Working capital management and its influence on profitability and sustainable growth

Abstract

This study aims to test the effect of working capital management on firms’ profitability and the effect of this relationship on sustainable growth. Our sample firms are 136 manufacturing firms listed in the Indonesian Stock Exchange from 2010 to 2017. We use data panel regression with fixed effect estimation model to analyze our data. The results demonstrate that working capital significantly affects firms’ profitability. However, working capital management does not exhibit a significant direct influence on sustainable growth but a significant indirect influence through firms’ profitability. Thus, this study suggests that firms need to manage their working capital to increase their profits and eventually to achieve sustainable growth. This study contributes by including sustainable growth in the analysis of the relationship between working capital and firm performance. In addition, this study will likely contribute to managers in efforts to increase sustainable growth for their enterprises through working capital management.