Impact of Inventory Management on Financial Performance of Listed Beverage, Food and Tobacco Companies in Sri Lanka

Abstract

The inventory of a business is a significant part of the current asset in most industries. In order to avoid losses resulting from stock deficits and surpluses, managing such inventories is useful for the business process. The main objective of this study is to investigate the relationship between inventory management and the financial performance of beverage, food and tobacco companies in Sri Lanka. A quantitative research approach is adopted for this study and financial data was obtained from the published annual reports of 42 listed beverage, food and tobacco companies on the Colombo Stock Exchange for a period of 5 years from 2016 to 2020. In this regard, correlation and regression analysis are used to analyze the data by using E views software. Inventory turnover, inventory conversion period and inventory leanness have been identified as a measurement of inventory management as well as operating efficiency, firm growth and firm size as control variables. Financial performance has been identified as the dependent variable and measured through return on assets and cash flow from operations. Results of the study show that inventory turnover has a significant positive impact on return on assets and cash flow from operations. The study also reveals that the inventory conversion period is significantly and negatively influenced by financial performance and inventory leanness has no significant impact on financial performance. The findings of this study would be important in guiding the management of beverage, food and tobacco companies on inventory management and financial performance.