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Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
http://indusedu.org Page 211
This work is licensed under a Creative Commons Attribution 4.0 International License
The Role of Cash Conversion Cycle in
Working Capital Management on
Profitability: A Study on Manufacturing
Industries
Dr. I. Navena Nesa Kumari1 and Dr. M. Victor Louis Anthuvan
2
1(Research Associate, Loyola Institute of Business Administration, Loyola College, Nungambakkam, Chennai,
India) 2(Dean – Research, Professor of Finance, Loyola Institute of Business Administration, Loyola College,
Nungambakkam, Chennai, India)
Abstract: Cash conversion cycle is an important component of the working capital management. It is a metric
used to measure the effectiveness of a company’s management and for the overall health of the organisations as
well. It is applicable to most of the manufacturing industries. It has been established from the previous Studies,
that lower the CCC higher will be the profitability. The present study aims to contribute on the impact of the
management of CCC on profitability of leading manufacturing companies of CNX 500 listed in NSE from 2006-
12. The study involves both primary and secondary data. The study aims at examining the efficiency of cash
conversion cycle of various manufacturing firms from the 15 sectors. The Net operating profitability is used as a
measure of organisational performance. The study involves about 162 companies for the secondary analysis.
The primary data confines with 34 companies available in and around Chennai. The study reveals that
pharmaceutical, textile, pump, food, cement, consumer durable, Engineering had a significant relationship
between the cash conversion cycle and profitability. The research states that cash cycle plays a key role to be
analysed in order to increase the profitability of the organisation.
Keywords: Cash conversion cycle, Profitability, working capital management, manufacturing Industries.
I. INTRODUCTION Cash the most liquid asset, is vital for the daily operations of business firms. While the proportion of
corporate assets held in the form of cash is very small, often between 1 to 3 percent. Its efficient management is
crucial to the solvency of business in a very important sense. Cash is the focal point of fund flows in a business
(Pandey, I. M. 2007).
The cash conversion cycle plays a major role in measuring the effectiveness of an organisational
performance and also the overall health of the company. The cycle aims to find out how much of dollar is tied
up in production and sales process before it is converted into cash through sales. The purpose of measuring cash
cycle is to arrive at the amount of time required to sell inventory, the time required to collect receivables, and
also to derive at the time period in which a company is affordable to pay its bills without incurring penalties.
Management of cash is one of the key areas of working capital management. Cash enables a firm to pay current
obligations as and when they fall in due since it forms the most liquid asset. In the words of Gitman (1976)
liquid assets provide a pool of funds to cover unexpected outlays, thereby reducing the risk of ‘liquidity crisis’.
Apart from the fact it is most liquid current asset; cash is the common denominator to which all current assets
can be reduced because the other major current assets, (i.e) receivables and inventory get eventually converted
into cash.
II. LITERATURE REVIEW A popular measure of Working Capital Management is the cash conversion cycle, the cash conversion
cycle is a form presented by Jose et al. (1996) the time lag between the expenditure for the purchases of raw
materials and the collection of sales of finished goods. The extension in the time lag, the greater will be the
investment in working capital (Deloof, 2003). A longer cash conversion cycle might increase profitability
because it leads to increased sales volume. On the other hand, corporate profitability might also decrease with an
increased cash conversion cycle. If the cost of investment in working capital increases, then the benefits of
holding more inventories and granting more trade credit to customers will also increase. Reducing cash
conversion cycle to a reasonable minimum generally leads to increased profitability. Amount of working capital
can change during a financial year of a firm. Usually numbers at the end of financial year are good estimates,
but if the operation of a firm is very seasonal they can be misleading. The cash conversion cycle is a popular
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
http://indusedu.org Page 212
This work is licensed under a Creative Commons Attribution 4.0 International License
measure of working capital management used in many studies. According to Jose et al. (1996), the cash
conversion cycle was introduced by Gitman (1974) and later refined by Gitman and Sachdeva (1982).
Richard and Laughlin’s (1980) was the first to introduce the cash conversion cycle concept for
determining the net amount of cash investment required for varying sales levels. This technique is based on
identifying the number of days of sales that are represented by inventories and accounts receivable. This
approach includes the length of time that the investment funds are tied up in the working capital as well as the
amount of fund required. Studies which considered cash conversion cycle as the best measure of working capital
has been discussed in this section.
