The Relationship of Cash Conversion Cycle and Profitability of Firms: An Empirical Investigation of Pakistani Firms

Abstract

Purpose – The objective of the study is to examine empirically the impact of Cash conversion cycle on the performance of Pakistani manufacturing firms. Design/methodology/approach – The study used the sample of 32 companies selected randomly from three manufacturing sectors i.e. chemical, automobiles and construction & material for the period of five years ranging from 2006 to 2010. The correlation and regression analyses were used to examine the relationship of CCC with performance of the firms: Return on Assets (ROA), Return on Equity (ROE) and Operating Profit (EBIT). Findings – The study examined the impact of different variables of cash conversion cycle on firm’s performance. The study found that the average collection period of accounts receivables, inventory conversion period and Cash conversion cycle (CCC) have negative relationship with firm’s performance. Originality/value–Many of the studies on working capital management (WCM) are with reference to developed economies like USA but fewer are with reference to developing economies like Pakistan. This study will contribute to the literature by analyzing the impact of working capital management on the performance of manufacturing firm by validating the results of previous studies stated in the literature.