Working Capital Management and Profitability of Firm: A Simulation-Based Analysis

Effective working capital management is crucial for balancing a firm's liquidity and profitability. This study investigates the relationship between working capital and firm performance using simulated data for illustrative purposes. We model the impact of the cash conversion cycle (a key indicator of working capital efficiency) on firm profitability, controlling for leverage and firm size. The regression analysis reveals a significant inverse relationship between the length of the cash conversion cycle and profitability. This finding supports the notion that efficient working capital management – maintaining a shorter cycle – can enhance a firm's financial performance, while excessive leverage may dampen returns. Key implications for financial managers are discussed.