Naziret al. (2009) has identified cash management as the process of ensuring cash available to meet the
running expenses. Cash conversion cycle starts with the purchases of raw materials. Then, the firm starts
production process during which these raw materials are converted into finished goods. Finished goods are then
sold. The purchase of raw materials and collection of cash for sale were identified as operating cycle. The cash
cycle allows in deducting the payable period from operating cycle. Richards and Laughlin (1980) adopted the
measure of cash conversion cycle to assess how well a company manages its working capital and also to key
point how the components of working capital are related. By covering a period of 1975-1978 the study includes
the calculation of Liquidity ratios and cash conversion cycle. The study stated that management should ensure
low cash conversion cycle period compared with that of competitors and industry average. The analysis
provides more than explicit insights for managing a firm’s working capital position which will assure the proper
amount and the timing of funds available to meet a firm's liquidity needs.
The importance of cash as an indicator of continuing financial health is not surprising in view of its
crucial role of business which includes both efficiency and organizational performance. Gentryetal. (1990)
suggested that the operating cycle provides aggregate summary measures for short-run financial management.
This study investigated the relationship between cash conversion cycle and levels of liquidity, investment in
capital, and productivity of small firms. The sample consists of 879 small U.S manufacturing and 833 small U.S
retail firms. The cash conversion cycle was found to be significantly related in all the three aspects. Firms with
efficient cash conversion cycles remains more liquid requires less debt and equity financing had higher returns.
The results also indicate that the small firm managers must be active in managing cash conversion cycle. The
study brings in the importance of cash conversion cycle as a pro-active management tool also for the small firm.
Abdul et al.(2010), study empirically estimate and compare sector-wise impact of working capital
management on performance of manufacturing firms in terms of collection period, inventory period, payment
period, Cash Cycle and Net Trading Cycle using financial data for 204 firms listed on Karachi Stock Exchange
classified in 9 sectors during the period1998-2007. The results indicate that there are differences in sector-wise
performance in terms of disparate measures of working capital management. The impact of Gross working
capital turnover and the current assets to total assets ratio on profitability is significant and positive. Another
study on the effect of working capital management on firm’s profitability with reference to the Turkey was
presented by Samiloglu and Demirgunes (2008) for manufacturing firms listed at Istanbul Stock Exchange for
the period 1998 to 2007. The results suggest that receivable and inventory period with liquidity has a negative
impact on the profitability of the firm while growth is positively associated with profitability. Lind et al. (2012)
examined the working capital management by cycle times in the value chain of the automotive industry during
2006–2008. The empirical study offers a holistic view of the value chain from raw materials to the end
customers. According to the study, the change of cycle times of working capital followed mainly the change of
cycle time of inventories. Hirsh and Teoh (2003) framework suggests that when analysts forecast on the
components of earnings (i.e) cash flow from operations and changes in working capital. They are likely to have
more accurate forecasts of earnings. The study predicts that when the components of aggregated information
exhibit in different time-series properties and forecasting effort is concentrated on the individual components
instead of the aggregated information.
In a recent working paper, Givoly et al.(2000) examines the properties of analysts’ cash flow forecasts.
The study found in regression analysis of cash flow forecasts on earnings forecasts, depreciation expenses,
working capital accruals, and other accrual adjustments, coefficients are positive. They thus conclude that
analysts’ cash flow forecasts appear to be simple, mechanical and adjusted to their own earnings forecasts. Platt
(2010) argued saliently for a new management dynamic emphasizing cash flow as the metric of organizational
success. Suggesting that everything is that a company should be oriented toward maximizing its cash flow, he
charts a new paradigm in which cash flow, organizational survival, and long-term growth are in-exorably linked
with performance The book provide a framework for a managerial culture focusing on cash flow; a review of
the basics of cash flow, cash flow analyses, the interrelationship of working capital and the cash flows, bring
familiarity about traditional accounting principles, practices, financial analysis and organizational leadership
were pre-requisites for the success of the firm.
Soenen's (2000) study covers inter-departmental conflicts over the cash management decisions. The
survey responses indicate that the two departments most likely to conflict regarding cash management decision
and sales. The questionnaire was mailed to managers in 200 London companies. The managers were members
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
http://indusedu.org Page 213
This work is licensed under a Creative Commons Attribution 4.0 International License
of the Association of Corporate Treasurers, financial executives, public enterprises and government agencies.
