INTERNATIONAL JOURNAL FOR INNOVATIVE RESEARCH IN MULTIDISCIPLINARY FIELD

Abstract:  Working capital management plays a crucial role in determining the liquidity, operational efficiency, and profitability of firms. Despite extensive empirical research on the relationship between working capital management and firm profitability, the findings remain fragmented across countries, industries, and methodological approaches. This study aims to critically review and synthesize empirical evidence on the working capital management–profitability nexus using secondary data. The paper systematically examines prior empirical studies focusing on key components of working capital, including accounts receivable, inventory, accounts payable, and the cash conversion cycle. The review reveals a predominant inverse relationship between the cash conversion cycle and firm profitability, indicating that firms with efficient working capital practices tend to achieve superior financial performance. However, the findings also highlight the presence of non-linear relationships, suggesting the existence of optimal working capital levels beyond which profitability may decline. The study further identifies contextual factors such as industry characteristics, firm size, and economic conditions that influence the effectiveness of working capital management. By consolidating empirical findings, this review contributes to the financial management literature and offers valuable insights for managers, researchers, and policymakers regarding effective working capital strategies.