Exploring the Causal Effect of Cash Conversion Cycle Signals on Profitability of Tanzanian Manufacturing Firms

Abstract

Management of Cash Conversion Cycle (CCC) components is piercing for firms’ profitability. Financial Managers world-wide, adopts cash conversion cycle in measuring and estimating the level of risks and return of their firms for profit and wealth maximization. As a result, managers keep an eye on the drivers and derailers of profitability. The study focused on establishing the causal effect of cash conversion cycle on profitability while exploring whether single or double digit indicators matter for profitability determination of manufacturing firms. Theoretical and extant empirical literature reviewed guided the scholar foundations for gap identification. The findings were elicited from annual audited financial statements of companies enrolled on DSE from 2008 to 2022 with a sample of 8 manufacturing firms for 15 years, aggregating to a total of 120 observations. Profit was estimated using Profit-After Tax (PAT) and the Cash Conversion Cycle was measured through Inventory Turnover Days (ITD), Debt Collection Days (DCD) and Credit Payment Days (CPD). In model selection, Hausman test was adopted to pick between fixed effect and random effect model while Panel Regression was favored in estimating the causal effect of CCC and profitability. Based on regression analysis, Inventory Turnover Days (ITD) has a negative impact on firms’ profitability and Debt Collection Days (DCD) revealed an insignificant positive relationship between DCD and profitability. Furthermore, the study found a negative relationship between Credit Payment Days (CPD) and profitability. On the other hand, the research found that profitability of most firms with double digit cash conversion cycle proved to be higher than those firms with single or triple cash conversion cycle. The research findings unveiled that CCC correlates positively with profitability and significantly impacts manufacturing firms’ profitability. So, for DSE firms to increase their profitability and firm value under modern competitive era, concentration on double digit cash conversion cycle is paramount ought to the nature of business and assets invested in. Therefore, we conclude that there is a significant causal-relationship of cash conversion cycle on profitability for firms in Tanzania, indicating the necessity of managing appropriately the CCC components.