Abstract:
Working capital management (WCM) is one of the prerequisites for a firm's success, and it is essential to retain the optimum level of working capital for a firm’s sustainability. Though empirical evidence exists on the topic, there is uncertainty in determining the optimum level of WCM, especially in the Sri Lankan context.WCM may be different from industry to industry. Therefore, firms have to follow an appropriate WCM approach that is related to the particular industry sector for sustained financial performance. This study attempted to investigate the impact of the WCM on financial performance in plantation companies in Sri Lanka. Data was collected from annual reports of 18 listed plantation companies of Colombo Stock Exchange in 2011/2012. Although the plantation industry plays a significant role in the Sri Lankan economy as a main foreign exchange earner and employment generator, literature relating to the WCM of the plantation industry in Sri Lanka is scarce. Therefore, this study enriches the literature by providing evidence that can be easily applied for the plantation industry in Sri Lanka. The study measures financial performance in terms of Net Profit margin (NPM), Return On Assets (ROA) and Return on Equity (ROE) whereas the WCM is measured in terms of Inventory Turnover Days (ITD), Accounts Receivable Days (ARD) and Cash Conversion Cycle (CCC). Based on multiple regression analysis the results indicate that negative relationship between CCC and ITD with NPM and ROA. Moreover ARD has a significant positive effect on ROA. Hence the study recommends plantation companies to manage their working capital by implementing liberal credit term policy, reducing inventory turnover days and the cash conversion cycle to improve their financial performance and survive in the undetermined business environment.
Key Words: Working Capital Management, Financial Performance, Plantation Companies, Colombo Stock Exchange.
