Effect will look while dealing with a company.

Effect
of Cash Management to Company Performance in Manufacturing Industry in Sri
Lanka  

 

 

 

Research
Proposal

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BBA
4101: Dissertation-I

 

 

A.A.D.M.D.Gunawardana

MF/2013/3626

 

 

 

 

 

 

Department
of Accounting and Finance

Faculty
of Management and Finance

University
of Ruhuna

 

 

Declaration

I hereby declare that this research proposal is my own work and effort and
that, to the best of my knowledge and belief, it
contains no material previously published or written by another person except
where due acknowledgment has been made in the text.

 

Signature of the student:                    ________________________________

Name of the student:                           A.A.D.M.D.Gunawardana

Registration number of the student:   MF/2013/3626

Date:                                                   02nd
February 2018

 

 

 

 

Certification

This is
to certify that this research proposal submitted by above candidate is a record
of the own work carried out by the candidate under my supervision.

 

____________________________

H.V.D.I.Abeywickrama

Supervisor      

Department of Accounting and Finance

Faculty of Management and Finance

University of Ruhuna

 

 

Abstract

 Cash management considers as an effective way
of managing the overall working capital in a company. Financial management is
also established to have the effective flow of cash within the organization.
The determination of this study is to identify the effect of cash management to
company performance in manufacturing industry Sri Lanka. Identifying the
relationship of cash conversion cycle to net profit and return on assets is an
objective of the study. Cash conversion cycle uses to measure the level of cash
management and net profit and return on assets use to measure the level of
company performance. Secondary data will collect from the annual reports of 10
selected manufacturing companies from the year 2012 to 2016. Correlation test
and regression analysis techniques will carry out to analyze data.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.      Background

In
today’s world managing cash is one of the crucial things in every organization.
According to (Hamza, Mutala, & Antwi, 2015) Cash management is one of the main
aspects in working capital management. It is about planning and controlling the
cash asset within the company and optimizing the cash availability in the
company. Cash management is useful to measure company performance, to develop
internal and external financial relationships etc.

A
company’s performance is the main thing stakeholder will look while dealing
with a company. Mainly the performance of a company can be measured by using
gross profit, net profit and return to assets. If these aspects function
effectively and efficiently, then the overall performance of the company will
improve. Many researches have proven that cash management has an effect towards
the performance of the company in most of the industries.(Ogundipe, Idowu, & Ogundipe, 2012)

In
manufacturing industry optimum cash management techniques use to have effective
and efficient performance because cash lacks can interrupt manufacturing operations
and also excessive cash will remain idle and it will not contribute anything to
the company wellbeing.(Uwuigbe, Uwuigbe, & Ben-Caleb,
2012)

The
aim of this study is to identify the effect of cash management to the
performance of manufacturing companies in Sri Lanka by using the cash
conversion cycle as the main component of cash management.

 

 

 

 

 

 

 

 

2.    
Research Problem, Research Question and
Objectives

Every
organization likes to have a smooth flow of cash to make the operation
activities stable. Especially in manufacturing firms they try to have a higher
management regarding its cash because a loss of control on cash can lead to
various types of losses and difficulties in firm performance within every stage
in the company process.

When
look at the past researches it has found that the number of researches that
have done to discover the relationship between cash management to firm
performance in manufacturing industry is fairly low in Sri Lanka. Also even the
researches done in foreign countries state outcomes which are different from
one to another.

(Uwuigbe et al., 2012) have stated that there is a strong negative
relationship between cash management and firm performance. According to (John, 2014) there is a positive
relationship of firm performance to cash management. But (Wongthatsanekorn, 2010) has detailed that there is no such
relationship between these two aspects. Therefore after considering these
situations the main problem that arises is;

How
cash management will affect firm performance in Sri Lankan manufacturing firms.

With regard to this the
research problem is;

Does there is an effect
of cash management to firm performance in manufacturing industry.

By following this
research it expects to achieve the below objectives.  

