This document analyzes the relationship between working capital management and firm performance of 30 manufacturing companies in Sri Lanka over the period of 2006-2010. Regression analyses found that cash conversion cycle had a negative relationship with return on total assets, while current ratio and quick ratio were positively related. The study indicates that effective working capital management through reducing cash conversion cycle can increase profitability for manufacturing companies.

1. Working Capital Management and
Firms’ Performance
An Analysis of Sri Lankan Manufacturing Firms
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2. Group Members
Group Members:
 Bandana Lama
 Chhitiz Shrestha
 Aasish Baidya
 Aasish Tandukar
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3. Introduction
Working capital meets the short term financial
requirement of business enterprise
Working capital requirement decides the
liquidity and profitability of a firm
Less working capital leads to less financial
needs and less cost of capital
Relationship between working capital
management and firms performance of 30
manufacturing company in Colombo stock
exchange is analyzed
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4. Objectives of the study
To establish relationship that is statistically
significant between profitability, CCC & its
components
To identify the influence of liquidity
management on profitability for five years.
To measure the relationship between working
capital and performance.
To find out the effect of current assets
components of stock on profitability.
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5. Literature Review
Vijaykumar and Venkatachalam (1995)
concluded that liquidity was negatively
associated with profitability
Shin and Soeven (1998) and Koperunthevi
(2010) found a negative relationship between
cash conversion cycle and profitability
Koperunthevi (2010) concluded that the
working capital management very much
influences profitability of manufacturing
companies and increase in the cash
conversion cycle leads to less profitability.
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6. Methodology
Population: 242 companies listed in
the Colombo Stock Exchange (CSE)
market
Sample: 30 sample companies
Observation: 150
Study Period: 2006-2010 (5 years)
Tools and Techniques: simple
statistical methods like descriptive
statistics, correlation and regression
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7. Financial Tools
The formulas used were,
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8. Variables
Variables
Explanatory Control
Variables Variables
•Liquidity Ratio •Natural Logarithm of
•Working Capital Sales
Cycle •Gearing Ratio
•Gross Working Capital
•Components of
Turnover
Current Assets •Current Assets to Total
Assets
•Current Liability to Total
Assets
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9. Variables
Variables: Working capital managements
effect on performance is calculated by using
explanatory variables and control variables.
Explanatory Variables:
 Liquidity ratio of current ratio (CR) is defined as
current assets divided by current liabilities
 Quick ratio (QR) defined as current assets other
than inventories divided by current liabilities.
 CCC=INP days + AR days - AP days
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10. Variables
Control variables:
 Control variables include assets management
system and financial policies.
 In order to include the firm size as control variable
sales, a proxy for size.
 To gross working turnover and current liability to
total assts are included as control variables.
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11. Hypothesis
H1= There is no relationship between
cash conversion cycle and profitability
of manufacturing companies
H2= There is no relationship between
liquidity ratio and profitability of
manufacturing companies
H3= There is no relationship between
current assets component of stock and
profitability of manufacturing companies
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12. Result & Discussion
The study found the strong relationship
between working capital management
and performance.
This reveals that high investment in
inventories and receivables lead to
lower profit.
The performance was measured in
terms of profitability by return on total
assets.
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13. Descriptive Statistics
Return on total assets had an average of 13.1
%.
Mean value of explanatory variables of cash
conversion cycle was 51.13 days, current
ratio was 1.5139, quick ratio was 0.9938 and
stock to current assets was 42.51%.
 This means 42.51% of currents assets were
stocks. This could be the reason for
difference between current ratio and quick
ratio.
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15. Regression Analysis
1 Model I
2 Model II
3 Model III
4 Model IV
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16. MODEL 1
Cash conversion cycle had a negatively related
Coefficient
It was significant at 5% level
Null hypothesis was rejected and there was
significant relationship between cash conversion
cycle and return on total assets
Size of the firm had positive influence on ROTA
Dependent variables is changed by 15.21% due
to change in independent variables
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17. Calculation
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18. MODEL 2
Current ratio was positively related with
the ROTA .
Size of firm had positive relations with
ROTA.
Dependent variables is changed by
18.04% due to change in independent
variables.
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19. Calculation
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20. MODEL 3
Size of the firm was positively related
with ROTA but it was not a statistically
significant level.
Quick ratio has also positively
determined the ROTA.
R-squared is 15.40%
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21. Calculation
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22. MODEL 4
No significant relation between stock to
current assets and ROTA an also between
the size of firm.
Dependent variables changes by 14.07%
due to changes in independent variables.
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23. Calculation
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24. Conclusion
Empirical evidence about the effect of
working capital management on profitability
The study indicates negative relationship
between cash conversion cycle and working
capital management efficiency
Working capital management influences
profitability of companies and increase in
CCC leads to less profit
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25. Conclusion
Current ratio and quick ratio are positively
related to profitability
More current assets to total assets leads to
more profit
Shorter receivable period leads to shorter
cash conversion cycle and thus optimal
profitability
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26. Limitations
Preliminary study to analyze the working
capital management and firm's performance
This study would be more meaningful if more
samples were considered
Focus was only on manufacturing firms,
hence it is not applicable to other type of firms
The term working capital is very vast however
only few of the component were analyzed.
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27. Limitations
Some abbreviations used are complex and
confusing to understand, such as
 CATA,
 CLTA,
 QAR
 SKCA and
 CA_TURN.
This research study has only used secondary
sources of data
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28. Implications In
Nepalese Context
As Nepal and Sri Lanka are both
developing South Asian countries,
Hence the decrease in CCC leading to
increase in profitability, as the case of
Sri Lanka, is also applicable in Nepal
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