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UNIVERSITY OF GHANA 
 
 
 
 
QUADRATIC RELATIONSHIP BETWEEN WORKING CAPITAL MANAGEMENT 
AND THE PROFITABILITY OF LISTED MANUFACTURING COMPANIES IN 
GHANA 
 
 
BY 
YAW BAMFO-DEBRAH 
 (10700592) 
 
 
 
A LONG ESSAY SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON IN 
PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF A 
MASTER OF SCIENCE IN ACCOUNTING AND FINANCE 
 
 
 
 
 
AUGUST 2019 
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DECLARATION 
I, YAW BAMFO-DEBRAH thusly pronounce that this work is my own work towards the 
honor of the Master of science qualification and that, as far as I could possibly know, it contains 
no material recently distributed by someone else nor material which has been acknowledged 
for the honor of some other college degree, aside from where due affirmations has been made 
in the content. 
I bear sole responsibility for any shortcomings. 
 
 
 
……………………………...                 ………………………..  
YAW BAMFO-DEBRAH               DATE 
        (10700592) 
 
 
 
 
 
 
 
 
 
 
 
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CERTIFICATION 
This is to guarantee that this long essay was duly supervised as per the procedures laid down 
by the University of Ghana. 
 
 
 
…………………….                    ……………………  
DR. R. A. BEKOE                                                  DATE    
(SUPERVISOR)                                      
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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DEDICATION 
This long essay is primarily dedicated to God Almighty. This work is likewise dedicated to my 
dear parents Mr. and Mrs. MANU-DEBRAH for supporting and empowering me all through 
my study. I am genuinely grateful for having both of you in my life. This work is additionally 
devoted to my sisters NANA YAA POKUAH-DEBRAH, MAME YAA POKUAH-DEBRAH 
and AKOSUA TAKYIWA-DEBRAH. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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ACKNOWLEDGEMENT 
I would like to thank the Almighty God for His immense mercies and guidance throughout my 
studies. I wish to also recognize the massive commitment of my supervisor, Dr. R. A. BEKOE 
for her unparalleled tolerance, insightful guidance and ageless commitment all through the 
supervision of this work.  
I likewise recognize and appreciate the commitments and contributions of JOAN ESINAM 
AKOSUA AGBENYA and ADWOA FREMAH NTOSOUR-AMPONSEM who assisted me 
with the effectively culmination of this long exposition. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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TABLE OF CONTENT 
 
DECLARATION .................................................................................................................. ii 
CERTIFICATION ............................................................................................................... iii 
DEDICATION ..................................................................................................................... iv 
ACKNOWLEDGEMENT ..................................................................................................... v 
TABLE OF CONTENT ....................................................................................................... vi 
LIST OF TABLES ............................................................................................................. viii 
LIST OF FIGURES ............................................................................................................. ix 
ABSTRACT ......................................................................................................................... x 
CHAPTER ONE ................................................................................................................... 1 
INTRODUCTION ................................................................................................................ 1 
1.1 Background ................................................................................................................. 1 
1.2 Rationale of the Study .................................................................................................. 2 
1.3 Aim ............................................................................................................................. 3 
1.4 Objectives .................................................................................................................... 3 
1.5 Limitation of the Study ................................................................................................ 4 
1.6 Plan of Dissertation ...................................................................................................... 4 
1.7 Summary ..................................................................................................................... 4 
CHAPTER TWO .................................................................................................................. 5 
LITERATURE REVIEW ...................................................................................................... 5 
2.1 Introduction ................................................................................................................. 5 
2.2 Approaches to Working Capital Management .............................................................. 5 
2.2.1 Defensive policy.................................................................................................... 5 
2.2.2 Aggressive Policy .................................................................................................. 6 
2.2.3 Conservative Approach ......................................................................................... 7 
2.3 Review of Empirical Literature .................................................................................... 7 
2.3.1 Research on Linear Connection between Working Capital Management and Firm 
Performance .......................................................................................................... 7 
2.3.2 Research on the quadratic connection between Working Capital management and 
Firm Performance................................................................................................ 16 
2.3 Summary ................................................................................................................... 18 
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CHAPTER THREE ............................................................................................................. 19 
RESEARCH METHODOLOGY......................................................................................... 19 
3.1 Introduction ............................................................................................................... 19 
3.2 Research Approach .................................................................................................... 19 
3.3 Data Source and Sample Selection ............................................................................. 19 
3.4 Measurement of Estimation Variables ........................................................................ 20 
3.5 Empirical Estimation Models ..................................................................................... 21 
3.6 Summary Statistics and Correlation Analysis ............................................................. 21 
3.6.1 Descriptive Statistics ........................................................................................... 21 
3.6.2 Correlation Analysis ............................................................................................ 22 
3.7 Methodological Issues ............................................................................................... 23 
3.8 Summary ................................................................................................................... 23 
CHAPTER FOUR ............................................................................................................... 24 
PRESENTATION AND ANALYSIS OF RESULTS .......................................................... 24 
4.1 Introduction ............................................................................................................... 24 
4.2 Cash Conversion Cycle and Profitability .................................................................... 24 
4.3 Components of Cash Conversion Cycle and Profitability ........................................... 26 
4.3.1 Receivable Period and Profitability ...................................................................... 26 
4.3.2 Inventory Period and Profitability ........................................................................ 28 
4.3.3 Payable Period and Profitability .......................................................................... 30 
4.4 Optimal Working Capital Policies .............................................................................. 32 
4.5 Summary ................................................................................................................... 38 
CHAPTER FIVE ................................................................................................................ 39 
CONCLUSIONS AND RECOMMENDATIONS ............................................................... 39 
5.1 Introduction ............................................................................................................... 39 
5.2 Summary ................................................................................................................... 39 
5.3 Recommendations...................................................................................................... 40 
REFERENCES ................................................................................................................... 42 
 
  
 
 
 
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LIST OF TABLES 
Table 3.1 Descriptive Statistics…..........................................................................................22 
Table 3.2 Correlation Matrix..................................................................................................23 
Table 4.1 Regression 1 Results…………..............................................................................25 
Table 4.2 Hausman Test 1……………….............................................................................25 
Table 4.3 Regression 2 Results.............................................................................................27 
Table 4.4 Hausman Test 2………………............................................................................27 
Table 4.5 Regression 3 Results............................................................................................29 
Table 4.6 Hausman Test 3………………...........................................................................29 
Table 4.7 Regression 4 Results...........................................................................................31 
Table 4.8 Hausman Test 4.………………..........................................................................31 
Table 4.9 Roots and Turning Points....................................................................................33 
 
 
  
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LIST OF FIGURES 
Figure 1.1 Maximum Quadratic Relationship Illustration ..................................................2 
Figure 4.1 NPM-RP Quadratic Relationship Curve…………...........................................34 
Figure 4.2 NPM-IP Quadratic Relationship Curve……....................................................35 
Figure 4.3 NPM-PP Quadratic Relationship Curve...........................................................36 
Figure 4.4 NPM-CCC Quadratic Relationship Curve........................................................37 
 
 
  
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ABSTRACT 
As of late, analysts have led concentrates to explore the straight connection that may exist 
between working capital administration and profitability. Some researchers have discovered a 
positive linear connection between working capital administration and profitability while 
others have discovered a negative straight connection between working capital and 
profitability. A couple of different specialists have likewise discovered blended outcomes with 
regards to the connection between working capital administration and profitability. Is it 
possible that the researchers finding a positive linear connection between working capital 
administration and profitability are seeing one side of a maximum quadratic curve while the 
studies that found a negative straight connection are also taking a gander at the opposite side? 
This study consequently looks to analyze the quadratic connection that may exist between 
working capital administration and profitability and furthermore endeavor to determine the 
ideal working capital policies that would guarantee greatest profitability. 
Listed manufacturing companies in Ghana were the entities used for this study. The study 
considered the audited annual financial statements of these entities from 2006 to 2015. The 
results of the investigation revealed that there is a quadratic connection between working 
capital management and profitability and that there is an optimum cash conversion cycle 
period, receivables collection period, inventory turnover period and payables payment period 
that would have maximum positive impact on profitability measured by net profit margin. 
 