·        
Examination and identification of the
relationship between cash management to Return on Assets and Net Profit in
manufacturing industry Sri Lanka

·        
Understanding the application of cash
conversion cycle trends to manufacturing firm performance.

·        
Identification of the main components and
exact role of cash conversion cycle

 

 

 

3.    
Significance and limitations

Many
researches have done regarding various industries including hotel and planation
industry in Sri Lanka and not about manufacturing industry. Therefor this
research will conduct relating to the manufacturing industry in Sri Lanka. Time
duration of the research is five years and this will cover a significant rage
to do a proper research. There were several researches which only cover two or
three years only.

By
doing this research, the exact relationship between cash management and company
performance will reveled while obtaining a better understanding about the
components and role of cash conversion cycle. Further the optimal cash level a
manufacturing firm can conduct will figure out. Therefor companies can improve
their performance according to the cash level. 

The
main limitation of this research will be the less number of years which use to
analyze data. It is five years from year 2012 to 2016. Further the number of
manufacturing companies taking to consideration is limited to 10 even there are
42 listed manufacturing companies in Sri Lanka. Only the financial reports
which can obtain from the official websites of the each company will use to
gather data. However there are many detailed information a research should examine
to obtain a perfect result similar test books and other written documents.

 

 

 

 

 

 

 

 

4.    
Literature Review

4.1 cash management

There
is no business organization in this world that does not use cash management and
cash is the most mandatory liquidity related asset. Positive cash management is
the most significant thing to a firm. Though corporate finance should focus on
short term assets, currently they have their concentration on only long term
assets and its related investment decisions as stated by (Uwuigbe et al., 2012)

 According
to (Nobanee, Abdullatif, & AlHajjar,
2011) Cash management is a key component
of working capital management. To have an effective manage in working capital,
it is a must to control cash efficiently and effectively. To have the best
result the cash conversion cycle is used. Accounts receivable days and
inventory days are added together and creditor days are deducted from that to
get the accurate cash conversion cycle.            

(Murugesu, 2013) as identified
that irrespective of the profit orientation, firm size or its nature, cash
management will have an impact to firm profit and overall performance. To
achieve the desired profits cash conversion cycle has identified has the best
mechanism and it has added the newest technology and global advancements to
have the most accurate and beneficial results.

4.2 Company performance

As
(Mungal, 2015) stated net profit is the gap between
the business revenue and the operational expenses. Every firm aims at
expressively reduce their operational expenses and aims to increase firm
incomes to have a satisfying net income. This calculates by dividing total net
profit after tax from the total revenue.

ROA
recognizes as the amount of earnings a firm can earn from the amount of assets
invested. It helps investors to understand whether the company is working
effectively or not. Financial managers pay special attention on this variable (Vartak & Babani). This computes by
dividing net income from total assets. .

 

4.3 Cash management theories

According to (Panigrahi, 2013) 
it has presented cash conversion cycle as a tool that can measure
liquidity and company performance. Market value of a firm has also been
affected by CCC. CCC and the level of least liquidity condition have a positive
relationship as when one aspect increases, the other aspect will also increase.
Further the study found that the prime level of liquidity point was found at
the bottom level of liquidity.

 

(Uwuigbe et al., 2012) stated that cash management can
assistance to attain liquidity control as it cannot be easily predicted and
give opportunity to invest excess cash in profitable undertakings. Further
innovations about cash earnings can also be obtained. The primary benefit to
get from managing cash is to reduce cost of the company such as interest
outlays, cost of assembly etc.

 

(Pakistan 2) found
that investing higher cash level in inventory can diminish the optimum level
and firm performance will go down. 
Further firm profitability can be increased by maintaining a lower level
of inventory days and receivable days along with shorter cash cycle. The
results have reviled the substantial link of cash conversion cycle with the
yield on firm investments.