Finally, 60 responses were collected within the time frame, ranging a period of 1986-1998. The survey revealed
that the financial vice president was noted to be the responsible person for establishment of overall working
capital policy. The managers responded for this study reiterated a basic weakness in the international cash
management by an executive decision rather than the sound conceived set of policies.
This paper aims to determine that what variables play a major role in taking cash holding decision by
firm. Sohani Islam (2012), stated cash holding decision is one of the most significant decisions taken by the
financial managers of any manufacturing firms. The objective was to find out which variables had a significant
influence on cash holding decision of manufacturing firms. The study contains five years’ data from 2006 -
2010 of firm specific variables, with a panel data of 54 manufacturing companies listed at Dhaka stock
Exchange. From the regression results it is found that most of the variables in the model are significant in
defining the cash levels of Bangladeshi firms.
Yujun Lian Sepehri (2011), focuses on how firm characteristics, especially financial constraints and
investment options are associated with cash holdings. This study would examine how the Chinese firms manage
cash holdings, in general and during a crisis in comparison with the firms in other countries. The data is
collected from National Business and Economics Research (NBER) for the period 1999-2009. The study found
that similar to US firms; Chinese firms tend to increase their cash holdings during financial crisis as compared
to the normal times. Generally, firms that are more financially constrained with more investment opportunities
are more likely to have greater cash holdings. Furthermore, firms with lower leverage, less net working capital
(NWC), and lower capital expenditures, are more likely to increase cash holdings. Similarly, firms with the
same characteristics tend to save more cash from cash flow.
Leavell Hadley (2006) stated managing working capital internationally is increasingly important as
more firms erase geographic boundaries. Formalizing an analytical method of maximizing capital and cash flow
is essential to deliver and explain the multinational corporations. The secured internet sources and the decisions
changed the pros and cons of shared service centers. A strong relationship with the service providers is
considered as the added advantage of global network banks. The multinational corporate should configure a
solution to maximize corporate treasury with international Cash management. Akinlo et al, (2011) investigates
the long run relationship between working capital measured by cash conversion cycle and profitability for 66
firms in Nigeria for the period 1999-2007. The study revealed a significant state of relationship between
working capital management and profitability for a cross section of firms. The result shows that there is a long
run and a short run causal relationship moving from working capital management to profitability. This result
envisages the importance of working capital management, in conforming that if mangers manage the working
capital efficiently, then it will lead to an increased profit.
In Vietnam firms, Dong (2010) investigates the relationship that exist between cash conversion cycle as
a measure of working capital management and profitability for 130 firms listed in Vietnam stock market for
period of 2006-2008. The correlation and regressions were used to test the relation between variables. The gross
operating profit is employed as the dependent variable measuring profitability. The independent variables
include cash conversion cycle, average collection period, average payment period and Cash conversion cycle
including control variables as company size, fixed financial assets ratio and debt ratio. The study found a strong
negative relationship between profitability and cash conversion cycle, average collection period for account
receivables, and Cash conversion cycle. The results suggest that managers can create a value for their
shareholders by reducing the cash conversion cycle. The study contradicts the earlier study of Deloof (2000)
which found a positive relationship between profitability and average payment days, this implies that more
profitable firms wait longer to pay their bills.
Nonetheless, Dong study had converse results, Dong and Su (2010) had an attempt to study the
relationship between profitability and cash conversion cycle of listed firms at Vietnam stock market. Findings of
the study showed that there is a strong negative relationship between Profitability and the cash conversion cycle.
This indicates that if CCC increases then it will lead to decrease the Profitability of the firm. Khamrui, (2012)
investigated the relationship between WCM and firm’s profitability in India. The findings of their study indicate
that CCC and debt are negatively associated with firm’s Profitability. The paper reveals that manufacturing
companies can boost their performance in terms of profitability by managing working capital appropriately.
In a different measure of efficiency Mohamad and Saad (2010) investigated the effect of WCM and the
performance of Malaysian listed companies. The study found a positive relationship with current assets to total
asset ratio. However, Cash conversion cycle, current assets to current liabilities ratio and current liabilities to
total assets ratio shows the negative relations. In literature, the length of operating cycle is the most widely used
method to determine working capital need. The working capital financing policy is based on the matching
approach. The majority of the companies have occasionally experienced working capital shortage, mainly due to
excess of inventory accumulation and the poor debt collections.
