The Optimal Relationship of Cash Conversion Cycle with Firm Size and Profitability

Cash conversion cycle (CCC) has been considered a useful measure of firm’s effective working capital management and especially the cash management. This study was conducted with the aim to look into the association of the cash conversion cycle with the size and profitability of the firms in the four specific manufacturing sectors listed at Karachi Stock Exchange namely Automobile and Parts, Cement, Chemical, and Food Producers. The data was collected from the annual reports of 31 sampled firms out of the total firms in the related sectors i.e. 143 covering the period of 2006-2010. The data analysis was conducted by using One-Way ANOVA and Pearson correlation techniques. The lowest mean value of the CCC length is found in the cement industry, with an average of -52.38 days, and the highest mean value of the CCC is found in the Automobiles industry, with an average of 73.72 days. As was expected there was found a significant negative correlation between the CCC and the firm size in terms of total assets, and was found a negative correlation between CCC and profitability in terms of return on total assets with the values of -0.415 and -0.131 respectively. This study presents an update account of the investigation into the subject matter of cash management- an area which is not very much researched upon in the developing nations like Pakistan. Within the particular context of the liquidity management it is supposed to be valuable for setting up ideal threshold points in the related sectors. Despite having limited base for data analysis, the present study has a number of useful implications and is supposed to be insightful for the finance managers, industry planners, academics and researchers.