Firms worldwide strive to boost profitability in order to enhance shareholder wealth.
Consequently, their management typically concentrates on making financial decisions that
ensure the firm's financial stability, encompassing both financial position and economic
performance. Working capital management is a crucial element of a firm's economic
performance, contributing significantly to profitability and directly influencing the firm's
liquidity (Chary & Kumar, 2011).
Almost half of the total asset value on the asset side of the balance sheet is typically made up of
current assets for many businesses that produce items, which are typically represented by cash,
cash equivalents, and inventories. However, this percentage may vary significantly more in the
case of businesses involved in distribution. The company's valuable financial resources could be
blocked by the excessive investment in these assets, which would ultimately lower the return on
the business's total capital. In order to ensure that the companies can meet their current
obligations in a satisfactory manner and that they will receive the maximum return on their
valuable investment in these floating assets, the areas of WCM essentially cover the planning
and controlling activities of the companies regarding their current assets and current liabilities
(Eljelly, 2004). In addition to.** add the ref**. That states that the primary purpose of working
capital management is to enable the company to maintain sufficient cash flow to meet its short-
term operating costs and short-term debt obligations.
Working Capital Management, also known as liquidity management, requires close attention
because it significantly impacts a firm’s profitability, risk, and overall value (Smith, 1980).
Working capital is the difference between current assets and current liabilities (Pass & Pike,
1984). Cash conversion cycle (CCC) is a performance indicator of working capital management
efficiency, measuring the number of days that funds are committed to inventories and accounts
receivable minus the number of days that payment to suppliers is deferred (Gitman, 1974).There
are two basic ways to assess the working capital management of firms, one is by following
balance sheet concept and studying current assets and current liabilities; the other is to approach
the concept of working capital management from point of view of Cash Conversion Cycle
(CCC). The CCC measures the number of days between actual cash expenditures on purchase of
raw materials and actual cash receipts from the sale of products or services (Eljelly, 2004). The
duration of CCC varies according on the industry and the company. In order to evaluate the
effectiveness of CCC and identify areas for improvement, companies investigate both their own
CCC and the industry benchmarks. ( 2007 Hutchison et al.). Trinh (2011) asserts that
unsynchronized and unpredictable cash influx and outflow patterns are associated with short-
term finance. The operating cycle (OC) and the cash conversion cycle (CCC) are both
represented by short-term operating activities. The interval is the OC. between the date on which
cash is collected from receivables and the order of inventory supply. Furthermore, the CCC ends
when money is collected from clients for credit sales and starts when the business pays suppliers
in cash for the products it has purchased. As an alternative, the CCC is calculated by adding the
accounts receivables period (RVP) and the inventory period (IVP), then deducting the accounts
payable period (PYP).
Profitability is a measure of an organization’s profit relative to its expenses.
Organizations that are more efficient will realize more profit as a percentage of
its expenses than a less-efficient organization, which must spend more to
generate the same profit.**add the ref**. One of the most crucial responsibilities of
company managers is to increase profitability in order to optimize shareholder wealth. The
company ultimately won't be able to survive without profitability. As a result, estimating future
profitability and evaluating existing and historical profitability are crucial. Debi'e (2011). Sharma
and Kumar (2011) examined 263 Indian enterprises from 2000 to 2008 and found a connection
between working capital management and firm performance. The study discovered a positive
association between profitability and the number of days accounts receivable, however a
negative relationship with the number of days accounts payable. Shin and Soenen (1998)
demonstrated that effective working capital management significantly impacts a company's
liquidity and profitability. Yet an excessive investment in working capital negatively affects a
firm's profitability while positively impacting its liquidity, Van Horne and Wachowicz (2006).
The aim of this study is to investigate the relationship between the Cash Conversion cycle and
the firm`s profitability. This research will be answering the flowing questions: (1) profitability are
associated with the cash conversion cycle time period? (2) How do different components of the cash
conversion cycle impact profitability? (3) Does a shorter cash conversion cycle lead to higher
profitability?
The specific research objectives are to:
• Investigate the existing literature on WCM and CCC.
• Understand the applicability CCC as a measure of working capital management.
• Understand the association between company profitability and management of CCC.