  
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CHAPTER ONE  
INTRODUCTION 
1.1 Background 
Over the years, countless number of articles have been published on the impact of working 
capital management on business profitability. The majority of these articles investigated the 
linear connection that may exist between working capital management and profitability. Kasozi 
(2017), Jakpar et al (2017), Akoto et al (2013) and others under took similar studies and 
discovered a positive linear connection between working capital management and profitability. 
These researchers attributed the positive influence of working capital management on 
profitability to potential increase in sales as a result of increase in credit period to customers. 
They also mentioned that elimination of stock out which catalyses low production can also be 
achieved by keeping high levels of inventory. Likely discounts from suppliers who are paid 
quickly was another reason given for the positive linear relationship between working capital 
management and profitability. These researchers also asserted that default risk is reduced when 
high levels of current assets relative to current liabilities are kept because there would be more 
than enough current assets to defray short term liabilities (Vishnani and Shah, 2007). 
On the other hand, Raheman & Nasr (2007), Gill, Biger & Mathur (2010), Mathuva (2010) and 
some others found a negative linear connection between working capital and profitability. 
These researchers argued that keeping high levels of current assets result in locked up funds. 
Funds held in receivables do not yield returns with time and therefore loss value. Having high 
levels of receivables also increase the risk of experiencing rampant bad debts which negatively 
impact profitability. The findings of these researchers have advocated the aggressive approach 
to working capital management which says that it is better to fund short term assets with short 
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term liabilities because short term liabilities are generally cheaper than long term liabilities 
(Andrew and Gallagher, 2000). 
Why are some researchers finding a negative linear connection between working capital 
management and profitability and others finding a positive linear connection between working 
capital management and profitability? Are these researchers looking at different sides of a 
curve (see figure 1.1)? Is there an optimum cash conversion cycle period for maximum 
profitability? 
 
Figure 1.1 Maximum Quadratic Relationship Illustration 
ProfitabPilirtyo fi
  
Cycle Period 
Red area- The red area signifies the area of positive connection between cycle period 
and profitability. 
Blue area- The blue area signifies the area of negative connection between cycle 
period and profitability. 
1.2 Rationale of the Study 
A study was made on 160 companies listed on the alternative investment market to ascertain 
how working capital level influence SME profitability (Afrifa et al, 2016). According to Afrifa 
et al (2016), there is a quadratic connection between working capital level and profitability and 
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that there is an optimal working capital level at which SMEs can maximize their profitability. 
Abdul-Hamid et al (2017) also recently tried to address the above questions by studying the 
quadratic connection between working capital management and firm performance. Their study 
considered 75 non-financial firms listed on the Nigerian stock exchange from 2007 to 2015. 
This study concluded that the connection between working capital management and 
profitability is quadratic. This is to suggest that an optimal level of investment in working 
capital exists. A general recommendation made by Abdul-Hamid et al (2017) was that more 
studies should be conducted to further understand the quadratic connection between working 
capital management and profitability, hence the justification for the study. 
1.3 Aim 
The general objective of the study is to investigate the quadratic connection that may exist 
between working capital management and the profitability of listed manufacturing firms in 
Ghana. 
1.4 Objectives 
The study seeks to: 
1. Examine the quadratic connection that may exist between cash conversion cycle and 
profitability of listed manufacturing companies in Ghana 
2. Examine the quadratic connection that may exist between the various components of 
cash conversion cycle and the profitability of listed manufacturing companies in Ghana 
3. Determine the roots and turning points of the quadratic functions estimated in objective 
1 and 2. 
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1.5 Limitation of the Study 
The study has a few limitations which will be elaborated in this section. Firstly, the study is 
limited by geography. The study only considers entities in Ghana and therefore results from 
this study cannot be generalized beyond Ghana. The second limitation is that the study 
considers only manufacturing companies in Ghana. This makes the results of this study 
industry specific. The results of this study can only therefore be associated with manufacturing 
concerns.  
1.6 Plan of Dissertation 
The organization of the remaining chapters of this long essay will be described in this section. 
Chapter 2 contains a discussion of the various approaches to working capital management and 
empirical literature pertinent to the area of study. Chapter 3 spells out the research approach, 
Data source and sampling, estimation variables and methods and a statistical description of 
empirical data. Chapter 4 presents analysis of data as well as a discussion of the findings and 
discoveries that were made in the course of the analysis. Lastly, chapter 5 concludes the 
discourse and gives recommendations for further studies.  
1.7 Summary 
This chapter discusses the background and rational of this study. The chapter also spells out 
the general aim and specific objectives of the research. The limitation of the study as well as a 
description of the outline of the dissertation can also be found in this chapter. The next chapter 
reviews the various approaches to working capital management and empirical literature to 
support the gap identified in section 1.2. 
 
