Cash Conversion Cycle Management in Small Firms: Relationships with Liquidity, Invested Capital, and Firm Performance

Abstract

This study investigated the relationship between cash conversion cycle and levels of liquidity, invested capital, and performance in small firms over time. In a sample of 879 small U.S. manufacturing firms and 833 small U.S. retail firms, cash conversion cycle was found to be significantly related to all three of these aspects. Firms with more efficient cash conversion cycles were more liquid, required less debt and equity financing, and had higher returns. The results also indicate that small firm owners/managers may be reactive in managing cash conversion cycle. The study highlights the importance of cash conversion cycle as a proactive management tool for small firm owners.RéSUMé. Cette étude examine le lien entre le cycle d'exploitation et les niveaux de liquidité, le capital investi, et le rendement chez les petites entreprises au fil du temps. Les résultats obtenus à partir d'un échantillon de 879 petites entreprises manufacturières américaines et 833 petites entreprises américaines de vente au détail révèlent que le cycle d'exploitation est lié de façon significative à ces trois aspects. Les entreprises avec des cycles d'exploitation plus courts avaient plus de liquidités, nécessitaient moins de financement par emprunt et par actions, et avaient des rendements supérieurs. Les résultats révèlent également que les propriétaires/gestionnaires de petites entreprises ont peut-être une approche réactive à la gestion du cycle d'exploitation. L'étude souligne l'importance du cycle d'exploitation comme outil de gestion proactive pour les propriétaires de petites entreprises.

Cash flow management and manufacturing firm financial performance: A longitudinal perspective

“…The methods used to investigate cash flow management strategies vary substantially across the literature: four of the papers use case-studies (Churchill & Mullins, 2001;Farris & Hutchinson, 2002;Randall & Farris, 2009;Stewart, 1995), seven use correlation and regression to examine empirical samples consisting of annual firm-level data (Deloof, 2003;Ebben & Johnson, 2011;Farris & Hutchinson, 2003;Garcia-Teruel & Martinez-Solano, 2007;Gill et al, 2010, Moss & Stine, 1993Soenen, 1993), and one presents a hypothetical optimization model (Hofmann & Kotzab, 2010). …”

“…These studies employ a variety of financial performance metrics, including Asset Turnover (Ebben & Johnson, 2011), Gross Operating Income (Deloof, 2003), Gross Operating Profit (Gill et al, 2010), Invested Capital (Ebben & Johnson, 2011), Net Balance Position (Ebben & Johnson, 2011), Return on Assets (ROA) (Garcia-Teruel & Martinez-Solano, 2007;Soenen, 1993), and Return on Investment (ROI) (Ebben & Johnson, 2011).…”

“…Nine of the studies explore these individual measures that comprise the CCC as well as the composite CCC metric itself; however, Moss and Stine (1993) and Ebben and Johnson (2011) examine only the CCC metric. In the study that does not focus on CCC, Churchill and Mullins (2001) examine the Operating Cash Cycle (OCC) metric.…”

“…The two studies included in Table 2 that partially consider the dynamic nature of cash flow management address only the relationship between changes in cash flow positions and static performance measurements. Ebben and Johnson (2011) examine the association between annual changes in CCC and snapshots of static performance measures, and GarciaTeruel and Martinez-Solano (2007) test the robustness of their findings by including a single period of lagged cash flow components to also examine static performance measures. Although these two studies begin to explore the dynamic impacts of cash flow management, to the best of this study's authors' knowledge, no prior studies fully investigate the relationship between changes in cash flow measures and changes in performance.…”

“…A firm's cash flow policies, which manage working capital in the form of cash receivables from customers, inventory holdings, and cash payments to suppliers, are widely linked to improved firm financial performance (Richards & Laughlin, 1980;Stewart, 1995). While industry has broadly accepted effective cash flow management as a performance improvement mechanism, the preponderance of academic investigations into the link between cash flows and performance examines the issue from a static, benchmarking perspective (Ebben & Johnson, 2011;Farris & Hutchinson 2002, 2003Moss & Stine, 1993). Namely, although previous efforts propose that adjustments to a firm's cash flow will change the firm's performance, they support these propositions empirically by comparing and contrasting firms utilizing static snapshot measures of cash flow positions and performance.…”