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Asian Journal of Research in Banking and Finance

Vol. 4, No. 3, March 2014, pp. 59-69.

Asian Journal
of Research in
Banking
and
Finance

ISSN 2249-7323

www.aijsh.org

Asian Research Consortium

Impact of Cash Conversion Cycle on Profitability of


Sugar Sector in Pakistan
Sadaf Jamal*; S.Nazneen Waseem**; Shazia Khan***
*Federal Urdu University of Arts, Science & Technology,
Karachi, Pakistan.
**Assistant Professor,
Business Administration,
Dadabhoy Institute of Higher Education,
Karachi, Pakistan.
***Karachi, Pakistan.

Abstract
The core purpose of research is to analyze the elements which influence the firms profitability. In
order to conduct this research, firms of sugar sector in Pakistan were selected to evaluate the
relationship between independent variables Net Income, Trade Receivable, Inventory, Trade
Payable, Capital, Firm size and Financial Charges and firms profitability. The research is a
descriptive study and the researcher randomly selected 36 companies out of 81 companies at
present, which is 44% of total population. Cash Conversion Cycle management is very important
tool to manage liquidity position of any organization, this study attempts to study its impact on
firms profit by different statistical tests. Results found were that all the variables have significant
impact on the profitability of the sugar industry of Pakistan. This research helped analyze the
importance of efficient cash conversion cycle, the short receivable period, minimum inventory cost
& long period to pay the short-term debt would improve profitability of the firm. The firm size also
affect the profitability of the firm, big firms are more able to maintain their short term financing by
their own capital. On the other hand, Cost of Goods sold & financial charges have negative impact
on the profitability of sugar industry of Pakistan.

Keywords: Pakistan Sugar Mills Association (PSMA), Cash Conversion Cycle, Inventory cost,
Financial Charges, Short-term debt, Cost of Goods sold, Liquidity position.

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

1. Introduction
Pakistan is basically an agro - based country, running engine of Pakistans economy. It is the
worlds 5th in producing sugar and the 2nd largest industry of Pakistan (Irfan, n.d). It has been
cultivated around an area of one million hectares. It has been largely export and generates
remarkable income and employments in the country, while comprising of 81 sugar mills having
annual crushing capacity of over 6.1 million tones (Irfan, n.d). It significantly contributes in income
generation of the country around 12.16 Billion double figure amount. Its GDP share rate is 1.9%,
provide 1.5 Million employment from all over the country thus supports the economy to grow by
investment of 100 Billion (Approx). It is the main source of generation of foreign exchange.
(Pakistan Economic Survey 2010-2011).
Although sugar industry has been facing continues crises because of inadequate liquidity
management which may include improper inventory placement, delayed in receivables recovery,
early payment to suppliers. All these problems would only be resolved by proper management of
cash conversion cycle (CCC) which includes operating cycle, firms growth, return on assets,
firms size, leverage, aggressive and conservative cash conversion cycle (CCC) policies which
ultimately influence the profitability of the sugar industry. For firms growth, efficient cash
conversion management (CCM) is essential. Cash conversion cycle requires proper management of
each of the elements these are: cash receivables, inventory and payables etc. (Khan, Hijaz, 2006).
In this research author had selected following variables responsible for the profitably of the firm:

A/R
TURNOVER

CASH
CONVERSION
CYCLE

PROFITABILITY

A/P
TURNOVER

COST OF
PRODUCTION

INVENTORY

TURNOVER

SIZE OF
FIRMS

FINANCIAL
EXPENSES

Fig1.2: Profitability Divisions

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

1.1 Hypothesis
H1: There is a significant relationship between efficient Cash Conversion Cycle management and
profitability of sugar companies in Pakistan.
H2: There is a significant relationship between Receivables and profitability of sugar companies in
Pakistan.
H3: There is a significant relationship between Trade Creditors and profitability of sugar companies
in Pakistan.
H4: There is a significant impact of Inventory Cost on profitability of sugar companies in Pakistan.
H5: There is a significant relationship between Size of Companies and profitability of sugar sector
of Pakistan.
H6: There is a significant relationship between Cost of Production and profitability of sugar
companies in Pakistan.
H7: There is a significant relationship between Interest Expense and profitability of sugar
companies in Pakistan.