 
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CHAPTER TWO 
LITERATURE REVIEW 
2.1 Introduction 
In this chapter, the ways to deal with working capital management as it identifies with 
profitability are discussed. Additionally, the findings of other researchers who have conducted 
similar studies in other jurisdictions and populations have also been reviewed.  
2.2 Approaches to Working Capital Management 
Working capital administration approach can be best depicted as a system which gives the rule 
to deal with the present resources and current liabilities in a manner that lessens the danger of 
default (Brian, 2009). Working capital approach is for the most part centered around making 
enough short term resources accessible so as to meet short term obligations. When the level of 
liquidity is excessively high, an organization has a lot of inactive assets and will have to 
shoulder the cost of these inert assets. Be that as it may, in the event that the liquidity is 
excessively low, the company will face scarcity of assets to meet its short term obligations 
(Vishnani and Shah, 2007). Short term resources are key parts of working capital and the 
working capital policy also relies upon the level of short term resources against the level of 
current liabilities (Afza and Nazir, 2007). Accounting and finance literature by and large 
classify working capital strategy into three categories (Arnold, 2008). 
2.2.1 Defensive policy  
An organization pursues defensive strategy by utilizing long haul obligations and equity to 
back its long term resources and major portions of short term assets. Accordingly, such an 
organization encounters extremely low risks as there will be all that could possibly be needed 
to settle current liabilities. This methodology consequently influences profitability in light of 
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the fact that long haul obligations offers high loan fee which will shoot up the cost of financing 
(Andrew and Gallagher, 2000). This suggests that such an organization is not eager to take 
risks and feels it is suitable to keep money or close to money balances, high inventories and 
maintain liberal credit terms. Generally, the organizations that are working in an uncertain 
environment prefer to adopt such an approach since they do not know what prices, demands 
and transient financing cost will be on a later date. In such a circumstance, it is smarter to have 
a high level of current assets. A typical exemplary scenario is to keep elevated amounts of 
inventory so as to meet the unexpected ascent in demand and to dodge the danger of stoppage 
in production. This approach gives a more drawn out cash conversion cycle for the 
organization. Defensive policy gives the shield against distress caused by the absence of assets 
to meet short term obligations yet as talked about before, long haul obligations for the most 
part have high interest cost which will build the cost of financing. Furthermore, capital tied up 
in a business on account of liberal credit arrangement of the organization consiquently have its 
opportunity cost. Hence, this arrangement may decrease the profitability and the cost of 
following this strategy may surpass the advantages of the approach (Arnold, 2008).  
2.2.2 Aggressive Policy 
An organization pursue aggressive strategy by financing its current assets with short term funds 
since it gives low financing cost however the hazard related with momentary obligation is 
higher than long haul obligation. This methodology is exceptionally unsafe on the grounds that 
the contrast between liquid resources and momentary liabilities turns practically nothing. Also, 
few managers go out on a limb by financing long haul resources with short term funds and this 
methodology sometimes pushes working capital to a negative. Managers attempt to enhance 
profitability by paying lesser interest rates, however this methodology can demonstrate 
exceptionally dangerous if transient financing costs change or the money inflows are not 
sufficient to satisfy the present liabilities (Andrew and Gallagher, 2000). Such an approach is 
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embraced by an organization which is working in a steady economy and is very sure about 
future money streams. An organization with aggressive working capital strategy offers short 
credit period to clients, holds minimal inventory and has a limited amount of money close by. 
This arrangement builds the danger of default in light of the fact that an organization may 
encounter an absence of assets to meet the transient liabilities yet it gives an exceptional yield 
as the exceptional yield is related with high risk (Vishnani and Shah, 2007).  
 2.2.3 Conservative Approach 
A number of organizations decide neither to be aggressive by decreasing the level of current 
assets relative to current liabilities nor to be defensive by expanding the level of current assets 
relative to current liabilities. So as to balance risk and return, these organizations pursue the 
conservative approach. This methodology is a blend of defensive working capital policy and 
aggressive working capital policy. With this methodology, temporary current assets which 
show up on the statement of financial position for brief period are financed with the transient 
borrowings whiles long haul obligations are utilized to back fixed resources and permanent 
current assets. Along these lines, the adherent of this methodology finds the moderate level of 
working capital with moderate risk and return (Andrew and Gallagher, 2000). In addition, this 
arrangement lessens the danger of default, also it likewise diminishes the opportunity cost of 
extra interest in the current resources.  
2.3 Review of Empirical Literature 
2.3.1 Research on Linear Connection between Working Capital Management and Firm 
Performance 
Kasozi (2017) conducted an investigation into the impact of working capital administration on 
profitability of listed manufacturing firms in South Africa. In this study, the researcher sought 
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to explore the association between working capital administration and profitability, estimated 
utilizing the cash conversion cycle and the return on assets of his population respectively. He 
likewise tried to evaluate the association between the different segments of working capital 
administration (in this way, receivables gathering period, payables payment period and 
inventory turnover period) and profitability. The discoveries of the investigation uncovered 
that average receivables gathering period and average payment period are negatively related 
with profitability. This is to propose that entities that give shorter credit periods to their clients 
and pay their suppliers on time enjoy better profitability. Inventory holding period was 
observed to be positively corresponded with profitability. This is likewise to recommend that 
organizations which stock-up and keep up their stock level endure less stock-outs and dodge 
difficulties in securing financing when required (Kasozi, 2017). In Kasozi's investigation, it 
was not determined as to whether a shorter or longer cash conversion cycle improves the 
profitability of the organizations. 
Jakpar et al (2017) directed an investigation on the association between working capital 
administration and profitability in Malaysia's manufacturing sector. This analysis tried to test 
five (5) hypothesis. These are:  
1. H1: There is an association between log of money conversion cycle and company's 
profitability  
2. H2: There is an association between the log of average collection period and firm's 
profitability  
3. H3: There is an association between the log of inventory turnover period and firm 
profitability  
4. H4: There is an association between debt ratio and firm profitability  
5. H5: there is an association between firm size and firm profitability  
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The discoveries of the analysis depicted above uncovered that the log of the money conversion 
cycle had no power over firm profitability and in this manner an organization that improves its 
money conversion cycle would not enjoy any additional profitability. The investigation 
additionally uncovered that there is a positive association between the log of average collection 
period and firm profitability. This additionally implies that managers ought to be urged to give 
clients longer credit periods so as to enhance profitability. The investigation likewise found a 
positive association between the log of inventory turnover period and firm profitability. This 
infers that firms with higher inventory turnover periods have better profitability. The analysis 
further uncovered that there is a negative association between debt ratio and firm profitability, 
while there exists a positive association between firm size and profitability. 
Akoto et al (2013) spearheaded an analysis of working capital administration and profitability 
of listed Ghanaian manufacturing organizations. The goal of this investigation was to look at 
how the working capital administration practices of listed manufacturing firms in Ghana sway 
their profitability for the period covering 2005-2009. The discoveries of this investigation 
uncovered that accounts receivable days is contrarily connected with profitability. It likewise 