Sen and Oruc (2009) investigated the efficiency of working capital management and its relationship
with profitability in Istanbul Stock Exchange (ISE). They used three-month table data issued by 49 production
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
http://indusedu.org Page 214
This work is licensed under a Creative Commons Attribution 4.0 International License
corporations for the period from 1993 - 2007 over five production sectors, including white goods, electronic,
Cement, food, chemical and textile. Their results showed that aggressive working capital management is
represented by shorter Cash Conversion Cycle and the current ratio which results in increased profitability.
Similarly, in India, Vijay Kumar (2011) examined the relationship between working capital management and
firm’s profitability in automobile industries. The study includes a sample consisted of 20 firms for the period of
13 years from 1996-2009. The result of this study has shown that there is a negative relationship between the
length of cash conversion cycle and the firm profitability. Abdul et al.(2010) study empirically estimated and
compared the sector-wise impact of working capital management on the performance of manufacturing firms in
terms of collection policy, inventory policy, payment policy and cash conversion cycle. The study was tested
using the financial data of 204 firms listed into Karachi Stock Exchange classified into 9 sectors during the
period of 1998-2007. The impact of working capital ratios on the other hand with Net Operating Profitability is
significant and positive for all the sectors except for Energy sector. Kim, et al. (1998) conducted a study on
industrial companies in America during 1975-1996, the study used correlation to analyze the various factors of
the working capital management and found that sale growth had a negative significant impact on the cash
conversion cycle of the American firms. This result contradicts the studies of Jeng-Ren (2006), as he
acknowledged that companies with higher sales growth are more willing to increase their working capital.
Whereas, the Companies that tend to have a high sale growth pay more attention to the management of working
capital hence, they extend the payment period and accelerate attracting customers. In other words, the longer the
payment period is, the higher will be the sales, which in turn results in an increased profitability. In Nigeria,
Ogundipe (2012) provides an empirical examination for the efficiency of working capital management and its
effect on the valuation of a firm in Nigeria for the period of 1995-2009. The study used Pearson correlation and
multiple regression technique to analyze the data. This conclusion attests the rule that maximizing profits will
maximize the wealth of stakeholder’s. A strong negative relationship between working capital management
measured by cash conversion cycle and profitability has been derived stating that the reduction in cash
conversion period will maximize profits.
Mojtahedzadeh (2011) found the relationship between methods of working capital management and
profitability. With a sample of 101 firms listed on Tehran Stock Exchange (TSE) during the period of 2004-
2008. Similarly, like other research studies they used gross operating profit as dependent variable and cash
conversion cycle and its components as independent variables. The results obtained from regression confirm that
there is a significant and inverse relationship between the cash conversion cycle period, payment period and the
period of collection of receivables with the profitability but insignificant and negative relationship between the
Cash conversion cycles and profitability. Hashem et al. (2012) studied the effect of company characteristics on
the working capital management. The sample consists of 83 firms listed in Tehran Stock Exchange for the
period of 2001 – 2010. The study used independent variables such as operating cash flow, company size, sale
growth, current ratio, quick ratio and the debt ratio with dependent variable as profitability. The research was
conducted in two different views, (i.e.) one in the aspect of company’s characteristics with cash conversion
cycle and the other with three different levels of companies such as Large, Average and small was assessed. The
usage of regressions and Pearson’s correlation indicated that the effective factors in top levels companies were
the operating cashflow, debt ratio, sale growth with the profitability. Whereas in the average level firms the
effective factors were the firm size, sale growth, debt ratio with the profitability, and small levels companies
were affected by sale growth, current ratio, quick ratio and debt ratio with profitability
Nilsson et al.(2010) article featuring the impact of Working capital management in the Swedish
companies where he compared the effects of these characteristics on cash conversion cycle, which is a measure
for the assessment of Working capital management. The results suggest that operating cash flow, company size,
sale growth and cash conversion cycle had an impact on profitability. The results state that there is a positive
relationship between profitability and cash conversion cycle and a negative relationship with sale growth and
operating cash flow.
