Effectiveness of Working Capital Management on Business Profitability and Liquidity: An Evidence from Manufacturing SMEs in Kitwe, Zambia

The effectiveness of working capital is a critical aspect of financial management for Small and Medium Enterprise (SMESs) in the manufacturing sector, as it directly impacts their profitability and overall business performance in many developing nations including Zambia. Small and Medium Enterprises (SMEs) in Zambia’s manufacturing sector faces challenges in managing their working capital that results to operational inefficiencies, lower profitability, and increasing chances of business failure. This study aimed to examine the influence of working capital management (WCM) on the performance of SMEs manufacturing sector in Kitwe, Zambia. The study employed a mixed-method design with the sample size of 200 were randomly collected and analyzed using the STATA and thematic analysis. The chi-square test reveals a statistically significant association between working capital management (WCM), Profitability (χ² = 229.150, p = 0.00) and between WCM and liquidity (χ² = 565.490, p = 0.00), indicating that working capital management has a significant impact either positive or negative on both profitability and liquidity of SMEs in the manufacturing sector. The Pearson correlation coefficient confirmed a strong positive relationship between working capital management (WCM), and profitability (r = 0.795. p = 0.000), as well as between WCM and liquidity (r = 0.957, p = 0.000), suggesting that effective WCM is associated with increased profitability and enhanced ability of SMEs to meet their short-term obligations, thereby improving liquidity. The study concluded that SMEs should implement the formal working capital policies, enhance financial knowledge, and adopt digital financial systems to boost efficiency. Furthermore, government should also improve access to reasonably priced credit and provide business infrastructure that supports it in order to foster an enabling environment.