The Role of Cash Conversion Cycle in Working Capital...

Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,

ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222

http://indusedu.org Page 211

This work is licensed under a Creative Commons Attribution 4.0 International License

The Role of Cash Conversion Cycle in

Working Capital Management on

Profitability: A Study on Manufacturing

Industries

Dr. I. Navena Nesa Kumari1 and Dr. M. Victor Louis Anthuvan

2

1(Research Associate, Loyola Institute of Business Administration, Loyola College, Nungambakkam, Chennai,

India) 2(Dean – Research, Professor of Finance, Loyola Institute of Business Administration, Loyola College,

Nungambakkam, Chennai, India)

Abstract: Cash conversion cycle is an important component of the working capital management. It is a metric

used to measure the effectiveness of a company’s management and for the overall health of the organisations as

well. It is applicable to most of the manufacturing industries. It has been established from the previous Studies,

that lower the CCC higher will be the profitability. The present study aims to contribute on the impact of the

management of CCC on profitability of leading manufacturing companies of CNX 500 listed in NSE from 2006-

12. The study involves both primary and secondary data. The study aims at examining the efficiency of cash

conversion cycle of various manufacturing firms from the 15 sectors. The Net operating profitability is used as a

measure of organisational performance. The study involves about 162 companies for the secondary analysis.

The primary data confines with 34 companies available in and around Chennai. The study reveals that

pharmaceutical, textile, pump, food, cement, consumer durable, Engineering had a significant relationship

between the cash conversion cycle and profitability. The research states that cash cycle plays a key role to be

analysed in order to increase the profitability of the organisation.

Keywords: Cash conversion cycle, Profitability, working capital management, manufacturing Industries.

I. INTRODUCTION Cash the most liquid asset, is vital for the daily operations of business firms. While the proportion of

corporate assets held in the form of cash is very small, often between 1 to 3 percent. Its efficient management is

crucial to the solvency of business in a very important sense. Cash is the focal point of fund flows in a business

(Pandey, I. M. 2007).

The cash conversion cycle plays a major role in measuring the effectiveness of an organisational

performance and also the overall health of the company. The cycle aims to find out how much of dollar is tied

up in production and sales process before it is converted into cash through sales. The purpose of measuring cash

cycle is to arrive at the amount of time required to sell inventory, the time required to collect receivables, and

also to derive at the time period in which a company is affordable to pay its bills without incurring penalties.

Management of cash is one of the key areas of working capital management. Cash enables a firm to pay current

obligations as and when they fall in due since it forms the most liquid asset. In the words of Gitman (1976)

liquid assets provide a pool of funds to cover unexpected outlays, thereby reducing the risk of ‘liquidity crisis’.

Apart from the fact it is most liquid current asset; cash is the common denominator to which all current assets

can be reduced because the other major current assets, (i.e) receivables and inventory get eventually converted

into cash.

II. LITERATURE REVIEW A popular measure of Working Capital Management is the cash conversion cycle, the cash conversion

cycle is a form presented by Jose et al. (1996) the time lag between the expenditure for the purchases of raw

materials and the collection of sales of finished goods. The extension in the time lag, the greater will be the

investment in working capital (Deloof, 2003). A longer cash conversion cycle might increase profitability

because it leads to increased sales volume. On the other hand, corporate profitability might also decrease with an

increased cash conversion cycle. If the cost of investment in working capital increases, then the benefits of

holding more inventories and granting more trade credit to customers will also increase. Reducing cash

conversion cycle to a reasonable minimum generally leads to increased profitability. Amount of working capital

can change during a financial year of a firm. Usually numbers at the end of financial year are good estimates,

but if the operation of a firm is very seasonal they can be misleading. The cash conversion cycle is a popular


ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, 11-222



measure of working capital management used in many studies. According to Jose et al. (1996), the cash

conversion cycle was introduced by Gitman (1974) and later refined by Gitman and Sachdeva (1982).

Richard and Laughlin’s (1980) was the first to introduce the cash conversion cycle concept for

determining the net amount of cash investment required for varying sales levels. This technique is based on

identifying the number of days of sales that are represented by inventories and accounts receivable. This

approach includes the length of time that the investment funds are tied up in the working capital as well as the

amount of fund required. Studies which considered cash conversion cycle as the best measure of working capital

has been discussed in this section.

Naziret al. (2009) has identified cash management as the process of ensuring cash available to meet the

running expenses. Cash conversion cycle starts with the purchases of raw materials. Then, the firm starts

production process during which these raw materials are converted into finished goods. Finished goods are then

sold. The purchase of raw materials and collection of cash for sale were identified as operating cycle. The cash

cycle allows in deducting the payable period from operating cycle. Richards and Laughlin (1980) adopted the

measure of cash conversion cycle to assess how well a company manages its working capital and also to key

point how the components of working capital are related. By covering a period of 1975-1978 the study includes

the calculation of Liquidity ratios and cash conversion cycle. The study stated that management should ensure

low cash conversion cycle period compared with that of competitors and industry average. The analysis

provides more than explicit insights for managing a firm’s working capital position which will assure the proper

amount and the timing of funds available to meet a firm's liquidity needs.

