The Relationship Between Working Capital Management and Profitabilit

5323 WordsOct 26, 201222 Pages
International Research Journal of Finance and Economics ISSN 1450-2887 Issue 49 (2010) © EuroJournals Publishing, Inc. 2010 The Relationship between Working Capital Management and Profitability: A Vietnam Case Huynh Phuong Dong Faculty of Accounting, Danang University of Economics, Vietnam E-mail: Tel: +84989392392 Jyh-tay Su Assistant professor at Southern Taiwan University, No.1 NanTai St Yong Kang City, Tainan County, Taiwan R.O.C E-mail: Abstract The working capital management plays an important role for success or failure of firm in business because of its effect on firm’s profitability as well on liquidity. The study is based on secondary data…show more content…
The way of working capital management can have a significant impact on both the liquidity and profitability of the company (Shin and Soenen, 1998). The main purpose of any firm is maximum the profit. But, maintaining liquidity of the firm also is an important objective. The problem is that increasing profits at the cost of liquidity can bring serious problems to the firm. Thus, strategy of firm must be a balance between these two objectives of the firms. Because the importance of profit and liquidity are the same so, one objective should not be at cost of the other. If we ignore about profit, we cannot survive for a longer period. Conversely, if we do not care about liquidity, we may face the problem of insolvency. For these reasons working capital management should be given proper consideration and will ultimately affect the profitability of the firm. Working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand( Eljelly,2004). Lamberson (1995) showed that working capital management has become one of the most important issues in organization, where many financial managers are finding it difficult to identify the important drivers of working capital and the optimum level of working capital. As a result, companies

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