found that there is a positive inconsequential association between accounts payable period and 
profitability. This is to assert that the accounts payable period is not so significant with regards 
to ascertaining the profitability of a manufacturing company. The analysis additionally found 
that there exists a positive association between money conversion cycle and firm profitability. 
This suggests that so as to improve profitability, supervisors should chip away at keeping up 
longer money conversion cycles. This investigation likewise asserted that current assets and 
sales essentially and positively determine profitability. Supervisors are hence to keep up 
adequate current assets and produce most feasible extreme sales so as to improve profitability 
(Akoto et al, 2013).  
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Raheman and Nasr (2007) found a solid negative association between the net operating profit 
and debt gathering period, inventory holding period and credit payment period when they 
played out a comparative report on 94 listed Pakistani firms. Their analysis found that 
supervisors can make additional profit for their investors by lessening the number of days for 
gathering receivables and the number of days for inventory turnover. Raheman and Nasr (2007) 
additionally referenced that the negative association between accounts payable period and 
profitability is consistent with the view that less lucrative firms take longer in paying their bills.  
Khalid (2012) studied the association between working capital efficiency and profitability, with 
a sample of sixteen (16) Indian firms recorded on Bombay Stock Exchange (BSE) for the time 
of 2006-2011. The results of the investigation demonstrated that there is a negative association 
between the variables of money conversion cycle and profitability. Khalid (2012) concluded 
that if account receivables and inventory holding days are decreased the organization will make 
more profit and the negative association of the accounts payable with profit additionally affirms 
other writings that say less profitable firms will haggle for longer periods to pay obligation. 
Rehn (2012) considered the impact of working capital administration on organizational profit. 
It was an industry-wise study of Finnish and Swedish public organizations. The factors used to 
determine working capital administration was money conversion cycle and net trade cycle. The 
results demonstrated that there is a noteworthy impact of working capital administration on 
gross profit. The connection between the working capital variables and gross profit were 
negative. This proposes that effective administration of working capital can build profitability 
in those businesses. 
Badu and Asiedu (2013), inspected the impact of working capital administration on the 
profitability of manufacturing organizations listed on the Ghana Stock Exchange (GES), 
explicitly those in the Accra. The principal target of the analysis was to look at the effect of the 
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different working capital administration variables on the profitability of listed manufacturing 
organizations in Ghana, and to likewise set up the association between liquidity and 
profitability of listed manufacturing organizations. The outcome of the analysis demonstrated 
that there is a negative association between accounts payable days and net operating profit in 
spite of the fact that the measurable outcome was of no noteworthy incentive on profit; it infers 
that the shorter the account payable period the more profitable the organization is. Furthermore, 
a negative association was found between the inventory holding time frame and net operating 
profit, the statistical worth is of no noteworthy incentive on profit; it proposes that whether it 
takes longer or shorter period to sell the products it does not generally have any effect on the 
benefit of the organization. Be that as it may, there was a positive association between money 
conversion cycle and net operating profit. This shows the period between payment of liabilities 
and collection of credit sales affects profit. Therefore, these factors ought to be overseen 
appropriately and productively to an ideal level so the desired profit of the company can be 
accomplished. 
Bhunia and Das (2015) examined the fundamental association between working capital 
administration and profitability of pharmaceuticals organizations in India for the time of 2004-
2013 with a sample of 140 pharmaceutical organizations. In the investigation, 8 ratios were 
recognized as pointers of working capital; current ratio, quick ratio, money position proportion, 
debt to equity ratio, inventory turnover ratio, indebted individuals' turnover proportion, lenders' 
turnover proportion and working capital cycle whereas one ratio was used as a pointer of 
profitability, return on capital utilized. The investigation of results demonstrated that there is 
no critical association between working capital administration and profitability despite the fact 
that the working capital cycle demonstrated some impact on the profit, it is not huge. 
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Gill, Biger and Mathur (2010) endeavored to assess the association between working capital 
administration and profitability of 88 firms listed on the New York stock exchange. No huge 
association was found between inventory holding period and profitability whereas a positive 
association was found between money conversion cycle and profitability. Directors can make 
wealth for investors by decreasing the number of days for accounts receivables collection (Gill, 
Bigger and Mathur, 2010). 
Mathuva (2010) additionally examined the impact of working capital administration 
components on corporate profitability. It was found that there exists an exceptionally 
noteworthy negative association between cash collection period and corporate profitability, a 
profoundly huge positive association between inventory turnover period and corporate 
profitability and very huge positive association between payment period and corporate 
profitability.  
Baveld (2012) explored the administration of working capital in the most productive ways, 
during non-crisis period and crisis period. 37 listed organizations from the Netherlands were 
examined with the non-crisis period going from 2004-2006 and the crisis time frame going 
from 2008 to 2009. The analysis uncovered that the number of days of accounts receivable has 
a negative association with the firm profitability during a non-crisis period whiles in the crisis 
time frame, there was no noteworthy association. This suggests that the association between 
number of days of account receivables and a firm profitability changes in the midst of crisis. 
The accounts payable and profitability additionally demonstrated a negative association in the 
two time frames. Conceivable reason cited for this was that firms who pay earlier, get discount 
which results in a higher profit. There was negative association among inventory turnover 
period and profitability in the two time frames. This recommends that during crisis and non-
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crisis periods, more consideration ought to be given to inventory and it ought to be kept up at 
a minimal level. 
NG'ANG'A (2009) also explored the association between working capital and profitability of 
listed organizations in the Nairobi Stock Exchange. The scientist studied 23 firms, a sample of 
firms listed at Nairobi Stock Exchange (NSE) for a time of 2003-2008. As per NG'ANG'A, in 
Kenya, studies have focused on explicit drivers such as creditor liabilities, accounts receivables 
and their effect on profitability without evaluating the association with working capital in its 
entirety. The return on assets was utilized as the dependent variable while money conversion 
cycle, debt collection period, creditor period, inventory period and leverage were utilized as 
independent variables. Empirical discoveries of the investigation demonstrated that accounts 
receivable period, creditor period, inventory period and money conversion cycle influence the 
firm profitability adversely. In its conclusion, the investigation proposed some strategy 
implications for the managers and financial specialists of Kenyan markets. The researcher 
recommended that organizations need to blend policies of cash levels with that of trade 
payables and inventory so the balances are streamlined or optimized. In view of the 
investigation's discoveries, firms should concentrate on decreasing the accounts receivable 
period, creditor period and inventory period. 
Aondona et al (2014) analyzed the effect of working capital administration on profitability of 
Nigerian cement industry for a time of eight (8) years; 2002 to 2009. The data set constituted 
4 out of 5 cement organizations listed on the Nigeria stock exchange. The investigation found 
a negative irrelevant association between firm profitability and accounts receivable period. The 
analysis likewise uncovered a critical negative association between profitability and the 
number of days within which inventory is held. However, the association between profitability 
and the money conversion cycle was observed to be altogether positive. The analysis 
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recommended that the number of days within which inventory is held and the money 
