Abstract:
The management of working capital can be defined as an accounting approach
that emphasize on maintaining proper levels of both current assets and current
liabilities. The management of working capital relates managing inventories,
accounts receivable, accounts payable and cash. Working Capital
Management (WCM) is a powerful element in any organization. For the
reason behind that, the main working capital components such as Average
Collection Period (ACP), Average Payable Period (APP), Inventory
Conversion Period (ICP) and Cash Conversion Cycle (CCC) are directly
impact to the firm’s performance. Consequently in this study also used these
variables as the independent variables. Return on Assets (ROA) is used as a
measure of profitability as well as dependent variable. Current Ratio (CR),
Debt Ratio (DR), Firm Size (SIZE) and Sales Growth (GROWTH) are the
control variables that used in present study to compute the WCM impact on
profitability. This paper analyzes the WCM and its impact on profitability in
Sri Lanka for the period of 2011 to 2015. The population consists with 38 hotel
and travel companies listed in Sri Lankan Colombo Stock Exchange and the
sample contains 20 companies of the above mentioned population. Pearson’s
correlations and ordinary least square regression method were used to
establish the relationship between WCM and firm’s profitability. This study
finds that positive relationship between return on assets and ICP, CCC and
CR. On the other hand present study suggests that there is a negative
relationship between ROA and ACP, APP, DR, SIZE and GROWTH of firms.
Among these variables, ICP and SIZE are highly significant to the
profitability. Based on the key findings from this study it has been evident
that managers can create a value for the enhancement of shareholder’s wealth
by increasing the number of days inventory conversion to a maximum level
and reducing the number of days accounts receivables and accounts payables
to a reasonable level. This study recommend to the management in setting
longer credit period policy for this sector to achieve higher profitability and they can maintain optimum high level of inventory in order to reduce the cost
of possible breaks in the production process and loss of business due to the
scarcity of inputs in production. Furthermore, firms can take short to pay their
creditors in as much as they can build up strong relationships with these
creditors. Also firm can get the sustainable competitive advantage by the
effective and efficient utilization of the firm resources through the increment
of the cash conversion cycle to its maximum. In so doing, the profitability of
the firms is expected to increase.
