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 Kumari 1 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
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Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
This work is licensed under a Creative Commons Attribution 4.0 International License
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.
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