The importance of cash as an indicator of continuing financial health is not surprising in view of its

crucial role of business which includes both efficiency and organizational performance. Gentryetal. (1990)

suggested that the operating cycle provides aggregate summary measures for short-run financial management.

This study investigated the relationship between cash conversion cycle and levels of liquidity, investment in

capital, and productivity of small firms. The sample consists of 879 small U.S manufacturing and 833 small U.S

retail firms. The cash conversion cycle was found to be significantly related in all the three aspects. Firms with

efficient cash conversion cycles remains more liquid requires less debt and equity financing had higher returns.

The results also indicate that the small firm managers must be active in managing cash conversion cycle. The

study brings in the importance of cash conversion cycle as a pro-active management tool also for the small firm.

Abdul et al.(2010), study empirically estimate and compare sector-wise impact of working capital

management on performance of manufacturing firms in terms of collection period, inventory period, payment

period, Cash Cycle and Net Trading Cycle using financial data for 204 firms listed on Karachi Stock Exchange

classified in 9 sectors during the period1998-2007. The results indicate that there are differences in sector-wise

performance in terms of disparate measures of working capital management. The impact of Gross working

capital turnover and the current assets to total assets ratio on profitability is significant and positive. Another

study on the effect of working capital management on firm’s profitability with reference to the Turkey was

presented by Samiloglu and Demirgunes (2008) for manufacturing firms listed at Istanbul Stock Exchange for

the period 1998 to 2007. The results suggest that receivable and inventory period with liquidity has a negative

impact on the profitability of the firm while growth is positively associated with profitability. Lind et al. (2012)

examined the working capital management by cycle times in the value chain of the automotive industry during

2006–2008. The empirical study offers a holistic view of the value chain from raw materials to the end

customers. According to the study, the change of cycle times of working capital followed mainly the change of

cycle time of inventories. Hirsh and Teoh (2003) framework suggests that when analysts forecast on the

components of earnings (i.e) cash flow from operations and changes in working capital. They are likely to have

more accurate forecasts of earnings. The study predicts that when the components of aggregated information

exhibit in different time-series properties and forecasting effort is concentrated on the individual components

instead of the aggregated information.

In a recent working paper, Givoly et al.(2000) examines the properties of analysts’ cash flow forecasts.

The study found in regression analysis of cash flow forecasts on earnings forecasts, depreciation expenses,

working capital accruals, and other accrual adjustments, coefficients are positive. They thus conclude that

analysts’ cash flow forecasts appear to be simple, mechanical and adjusted to their own earnings forecasts. Platt

(2010) argued saliently for a new management dynamic emphasizing cash flow as the metric of organizational

success. Suggesting that everything is that a company should be oriented toward maximizing its cash flow, he

charts a new paradigm in which cash flow, organizational survival, and long-term growth are in-exorably linked

with performance The book provide a framework for a managerial culture focusing on cash flow; a review of

the basics of cash flow, cash flow analyses, the interrelationship of working capital and the cash flows, bring

familiarity about traditional accounting principles, practices, financial analysis and organizational leadership

were pre-requisites for the success of the firm.

Soenen's (2000) study covers inter-departmental conflicts over the cash management decisions. The

survey responses indicate that the two departments most likely to conflict regarding cash management decision

and sales. The questionnaire was mailed to managers in 200 London companies. The managers were members





of the Association of Corporate Treasurers, financial executives, public enterprises and government agencies.

Finally, 60 responses were collected within the time frame, ranging a period of 1986-1998. The survey revealed

that the financial vice president was noted to be the responsible person for establishment of overall working

capital policy. The managers responded for this study reiterated a basic weakness in the international cash

management by an executive decision rather than the sound conceived set of policies.

This paper aims to determine that what variables play a major role in taking cash holding decision by

firm. Sohani Islam (2012), stated cash holding decision is one of the most significant decisions taken by the

financial managers of any manufacturing firms. The objective was to find out which variables had a significant

influence on cash holding decision of manufacturing firms. The study contains five years’ data from 2006 -

2010 of firm specific variables, with a panel data of 54 manufacturing companies listed at Dhaka stock

Exchange. From the regression results it is found that most of the variables in the model are significant in

defining the cash levels of Bangladeshi firms.

Yujun Lian Sepehri (2011), focuses on how firm characteristics, especially financial constraints and

investment options are associated with cash holdings. This study would examine how the Chinese firms manage

cash holdings, in general and during a crisis in comparison with the firms in other countries. The data is

collected from National Business and Economics Research (NBER) for the period 1999-2009. The study found

that similar to US firms; Chinese firms tend to increase their cash holdings during financial crisis as compared

to the normal times. Generally, firms that are more financially constrained with more investment opportunities

are more likely to have greater cash holdings. Furthermore, firms with lower leverage, less net working capital

(NWC), and lower capital expenditures, are more likely to increase cash holdings. Similarly, firms with the

same characteristics tend to save more cash from cash flow.

