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Volume 8 - Number 1 | March 2024

Cash conversion cycle and financial performance: evidence from manufacturing firms of Bangladesh

Rejaul Karim, Md. Abdullah Al Mamun, and Abu Sadeque Md. Kamruzzaman

25/03/2024 4 0 0
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Cash conversion cycle Liquidity Financial performances

Abstract:

Purpose
The purpose of the present study is to determine how the cash conversion cycle (CCC) affects the financial performance of manufacturing companies in Bangladesh.

Design/methodology/approach
The authors have collected data of 61 Dhaka Stock Exchange (DSE)-listed firms from the 10 distinct manufacturing industries of Bangladesh for 18 years, from 2003 to 2020. The data have been analyzed through the two-steps system generalized method of moment (GMM) regression model, using profitability indicators return on asset (ROA) and earnings per share (EPS) as dependent variables, while CCC has been used as the independent variable, whereas asset turnover (ATO) and financial leverage (LEV) were used as control variables to assess the relationship between the CCC and financial performance.

Findings
The findings indicated that CCC has a negative connection with profitability – ROA and EPS, with the connection between CCC and EPS being highly significant. This indicates that reducing the inventory conversion time, reducing the period of receivable collection and making payments to creditors with potential delays might help Bangladeshi manufacturing firms boost their profitability. In addition, the firm-specific characteristics, namely ATO and LEV significantly affect the firm's profitability.

Research limitations/implications
The research was based only on secondary sources and information was scarce. This research was conducted to determine the impact of the CCC on the corporate profitability of the manufacturing sector solely. There might be many other working capital variables that are still unexplored through this study.

Practical implications
The current study's findings are consistent with the traditional rule that minimizing the firm's days of the cash cycle may optimize financial performance. The results of this research have added to the existing body of knowledge on the topic of working capital management (WCM). Future research endeavors can be initiated for assessing the impact of the CCC on the firm's profitability in other industrial sectors or to identify other working capital variables that have much impact on corporate profitability.

Originality/value
This study is an original work of the researchers and adds value to the current literature in the domain of WCM and corporate profitability. The present study is the first one that covers firms in all the manufacturing industries in Bangladesh. The corporate managers, creditors, investors and other concerned stakeholders will be benefited from the findings of the present study.

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Further reading

  1. Ross, S.A., Westerfield, R.W. and Jordan, B.D. (2003), Fundamentals of Corporate Finance, 6th ed., The McGraw-Hill Companies, New York.

JEL classification: G30,G31,G32

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