability. Moreover the study finds that there is strongly significance positive relationship between size and firm profitability. Unlike, the study found that there is no statistically significance negative relationship between debt used and firms profitability. Keywords: working capital, working capital management, firm size, cash conversion cycle and profitability.

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Acknowledgements

First and foremost, I want to thank...
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