Measuring the organisational performance with cash conversion cycle
Chakraborty (1974) drew special attention to each component of operating cycle rather than on the
cycle itself claiming that component – wise computation was better than applying single operating cycle
duration and deriving working capital needs from its turnover. There are various methods drawn by
academicians on operating cycle such as Richards and Laughlin proposed a weighted cash conversion cycle
(WCCC). This WCCC measures the weighted number of days’ funds are tied up in inventories and receivables
less the weighted number of day’s cash payments are delayed to suppliers. Similar method was adopted by
Pandey (1974) in his book ‘financial management’. Operating cycle concepts claim that money is blocked first
in raw materials; labour and other conversion cost; selling and distribution costs comes in the end.
Thus the cash blocked in raw materials last for the whole of operating cycle while manufacturing
expenses blocked in work-in-progress stage, selling and distribution cost blocked in finished goods, storage and
sales blocked in debtors would last from their sequential commitment to the remaining period of operating
cycle. Hence the necessity for aggregate working capital could be more accurately derived by considering each
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
http://indusedu.org Page 215
This work is licensed under a Creative Commons Attribution 4.0 International License
component of working capital distinctly. It is doubtful whether in an ongoing business; expenses are incurred in
such a sequential manner.
III. RESEARCH METHODS The present research intends to contribute towards the important component of working capital
management known as the cash conversion cycle on the organisational performance with reference to India
(Chennai). The study aims to find the relationship between the cash cycle and its effects on the organisational
performance which is a measure of profitability of the selected manufacturing firms from CMIE prowess
Database for a period of 2006-2012. The section explains the variables included in this study, the data collection
process and the applied statistical techniques in investigating the relationship between the cash cycle and the
organisational performance. The study includes both secondary and primary data.
Objective of the study
To study the sector-wise relationship between the Cash conversion cycle and Net Operating
Profitability of 15 leading listed manufacturing sectors at Chennai for a period of 2006- 2012.
Variables of the study
Dependent variable – Net Operating Profitability
Independent variable – Cash Conversion Cycle.
Data Sources
The main sources of secondary data were collected through the financial statements, such as income
statements, balance sheets of S&P CNX 500 companies. The data has been derived from NSE were collected for
the period of 2006 – 2012 from CMIE Prowess Database. But due to inconsistency of data for the continuous 6
years’ period, only 162 companies from S&P CNX 500 companies have been considered for this study. The
other non-financial firms which lack in data were eliminated from this study.
Methods of Analysis
The present study adopts Random Sampling method. The tools such as Descriptive statistics, Ratio
analysis, Correlation, Chi-square has been used to analyse the secondary data. Questionnaire survey was used to
measure the primary data. Out of the 162 companies only 34 companies were available at Chennai. Hence the
primary survey was conducted only with these 34 companies. The statistical analysis was performed using the
SPSS tool 19.0 version.
IV. ANALYSIS AND INTERPRETATION This section explains about the results and discussion about the primary data.
Table showing the Descriptive Statistics (Mean and Standard Deviation) of 162 Firms, (i.e.) 15 Manufacturing
Sectors, for a period of 2006-2012
SECTORS CCC
AUTOMOBILE SECTOR
MEAN 150.4.
S.D 71.29
ELECTRICAL EQUIPEMENTS MEAN 36.65
S.D 10.56
STEEL & ALUMINIUM MEAN 15.68
S.D 5.29
PHARMACEUTICAL MEAN 63.84
S.D 28.19
CEMENT MEAN 9.8
S.D 0.22
CONSUMER DURABLES MEAN 25.2
S.D 8.6
ENGINEERING FIRMS MEAN 54.9
S.D 29.83
TEXTILES MEAN 55.27
S.D 22.56
CHEMICAL MEAN 19.23
S.D 1.46
TYRE MEAN 8.7
S.D 2.43
PUMP MEAN 28.46
S.D 18
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
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FOOD FIRMS MEAN 47.91
S.D 15.64
SUGAR MEAN 37.64
S.D 17.34
TRADING MEAN 23.82
S.D 9.16
CONSTRUCITON MEAN 0.39
S.D 0.11
Source: Calculation based on Annual Reports of firms from 2010-2016
The above table has arrived at the descriptive statistics (i.e) Mean and standard deviation for Cash
conversion cycle. The mean and standard deviation of each sector has been presented. The cash conversion
cycle period should be reduced to minimum to realize quick profits. Hence the profits realized within a certain
period of time can be utilised or invested in other capital resources to increase the organisational performance
and profitability.