Leavell Hadley (2006) stated managing working capital internationally is increasingly important as

more firms erase geographic boundaries. Formalizing an analytical method of maximizing capital and cash flow

is essential to deliver and explain the multinational corporations. The secured internet sources and the decisions

changed the pros and cons of shared service centers. A strong relationship with the service providers is

considered as the added advantage of global network banks. The multinational corporate should configure a

solution to maximize corporate treasury with international Cash management. Akinlo et al, (2011) investigates

the long run relationship between working capital measured by cash conversion cycle and profitability for 66

firms in Nigeria for the period 1999-2007. The study revealed a significant state of relationship between

working capital management and profitability for a cross section of firms. The result shows that there is a long

run and a short run causal relationship moving from working capital management to profitability. This result

envisages the importance of working capital management, in conforming that if mangers manage the working

capital efficiently, then it will lead to an increased profit.

In Vietnam firms, Dong (2010) investigates the relationship that exist between cash conversion cycle as

a measure of working capital management and profitability for 130 firms listed in Vietnam stock market for

period of 2006-2008. The correlation and regressions were used to test the relation between variables. The gross

operating profit is employed as the dependent variable measuring profitability. The independent variables

include cash conversion cycle, average collection period, average payment period and Cash conversion cycle

including control variables as company size, fixed financial assets ratio and debt ratio. The study found a strong

negative relationship between profitability and cash conversion cycle, average collection period for account

receivables, and Cash conversion cycle. The results suggest that managers can create a value for their

shareholders by reducing the cash conversion cycle. The study contradicts the earlier study of Deloof (2000)

which found a positive relationship between profitability and average payment days, this implies that more

profitable firms wait longer to pay their bills.

Nonetheless, Dong study had converse results, Dong and Su (2010) had an attempt to study the

relationship between profitability and cash conversion cycle of listed firms at Vietnam stock market. Findings of

the study showed that there is a strong negative relationship between Profitability and the cash conversion cycle.

This indicates that if CCC increases then it will lead to decrease the Profitability of the firm. Khamrui, (2012)

investigated the relationship between WCM and firm’s profitability in India. The findings of their study indicate

that CCC and debt are negatively associated with firm’s Profitability. The paper reveals that manufacturing

companies can boost their performance in terms of profitability by managing working capital appropriately.

In a different measure of efficiency Mohamad and Saad (2010) investigated the effect of WCM and the

performance of Malaysian listed companies. The study found a positive relationship with current assets to total

asset ratio. However, Cash conversion cycle, current assets to current liabilities ratio and current liabilities to

total assets ratio shows the negative relations. In literature, the length of operating cycle is the most widely used

method to determine working capital need. The working capital financing policy is based on the matching

approach. The majority of the companies have occasionally experienced working capital shortage, mainly due to

excess of inventory accumulation and the poor debt collections.

Sen and Oruc (2009) investigated the efficiency of working capital management and its relationship

with profitability in Istanbul Stock Exchange (ISE). They used three-month table data issued by 49 production





corporations for the period from 1993 - 2007 over five production sectors, including white goods, electronic,

Cement, food, chemical and textile. Their results showed that aggressive working capital management is

represented by shorter Cash Conversion Cycle and the current ratio which results in increased profitability.

Similarly, in India, Vijay Kumar (2011) examined the relationship between working capital management and

firm’s profitability in automobile industries. The study includes a sample consisted of 20 firms for the period of

13 years from 1996-2009. The result of this study has shown that there is a negative relationship between the

length of cash conversion cycle and the firm profitability. Abdul et al.(2010) study empirically estimated and

compared the sector-wise impact of working capital management on the performance of manufacturing firms in

terms of collection policy, inventory policy, payment policy and cash conversion cycle. The study was tested

using the financial data of 204 firms listed into Karachi Stock Exchange classified into 9 sectors during the

period of 1998-2007. The impact of working capital ratios on the other hand with Net Operating Profitability is

significant and positive for all the sectors except for Energy sector. Kim, et al. (1998) conducted a study on

industrial companies in America during 1975-1996, the study used correlation to analyze the various factors of

the working capital management and found that sale growth had a negative significant impact on the cash

conversion cycle of the American firms. This result contradicts the studies of Jeng-Ren (2006), as he

acknowledged that companies with higher sales growth are more willing to increase their working capital.

Whereas, the Companies that tend to have a high sale growth pay more attention to the management of working

capital hence, they extend the payment period and accelerate attracting customers. In other words, the longer the

payment period is, the higher will be the sales, which in turn results in an increased profitability. In Nigeria,

Ogundipe (2012) provides an empirical examination for the efficiency of working capital management and its

effect on the valuation of a firm in Nigeria for the period of 1995-2009. The study used Pearson correlation and

multiple regression technique to analyze the data. This conclusion attests the rule that maximizing profits will

maximize the wealth of stakeholder’s. A strong negative relationship between working capital management

measured by cash conversion cycle and profitability has been derived stating that the reduction in cash

conversion period will maximize profits.

