The effect of working capital management on corporate profitability has been studied considerably by different researchers (Deloof, 2003; Filbeck and Krueger, 2005; Lazaridis and Tryfonidis, 2006; Padachi, 2006; Samiloglu and Demirgunes, 2008; Shin and Soenen, 1998; Tewodros 2010).
Most of these and other researchers identify significant association between efficiency in working capital management and firms’ performance. However, almost all, these studies concentrated on large firms operating within well-developed money and capital markets of developed economies. From such findings it is difficult to generalize for relatively small size Ethiopian firms that operate within an undeveloped financial sector (with limited financial markets), where firms mostly obtain funds for investment in working capital from owner financing, trade credit and short term bank loans. Research studies on the effects of working capital management policies on firms’ profitability in developing countries, especially in Ethiopia remained an ignored area of empirical research. To the best of researcher’s knowledge, only one research has been done in Ethiopia by Tewodros Abera (2010) on Tigray region.
Generally, to address the issue under consideration, the researcher tried to answer the following research questions.
1. How working capital investment policies affect profitability of manufacturing Private Limited Companies in Addis Ababa?
2. How working capital financing policy affects profitability of manufacturing Private Limited Companies in Addis Ababa?
3. How are profitability and liquidity related, in manufacturing Private Limited Companies of Addis Ababa?