 

4.4           
Prior studies of cash management

In
(Abbasi & Bosra, 2012) statistics from the Tehran stock
exchange in years 1998 to 2009 has used. In this research effect of debtors
collection period, inventory days and creditor’s days have calculated to find
the effect to the company performance. Tow results have obtained. One is
creditors and debtors days have a negative relationship with gross profit while
and other one is GP only has an effect from the inventory days. It has
suggested cash conversion cycle should also be considered rather than only the
gross profit when making financial decisions and influencing companies to
reduce cash conversion period to have higher profits.

In (Lyroudi, K.,
& McCarty, D. (1993). An empirical investigation of the cash conversion
cycle of small business firms. Journal of Small Business Finance, 2(2),
139-161.

)analyzing effectiveness of cash
conversion cycle to company liquidity and determination of the relationship
between current assets and short term liabilities to cash conversion cycle were
the objectives. Cash conversion cycle and current or quick ratio, CCC and firm
profit, CCC and its component effect and CCC and size impact are the postulates
that have used. Negative impact of cash conversion cycle on to current ratio is
the outcome. The research implies that CCC varies from large scale firms to
small scale firms and it vary from manufacturing to retail also. Further retail
industries have smaller cash conversion cycles when compared to manufacturing
and service industries.

In
(Uyar, 2009) the research objectives are establishment of cash conversion cycle
benchmarks of manufacturing and retailing firms, and identification of
relationship of CCC to firm size and profit. ANOVA and Pearson correlation
analysis has used to analyze data of corporations listed in Istanbul stock
exchange in year 2007. The study found a negative relationship between cash
conversion cycle to firm size and its profit. However results cannot be applied
to non-listed companies and the results are only limited to merchandising and
manufacturing firms.

Yazdanfar, D., & Öhman, P. (2014). The impact of cash
conversion cycle on firm profitability: an empirical study based on Swedish
data. International Journal of Managerial Finance, 10(4),
442-452.

The purpose of ()is to find the effect of cash management to
firm performance. Swedish SMEs in 2008 to 2011are the data used. Unrelated
regression model has used to analyses data in four industries. Significant
connection between cash conversion cycle and firm profit and to have higher
profitability, managers should improve the performance of cash conversion cycle
to working capital management are findings. Data from other industries and
countries could also have used.

 

According to (Mungal, 2015) identifying the present
cash management practice of Tongaart area small retail firms and its effectiveness
to sustainability and profitability is the purpose of this study. Documentation
of today’s practice of cash management, determination of non-performance of
some practices and identification of reasons to fail the cash management
practice were the objectives of this study. A quantitative research method has
used as the methodology. 69 businesses have targeted and a questioner has used
as the data instrument. The study has found that managing inventory can have
effective CCC and firms with
proper cash budgets have obtained considerably positive profits.

The
objectives of (John, 2014) are identification of
the relationship between cash management and assets return and relationship
between cash management and equity return of manufacturing firms.15
manufacturing firms listed in Nigeria stock exchange has used in the study. The
result is a positive relationship between cash and firm performance when equity
return is taken performance and negative relationship when return on assets is
considered as performance. Expanding the scope of the study by including
multiple sectors is the main recommendation

Abuzayed,
B. (2012). Working capital management and firms’ performance in emerging
markets: the case of Jordan. International Journal of Managerial
Finance, 8(2), 155-

In
the article () the connection of Cash Conversion Cycle and financial functions
is the. 11 areas on the Amman Stock Exchange of Jordan have selected within the
period of 2005 to 2011. The finding of the research is the favorable
relationship between Cash conversion cycle and debt, dividend, productivity and
no relationship between Cash conversion cycle and profitability indicator. Need
of balancing collection, inventory, payment polices is the recommendation that
has given at the end of the research.

 

 

 

 

 

5       
Methodology

 

This
descriptive research is about how the cash management can affect company
performance in manufacturing industry in Sri Lankan consent. This research
conducts by taking the quantitative data which are already collected. Therefor
only the secondary data will be collected. As there is no such way to collect
newest data, primary data will not be used.

To
limit the number of data out of 42 listed manufacturing companies in Sri Lanka
this research will select only 10 companies as the population. The selection of
companies is a random selection. Years from 2012 to 2016 will be the time
duration.

