Impact of working capital efficiency on firm performance: evidence from South Asian retail industry

Abstract

The working capital management is important to the profitability of the firm, especially in the retail sector where companies act at a high inventory level and under constant liquidity demands. This paper will discuss the effect of working capital efficiency on financial performance of South Asian retail firms. The primary aim is to examine the significance of cash conversion cycle (CCC) and its two elements inventory holding period (IHP), receivables collection period (RCP), and accounts payable days (APD) on the firm profitability based on the measures of return on assets (ROA). Control variables which are firm-specific effects include firm size, leverage, and sales growth. The proposed models are tested using panel regression, correlation analysis, and descriptive statistics using panel data of sampled South Asian retail firms. The results show that there is a remarkable negative correlation between the cash conversion cycle and profitability that firms with the shorter CCCs are more financially successful. Retail inventory control is significant, as inventory holding period is also discovered to impact negatively on profitability most of all. Receivable collection period is also associated with a negative variation in profitability whereas account payable days indicate a positive affiliation, indicating that optimal utilization of supplier credit has the ability to improve the performance of firms. Generally, the paper concludes that good management of working capital is a major contributor to profitability in South Asian retail industry and has significant implications to managers, investors and policymakers.