conversion cycle are significant and huge in improving profitability. Consequently, directors 
should screen the inventory levels so as to diminish the number of days within which inventory 
is held in stock before sales. This will upgrade profitability, liquidity and furthermore augment 
investors' wealth. 
Atta et al. (2017) looked into the relationship between the working capital and corporate 
performance in the textiles sector in Pakistan for the period 2008 to 2012. The data set was the 
yearly report of textile organizations published for that period. This study uncovered that 
average conversion period, money conversion cycle and operating cycle are significantly and 
positively connected with firm profitability. 
Golas et al (2013) conducted an analysis of the association between working capital and 
profitability in the food industry of Poland. Inventory administration, receivables, current 
liabilities and operating indicators were utilized in dissecting the effectiveness of working 
capital administration. Return on Non-financial assets was the variable utilized in estimating 
the profitability of the various food companies. The objective was to decide the direction and 
quality of the effect of the cycles on profitability. The dissection indicated unmistakably that 
shorter cycles result in higher profitability. This proposes so as to make organizations in the 
Polish food industry profitable, managers should attempt to deal with their operating and 
money conversion cycles so as to keep them as short as feasible. 
In a research carried out by Garg and Gumbochuma (2015) on the association between working 
capital administration and profitability in Johannesburg Stock Exchange listed retail 
organizations, it was expressed that literature on this area of study have been uncertain on the 
association between working capital and profitability but have nonetheless, found a negative 
association between working capital and profitability. The consequences of Garg and 
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Gumbochuma's analysis showed that working capital administration influenced profitability 
and ought to be a necessary piece of the company's financial plan. In this present global 
environment of aggressive competition, practically all organizations have no other reasonable 
choice but to cut the expense of activities so as to be aggressive and be monetarily solid. 
Accordingly, productive working capital administration is an indispensable part of the overall 
corporate methodology to make investors wealthy. Dealing with an association between 
working capital and benefit is such a crucial thing for the association's survival (Khakhdia, 
2014).  
Syed et al (2010) conducted an exploration on the association between working capital strategy 
and profitability of Swedish firms. A sample of 37 listed organizations on the OMX Stockholm 
stock exchange for a time of 5 years, that is 2004 to 2008 were utilized. Gross operating profit 
was used as an indicator of profitability and the money conversion cycle was used to determine 
the aggressiveness of the working capital strategy. The working capital strategy can either be 
aggressive, defensive or moderate. The results demonstrated that there exists no association 
between money conversion cycle and profitability. Nonetheless, profitability is positively 
connected with inventory holding period and payables payment period but has a negative 
connection with receivables collection period.  
Temtime (2016) inspected the association between working capital administration strategies 
and profitability of small manufacturing firms. The study made use of financial information for 
the period 2004 to 2013 of a sample of 176 publicly traded small United States manufacturing 
organizations. A regression analysis was performed where the measure of profitability was 
gross operating profit, return on asset and Tobin's q. The outcome affirmed that working capital 
administration and working capital strategies have a critical constructive effect on firms' 
profitability.  
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2.3.2 Research on the quadratic connection between Working Capital management and 
Firm Performance 
Thapa et al (2013) attempted an analysis of how profitability is influenced by working capital 
administration in the food and beverages industry. The study in its survey of related writing 
referenced that leverage, growth, cash flow, size, age, tangible fixed assets and profitability 
were a portion of the elements that impacted working capital administration. Right off the bat, 
dissimilar to past studies which promote a straight association between the working capital 
administration and gainfulness, the investigation researched the presence of a conceivable non-
linear association. Additionally, the proficiency of working capital administration was checked 
utilizing performance index, utilization index and efficiency index as opposed to utilizing the 
regular turnover ratios. It was seen that the working capital measure, the money conversion 
cycle was positively identified with profitability and cash flow. Then again, the money 
conversion cycle was adversely connected with leverage, growth, size, age and fixed assets to 
total asset ratio. The analysis additionally dissected the non-linear association between 
profitability and the money conversion cycle. The positive and critical regression coefficient 
of money conversion cycle and its square proposed that there exists a non-linear connection.  
Ville (2015) examined the effect of working capital on corporate profitability and investor 
value in 1683 publicly listed US computer and electrical equipment organizations from 
1990−2013. This exploration inspected the quadratic association between operational working 
capital and profitability. It additionally evaluated the impact of working capital on market 
value, that is to discover how equity holders’ worth is affected by working capital.  
The discoveries of this exploration demonstrates a concave association between the money 
conversion cycle and return on asset, which suggests that, a perfect level of working capital 
must be reached so as to maximize profit. When working capital falls beneath that perfect level, 
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it diminishes the profitability. A further decrease expands the danger of illiquidity and distress 
cost whiles too high increments tied-up capital and lost opportunity, thus opportunity cost. This 
declaration is in concurrence with that of Arnold (2008) and Vishnani and Shah (2007). 
However, money conversion cycle negatively affected return on equity, that is, as working 
capital expands the value of equity holders lessens.  
In 2016, an investigation was conducted to study the association between working capital level, 
estimated by the cash conversion cycle and profitability of small and medium enterprises 
(Afrifa et al, 2016). The analysis was performed on 160 organizations listed on the alternative 
Investment market of Ghana to discover how working capital level impacts SME profitability 
for the period of 2005-2010. The discoveries of this analysis uncovered that there is a concave 
association between working capital level and firm profitability and that there is an ideal 
working capital level at which firms' profitability is maximized. Moreover, an analysis with 
respect to whether deviations from the ideal working capital level diminishes firm profitability 
shows that deviations above or beneath the ideal declines profitability.  
Most recently, Abdul-Hamid et al (2017) also decided to also probed the quadratic connection 
that may exist between working capital administration and firm performance utilizing proof 
from the Nigerian economy. The investigation was carried out on an aggregate of 75 firms 
listed on the Nigerian Stock Exchange (barring money related firms). The investigation 
considered the period spreading over from 2007 to 2015. The empirical results of this 
investigation found that there is a quadratic association between working capital administration 
and firm performance. This advocates that there is an ideal level of interest in working capital 
that maximizes firm performance. In this same research, Abdul-Hamid et al (2017) made a 
general proposal that more research ought to be done on the quadratic association between 
working capital administration and profitability. 
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2.3 Summary 
The chapter gives a thorough review of literature on the connection between working capital 
management and profitability. The general observation is that there are numerous researches 
conducted to investigate the linear connection between working capital management and 
financial performance as against the few researches conducted to investigate the quadratic 
connection that may exist between working capital management and financial performance. As 
such, this study seeks to continue investigations into the possibility of a quadratic connection 
between working capital management and financial performance. If indeed there exists a 
quadratic connection between working capital management and financial performance, this 
would lead us to ascertain the optimum working capital policies that would yield high financial 
performance. 
 
