Does working capital management strategy affect profitability? Evidence of Indonesian manufacturing companies during the COVID-19 pandemic

Abstract

This study investigates whether various components of working capital policy impact profitability. Furthermore, this study considers whether the COVID-19 outbreak can intervene in this relationship. Using a sample of 126 listed manufacturing companies in Indonesia from 2017 to 2020, we employ a comparison of two general equations (before and during the COVID-19 outbreak) of a linear model involving several working capital policies on profitability. The study shows an anomaly that occurred during COVID-19. Companies tended to carry out aggressive working capital behavior during the COVID-19 pandemic compared to before COVID-19. The reason behind this is that the company gets incentives to defer debt payments or get additional debt facilities which are used to increase receivables and inventory. This study also shows that there is a negative influence of the financial flow cycle on profitability, both before and during the COVID-19 period. Empirical findings indicating inconsistencies in working capital behavior prove that the practice of working capital implemented by manufacturing companies in Indonesia is currently not offended to be more.