Mojtahedzadeh (2011) found the relationship between methods of working capital management and

profitability. With a sample of 101 firms listed on Tehran Stock Exchange (TSE) during the period of 2004-

2008. Similarly, like other research studies they used gross operating profit as dependent variable and cash

conversion cycle and its components as independent variables. The results obtained from regression confirm that

there is a significant and inverse relationship between the cash conversion cycle period, payment period and the

period of collection of receivables with the profitability but insignificant and negative relationship between the

Cash conversion cycles and profitability. Hashem et al. (2012) studied the effect of company characteristics on

the working capital management. The sample consists of 83 firms listed in Tehran Stock Exchange for the

period of 2001 – 2010. The study used independent variables such as operating cash flow, company size, sale

growth, current ratio, quick ratio and the debt ratio with dependent variable as profitability. The research was

conducted in two different views, (i.e.) one in the aspect of company’s characteristics with cash conversion

cycle and the other with three different levels of companies such as Large, Average and small was assessed. The

usage of regressions and Pearson’s correlation indicated that the effective factors in top levels companies were

the operating cashflow, debt ratio, sale growth with the profitability. Whereas in the average level firms the

effective factors were the firm size, sale growth, debt ratio with the profitability, and small levels companies

were affected by sale growth, current ratio, quick ratio and debt ratio with profitability

Nilsson et al.(2010) article featuring the impact of Working capital management in the Swedish

companies where he compared the effects of these characteristics on cash conversion cycle, which is a measure

for the assessment of Working capital management. The results suggest that operating cash flow, company size,

sale growth and cash conversion cycle had an impact on profitability. The results state that there is a positive

relationship between profitability and cash conversion cycle and a negative relationship with sale growth and

operating cash flow.

Measuring the organisational performance with cash conversion cycle

Chakraborty (1974) drew special attention to each component of operating cycle rather than on the

cycle itself claiming that component – wise computation was better than applying single operating cycle

duration and deriving working capital needs from its turnover. There are various methods drawn by

academicians on operating cycle such as Richards and Laughlin proposed a weighted cash conversion cycle

(WCCC). This WCCC measures the weighted number of days’ funds are tied up in inventories and receivables

less the weighted number of day’s cash payments are delayed to suppliers. Similar method was adopted by

Pandey (1974) in his book ‘financial management’. Operating cycle concepts claim that money is blocked first

in raw materials; labour and other conversion cost; selling and distribution costs comes in the end.

Thus the cash blocked in raw materials last for the whole of operating cycle while manufacturing

expenses blocked in work-in-progress stage, selling and distribution cost blocked in finished goods, storage and

sales blocked in debtors would last from their sequential commitment to the remaining period of operating

cycle. Hence the necessity for aggregate working capital could be more accurately derived by considering each





component of working capital distinctly. It is doubtful whether in an ongoing business; expenses are incurred in

such a sequential manner.

III. RESEARCH METHODS The present research intends to contribute towards the important component of working capital

management known as the cash conversion cycle on the organisational performance with reference to India

(Chennai). The study aims to find the relationship between the cash cycle and its effects on the organisational

performance which is a measure of profitability of the selected manufacturing firms from CMIE prowess

Database for a period of 2006-2012. The section explains the variables included in this study, the data collection

process and the applied statistical techniques in investigating the relationship between the cash cycle and the

organisational performance. The study includes both secondary and primary data.

Objective of the study

To study the sector-wise relationship between the Cash conversion cycle and Net Operating

Profitability of 15 leading listed manufacturing sectors at Chennai for a period of 2006- 2012.

Variables of the study

Dependent variable – Net Operating Profitability

Independent variable – Cash Conversion Cycle.

Data Sources

The main sources of secondary data were collected through the financial statements, such as income

statements, balance sheets of S&P CNX 500 companies. The data has been derived from NSE were collected for

the period of 2006 – 2012 from CMIE Prowess Database. But due to inconsistency of data for the continuous 6

years’ period, only 162 companies from S&P CNX 500 companies have been considered for this study. The

other non-financial firms which lack in data were eliminated from this study.

Methods of Analysis

The present study adopts Random Sampling method. The tools such as Descriptive statistics, Ratio

analysis, Correlation, Chi-square has been used to analyse the secondary data. Questionnaire survey was used to

measure the primary data. Out of the 162 companies only 34 companies were available at Chennai. Hence the

primary survey was conducted only with these 34 companies. The statistical analysis was performed using the

SPSS tool 19.0 version.

IV. ANALYSIS AND INTERPRETATION This section explains about the results and discussion about the primary data.

Table showing the Descriptive Statistics (Mean and Standard Deviation) of 162 Firms, (i.e.) 15 Manufacturing

Sectors, for a period of 2006-2012

SECTORS CCC

AUTOMOBILE SECTOR

MEAN 150.4.

S.D 71.29

ELECTRICAL EQUIPEMENTS MEAN 36.65

S.D 10.56

STEEL & ALUMINIUM MEAN 15.68

S.D 5.29

PHARMACEUTICAL MEAN 63.84

S.D 28.19

CEMENT MEAN 9.8

S.D 0.22

CONSUMER DURABLES MEAN 25.2

S.D 8.6

ENGINEERING FIRMS MEAN 54.9

S.D 29.83

TEXTILES MEAN 55.27

S.D 22.56

CHEMICAL MEAN 19.23

S.D 1.46

TYRE MEAN 8.7

S.D 2.43

PUMP MEAN 28.46

S.D 18





FOOD FIRMS MEAN 47.91

S.D 15.64

SUGAR MEAN 37.64

S.D 17.34

TRADING MEAN 23.82

S.D 9.16

CONSTRUCITON MEAN 0.39

S.D 0.11

Source: Calculation based on Annual Reports of firms from 2010-2016

The above table has arrived at the descriptive statistics (i.e) Mean and standard deviation for Cash

conversion cycle. The mean and standard deviation of each sector has been presented. The cash conversion

cycle period should be reduced to minimum to realize quick profits. Hence the profits realized within a certain

period of time can be utilised or invested in other capital resources to increase the organisational performance

and profitability.