2. Literature Review
According to (Nazir, Sajid, Afza, 2008) in Pakistan over 204 companies are included in
manufacturing sector. In manufacturing sector liquidity management is highly associated with the
business scenario and profit that avail. The cash conversion cycle associated with the operating
cycle of the firm shows to what extent and how much a firm is efficiently able to meet its liquidity
requirement. Among the several developing countries including Pakistan cash conversion cycle
does have an impact on profitability of many industries including sugar industries of Pakistan
(Safiullah, Amir, Syed, 2006)
By efficiently managing cash conversion cycle results in terms of positive return. Extended cash
conversion cycle and profitability of the firm has negative correlation with each other. (Ali, 2009).
Firms sales depend upon efficient cash conversion cycle, which ultimately increases profit of the
firm. (Blinder, Maccini, 1991)
Performance of a firm depends on the efficiency of management. Companies with higher growth
level must have efficient cash conversion cycle. To maintain Cash conversion cycle by organization
to improve its liquidity position. Major assets portion comprises on current asset. Working capital
management divided in various segments. Cash Conversion Cycle (CCC), Inventory Turnover in
Days (ITID), Receivable Turnover in Days (RTD), Net Trade Cycle (NTC) and Payable Turnover
in Days (PTD) are various tools that have been used to measure the efficiency of a firm. (Chiou, J.
R., Cheng, 2006). Cash conversion cycle and cash ratio helps to analyze firms profitability and
liquidity position (Cash Gap). Profitability and liquidity of the firm also effect by size of the firm.
Cash Conversion Cycle is different of every organization it varies from firm to firm and industry to
industry. Each of the factors manipulate the cash conversion cycle in the firm and the result of cash
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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

conversion cycle may be changes due to change in nature, size of a firm, policies, debt or equity or
asset management structure, debtors or creditors policies, inventory purchasing and proceeding
duration etc. (Eljelly, 2004).
According to (Chiou, 2006) larger firm size having better extend its approach to market gets more
trade credit and ultimately increase size of the firm. Efficient cash conversion cycle helps company
to get capital easily from outside to invest in other portfolio business. As per Shin and Soenen firms
avails market opportunity and gets higher return (1998). Companies have shorter CCC may not
need external financing, less borrowing cost hence increase profitability. (Samiloglu,
Demiraunes, 2008)
Cash conversion cycle is used to measure that how much expenditure takes place with comparison
to the collection from sales in certain period of time. Cash cycle improve firms profitability by
comparison the ability of firm to collect payment from their customers and make payments to their
suppliers. (Eljelly, 2004).

3. Research Methodology
The type of investigation is correlation (Non-Directional) with minimum researcher interference
and Non-Contrived study setting. The researcher has used statistical software SPSS 16.0 for
analysis of this study. This Study is based on Secondary Data and the desired data has been
collected from the following sources:

Pakistan Sugar Mills Association (PSMA)

State Bank of Pakistan (SBP)

Previous Researches on Sugar Industries of Pakistan & Cash Conversion Cycle

Financial Statement of 36 Sugar Industries of Pakistan

Pakistan economic Survey

Following Linear Regression Model has been used for research purpose:
3.1 Model Equation
Prof = + 1 (CC) + 2 (A/R ) + 3 (A/P) + 4 (INV) + 5(CAP)+ 6(COGS) + 7 (INT) + i
Where:
PROF

Profitability of Sugar Companies

CC

Cash conversion cycle

A/R

Account Receivable

A/P

Account Payable

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

INV

= Inventory

CAP

= Capital

COGS = Cost of goods sold


INT
=

= Interest rate
Error Term

4. Results
4.1 Regression Statistics Analysis
Model
1

R
0. 611

R Square

Adjusted R Square

0.374

0.353

Here, R value illustrates that coefficient and correlation is the statistical denote use of potency of
the linear association among variables. In the above analysis the first column of Model summery
shows R is 0.611 which prove that there is a moderate correlation between dependent variable
(Net Income) and independent variables (Cash Conversion Cycle, Inventory, Customer Receivable,
Capital, Trade Creditors, Cost of Goods Sold & Financial Expense). The square of Coefficient of
Correlation represents Coefficient of Determination and when multiplied by 100, it gives the
percentage of variation. In above results R2 =0.374, it indicates 37.40% variations in dependent
variable is due to independent variables. The R change revealed that variation among R value and
adjusted R square.
4.2 Variance Statistics Analysis (ANOVA)

Table : 2 Summary of Anovas


Model
1.

Sum of Squares

df

Mean Square

Sig.

Regression

2146263.926

306609.132

17.747

.000a

Residual

3593578.282

208

17276.819

5739842.208
215
Total
a. Predictors: (Constant), Cash Conversion Cycle, Inventory, Customer Receivable, Capital,
Trade Creditors, Cost of Goods Sold, Financial Expense
b. Variable: Net Income Dependent
ANOVA table shows value of F is 17.74 with the significance value of 0.000 which shows
overall model is significant and variations occurred are not by chance.