 
 
 
 
 
 
  
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CHAPTER THREE 
RESEARCH METHODOLOGY 
3.1 Introduction 
The purpose of this chapter is to elaborate on the research methodology chosen in conducting 
this study. The chapter will explain the research approach, source of data collected, sample and 
selection criteria, execution strategy and other methodological issues. 
3.2 Research Approach 
Research may take three forms; quantitative approach, qualitative approach or mixed approach, 
which is a blend of the first two approaches. This study would be carried out using the 
quantitative approach because its objectives require the quantitative measurement of working 
capital management and profitability using numerical variables gathered from secondary data 
and the analysis of the econometric connection that may exist between these variables.  
3.3 Data Source and Sample Selection 
The study period will consider 2006-2015 so as to cover the most recent years with available 
data. Secondary data will be sourced from the annual audited financial statements of 
manufacturing companies listed on the Ghana Stock Exchange.  
The population for the study includes all eleven (11) manufacturing companies listed on the 
Ghana Stock Exchange and the entire population would be used for the study so as to capture 
all instances of the population. Manufacturing companies are the focus of this study because 
of the current government of Ghana’s intentions to industrialize the country by establishing 
one factory in every district (New Patriotic Party,2016). The results of this study will give the 
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management of these to-be-established factories a guide as to how they can manage their 
working capital in a fashion that will positively impact financial performance. 
3.4 Measurement of Estimation Variables 
The study will make use of four (4) regressions. The dependent variable for all for regressions 
will be the Net Profit Margin (NPM). This variable will be used as a measure of the profitability 
of the various companies that would be analyzed in this study. For the first regression, the 
primary independent variables will be Cash Conversion Cycle (CCC) and its square (CCC2). 
This particular regression will be used to determine whether there is a concave connection 
between NPM and CCC as a whole. The primary independent variables for the second 
regression will be Receivables Collection Period (RCP) and its square(RCP2). The second 
regression seeks to determine if there exists a non-linear connection between NPM and RCP 
as a component of working capital management.  The primary independent variables of the 
third regression will be the Inventory Turnover Period (ITP) and its square (IPT2). This 
regression seeks to determine the quadratic connection that may exist between NPM and ITP 
as a component of working capital management. Lastly, the primary independent variables for 
the fourth regression will be Payables Payment Period (PPP) and its square (PPP2). This last 
regression will be used to ascertain if there exists a quadratic connection between NPM and 
PPP as a component of working capital management.  
Consistent with empirical studies (Afrifa, 2016; Abdul-Hamid et al, 2017; Ville, 2015), the 
following control variables will be included in all the regressions because other literature have 
established that they are also factors that affect profitability. These controls include the age of 
the company (AGE), the size of the company measured with total assets (SIZE), the financial 
leverage of the company measured with total debt ratio (LEV) and its liquidity measured with 
current ratio (CR). 
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3.5 Empirical Estimation Models 
In order to achieve objective one (1) in chapter one, the following econometric model will be 
used: 
NPM 2it = β0 + β 1CCC it + β 2CCCit + β 3AGEit + β 4SIZEit + β 5LEVit + β 6CRit + ℰit - (1) 
Objective two (2) of this study will be achieved using the regression models below: 
NPM 2it = β 0 + β 1RP it + β 2RPit + β 3AGEit + β 4SIZEit + β 5LEVit + β 6CRit + ℰit - (2) 
NPMit = β 0 + β 1IP
2
it + β 2IPit + β 3AGEit + β 4SIZEit + β 5LEVit + β 6CRit + ℰit - (3) 
NPMit = β 0 + β
2
 1PP it + β 2PPit + β 3AGEit + β 4SIZEit + β 5LEVit + β 6CRit + ℰit - (4) 
Objective three of the study will be achieved by using calculus and algebra in finding the roots 
and turning points of the quadratic functions derived from objective 1 and 2. These will help 
estimate the optimal working capital management policies for maximum profitability.  
3.6 Summary Statistics and Correlation Analysis 
3.6.1 Descriptive Statistics 
Table 3.1 presents a statistical description of the data used for this study. NPM has a mean of 
5% and maximum and minimum of 27% and -78% respectively. RP has a mean of 60 days and 
a minimum and maximum of 0.72 day and 185 days respectively. The minimum and maximum 
of IP is 28 and 389 days respectively with a mean of 130 days. PP has a maximum of 589 days 
and a minimum of 28. The mean PP however, is 144 days. CCC shows a mean of 47 days, a 
maximum of 360 days and a minimum of -434 days. The oldest company in the population is 
80 years old whereas the youngest is 14 years old. The mean age is 41 years. The biggest 
company in the population has a total asset value of GH¢419.38million and the smallest 
company has a total asset value of GH¢1.58million. The mean size is GH¢76.18million. The 
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mean LEV is 54%, the minimum is 8% and the maximum is 108%. CR also has a maximum 
of 9.81 times, a minimum of 0.18 times and a mean of 1.56 times.  
Table 3.1 – Descriptive Statistics 
 
3.6.2 Correlation Analysis 
Table 3.2gives the correlation matrix of the data for this study. The correlation coefficients of 
the variables will be analyzed based on the regression models indicated in section 3.5 above. 
The correlation coefficient between CCC and NPM depicts a positive connection between the 
two variables. On the other hand, RP is also seen to be negatively correlated with NPM. The 
correlation matrix also reveals a positive connection between IP and NPM. Also, PP is shown 
in the correlation matrix to be negatively correlated with NPM. NPM is positively correlated 
with CR and SIZE but negatively correlated with AGE and LEV. The remaining control 
variables show no correlation coefficient greater than 0.8. This suggests that multicollinearity 
is unlikely to be present (Field, 2005). 
 
 
 
 
 
  
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Table 3.2 – Correlation Matrix 
 
3.7 Methodological Issues 
Firstly, outliers were detected during a preliminary data analysis conducted. As recommended 
by Beiner et al (2006), these outliers were dealt with by removing them from the data. Since 
this study involves panel data, the Hausman test was performed to determine whether to use 
Fixed Effect or Random Effect in estimating the panel regression model. After estimating the 
regression models, the turning points and roots of the curves were determined by using calculus 
and algebra respectively. With the turning points and roots of the curves, an estimate of 
optimum working capital management policies that would maximize profitability can be 
determined. These policies refer to those that affect receivable collection period, inventory 
turnover period, payable payment period and cash conversion cycle as a whole.  
3.8 Summary 
This chapter gives detailed explanation of the research approach, the data source and sample 
selection. It also talks about the various variables, estimation models and methodological issues 
that were essential in obtaining the results presented in the next chapter.  
 
 
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CHAPTER FOUR 
PRESENTATION AND ANALYSIS OF RESULTS  
4.1 Introduction 
This chapter presents the results and findings of the study. This chapter is organized to address 
the objectives as stated in chapter one. The first part elaborates on the results and findings from 
studying the quadratic connection between cash conversion cycle and financial performance. 
The second part gives the outcome from the study of the quadratic connection that may exist 
between the components of cash conversion cycle and profitability of listed manufacturing 
firms in Ghana. The last part seeks to present the results after determining the roots and turning 
points of the quadratic model estimated in the first and second part. 
4.2 Cash Conversion Cycle and Profitability 
In studying the quadratic connection between cash conversion cycle and profitability, model 1 
in chapter 3 was used as the empirical estimation model. In this model, profitability measured 
by NPM was dependent on CCC and CCC2 as well as some other control variables. The results 
of this estimation is presented in table 4.1.  
In the table, the adjusted R2 shows that about 35% of the variations in NPM are accounted for 
by the independent variables in the regression model. The F statistic value also suggests that 
the independent variables as a whole are significant in determining the NPM of listed 
manufacturing companies in Ghana. The results also depict that CCC2 is statistically significant 
in determining NPM at 1% level of confidence. CR which is one of the control variables and 
the intercept also show statistical significance in determining the NPM of the study population 
at a 10% level of confidence. From basic algebra, the negative coefficient of CCC2 signifies 
that the quadratic connection between CCC and NPM is maximum in nature. The random effect 
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panel regression was used for the model estimation because the probability value from the 
Hausman test as shown in table 4.2 upholds the random effect panel regression. Using the 
coefficients in table 4.1, model 1 in chapter 3 can be rewritten as: 
NPMit = 1.70E-01 - 2.26E-06CCC
2
it + 1.93E-04CCCit - 1.15E-03AGEit - 9.00E-05SIZEit - 
1.35E-01LEVit + 2.35E-02CRit + ℰit - (5) 
Table 4.1 Regression 1 Results 
 
Standard errors are reported in parentheses. *, **, *** indicates significance at the 10%, 5%, 
and 1% level respectively 
 
  
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Table 4.2 Hausman Test 1 
 
4.3 Components of Cash Conversion Cycle and Profitability 
4.3.1 Receivable Period and Profitability 
The results of the study on the quadratic connection between receivable period and profitability, 
measured by NPM is illustrated in table 4.3 Model 2 in chapter 3 was the empirical model used 
to conduct this investigation. Table 4.3 shows the estimation output after running regression 2 
in chapter 3. In this regression, the dependent variable was NPM and the primary independent 
variables were RP and RP2, together with other control variables as explained in chapter 3. 
The adjusted R2 for this regression as shown in table 4.3 denotes that about 14% of variations 
in NPM can be accounted for by the regressors of the regression. The F-statistic value also 
suggests that the predictors in the regression as a whole are significant in determining the 
profitability of the sample firms. However, the only variable that showed singular significance 
in determining the NPM was LEV. LEV showed a significant positive connection with NPM 
at a 1% confidence level. The intercept also demonstrated significance at the 5% level of 
significance. The quadratic connection between RP and NPM can be said to be maximum 
because the coefficient of RP2 is negative. The random effect panel regression was used in the 
model estimation because the probability value from the Hausman test as shown in table 4.4 
upholds the random effect panel regression. We can also rewrite model 2 in chapter 3 as follows 
using the coefficients of the variables from the regression: 
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NPMit = 2.44E-01 – 5.63E-06RP
2
it + 5.07E-04RPit - 1.82E-03AGEit + 6.90E-05SIZEit - 
2.86E-01LEVit + 1.69E-02CRit + ℰit - (6) 
Table 4.3 Regression 2 Results 
 
