Wcm and a firm's performance


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Assignment, Seminar in Working Capital management, BBA-BI 6th semester, Ace Institute of Management

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Wcm and a firm's performance

  1. 1. Working Capital Management and Firms’ PerformanceAn Analysis of Sri Lankan Manufacturing Firms LOGO
  2. 2. Group MembersGroup Members:  Bandana Lama  Chhitiz Shrestha  Aasish Baidya  Aasish Tandukar LOGO
  3. 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 LOGO
  4. 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. LOGO
  5. 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. LOGO
  6. 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 LOGO
  7. 7. Financial ToolsThe formulas used were, LOGO
  8. 8. Variables Variables Explanatory Control Variables Variables•Liquidity Ratio •Natural Logarithm of•Working Capital SalesCycle •Gearing Ratio •Gross Working Capital•Components of TurnoverCurrent Assets •Current Assets to Total Assets •Current Liability to Total Assets LOGO
  9. 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 LOGO
  10. 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. LOGO
  11. 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 LOGO
  12. 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. LOGO
  13. 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. LOGO
  14. 14. LOGO
  15. 15. Regression Analysis 1 Model I 2 Model II 3 Model III 4 Model IV LOGO
  16. 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 LOGO
  17. 17. Calculation LOGO
  18. 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. LOGO
  19. 19. Calculation LOGO
  20. 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% LOGO
  21. 21. Calculation LOGO
  22. 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. LOGO
  23. 23. Calculation LOGO
  24. 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 LOGO
  25. 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 LOGO
  26. 26. LimitationsPreliminary study to analyze the working capital management and firms 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. LOGO
  27. 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 LOGO
  28. 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 LOGO
  29. 29. LOGO