i. In Automobile sector, Cash conversion cycle is 150.4 days. The cycle days should be reduced to

minimum.

ii. In Electrical Equipment’s sector the Cash conversion cycle is 36 days. These days can also be reduced.

iii. In Steel &Aluminum sector, Cash conversion cycle is 15 days etc.

iv. In Pharmaceutical sector, the Cash conversion cycle has got the highest mean of 63 days. This infers

that the pharmaceutical sector is providing too much of time for their customers to pay their bills. The

cash conversion cycle process can be made even faster to realize quick profits.

v. In Cement sector, Cash conversion cycle is about 9 days.

vi. In Consumer Durables sector, Cash conversion cycle is about 25 days.

vii. In Engineering sector, Cash conversion cycle is 54 days. This period should be reduced to minimum to

increase profit.

viii. In Textile sector the Cash conversion cycle is 55 days. This implies that textile sector acquires too long

to convert it into cash, hence it has to be reduced.

ix. In Chemical sector the Cash conversion cycle is 19 days. This period is also moderate.

x. In Tyre sector Cash conversion cycle is about 8 days.

xi. In Pump Sector Cash conversion cycle is about 28 days. This period can also be reduced.

xii. In Food sector the Cash conversion cycle is about 47 days. This implies that food sector took too long

period to pay for its suppliers.

xiii. In sugar sector the Cash conversion cycle is about 37 days. This implies that sugar sector took too long

for its resources to convert it into cash.

xiv. In trading sector, the Cash conversion cycle is 23 days. This period should be reduced to minimum to

increase profit.

xv. In Construction sector the Cash conversion cycle is about 0.39 days. This compared to other sectors

was really doing well

Table showing the Correlations between the Net Operating Profitability and the Cash conversion cycle of

Automobile, Electrical equipment, Steel and Aluminium, Pharmaceutical, and Cement sectors for the

period of 2006 - 2012

NOP

Pearson

1

Correlation

Pearson .219

CCC Correlation

AUTOMOBIE Sig. (2-tailed) .093

NOP

Pearson

1

Correlation

ELECTRICAL

ITP

Pearson .256

Correlation

EQUIPMENT Sig. (2-tailed) 0.05

NOP

Pearson

1

Correlation





Pearson

.092

STEEL AND ITP Correlation

ALUMINIUM Sig. (2-tailed) .358

NOP

Pearson

1

Correlation

Pearson

-.376**

ITP Correlation

PHARMACEUTICAL Sig. (2-tailed) 0.000

NOP

Pearson

1

Correlation

Pearson

-.274*

ITP Correlation

CEMENT Sig. (2-tailed) .015

**. Correlation is significant at the 0.01 level (2- tailed.

*. Correlation is significant at the 0.05 level (2-tailed).

From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,

has (-219) and a P value of (.093) which is insignificant. Since the (P value > .05) there is no relationship exist

between Cash conversion cycle and the Net operating profitability of the Automobile sector.


has (-.256) and a P value of (0.05) which is insignificant. Since the (P value > .05) there is no relationship exist

between Cash conversion cycle and the Net operating profitability of the Electrical Equipment sector.


has (-.092) and a P value of (0.358) which is insignificant. Since the (P value > .05) there is no relationship exist

between Cash conversion cycle and the Net operating profitability of the Steel and Aluminium sector.

From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle

has (-.376**) and a P value of (.000) which is significant at 1% and it is negatively correlated with the Net

operating profitability. The negative correlation between Cash conversion cycle with Net operating profitability

indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the

Pharmaceutical sector.


has (-.274*) and a P value of (.015) which is significant at 5% and it is negatively correlated with the Net



Cement sector.

Table showing the Correlations between the Net Operating Profitability and the Cash conversion cycle of

Consumer durables, Engineering, Textiles, Chemical and Tyre sectors for the period of 2006-2012

NOP

Pearson

1

Correlation

Pearson

-.376*

CONSUMER ITP Correlation

DURABLES Sig. (2-tailed) 0.024

NOP

Pearson

1

Correlation

Pearson

-.414**

ITP Correlation

ENGINEERING Sig. (2-tailed) .006





NOP

Pearson

1

Correlation

ITP

Pearson

-.360**

Correlation

TEXTILES Sig. (2-tailed) .001

NOP

Pearson

1

Correlation

ITP

Pearson

.090

Correlation

CHEMICAL Sig. (2-tailed) .453

NOP

Pearson

1

Correlation

ITP

Pearson

.086

Correlation

TYRE Sig. (2-tailed) 0.650

**. Correlation is significant at the 0.01 level (2-tailed).



has (-.376*) and a P value of (.024) which is significant at 5% and it is negatively correlated with the Net



Consumer Durables sector.


has (.414**) and a P value of (.006) which is highly significant at 1% and it is negatively correlated with the Net



engineering sector.


has (.360**) and a P value of (.001) which is highly significant at 1% and it is negatively correlated with the Net


indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the Textile

sector.


has (-.090) and a P value of (.453) which is insignificant. Since, the (P value > .05) there is no relationship exist

between Cash conversion cycle and the Net operating profitability of the Chemical sector.


has (-.086) and a P value of (.650) which is insignificant. Since the (P value > .05) there is no relationship exist

between Cash conversion cycle and the Net operating profitability of the profitability of the Tyre sector.