Standard errors are reported in parentheses. *, **, *** indicates significance at the 10%, 5%, 
and 1% level respectively 
 
Table 4.4 Hausman Test 2 
 
 
 
 
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4.3.2 Inventory Period and Profitability 
The results of the study on the quadratic connection between Inventory Turnover Period and 
profitability, measured by NPM is illustrated in table 4.5. The model used to conduct this 
investigation is model 3 as found in chapter 3 of this study. Table 4.5 shows the estimation 
output after running regression 3 in chapter 3. In this regression, the dependent variable was 
NPM and the primary independent variables were IP and IP2, together with other control 
variables as explained in chapter 3. 
Table 4.5 gives the results of the regression. The adjusted R2 as reported in the table is about 
14%. This signifies that 14% of the variations in NPM can be accounted for by the predictors 
in the regression model. The F statistic value also signifies that the independent variables in 
the regression contribute largely to determining NPM. LEV was the only predictor that showed 
positive connection with NPM at a 1% degree of confidence. IP also showed a significant 
positive connection with NPM at a 10% degree of confidence. Because the coefficient of IP2 is 
negative, the nature of the quadratic connection between IP and NPM can be said to be 
maximum in nature. The random effect panel regression was used for the model estimation 
because the probability value from the Hausman test as shown in table 4.6 upholds the random 
effect panel regression. The coefficients in table 4.5 can be used in rewriting model 3 in chapter 
3 as follows: 
NPMit = 1.78E-01 - 2.80E-06IP
2
it + 1.32E-03IPit - 2.75E-03AGEit + 8.36E-05SIZEit - 2.86E-
01LEVit + 1.07E-02CRit + ℰit - (7) 
 
 
 
 
  
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Table 4.5 Regression 3 Results 
 
Standard errors are reported in parentheses. *, **, *** indicates significance at the 10%, 5%, 
and 1% level respectively 
 
Table 4.6 Hausman Test 3 
 
 
 
 
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4.3.3 Payable Period and Profitability 
The last regression performed in this study was performed to understand the quadratic 
connection that may exist between NPM and PP. Model 4 as found in chapter 3 was used in 
studying this connection. In this model, the dependent variable is NPM and the primary 
independent variables are PP and PP2. The results of this regression is presented in table 4.7 
below.  
In the table, adjusted R2 is reported to be about 23%. This denotes that about 23% of the 
variations in NPM can be accounted for by the predictors in model 4 as found in chapter 3. The 
F statistic also suggests that the independent variables in the model have overall significance 
in determining NPM. PP2 showed a high significance at a 1% level of confidence, whereas PP 
and LEV showed significance at 5% degree of confidence. The intercept however showed 
significance at 10% degree of confidence. The coefficient of PP2 suggests that the nature of the 
quadratic connection between PP and NPM is maximum in nature. The random effect panel 
regression was used for the model estimation because the probability value from the Hausman 
test as shown in table 4.8 upholds the random effect panel regression. Model 4 in chapter 3 can 
therefore be rewritten as follows using the coefficients from table 4.7: 
NPMit = 1.66E-01 - 1.95E-06PP
2
it + 8.67E-04PPit - 2.42E-03AGEit + 1.56E-05SIZEit - 
2.21E-01LEVit + 2.07E-02CRit + ℰit- (8) 
 
 
 
 
 
 
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Table 4.7 Regression 4 Results 
 
Standard errors are reported in parentheses. *, **, *** indicates significance at the 10%, 5%, 
and 1% level respectively 
 
Table 4.8 Hausman Test 4 
 
 
 
 
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4.4 Optimal Working Capital Policies 
In this section, the functions derived from the four regressions will be further analyzed to 
determine the optimal cash conversion cycle period for maximum profitability. The turning 
point of the curve gives the value of the primary predictor that gives maximum NPM. The roots 
of the curve give that range of values of the predictor for which positive NPM would be 
obtained. 
Model 1 as found in chapter 3 was used in studying the quadratic connection that may exist 
between CCC and NPM. In this model, the primary predictors were CCC2   and CCC whiles 
the regressand was NPM. From the results of the regression, model 1 was rewritten to become 
model 5 as found below: 
NPM 2it = 1.70E-01 - 2.26E-06CCC it + 1.93E-04CCCit - 1.15E-03AGEit - 9.00E-05SIZEit - 
1.35E-01LEVit + 2.35E-02CRit + ℰit - (5) 
By taking the first derivative of the function with respect to CCC using calculus, we get: 
d NPM    =    -4.52E-06CCC + 1.93E-04 
d CCC 
 
At the turning point of a quadratic curve, the first derivative is equal to Zero. This implies that: 
0    =   -4.52E-06CCC + 1.93E-04 
CCC =    42.7 days 
Therefore, in order to obtain maximum NPM, managers are to put in place working capital 
management policies that will ensure that CCC is approximately 43 days long. This assertion 
is true when the effect of the other variables on NPM are nullified.  
In basic algebra, at the roots of a quadratic function, the dependent variable is equal to zero. 
This means that model 5 has to be equated to zero in order to determine its roots.  
0 = 1.70E-01 - 2.26E-06CCC2it + 1.93E-04CCCit - 1.15E-03AGEit - 9.00E-05SIZEit - 1.35E-
01LEVit + 2.35E-02CRit + ℰit  
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By using the quadratic formula, and nullifying the effects of the other augmenting predictors, 
we have: 
     CCC = -b ± √ (b2 -4ac) 
                            2a 
 
             = -1.93E-04 ± √((1.93E-04)2 -4(-2.26E-06) (1.70E-01)) 
                                                         2(-2.26E-06) 
 
CCC= -234 and CCC=320 
 
The above exercise was performed on the other three regression models. The results are shown 
in Table 4.9, figure 4.1, figure 4.2, figure 4.3 and figure 4.4. 
 
Table 4.9 
  
 
In section 2.2.1 in chapter two, the defensive approach to managing working capital was 
discussed extensively. This approach seeks to take advantage of the benefits that come with 
having more than enough current assets to defray current liabilities. Such advantages include 
the low risk of current liability default and the ability to meet demand anytime it rises in an 
uncertain environment (Arnold, 2008). As such, companies that adopt this approach will be 
ready to receive supplies for cash and give customers liberal credit terms. 
In section 2.2.2 in chapter two, there is a discussion on the aggressive approach to managing 
working capital. This approach holds an opposing view from that of the defensive approach. 
The aggressive approach funds its short term assets with short term liabilities.  This approach 
sometimes funds long term assets with short term liabilities. In this way, the firm would pay 
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lesser finance cost (Andrew & Gallagher,2000). The main aim of this approach is to make sure 
that funds are not tied up in receivables or inventory at an expensive opportunity cost. 
The question that arises is: is there an optimum policy for managing working capital that would 
maximize profitability and balance the risk and returns that come with the two extreme 
approaches described above? The answer to this question can be found in Table 4.9 and 
illustrated in figure 4.1, figure 4.2, figure 4.3 and figure 4.4. 
 
