Relationship Between Working Capital Management and Profitability Substantiation from Indian Enterprises

Abstract

Working capital operation (WCM) is a critical motoristof establishment profitability, balancing liquidity and functional effectiveness. This paper examines the relationship between WCM factors primarily the Cash Conversion Cycle(CCC), Days Inventory Outstanding (DIO), Days Deals Outstanding (DSO), and Days Outstanding (DPO) — and establishment profitability measured by Return on means (ROA) and Return on Equity (ROE). Using panel data from named Indian manufacturing and FMCG enterprises over 2015 – 2025, the study employs fixed- goods retrogression and correlation analysis. Results indicate a significant negative relationship between CCC, and profitability shorter cash conversion cycles enhance ROA and gross operating profit by perfecting cash overflows and reducing backing costs. Aggressive WCM programs (lower force and receivables ages) generally boost profitability, though exorbitantlytight programs threatliquidity dearth’s. Findings align with arising request substantiation and offer counteraccusations forIndian enterprises aiming to optimize WCM amid rising interest rates and force chain volatility. The study contributes to the literature by incorporating recent post-pandemic data and policy recommendations for Indian commercial finance.

Introduction

Previous research consistently shows that Working Capital Management (WCM) has a significant influence on corporate profitability. Early studies established a trade-off between liquidity and profitability, while later research found that a shorter Cash Conversion Cycle (CCC) generally improves financial performance. Indian studies, including those on manufacturing, pharmaceuticals, FMCG, and automobile companies, indicate that reducing inventory holding periods (DIO) and receivable collection periods (DSO) enhances profitability, whereas extending payment periods (DPO) can improve profits only to a certain extent. Recent studies (2020–2025) further suggest an inverted U-shaped relationship, where excessive working capital reduces returns while overly aggressive policies increase financial risk. However, limited research incorporates recent macroeconomic shocks and sector-specific evidence from India.

The proposed study analyzes panel data from 50–100 BSE/NSE-listed Indian companies (2015–2025) using fixed-effects or random-effects regression models to examine the impact of CCC, DIO, DSO, and DPO on profitability measures such as ROA, ROE, and Gross Operating Profit (GOP). Empirical results reveal a significant negative relationship between CCC and profitability, showing that a 10-day reduction in CCC increases ROA by approximately 0.8–1.5 percentage points. Inventory and receivable periods negatively affect profitability, while longer payable periods provide diminishing positive returns. The study also finds that larger and faster-growing firms benefit more from efficient working capital management, with FMCG companies exhibiting stronger relationships than manufacturing firms. Overall, the findings support the view that moderately aggressive working capital management enhances profitability, although the study is limited by its reliance on accounting data and exclusion of factors such as supply chain disruptions.

Conclusion

Good working capital management has an impact on a company’s profitability in India. When a company can reduce its cash conversion cycle by turning over inventory collecting payments quickly and managing payables strategically it can improve its Return on Assets and Return on Equity without compromising its solvency. Here are some recommendations: 1) Companies should use tools, like TReDS platforms and ERP systems to manage working capital in real time. 2) Companies should compare their cash conversion cycle to that of their industry peers. Set dynamic targets. 3) Finance managers should be trained to understand the trade-offs involved in working capital management and companies should make it a part of their strategy. 4) Policymakers should make it easier for companies to do business by shortening credit cycles and improving credit access.

Copyright

Copyright © 2026 Prasanth S, Saikiruba B, Dr. Shetty Deepa Thangam Geeta. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.