Cash
conversion cycle is the best technique to calculate the effective cash
management which is identified as the average time duration given to purchase
raw materials to the receivables collection linked with the product sale. It is
the amount of inventory days and receivable days excluding payable days.
Company performance is measured using net profit and return to assets.

The
data for the cash conversion cycle will be collected for the statement of
financial position in the annual reports of the manufacturing firms from 2012
to 2016. Data for net profit ratio and asset turnover ratio will be collected
by using the both statement of comprehensive income and statement of financial
position. The values of the revenues, net profits, non-current assets, debtors,
creditors, cash and cash equivalents can be obtained from the financial
statements.

A
quantitative approach will follow to employ the collected data. Correlation
test and regression analysis techniques will use to analyze the data.  Identification and quantifying data is easy
with these techniques. Correlation test carries out to find the relationship
between the variables. While regression analysis technique uses to identify the
effect of cash conversion cycle to net profit and return on assets.

FP = ? + ?0CMP + ?

H1 = ?0 ? 0

H0
= ?0 = 0

FP
signifies firm performance and CMP denotes cash management practice. ?0 represents
regression coefficient and ? signify constant. ? expresses the random error.

 

5.1
conceptual framework

Conceptual
framework is a graphical illustration of a relation between a variable to
specific problem. Two variables are exposed in the boxes while the relationship
is shown by the arrow. The dependent variable is company performance. Cash
management is the independent variable.

 

 

Cash management
    
Cash conversion cycle

Company Performance
Net
Profit and Return on Assets
·        
 
 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

6       
References

Abbasi, E., &
Bosra, S. A. H. (2012). The Effect Of The Cash Conversion Cycle On
Profitability In Tehran Stock Exchange. World,
1(1), 01-07.

Hamza,
K., Mutala, Z., & Antwi, S. K. (2015). Cash Management Practices And
Financial Performance Of Small And Medium Enterprises (SMEs) In The Northern
Region Of Ghana. International Journal of
Economics, Commerce and Management.

John,
A. O. (2014). Effect of cash management on profitability of Nigerian
Manufacturing firms. International
journal of marketing and technology, 4(1), 129.

Mungal,
A. (2015). The impact of cash management
on profitability and sustainability of small retail businesses in the Tongaat
area, KwaZulu-Natal.  

Murugesu,
T. (2013). Effect of cash conversion cycle on profitability: listed plantation
companies in Sri Lanka.

Nobanee,
H., Abdullatif, M., & AlHajjar, M. (2011). Cash conversion cycle and firm’s
performance of Japanese firms. Asian
Review of Accounting, 19(2), 147-156.

Ogundipe,
S. E., Idowu, A., & Ogundipe, L. O. (2012). Working capital management,
firms’ performance and market valuation in Nigeria. World Academy of Science, Engineering and Technology, 61(1),
1196-1200.

Panigrahi,
A. K. (2013). Cash Conversion Cycle and Firms’ Profitability–A Study of Cement
Manufacturing Companies of India. Browser
Download This Paper.

Uwuigbe,
O., Uwuigbe, U., & Ben-Caleb, E. (2012). Cash Management and Corporate
Profitability: A Study of Selected Listed Manufacturing Firms in Nigeria. Acta Universitatis Danubius: Oeconomica, 8(1).

Uyar, A. (2009). The relationship of cash conversion cycle
with firm size and profitability: an empirical investigation in Turkey. International Research Journal of Finance
and Economics, 24(2), 186-193.

Vartak, P., & Babani, V. MANAGEMENT AND EFFECTS OF CASH
CONVERSION CYCLE ON FIRM’S PROFITABILITY AND RETURN ON ASSETS: A STUDY ON
SELECTED TEXTILE COMPANIES IN INDIA.

Wongthatsanekorn, W. (2010). Study of cash-to-cash cycle management on profitability of private
hospital in Thailand by regular and panel data regression analyses. Paper
presented at the Proceedings of the World Congress on Engineering and Computer
Science.