Figure 4.1 NPM-RP Quadratic Relationship Curve 
 
 
Figure 4.1 gives an illustration of the quadratic connection that exists between receivables 
collection period and net profit margin. The curve is a maximum curve because the coefficient 
of the quadratic term in model 6 (RP2) is negative. This means the curve is a rise and fall curve. 
According to the results of this study, the optimum receivables collection period that 
maximizes net profit margin is 45 days. The first root which is -168 days signifies that taking 
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prepayments from customers beyond 168 days will result in negative net profit margin. The 
second root which is 258 days also signifies that offering credit period to customers beyond 
258 days will result in negative net profit margin. It is therefore recommended that prepayment 
period should not exceed 168 days and credit period should also not exceed 258 days. However, 
the optimum credit period for maximum net profit margin is 45 days. These assertions are true 
if the effects of other factors on net profit margin are nullified and the focus is placed on 
receivables collection period. 
Figure 4.2 NPM-IP Quadratic Relationship Curve 
 
 
Figure 4.2 illustrates the quadratic connection that exists between inventory turnover period 
and net profit margin. This curve is also maximum because the coefficient of the quadratic term 
(IP2) in model 7 is also negative. This means the curve rises and falls. According to the results 
of this study, the optimum inventory turnover period for maximum net profit margin is 236 
days. Obviously, it is impractical to have a negative inventory turnover period in the 
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manufacturing sector so, the first root of the curve can be ignored. Nevertheless, the second 
root signifies that if inventory turnover period grows beyond 582 days, the result will be 
negative net profit margin. However, the optimum inventory turnover period for maximum net 
profit margin is 236 days. These assertions are true if the effects of other factors on net profit 
margin are nullified and the focus is placed on inventory turnover period. 
Figure 4.3 NPM-PP Quadratic Relationship Curve 
 
 
Figure 4.3 graphically illustrates the nature of the quadratic connection between payable 
payment period and net profit margin. This curve is also maximum because the coefficient of 
PP2 in model 8 is negative. This suggests that the curve rises then falls. The results of this study 
indicate that the optimum payable payment period for maximum net profit margin is 222 days. 
The first root of the quadratic curve suggests that a negative net profit margin will be 
experienced if companies pay their suppliers more than 144 days before an invoice is raised. 
The second root also signifies that if it takes a manufacturing company in Ghana more than 
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589 days to pay its suppliers, this company will experience negative Net Profit Margins. In 
order to make maximum net profit margins, the payable payment period should be around 222 
days. These assertions are true if the effects of other factors on net profit margin are nullified 
and the focus is placed on payable payment period. 
Figure 4.4 NPM-CCC Quadratic Relationship Curve 
 
 
Figure 4.4 gives an illustration of the quadratic connection that exists between cash conversion 
cycle and net profit margin. The curve is a maximum curve because the coefficient of the 
quadratic term in model 5 (CCC2) is negative. This means that the curve is expected to rise and 
fall. The results of the study indicate that manufacturing companies in Ghana are likely to 
experience maximum net profit margin, if they maintain a cash conversion cycle of about 43 
days, ceteris paribus. Furthermore, the results suggest that in order to keep experiencing 
positive net profit margin, the cash conversion cycle should not exceed 320 days, also the 
payable payment period should not exceed the sum of the receivable collection period and the 
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inventory turnover period by more than 234 days. This will ensure that the net profit margin of 
such entities remain in the positive region. 
4.5 Summary 
The chapter contains a presentation of the results of the study as well as a discussion of the 
findings from the study. The results indicate that there is a quadratic connection between cash 
conversion cycle and profitability. There is also a quadratic connection between the 
components of cash conversion cycle and profitability. The results of the study revealed the 
optimum working capital management policies that would ensure maximum profitability. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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CHAPTER FIVE 
CONCLUSIONS AND RECOMMENDATIONS 
5.1 Introduction 
This chapter contains a summary of the study. It provides the motive for the research, the 
findings that were made as well as recommendations for further studies on the quadratic 
connection between working capital management and profitability. 
5.2 Summary 
Over the years, a lot of studies have been conducted to examine the connection between 
working capital management and profitability. These studies can be broadly classified into 
three groups. The first group of studies sought to suggest that there exists a positive connection 
between working capital management and profitability. The findings of these studies support 
the defensive approach to working capital management as discussed in section 2.2.1 of this 
study. The second group of studies discovered a negative connection between working capital 
management and profitability. This group of studies on the subject advocate the aggressive 
approach to managing working capital as explained in section 2.2.2 of this study. The last group 
of studies advocate the conservative approach to managing working capital. This approach 
seeks to balance the risk and returns from working capital in order to maximize profitability. 
However, the optimum working capital management policies with which profitability can be 
maximized is not known. The objective of this study was therefore to examine the quadratic 
connection that may exist between cash conversion cycle as well as its components and 
profitability. The study also attempted to use the roots and turning points of the quadratic curves 
to determine the optimum working capital policies that would maximize profitability, measured 
with net profit margin. 
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The findings suggest that, when all other factors are held constant or nullified, manufacturing 
companies in Ghana have to maintain a cash conversion cycle period of about 43 days in order 
to maximize profitability.  The regression model derived suggests that positive net profit 
margin will be experienced if cash conversion cycle can be maintained between -234 and 320 
days.  
The range of receivable collection period for which positive net profit margin will be 
experienced, according to the results of this study was identified to be between -168 and 258 
days. However, the optimum level of receivables collection period for maximum net profit 
margin is 45 days. 
The study on the quadratic connection between inventory turnover period and net profit margin 
also revealed that 236 days is the ideal inventory turnover period that manages to risk and 
return such that maximum net profit margin is achieved. The study further revealed that in 
order to keep net profit margin in the positive zone, inventory turnover period should be 
between -109 and 582 days. However, inventory cannot practically be a negative so the range 
was revised to be between zero (0) and 582 days. 
Lastly, the quadratic connection between payables payment period and net profit margin was 
examined. The results of this analysis also revealed that the optimum payable payment period 
that will maximize net profit margin is 222 days. Furthermore, the range of payables payment 
period that will ensure positive net profit margin is between -144 and 589 days. 
5.3 Recommendations 
The research focused on the Ghanaian setting of listed manufacturing companies. This limits 
the scope of the research which can be augmented by further research into a wider sample of 
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manufacturing companies including unlisted manufacturing companies in Ghana, unlisted and 
listed manufacturing companies in other countries. 
The industrial focus of the study also poses as a limitation to the study. The manufacturing 
industry was the focus of the study and therefore results and interpretations made were pertinent 
to manufacturing concerns. It is recommended that a similar study be conducted to focus on a 
different setting like the trading industry. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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