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LIQUIDITY MANAGEMENT AND PROFITABILITY: A CASE OF

MANUFACTURING COMPANY IN SRI LANKA

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 LIQUIDITY MANAGEMENT AND PROFITABILITY: A CASE OF
MANUFACTURING COMPANY IN SRI LANKA
Bandara D.A.G.N.P.1 and Wijesinghe M.R.P.2
12
Department of Finance, University of Kelaniya, Sri Lanka
1
nilansapathirana@gmail.com, 2ruwanmrp@kln.ac.lk
ABSTRACT
Liquidity management plays a significant role in the success of a business entity and
maintains an attractive level of profitability to an entity. Furthermore, liquidity
management and profitability are crucial aspects in the growth and survival of each
type of business. With this backdrop, the main objective of the study is to investigate
the impact of liquidity management on performance of a selected manufacturing
company in Sri Lanka and to explore and evaluate the current Liquidity and
profitability position of the chosen company. This study becomes significant as a
mixed method study relating to liquidity and performance as most of the studies have
focused only on a quantitative methodology. Hence, both quantitative and qualitative
methods have been employed in this study using monthly management reports from
the year 2015 to the year 2019. Regression analysis along with correlation analysis &
descriptive statistics were used to analysis the statistical data. Discussions with
Management were used as the primary qualitative analysis technique. The findings of
the study revealed that, there is a positive impact from liquidity management on
profitability in the selected company. Furthermore, the results found that, factors such
as technology, management knowledge and experience are affected to effective
liquidity management. More interestingly, both quantitative and qualitative results
have shown the impact of liquidity on profitability. Based on the study outcomes, it
can be recommended to follow stringent policies for fund management, internal
control for stock management, receivable management, credit management, and
manage wastages to manage sufficient profitability levels.
Keywords: Liquidity Management, Profitability, Technology, Management
Knowledge, Mix Methodology
INTRODUCTION
Liquidity management and profitability are paramount vital issues in the growth and
survival of the business (Priya and Nimalathasan., 2013).. Liquidity and profitability
are the fundamental categories of every business environment to succeed in their
operation. Therefore, companies should treat liquidity management and profitability
as equally important aspects because it is a function of efficiency.
It is a well aware fact that liquidity has a significant relationship with profitability
(Alarussi, 2018). Considering the relationship between liquidity management and
profitability, it is one of the most important relationships to a business entity (Ahmad,
2016; Eijelly, 2004). Liquidity management is more critical to managing day-to-day
business operations, making investment decisions, cash flow decisions, inventory
management decisions, etc. Stakeholders of the company have the main objective to
profit maximization. Sound liquidity leads to better profitability (Jeyanthi and Kumar,

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

2019). When achieving these two objectives, it should be nearly investigated. Correct
relationships will be guided to make proper decisions and to achieve common goals.
The majority of the studies have used one methodology with limited measurements
to liquidity management to examine the impact of liquidity on profitability (Ahmad,
2016; Eijelly, 2004; Ajanthan 2013; Kobika, 2018; Deloof, 2003; Bulin, Basit, &
Hamza, 2016; Niresh, 2012). Furthermore, as the existing studies mainly focused on
quantitative methodology, effective analysis of a company and its environment is
lacking because it does not provide a reasonable weight to both qualitative and
quantitative factors. At the same vein, we couldn’t find a study that used mix
methodology to investigate the impact of liquidity on profitability in Sri Lankan
context. In this case, we used both qualitative and quantitative methods to analyze the
relationship to ensure the study's quality. Mixed methods are instrumental in
understanding contradictions between quantitative results and qualitative findings
(Wisdom and Creswell, 2013). Further Hussein, (2009) indicates that the use of
multiple methods will increase the credibility of the study.
In the same vein, the selected company’s present financial figures show a liquidity
issues and therefore, it is vital to identify the relationship between liquidity
management and profitability of this company. Therefore, as highlighted above, there
is a vacuum to investigate profitability and liquidity using a mixed-method as the
existing studies are limited only to qualitative or quantitative analysis. Hence, the
current problem is to examine the impact of liquidity on profitability is vital to the
existing knowledge.
Given this backdrop, this study's main objective is to investigate the impact of
liquidity management on the firm profitability in a well-known manufacturing
company in Sri Lanka during the period year 2015 to year 2019. Furthermore, the
study intends to explore (through the qualitative technique) whether any other factors
that may affect this liquidity and the profitability relationship of the selected
company.
Moreover, the selected company is facing liquidity issues and continuous business
losses in the recent past. The company has the insufficient cash flow to manage its
working capital, and company production and sales are declined. With this milieu, it
is essential to further investigation regarding the selected company.
The remainder of this paper is organized as follows. The next section will develop the
theoretical framework and literature review, while Section 3 describes the research
methods used. Next, in Section 4, the principal results findings. The final section of
the paper presents the main conclusion, discussion, implications, and limitations.
REVIEW OF LITERATURE
There are numerous types of studies available to measure the relationship and impact
of liquidity management and profitability. The liquidity problem is affected by each
business in a day to-day business life cycle. Liquidity management has interconnected
with the working capital management. Many studies are available with various