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

4.3 Coefficient Analysis

Table : 3 Coefficient a of Correlation


Un standardized
Coefficients

B
8.964

Std. Error
15.425

Standardiz
ed
Coefficient
s
Beta
0.000

Cash Conversion Cycle

(0.130)

0.062

(0.159)

(2.080)

0.039

Inventory

(0.019)

0.054

(0.023)

(0.358)

0.042

Customer Receivable

(0.152)

0.034

(0.953)

(4.519)

0.000

0.023

0.027

0.101

0.822

0.013

(0.180)

0.025

(1.238)

(7.292)

0.000

Cost of Goods Sold

(0.064)

0.014

(0.544)

(4.565)

0.000

Financial Expense

(0.357)

0.139

(0.317)

(2.563)

0.011

Model

(Constant)

Capital
Company)
Trade Payable

a.

(Size of

Sig.

0.581

0.027

Dependent Variable : Net Income

The third column of first row of coefficients table shows constant i.e. 8.964 which indicates that
when all predictors (Cash Conversion cycle, Inventory, Customer Receivable, Capital, Trade
Payable, Cost of Goods Sold & Financial Expense) are held at zero the value of Net Income would
be 8.964. By rules if T value is higher than 2 than null hypothesis has to be discarded and
alternating hypothesis will be acknowledged.

Individual Significance
Hypothesis 1
H1: It indicates there is a significant relationship between cash conversion cycle and net income as
according to the above table in the case of cash conversion cycle the value of t-value is 2.080 which
means that we accept H1.
The value of beta -0.159 that shows that if Cash Conversion Cycle increases by 1 million, net
Income also will reduce by 0.159 million. Therefore, the analysis shows the powerful Cash
Conversion Cycle and Net income relation in Sugar industry of Pakistan. Hence, proved above H1
is accepted.

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

H1:

There is a significant relationship between efficient Cash Conversion Cycle management


and profitability of sugar companies in Pakistan.

The equation of above relationship of Cash Conversions Cycle with Net Income is:
Net Income (y) = -0.159x +8.964
In above equation x=Cash Conversion Cycle
Hypothesis 2
It indicates there is an insignificant relationship between Inventory cycle and net income, as
according to the above table in the case of Inventory the value of t-value is 0.358 which means that
we donot accept H2.
The value of beta -0.023 shows that if inventory increases by 1 million, net Income will reduce by
0.023 million. Therefore, the analysis of relationship shows no significant relationship between
Inventory and Net income of Sugar industry of Pakistan. Hence, proved above Ho2 is accepted and
H2 is rejected.
HO2:

There is no significant relationship between inventory cost and profitability of sugar


companies of Pakistan.

The equation of above relationship of inventory with Net Income is:


Net Income (y) =-0.023x+8.964
In above equation x=Inventory
Hypothesis 3
It indicates there is a significant relationship between Customers receivables and net income, as
according to the above table in the case of Customers receivables the value of t-value is 4.519
which means that we accept H1.
The value of beta -0.953 shows that if receivables increases by 1 million, net Income also will
reduce by 0.953 million. Therefore, the analysis of relationship shows significant relationship
between receivables and Net income of Sugar industry of Pakistan. Hence, proved above H3 is
accepted.
H3:

There is significant relationship between customers receivables and profitability of sugar


companies of Pakistan.

The equation of above relationship of receivables with Net Income is:


Net Income (y) =-0.953x+8.964
In above equation x=Customer Receivable

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

Hypothesis 4
It indicates there is no significant relationship between Companies Capital and net income, as
according to the above table in the case of Capital the value of t-value is 0.822 which means that
we accept Ho4.
The value of beta 0.101 shows that if receivables increases by 1 million, net Income also will
increase by 0.101 million. Therefore, the analysis of relationship shows no significant relationship
between receivables and Net income of Sugar industry of Pakistan. Hence, proved above Ho4 is
accepted.
Ho4:

There is no significant relationship between size of companies and profitability of sugar


sector in Pakistan.

The equation of above relationship of Capital size with Net Income is:
Net Income (y) =0.101x+8.964
In above equation x= Capital (Size of Firm)
Hypothesis 5
It indicates there is a significant relationship between Trade Payables and net income, as according
to the above table in the case of Trade Payables the value of t-value is 7.292 which mean that we
accept H5.
The value of beta -1.238 shows that if Payables increases by 1 million, net Income will reduce by
1.238 million. Therefore, the analysis of relationship shows significant relationship between
Payables and Profitability of Sugar sector of Pakistan. Hence, proved above H5 is accepted.
H5:

There is a significant relationship between Trade Creditors and profitability of sugar


companies in Pakistan

The equation of above relationship of Trade Payable with Net Income is:
Net Income (y) = -1.238x+8.964
In above equation x=Trade Payable
Hypothesis 6
It indicates there is a significant relationship between Cost of Goods Sold and net income, as
according to the above table in the case of CGS the value of t-value is 4.565 which mean that we
accept H6 at significance level 0.000.
The value of beta -0.544 shows that if CGS increases by 1 million, net Income will reduce by 0.544
million. Therefore, the analysis of relationship shows significant relationship between CGS and
Profitability of Sugar sector of Pakistan. Hence, proved above H6 is accepted.