i. In Automobile sector, Cash conversion cycle is 150.4 days. The cycle days should be reduced to
minimum.
ii. In Electrical Equipment’s sector the Cash conversion cycle is 36 days. These days can also be reduced.
iii. In Steel &Aluminum sector, Cash conversion cycle is 15 days etc.
iv. In Pharmaceutical sector, the Cash conversion cycle has got the highest mean of 63 days. This infers
that the pharmaceutical sector is providing too much of time for their customers to pay their bills. The
cash conversion cycle process can be made even faster to realize quick profits.
v. In Cement sector, Cash conversion cycle is about 9 days.
vi. In Consumer Durables sector, Cash conversion cycle is about 25 days.
vii. In Engineering sector, Cash conversion cycle is 54 days. This period should be reduced to minimum to
increase profit.
viii. In Textile sector the Cash conversion cycle is 55 days. This implies that textile sector acquires too long
to convert it into cash, hence it has to be reduced.
ix. In Chemical sector the Cash conversion cycle is 19 days. This period is also moderate.
x. In Tyre sector Cash conversion cycle is about 8 days.
xi. In Pump Sector Cash conversion cycle is about 28 days. This period can also be reduced.
xii. In Food sector the Cash conversion cycle is about 47 days. This implies that food sector took too long
period to pay for its suppliers.
xiii. In sugar sector the Cash conversion cycle is about 37 days. This implies that sugar sector took too long
for its resources to convert it into cash.
xiv. In trading sector, the Cash conversion cycle is 23 days. This period should be reduced to minimum to
increase profit.
xv. In Construction sector the Cash conversion cycle is about 0.39 days. This compared to other sectors
was really doing well
Table showing the Correlations between the Net Operating Profitability and the Cash conversion cycle of
Automobile, Electrical equipment, Steel and Aluminium, Pharmaceutical, and Cement sectors for the
period of 2006 - 2012
NOP
Pearson
1
Correlation
Pearson .219
CCC Correlation
AUTOMOBIE Sig. (2-tailed) .093
NOP
Pearson
1
Correlation
ELECTRICAL
ITP
Pearson .256
Correlation
EQUIPMENT Sig. (2-tailed) 0.05
NOP
Pearson
1
Correlation
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
http://indusedu.org Page 217
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Pearson
.092
STEEL AND ITP Correlation
ALUMINIUM Sig. (2-tailed) .358
NOP
Pearson
1
Correlation
Pearson
-.376**
ITP Correlation
PHARMACEUTICAL Sig. (2-tailed) 0.000
NOP
Pearson
1
Correlation
Pearson
-.274*
ITP Correlation
CEMENT Sig. (2-tailed) .015
**. Correlation is significant at the 0.01 level (2- tailed.
*. Correlation is significant at the 0.05 level (2-tailed).
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,
has (-219) and a P value of (.093) which is insignificant. Since the (P value > .05) there is no relationship exist
between Cash conversion cycle and the Net operating profitability of the Automobile sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,
has (-.256) and a P value of (0.05) which is insignificant. Since the (P value > .05) there is no relationship exist
between Cash conversion cycle and the Net operating profitability of the Electrical Equipment sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,
has (-.092) and a P value of (0.358) which is insignificant. Since the (P value > .05) there is no relationship exist
between Cash conversion cycle and the Net operating profitability of the Steel and Aluminium sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle
has (-.376**) and a P value of (.000) which is significant at 1% and it is negatively correlated with the Net
operating profitability. The negative correlation between Cash conversion cycle with Net operating profitability
indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the
Pharmaceutical sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle
has (-.274*) and a P value of (.015) which is significant at 5% and it is negatively correlated with the Net
operating profitability. The negative correlation between Cash conversion cycle with Net operating profitability
indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the
Cement sector.