Table showing the Correlations between the Net Operating Profitability and Cash conversion cycle of

Pump, Food, Sugar, Trading and Construction sectors for the period of 2006-2012

NOP

Pearson

1

Correlation

Pearson

-0.471**

ITP Correlation

PUMP Sig. (2-tailed) 0.009

NOP

Pearson

1

Correlation

Pearson -.582**





ITP Correlation

FOOD Sig. (2-tailed) .000

NOP

Pearson

1

Correlation

Pearson

-0.132

ITP Correlation

SUGAR Sig. (2-tailed) 0.487

NOP

Pearson

1

Correlation

Pearson

-.086

ITP Correlation

TRADING Sig. (2-tailed) 0.735

NOP

Pearson

1

Correlation

Pearson

.079

ITP Correlation

CONSTRUCTION Sig. (2-tailed) .262

**. Correlation is significant at the 0.01 level (2-tailed).


From the above correlation table, it has been observed that Cash conversion cycle, has a co-efficient of

(-.471*) and a P value of (.009) which is significant at 10% and it is negatively correlated with the Net operating

profitability. Since the (P value < .10) the results indicate that there is a negative correlation between the Cash

conversion cycles with the Net operating profitability. This implies that an increase in the Inventory period will

decrease the profitability of the Pumps sector.

From the above correlation table, it has been observed that Cash conversion cycle, has a co-efficient of

(-0.582**) and a P value of (.053) which is significant at 1% and it is negatively correlated with the Net


indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the food

sector.

From the above correlation table, it has been observed that Cash conversion cycle has a co-efficient of

(-.132) and a P value of (.487) which is insignificant. Since the (P value > 0.05) the results indicate that thereis

no relationship exists between the dependent variable Net operating profitability with the independent variable

Cash conversion cycle of the Sugar sector.


has a co-efficient of (-.086) and a P value of (.735) which is insignificant. Since the (P value > 0.05) there is no

relationship exist between the dependent variable Net operating profitability with the independent variable Cash

conversion cycle of the trading sector.


has (-.079) and a P value of (.262) which is insignificant. Since the (P value > 0.05) the results indicate that

there is no relationship exists between the dependent variable Net operating profitability with the independent

variable Cash conversion cycle of the Construction sector.

V. ANALYSIS OF PRIMARY DATA (I). The Cash management practices of selected industrial units at Chennai

Companies must ensure that their information and reporting systems should produce data which are

relevant, accurate and up to date. They must then use this information to make prompt decisions. Some of the

most important decisions are likely to concern cash management and liquidity measures, particularly the role of

cash flow forecasting in building and maintaining trust with key stakeholders and financiers.





5.(I). Table showing the Cash management practices at selected industrial units at Chennai

Source: Primary Data

Inference

It has been observed from the table 5. (I). that the surveyed companies ascertain certain cash

management practices in their organization to maintain the cash flow. It is clear from the study that 18 firms

often adopt preparation of cash budgets as a major cash management practices in their organization. The cash

budgeting is a very important to meet the day-to-day requirements of the organization. Proper flow of cash

inside the firms will induce the organizational performance, which will increase the profitability.

II. Correlation Analysis

The table stated below shows the relationship between the importance (or) priority that the organisation

place on working capital with reference to the utilization of company’s potential working capital resources,

which helps in increasing the profitability.

5(II). The table representing Chi-squared analysis for Priority on working capital with optimum

utilization of company's potential capital Resources

Priority Utilization of Capital Resources

On

Working

Capital Excellent Good Satisfaction Poor Total

N 7 7 0 0 14

Highest Row % 50.00% 50.00% 0.00% 0.00% 100.00%

N 2 0 8 1 11

High Row % 18.20% 0.00% 72.70% 9.10% 100.00%

Neither N 0 1 6 2 9

High Nor

Now Row % 0.00% 11.10% 66.66% 22.22% 100.00% Chi Squared

N 9 8 14 3 34 Value=41.86;

Total Row % 26.50% 23.50% 41.17% 8.82% 100.00% P Value = 0.00

It has been inferred from the table that the organisation which place a highest priority on working

capital, have good and excellent utilization of potential working capital resources. Whereas the organisations

which place a little low priority only have 18% of utilization and 72% of satisfactory level of utilization of

potential resources. So it is identified that companies which give more priority to working capital have a better

utilization of company’s potential resources.

Since the P value 0.00, it has been inferred that there is a significant relationship exists between the

priority on working capital by the organisation and utilization of potential working capital resources. Hence

priority on working capital is essential for a better utilization of resources, which will induce the efficiency of

the organizational performance and also to reduce the wastage/ scrap.

VI. FINDINGS AND CONCLUSION The study identifies the issues related to the cash conversion cycle and organizational performance

undertaken by manufacturing industries through the questionnaire survey and secondary data analysis.

It has been understood that the lower the cash conversion cycle the higher will be the profitability.

