An assessment of impact of working capital management on performance of government commercial enterprises: the case of medical stores department

Working capital management plays a significant role in improving profitability of firms. Firms can achieve optimal management of working capital by making the trade-off between profitability and liquidity. This is particularly important for Government Business Enterprises (GBE) such as Medical Stores Department where a major part of assets is composed of current assets. The level of Working Capital must be properly determined and allocated to various segments, effectively controlled and regularly reviewed in order to have adequate and efficient flow of working capital. This in turn may impact profitability of an entity such as MSD. In this perspective, this paper analyzes the effect of working capital management on profitability of MSD for the period of 2007 to 2013. Correlation coefficient and regression models were used to establish the relationship between working capital management versus firm’s profitability, and the relationship between liquidity versus profitability. The study finds a negative relationship between Cash conversion cycle versus profitability of MSD, also a negative relationship between profitability versus liquidity of MSD. The research project also found that political interference to Government Business Enterprises (GBE’s) on professional working capital management leads to decisions that are politically motivated.Based on the key findings from this study it has been concluded that the management of MSD can create value for the entity by maintaining optimal liquidity position and a reduction of the cash conversion cycle to its minimum by establishing a moderate working capital policy.