The Impact of Working Capital Management on Profitability: Evidence from Listed Companies in Sri Lankan Consumer Staples Sector

Abstract

This study aims to investigate the impact of Working Capital Management on Profitability with special reference to the Consumer Staples Sector firms in Sri Lanka. Further, this sector displayed a considerable growth potential in Sri Lanka. This study is adopted in a quantitative research approach. Data were drawn from a sample of 46 Consumer Staple Sector firms listed in the Colombo Stock Exchange (CSE) for a period of five years commencing from 2014/2015 to 2018/2019. To test the hypothesized relationships between the constructs, the panel data analysis is performed using STATA. The study found that the Inventory Conversion Period has an insignificant negative impact on Profitability. Receivables Collection Period negatively and significantly impact the Profitability. Further, the study observed that the Payables Settlement Period has an insignificant positive impact on Profitability and observed a significant positive impact of the Current Assets Ratio on Profitability. The findings are useful to investors, managers and shareholders when making decisions regarding the firm's profitability under aforementioned sector. This study is a contribution to the existing body of knowledge on Working Capital Management and it impact on the Profitability of listed companies in the Sri Lankan Consumer Staples Sector since the researchers used the recent data in the data analyzing process. Further, this paper is limited to the analysis of data obtained for five years by fortysix companies only. The time period and sample can further be increased by future researchers in order to broaden up the scope of the study.

The impact of working capital management on the profitability of listed halal food and beverage companies

“…It is the time (expressed in days) between when money is used to purchase inventories and when it is collected from the customers after sales (García-Teruel and Martínez-Solano, 2007; Ibrahim and Isiaka, 2021). Besides, CCC offers more precise insights for handling a company's WC condition to ensure it has enough funds and the right time to satisfy its liquidity demand (Thenuwara and Ekanayake, 2021).…”

“…Moreover, the CCC theory was proposed by Richards and Laughlin (1980). The theory describes how companies guarantee a lower operation cycle with a view to minimizing the consequences of poor WCM (Thenuwara and Ekanayake, 2021). It argues that a company's liquidity, profitability and values will improve when it efficiently manages its working capital by lessening CCC (Oseifuah, 2016).…”

“…It is a financial metric that indicates the operation liquidity handy to companies (Njoroge and Opuodho, 2022). Besides, WC ensures a firm keeps sufficient cash to pay its short-term financial commitments (Thenuwara and Ekanayake, 2021). Although WC is all about short-term financing, it is crucial for long-term financing.…”

Determinants of Working Capital Requirements: Evidence From Colombo Stock Exchange

“…Efficient working capital management is described by Eljelly (2004) as an activity that entails planning and controlling current assets and current liabilities in such a way to eliminate any risks of not meeting short-term obligations when they fall due which also prevent any excessive investments in these assets. Furthermore, numerous studies concentrating on working capital management have drawn attention from the scholars in literature in the Sri Lankan context emphasizing the importance of understanding the determinants of working capital (Thenuwara and Ekanayake, 2021;Jayarathne, 2014;Nimalathasan, 2010;Jahfer, 2012).…”

“…Nature of company, demand and market conditions, policies with respect to technology, production and credit facilities, supplier credit terms, operating efficiency, and price level variations are amongst such determining elements recognized and explored. Amongst numerous studies concentrating on the relationship between different variables and working capital management, the firm profitability has drawn a lot of attention from the scholars in literature in the Sri Lankan context (Thenuwara and Ekanayake, 2021;Jayarathne, 2014;Nimalathasan, 2010;Jahfer, 2012). The higher number of prior studies available in this study context identifying the relationship between the working capital management and profitability reflects that the other determinants of working capital have remained untouched by the scholars.…”