Table showing the Correlations between the Net Operating Profitability and the Cash conversion cycle of
Consumer durables, Engineering, Textiles, Chemical and Tyre sectors for the period of 2006-2012
NOP
Pearson
1
Correlation
Pearson
-.376*
CONSUMER ITP Correlation
DURABLES Sig. (2-tailed) 0.024
NOP
Pearson
1
Correlation
Pearson
-.414**
ITP Correlation
ENGINEERING Sig. (2-tailed) .006
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
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NOP
Pearson
1
Correlation
ITP
Pearson
-.360**
Correlation
TEXTILES Sig. (2-tailed) .001
NOP
Pearson
1
Correlation
ITP
Pearson
.090
Correlation
CHEMICAL Sig. (2-tailed) .453
NOP
Pearson
1
Correlation
ITP
Pearson
.086
Correlation
TYRE Sig. (2-tailed) 0.650
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,
has (-.376*) and a P value of (.024) which is significant at 5% and it is negatively correlated with the Net
operating profitability. The negative correlation between Cash conversion cycle with Net operating profitability
indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the
Consumer Durables sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,
has (.414**) and a P value of (.006) which is highly significant at 1% and it is negatively correlated with the Net
operating profitability. The negative correlation between Cash conversion cycle with Net operating profitability
indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the
engineering sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,
has (.360**) and a P value of (.001) which is highly significant at 1% and it is negatively correlated with the Net
operating profitability. The negative correlation between Cash conversion cycle with Net operating profitability
indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the Textile
sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle
has (-.090) and a P value of (.453) which is insignificant. Since, the (P value > .05) there is no relationship exist
between Cash conversion cycle and the Net operating profitability of the Chemical sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle
has (-.086) and a P value of (.650) which is insignificant. Since the (P value > .05) there is no relationship exist
between Cash conversion cycle and the Net operating profitability of the profitability of the Tyre sector.
Table showing the Correlations between the Net Operating Profitability and Cash conversion cycle of
Pump, Food, Sugar, Trading and Construction sectors for the period of 2006-2012
NOP
Pearson
1
Correlation
Pearson
-0.471**
ITP Correlation
PUMP Sig. (2-tailed) 0.009
NOP
Pearson
1
Correlation
Pearson -.582**
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
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ITP Correlation
FOOD Sig. (2-tailed) .000
NOP
Pearson
1
Correlation
Pearson
-0.132
ITP Correlation
SUGAR Sig. (2-tailed) 0.487
NOP
Pearson
1
Correlation
Pearson
-.086
ITP Correlation
TRADING Sig. (2-tailed) 0.735
NOP
Pearson
1
Correlation
Pearson
.079
ITP Correlation
CONSTRUCTION Sig. (2-tailed) .262
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
From the above correlation table, it has been observed that Cash conversion cycle, has a co-efficient of
(-.471*) and a P value of (.009) which is significant at 10% and it is negatively correlated with the Net operating
profitability. Since the (P value < .10) the results indicate that there is a negative correlation between the Cash
conversion cycles with the Net operating profitability. This implies that an increase in the Inventory period will
decrease the profitability of the Pumps sector.
From the above correlation table, it has been observed that Cash conversion cycle, has a co-efficient of
(-0.582**) and a P value of (.053) which is significant at 1% and it is negatively correlated with the Net
operating profitability. The negative correlation between Cash conversion cycle with Net operating profitability
indicates that an increase in the Cash conversion cycle will decrease the Net operating profitability of the food
sector.
From the above correlation table, it has been observed that Cash conversion cycle has a co-efficient of
(-.132) and a P value of (.487) which is insignificant. Since the (P value > 0.05) the results indicate that thereis
no relationship exists between the dependent variable Net operating profitability with the independent variable
Cash conversion cycle of the Sugar sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle,
has a co-efficient of (-.086) and a P value of (.735) which is insignificant. Since the (P value > 0.05) there is no
relationship exist between the dependent variable Net operating profitability with the independent variable Cash
conversion cycle of the trading sector.
From the above correlation table, it has been observed that the co-efficient of Cash conversion cycle
has (-.079) and a P value of (.262) which is insignificant. Since the (P value > 0.05) the results indicate that
there is no relationship exists between the dependent variable Net operating profitability with the independent
variable Cash conversion cycle of the Construction sector.
V. ANALYSIS OF PRIMARY DATA (I). The Cash management practices of selected industrial units at Chennai
Companies must ensure that their information and reporting systems should produce data which are
relevant, accurate and up to date. They must then use this information to make prompt decisions. Some of the
most important decisions are likely to concern cash management and liquidity measures, particularly the role of
cash flow forecasting in building and maintaining trust with key stakeholders and financiers.
