Working Capital Management and Profitability Relationship: The Role of Macroeconomic Indicators

Abstract

The aim of this article is to search for the relationship between working capital management (WCM) and profitability under different macroeconomic conditions. The dataset includes 179 companies from Gulf Cooperation Council (GCC) countries for a six-year period. Results reveal a nonlinear relationship between CCC and profitability in a way that, shorter CCC periods have opposite direction with profitability yet as the period increases this relation turns to be positive. The partial effect of CCC has a more significant influence than those of its components. However, overall significances of the components are higher. Gross profit and operating profit margins have high responsiveness against WCM changes. Among macroeconomic indicators, inflation and unemployment are distinctive in models yet GDP per capita has a moderate influence on profitability. To the best of our knowledge, this is the first study to examine the WCM-profitability relationship with a focus on macroeconomic variables in the GCC region.

Keywords

• cash conversion cycle (ccc)
• profitability
• working capital management
• macroeconomic indicators