International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 3, October - 2018
Impact of Cash Conversion Cycle on Firm’s
Profitability
Hashini AMC
Department of Accounting and Finance,
Faculty of Management and Finance,
University of Ruhuna, Wellamadama, Matara,
Sri Lanka
Abstract:- Cash Conversion Cycle (CCC) is the most
widely used evaluation method to measure the risks and
returns associated with liquidity management and
profitability. Since corporate companies are extremely
concerned about how to sustain and improve the
profitability they have to keep an eye on the factors
influenced the profitability. Therefore the main purpose of
the study is to identify the impact of CCC on profitability
used companies in Sri Lanka. For this purpose data were
collected from twenty listed companies in the Beverage
Food and Tobacco industry sector covering the period
from 2015 to 2017. The profitability of companies was
measured in terms of Return on Equity (ROE) and Return
on Assets (ROA) taking into account two years period
from 2015 to 2017 the CCC was by Inventory Conversion
Period (ICP), Debtor Conversion Period (DCP), and
Payable Conversion Period (PCP). In this study, regression
and correlation statistical techniques were used to estimate
the relationship between CCC and profitability. Results
revealed that ICP and DCP has positive strong
relationship with the profitability. Further the study found
that the PCP are negatively affected to the ROE and ROA.
According the study reveals that CCC negatively
correlated with the profitability and CCC has significant
impact on profitability. These results suggested that
managers can create value for their shareholders by
reducing the number of days of account receivables and
inventories to a reasonable extend.
Keywords:- Cash Conversion Cycle, Return on Assets, Return
on Equity, Listed Companies, Working Capital Management.
I. INTRODUCTION
Working capital management (WCM) is considered as
the lifeblood of a business. WCM is a very significant
component of business finance because it directly affects the
liquidity and profitability of the company. The management of
working capital plays a significant role in a company’s
survival and growth. Working Capital (WC) is required for
functioning day to day transactions smoothly. In order to
manage WC effectively a firm has to be aware about the CCC.
Therefore, the CCC, is the most significant part of WCM and
it indicates how long it takes to convert their goods and
services into cash. It helps to protect liquidly power which is
the main factor on profitability.
Besides, most of the managers’ decisions are depended
on firms’ financial performance. Therefore they always try to
increase profit from many sources. And they ignore the impact
of CCC on profitability. But they must think that how the
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Nanayakkara MS
Department of Accounting and Finance,
Faculty of Management and Finance,
University of Ruhuna, Wellamadama, Matara,
Sri Lanka
changes in CCC impacts on the profitability since it is an
important component of WCM. The previous research
findings have been shown the different opinions regarding the
Beverage Food and Tobacco companies in connection with
CCC.
II. LITERATURE REVIEW
Management of liquidity and profitabilty can be changed
on CCC. Early work done by “Ref [24]” if the firm deduction
its liquidity the profitabilty would be high. Management of the
liquidity and profitability has set in a crucial effect in todays
competetive. As the results represent that there is a negative
between profitability and liquidity.
“Ref [24]” as stated by True and Solono, (2007)
investigated the impact of WCM on the firms’ profitability of
a sample of small and medium sized Spanish firms. They
based that managers can build value by deduction their
inventories and the number of days for which their accounts
are arrears. Besides, abbreviation the CCC also develops the
firms’ profitability.
“Ref [8]” reported that the firms’ profitability and
liquidity are affected by WCM in his analysis. Pooled data are
selected for carrying out the research for the era of 2006-2008
for assessing the companies listed in stock market of Vietnam.
He focused on the variables that include profitability,
conversion cycle and its related elements and the relationship
that exists between them. From his research it was found that
the relationships among these variables are strongly negative.
This denotes that decrease in the profitability occurs due to
increase in CCC. It is also found that if the number of days of
account receivable and inventories are diminished then the
profitability will increase numbers of days of accounts
receivable and inventories.
III. METHODOLGY
In this study, twenty Beverage Food and Tobacco
companies listed in CSE are taken to find the effect of CCC on
profitability. For this purpose, the researcher used secondary
data from financial statements covering 2015 and 2017.
Regression analysis is used to examine the impact of CCC on
profitability. The following linear regression models was
applied in this study to investigate the relationship between
CCC and profitability.
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 International Journal of Economics, Commerce and Management Research Studies
Accordingly two regression models were developed.
 Model 1:
 Model 2:
In the regression model, α denotes constant and β
denotes the coefficient of variables. ICP denotes Inventory
conversion period and, DCP denotes Debtor conversion period
and PCP denotes Payable Conversion Period. ROA denotes
the Return on Assets and ROE denotes Return on Equity. ε
denotes error.
IV. RESULT AND DISCUSSION
The study used 0.01 and 0.05 significant level to run the
regression towards identifying the relationship between CCC
and the profitability of Beverage Food and Tobacco companies
listed in CSE for the period of 2015 and 2017. According to
the results it can be concluded that the selected variables have
significant impact on the profitability determination. The table
3.1 (see annexure 1) shows the summarized findings of the
regression analysis. R squared value represent the explanatory
power of the independent variable and strength of the effect.
This study shows the R square between ICP, DCP and PCP of
the selected firms to ROE as .602 and ROA as .351. The
meaning of that, 60 percent of ROE and 35 percent of ROA is
determined by the CCC.
According to the findings of the regression, ICP shows
the impact on profitability of Beverage Food and Tobacco
firms (ROE: β = .072, P = .000, ROA: 001, P = .000). The
results indicated that if ICP increase, from one day ROE and
ROA increased by 0.072 and .001 when other variables are
constant. DCP also have impact on profitability (ROE: β
=126.377, P = .000, ROA: β = 0.124, P = .021). That indicates
that if DCP increase, from one day ROE and ROA increase by
126.377 and 0.124 when other variables are constant. PCP also
have impact on profitability (ROE: β = -243.843, P = .039,
ROA: β = -1.605, P = .046). In turn if the PCP decrease, from
one day ROE and ROA decrease by -243.843 and -1.605 to the
extent other variables are constant. Therefore when ICP and
DCP increase profitability increase and when PCP decrease,
profitability decreases. The regression results emphasized that
there is an impact on profitability from ICP, DCP and PCP. It
is the control variable of the study. Therefore it can be said
that the findings of the study are not manipulated by
extraneous variables.
V. CONCLUSION
By considering the research findings: ICP, DCP, PCP
concluded that independent variables are positively and [14].
negatively related with the ROA and ROE. Regression
coefficients of this study disclose statistical significance.
Furthermore, results reveal that ICP, DCP and PCP effect on
profitability. “Ref [22]” concluded that by reducing inventory [15].
conversion period, accounts receivable period, and by
increasing accounts payable period profitability can be
increased. This study have found negative and positive
relationship between CCC and profitability using similar [16].
variables and found the same results. The study suggests that
CCC as a significant part of the WCM should be managed
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Volume 1, Issue 3, October - 2018
property in order to maintain the profitability of companies of
a satisfactory level.
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Volume 1, Issue 3, October - 2018
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APPENDIX

Model 1(ROE) Model 2(ROA)

RSq=0.602, F=18.123, RSq=.351 , F=10.491,
P=.000 P=.000
B Std. sig B Std. sig
Error Error
Constant 51.617 12.002 .000 1.521 0.157 .000
ICP 0.072 0.017 .000 0.001 0.000 .000
DCP 126.377 24.439 .000 0.124 0.321 .021
PCP -243.843 113.885 .039 -1.605 1.494 .046

Table 1: Regression Analysis

n= 40
Source: SPSS data

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