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
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5.(I). Table showing the Cash management practices at selected industrial units at Chennai
Source: Primary Data
Inference
It has been observed from the table 5. (I). that the surveyed companies ascertain certain cash
management practices in their organization to maintain the cash flow. It is clear from the study that 18 firms
often adopt preparation of cash budgets as a major cash management practices in their organization. The cash
budgeting is a very important to meet the day-to-day requirements of the organization. Proper flow of cash
inside the firms will induce the organizational performance, which will increase the profitability.
II. Correlation Analysis
The table stated below shows the relationship between the importance (or) priority that the organisation
place on working capital with reference to the utilization of company’s potential working capital resources,
which helps in increasing the profitability.
5(II). The table representing Chi-squared analysis for Priority on working capital with optimum
utilization of company's potential capital Resources
Priority Utilization of Capital Resources
On
Working
Capital Excellent Good Satisfaction Poor Total
N 7 7 0 0 14
Highest Row % 50.00% 50.00% 0.00% 0.00% 100.00%
N 2 0 8 1 11
High Row % 18.20% 0.00% 72.70% 9.10% 100.00%
Neither N 0 1 6 2 9
High Nor
Now Row % 0.00% 11.10% 66.66% 22.22% 100.00% Chi Squared
N 9 8 14 3 34 Value=41.86;
Total Row % 26.50% 23.50% 41.17% 8.82% 100.00% P Value = 0.00
It has been inferred from the table that the organisation which place a highest priority on working
capital, have good and excellent utilization of potential working capital resources. Whereas the organisations
which place a little low priority only have 18% of utilization and 72% of satisfactory level of utilization of
potential resources. So it is identified that companies which give more priority to working capital have a better
utilization of company’s potential resources.
Since the P value 0.00, it has been inferred that there is a significant relationship exists between the
priority on working capital by the organisation and utilization of potential working capital resources. Hence
priority on working capital is essential for a better utilization of resources, which will induce the efficiency of
the organizational performance and also to reduce the wastage/ scrap.
VI. FINDINGS AND CONCLUSION The study identifies the issues related to the cash conversion cycle and organizational performance
undertaken by manufacturing industries through the questionnaire survey and secondary data analysis.
It has been understood that the lower the cash conversion cycle the higher will be the profitability.
From the analysis it is predicted that there is a lower Cash conversion cycle in the construction sector. So, in the
construction sector the cash cycle was less hence the cash flow will be good when compared with the other
sectors chosen for the study. Apart from this sector Tyre, cement Steel& Aluminium has less than 15 days of
cash conversion cycle period. So, from the analysis it is pictured as they are doing very well on the basis of
Cash Preparation of cash Determination of cash Occurrence of cash Occurrence of cash
management Budgets balances shortage surpluses
Practice No. of Percentage No. of Percentage No. of Percentage No. of Percentage
Respondents of Respondents of Respondents of Respondents of
Respondents Respondents Respondents Respondents
Very Often 8 24 8 23 13 38 5 15
Often 10 29 19 56 11 33 15 44
Sometimes 4 12 0 0 0 0 0 0
Rarely 12 35 7 21 10 29 14 41
Total 34 100 34 100 34 100 34 100
Dr. I. Navena Nesa Kumari et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 12, December 2017, Page 211-222
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cycle period. In the correlation table it has been projected that cement, consumer Durables, Engineering had a
significant impact on profitability. whereas, pharmaceutical, Textile, pump, food had a highly significant impact
on the profitability, which means the organisations realised high profits with the reduced cash conversion cycle
periods. Based on the secondary data analysis, it is understood that companies can adjust their standard of credit
purchase or cash collection in order to pay for its suppliers. It is clear that companies Investment decision can
directly have an influence on cash cycle. In times of cheap credit cash cycle have been slowed to shorten as it
becomes more affordable for companies to borrow money towards their inventory Investments.
From the primary analysis it is revealed that the surveyed companies should concentrate more on the
variables such as grounding of cash budgets. The surveyed companies lack in the cash budget preparation.
Periodical determination of cash balances is essential for the finance manager to plan for the future investments
in resources. A review on the occurrences of cash shortage and cash surpluses will also have an impact on the
inventory investments. The chi-squared analysis predicts that there is a highly significant relationship between
the priority they have for working capital and the utilisation of capital resources.Overall it has been observed
that low cash conversion cycle signifies a well - organised management of companies that induces potential
investments.
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