From the analysis it is predicted that there is a lower Cash conversion cycle in the construction sector. So, in the

construction sector the cash cycle was less hence the cash flow will be good when compared with the other

sectors chosen for the study. Apart from this sector Tyre, cement Steel& Aluminium has less than 15 days of

cash conversion cycle period. So, from the analysis it is pictured as they are doing very well on the basis of

Cash Preparation of cash Determination of cash Occurrence of cash Occurrence of cash

management Budgets balances shortage surpluses

Practice No. of Percentage No. of Percentage No. of Percentage No. of Percentage

Respondents of Respondents of Respondents of Respondents of

Respondents Respondents Respondents Respondents

Very Often 8 24 8 23 13 38 5 15

Often 10 29 19 56 11 33 15 44

Sometimes 4 12 0 0 0 0 0 0

Rarely 12 35 7 21 10 29 14 41

Total 34 100 34 100 34 100 34 100





cycle period. In the correlation table it has been projected that cement, consumer Durables, Engineering had a

significant impact on profitability. whereas, pharmaceutical, Textile, pump, food had a highly significant impact

on the profitability, which means the organisations realised high profits with the reduced cash conversion cycle

periods. Based on the secondary data analysis, it is understood that companies can adjust their standard of credit

purchase or cash collection in order to pay for its suppliers. It is clear that companies Investment decision can

directly have an influence on cash cycle. In times of cheap credit cash cycle have been slowed to shorten as it

becomes more affordable for companies to borrow money towards their inventory Investments.

From the primary analysis it is revealed that the surveyed companies should concentrate more on the

variables such as grounding of cash budgets. The surveyed companies lack in the cash budget preparation.

Periodical determination of cash balances is essential for the finance manager to plan for the future investments

in resources. A review on the occurrences of cash shortage and cash surpluses will also have an impact on the

inventory investments. The chi-squared analysis predicts that there is a highly significant relationship between

the priority they have for working capital and the utilisation of capital resources.Overall it has been observed

that low cash conversion cycle signifies a well - organised management of companies that induces potential

investments.

VII. REFERENCES [1] Gitman L.J. (1976). Principles of managerial finance, New York: Harper and Row Publishers, P. 148. [2] Pandey I.M. (1999). Financial Management, Vikas Publishing House Pvt Ltd, 8th Edition.

[3] Richard, V. D. and Laughlin, E. J. (1980). A Cash Conversion Cycle Approach to Liquidity Analysis.Financial Management,

9(1), 32-38. [4] Nazir, M. Afza, T. (2009). Impact of Aggressive Working Capital Management Policy on Firms Profitability. The IUP Journal of

Applied Finance, 25 (8), 19-30.

[5] James A. Gentry, R. Vaidyanathan, and HeiWai Lee (1990). A Weighted Cash Conversion Cycle. Journal of Financial Management Association, 90 – 99.

[6] Abdul Raheman, Abdul Qayyum, TalatAfza. (2010), Sector-wise Analysis of Working capital Management and Firm

Performance in Manufacturing Sector of Pakistan, Interdisciplinary Journal Of Contemporary Research In Business, 2(7). [7] Samiloglu, F. and Demirgunes, K. (2008). The Effects of Working Capital Management on Firm Profitability: Evidence from

Turkey. The InternationalJournal of Applied Economics and Finance,2(1), 44-50.

[8] Lind, L. (2012). Working capital management in the automotive industry: Financial value chain analysis. Journal of Purchasing and SupplyManagement,http://dx.doi.org/10.1016/j.pursup.2012.04.003

[9] Hirsh leifer, D. and Teoh, S. H. (2003).Limited attention, information disclosure, and financial reporting. Journal of Accounting

& Economics, 36, 337–386. [10] Givoly D, and Hayn C. (2000). The changing time series properties of earnings, cash flows andaccruals: Has financial reporting

become more conservative? Journal of Accounting and Economics, 29(3), 287–320. [11] Platt, Harlan. (2010). Lead with cash: cash flow for corporate renewal. Imperial College Press, (242). Index ISBN 1848163754,

ISBN 9781848163751.

[12] Soenen (2000). International Cash Management: A Study of the Practices of U.K - Based Companies. The International Executive. 28(3) 12; ABI/INFORM Complete,

[13] Sohani Islam. (2012). Manufacturing Firms’ Cash Holding Determinants Evidence from Bangladesh, International Journal of

Business and Management, 6(172). [14] YujunLian, MohamadSepehri. (2011). Corporate cash holdings and financial crisis: an Empirical study of Chinese companies

and Maggie Foley, Eurasian Business Review, 6 (2), 112-124.

[15] Leavell, Hadley, (2006). International Working Capital Management, TheBusiness Review, Cambridge; 5 (1), 233; ABI/INFORM Complete.

[16] Akinlo, O. (2011). Does Working Capital Cause Profitability? The Nigerian Experience. Journal of Modern Accounting and

Auditing, Vol. 7(5), 457-462.

[17] Dong, H.P. and Su, J.T. (2010). The relationship between working capital management and profitability: A Vietnam case.

International Research Journal ofFinance and Economics, (49), 62-71.

[18] Deloof, M. 2003. Does Working Capital Management Affects Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30 (3, 4) 573 – 587.

