The impact of macroeconomic indicators on working capital management and firms’ profitability in Egypt

Purpose This study examines the influence of macroeconomic factors on the relationship between working capital management (WCM) and firm profitability, using annual data from 94 firms listed on the Egyptian stock market from 2013 to 2022. The analysis also distinguishes between manufacturing and non-manufacturing firms by dividing the sample accordingly. Design/methodology/approach A dynamic panel data method (system GMM) is used to control the endogeneity problem when studying the relationship between WCM and profitability and the impact of macroeconomic variables on the relationship of interest. These macro variables are the real GDP growth rate, lending interest rate, real exchange rate and inflation rate. The cash conversion cycle (CCC) measures WCM and the return on assets (ROA) for profitability. Findings The results show a positive relationship between CCC and ROA for the whole and manufacturing firms' samples, while the relationship was insignificant for non-manufacturing firms. The results confirm that macroeconomic variables significantly affect the relationship of interest. The GDP growth rate, interest rate and inflation rate make the relationship negative for the entire sample and non-manufacturing firms. However, a positive relationship applied to the manufacturing sample. The results suggest manufacturing firms in Egypt should prioritize extending credit terms during currency devaluations. Originality/value This study broadens the scarce empirical studies on the relationship between WCM and profitability in less developed economies. Additionally, this is the first study in Egypt to investigate the impact of macroeconomic variables on firm profitability through WCM, covering multiple sectors and examining four key macroeconomic factors that influence the business environment.