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

H6:

There is a significant relationship between Cost of Production and profitability of sugar


companies in Pakistan.

The equation of above relationship of Cost of Goods Sold with Net Income is:
Net Income (y) = -0.544x+8.964
In above equation x=Cost of Goods Sold
Hypothesis 7
It indicates there is a significant relationship between Financial Expenses and net income, as
according to the above table in the case of Financial Expenses the value of t-value is 2.563 which
mean that we accept H7at significance level p=0.011.
The value of beta -0.317 shows that if Financial Expenses increases by 1 million, net Income will
reduce by 0.317 million. Therefore, the analysis of relationship shows significant relationship
between Financial Expenses and Profitability of Sugar sector of Pakistan. Hence, proved above H7
is accepted.
HA7:

There is a significant relationship between Financial Expense and profitability of sugar


companies in Pakistan.

The equation of above relationship of Financial Expense with Net Income is:
Net Income (y) = -0.317x+8.964
In above equation x=Financial Expense

5. Conclusion
As per entire research concluded the relationship of dependent variable (Net Income) and
independent variables (Cash Conversion Cycle, Trade Receivable, Inventory, Trade Payable,
Capital, Cost of Goods Sold & Financial Charges) by statistical hypothesis. Result found that all the
variables has significant effects on the profitability of the sugar industry of Pakistan & the
relationship of Cash Conversion Cycle, Trade Receivable, Inventory, Customer receivables, CGS,
Financial expenses and Trade Payable with the profitability of firm is negative because big Cash
Conversion Cycle shows the maximum collection days, large inventory cost & minimum payment
period which are directed effect on the financing of the firm and push to borrow loan which
increase the financing cost of the firm & decrease the profit of the firm. Cost of Goods sold &
Financial Charges also negatively affected on the profitability of the sugar industry because high
cost of goods sold shows the wastage of raw material & the weak management of maintaining
inventory which increase the external financing and financial charges of the firm & they both
variable are negatively effect on the profitability of the firm.
The relationship between the size of the firm (Capital) and profitability of sugar industry
of Pakistan shows the positive impact on the profitability of sugar sector as the industry mostly has

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

its own resources i.e. equity. That to be injected in the business if needed instead of any external
borrowings with creates negative impact and huge financial cost/burden on the sugar industry,
critically evaluating this element researcher finds that larger the size of the firm (capital) lower will
be the long term debts (financial leverage) firms have enough resources to manage their liquidity
requirements. On the other hand, less financial leverage (debt) significantly decreases the burden of
taxes on the firms.

6. Recommendations
After conducting the research the authors recommend the following points which may be useful to
improve the efficiency and profitability of Sugar Industry in Pakistan.
The Government of Pakistan, policy makers & all stakeholders should pay concern on these points
as recommended.

To appoint qualified employees for their key posts on merit basis, so as to revise company
procedures efficiently & prepare the policies for creditors & debtors which result to small
Cash Conversion Cycle and increase the profitability.

To arrange the training program for their employees and inform about financial and
market information to reduce the market risk and improve the efficiency of employees.

To introduce and import new technology for increasing sugar recovery & make efforts to
increase the area under sugarcane crop.

In order to cultivate large area of sugar we have to require frequent amount of water
supply. Improve quality, quantity and introduce various varieties will ultimately benefit to
farmers and sector too. Better utilization of resources and improve crop management.

To introduce high yielding varieties for sugar cane this will increase production of sugar
and allow working capital on easy terms.

To make sure that all mills utilize their maximum capacity and announce subsidy &
reduction in the rate of taxes this will increase production & profitability.

To evaluate policies which help in stabilizing the crop size at a required level & device
policy those helps balancing the sugar demand and supply.

To reduce the man-mad crisis by hard law & order and give tough punishment to the
people involved in man-mad crisis.

To provide fertilizer on cheap rates to the growers and other facilities. Fertilizers fully
utilize so that production increase.

To produce new varieties through research institutes that help to increase per ton hectare
production increase.

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Jamal et al. (2014). Asian Journal of Research in Banking and Finance,


Vol. 4, No.3, pp. 59-69.

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