[19] Dong, H.P. and Su, J.T. (2010). The relationship between working capital management and profitability: A Vietnam case.

International Research Journal ofFinance and Economics, (49), 62-71. [20] Bagchi, B. and Khamrui, K. (2012). Relationship between working capital management and profitability: A study of selected

FMCG companies in India. Business and Economics Journal, 1-11.

[21] Nor Edi Azhar Binti Mohamad, NorizaBinti Mohd Saad. (2010). Working Capital Management: The Effect of Market Valuation and Profitability in Malaysia, International Journal of Business and Management, 5(11), 140–147, ISSN1833-3850 E-ISSN

1833-8119.

[22] Sen, M. and Oruc, E. (2009). The Relationship between Efficiency Level of WorkingCapital Management and Return on Total Assets in Ise .International Journal of Applied Economics and Finance, 2(10).

[23] Vijayakumar, A. (2011). Cash Conversion Cycle and Corporate Profitability – An Empirical Enquiry in Indian Automobile

Firms. International Journal of Research inCommerce, IT & Management, 1 (2), 84-91. [24] Abdul Raheman, Dr.AbdulQayyum,Dr. TalatAfza (2010), Sector-wise Analysis of Working capital Management and Firm

Performance in Manufacturing Sector of Pakistan, Interdisciplinary Journal Of Contemporary Research In Business, 2(7).

[25] Kim, C. S., Mauer, D. C., and Sherman, A. E. (1998). The determinants of corporate liquidity: Theoryandevidence.Journal of Financial and Quantitative Analysis, 33(3), 335-359.

[26] Jeng-Ren., Chiou and Li, C. (2006). The determinants of working capital management. The Journal of American Academy of

Business, Cambridge, 10, 149-155. [27] S. Ogundipe, A. Idowu and Ogundipe .L (2012). Working Capital Management- Firms’ Performance and Market Valuation in

Nigeria. World Academy of Science, Engineeringand Technology,61, pp. 1196-1200.





[28] V. Mojtahedzadeh, S. Tabari and Mosayebi, R. (2011). The Relationship between Working Capital Management and Profitability

of the Companies - Case Study: Listed Companies on TSE. International Research Journal of Finance and Economics, 76, 158-166.

[29] Hashem valipour, JavadMoradi and FatemehDehghan Farsi, (2012). The Impact of company characteristics on working capital

management, Journal of applied finance and banking, 2(1), 105-125, Issn: 1792-6580 (print version), 1792-6599. [30] Hans Nilsson, (2010), The effect of company characteristics on working capitalmanagement,Umea School of Business.

[31] S. Ogundipe, A. Idowu and Ogundipe .L (2012). Working Capital Management- Firms’ Performance and Market Valuation in

Nigeria. World Academy of Science, Engineeringand Technology,61, pp. 1196-1200. [32] V. Mojtahedzadeh, S. Tabari and Mosayebi, R. (2011). The Relationship between Working Capital Management and Profitability

of the Companies - Case Study: Listed Companies on TSE. International Research Journal of Finance and Economics, 76, 158-

166. [33] Hashem valipour, JavadMoradi and FatemehDehghan Farsi, (2012). The Impact of company characteristics on working capital

management, Journal of applied finance and banking, 2(1), 105-125, Issn: 1792-6580 (print version), 1792-6599.

[34] Hans Nilsson, (2010), The effect of company characteristics on working capitalmanagement,Umea School of Business. [35] S. Ogundipe, A. Idowu and Ogundipe .L (2012). Working Capital Management- Firms’ Performance and Market Valuation in

Nigeria. World Academy of Science, Engineeringand Technology,61, pp. 1196-1200.

[36] V. Mojtahedzadeh, S. Tabari and Mosayebi, R. (2011). The Relationship between Working Capital Management and Profitability

of the Companies - Case Study: Listed Companies on TSE. International Research Journal of Finance and Economics, 76, 158-

166.

[37] Hashem valipour, JavadMoradi and FatemehDehghan Farsi, (2012). The Impact of company characteristics on working capital management, Journal of applied finance and banking, 2(1), 105-125, Issn: 1792-6580 (print version), 1792-6599.

[38] Hans Nilsson, (2010), The effect of company characteristics on working capitalmanagement,Umea School of Business.

[39] Chakraborty, S.K. (1974). Cash Working Capital Vs. Balance Sheet Working Capital. The Economic and Political Weekly, MII-M22.

[40] Jose, M.L., Lancaster, C. and Stevens, J.L. (1996). Corporate returns and cash conversioncycles. Journal of Economics and

Finance, 20(1), 33-46. [41] Deloof, M. and Jeger, M. (1996). Trade credit, product quality, and intra group trade: Some European evidence. Financial

Management, 25 (3), 945-968. [42] Gitman, L.J. (1974). Corporate liquidity requirements: A simplified approach. The Financial Review 9, 79-88.

[43] Gitman, L.J. and Sachdeva K. S. (1984). A framework for estimating and analyzing the required working capital investment.

Review of Business and Economic Research 17, no. 3 pp. 36-44.

The Role of Cash Conversion Cycle in Working Capital...

Documents

Transcript of The Role of Cash Conversion Cycle in Working Capital...