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 Journal of Accountancy & Finance

inferences related to liquidity management and profitability. Nevertheless, majority

of the studies have used quantitative methodology for their conclusions.
Chandrabai and Praveen, (2020) investigated the impact of working capital
management on profitability of heavy Engineering Public Sector Manufacturing
Companies in India. They have used return on total assets, ratio of current assets to
total assets, ratio of current liabilities to total assets, leverage, current assets turnover,
the natural logarithm of sales, days inventory, days receivable and days payable, cash
conversion cycle to measure the liquidity and profitability. By concluding the study,
they show that there is a significant impact of liquidity on profitability of select
sample.
Jeyanthi and Kumar, (2019) investigated the impact on liquidity to profitability in
Indian context using Ramco Cements Limited as the sample from 2008/2009 to
2017/2018. They have used the Current ratio, Quick ratio, inventory to current assets,
current assets turnover ratio, and working capital turnover ratio to evaluate the
company's liquidity position. The finding of the study reveals that there is an
insignificant impact on liquidity to profitability.
At the same time Bhaskar, (2014) investigated the impact of liquidity management
on the profitability of Indian Fast-moving consumer goods (FMCG) firms. He
measured liquidity by current ratio, liquidity ratio, absolute liquidity ratio, and cash
conversion cycle, as well as the age of creditors, age of debtors, age of inventory
sales, and inter-temporal growth in sales are taken as control variables. Using panel
data regression analysis, the study found a strong negative relationship between the
measures of liquidity management and firms’ profitability. Still, firms’ size has a
strong positive affiliation with profitability.
Again in the Indian context, Panigrahi, (2014) collected data of the cement company
of ACC limited from 2000-2001 to 2009-2010 to investigate the same. The study
found that there is a negative working capital most of the time, but the company can
earn a reasonable rate of return because of its aggressive working capital policy.
Sound policies have guided the correct direction to the company.
Given these findings, we can identify the contradictory results in the context of India
on the impact of liquidity management on profitability, which emphasis the need of
further studies as this an unresolved issue in the literature.
According to the factors affecting profitability in Malaysian listed companies’
Alarussi, (2018) found that liquidity has no significant relationship with profitability.
Still, he found a strong positive relationship between firm size and working capital
and assets turnover ratio. The result also shows a negative relationship between debt
equity ratio and leverage ratio. However, the study conducted by Bulin (2016) to
investigate the impact of Working Capital Management on Malaysia’s consumer
product firms' profitability found an insignificant relationship between Inventory
Turnover Ratio, Working Capital Turnover Ratio, and Collection Period on Return
on Asset. Furthermore, the researcher found a significant association between Cash
Conversion Cycle and Return on Asset. Hence, the results are not similar even with
in the same country, which highlight the need for further investigations.

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

Durrah, (2016) has examined the relationship between liquidity ratios and indicators
of financial performance in the industrial food companies listed in Amman Bursa
between 2012 and 2014. The outcomes showed that there was no relationship between
all liquidity ratios and the gross profit margin. But there is a weak positive
relationship between the current ratio and each of the operating profit margin and the
net profit margin. Nevertheless, study found a positive relationship between liquidity
ratios (current ratio, quick ratio, cash ratio) and return on assets.
Garanina, (2015) has investigated the liquidity, cash conversion cycle, and financial
performance of Russian companies. The research covers the effect of the current
liquidity ratio and cash conversion cycle on financial performance measured by return
on net operating assets. The study found a negative relationship between the cash
conversion cycle and a return on net operating assets. The results also evidenced that
there is a positive relationship between companies’ current liquidity ratio and return
on net operating assets.
Ben-Caleb, (2013) has examined the relationship between Liquidity Management and
Profitability of Manufacturing Companies in Nigeria. The analysis was based on a
sample of 30 manufacturing companies listed on the Nigeria Stock Exchange for the
period 2006 to 2010. The result has suggested that the current ratio and liquidity ratio
have positively associated with profitability while the cash conversion period has
negatively related to the profitability of manufacturing companies in Nigeria.
The study of working capital management and AIM-listed SME company’s
profitability has been evaluated by Afrifa, (2013). He has used the mixed research
method approach. Analysis of data from the annual reports found no evidence that
the cash conversion cycle has any effect on profitability. Under the control variables,
corporate governance factors were found to be statistically significant in explaining
the profitability of AIM-listed SME companies. Moreover, the study revealed that,
there are differences in the level of educational and work experience directors and
their attitude on liquidity.
There is a relationship between liquidity management and corporate profitability of
the manufacturing companies in the Nigerian Stock Exchange as examined by
Owolabi, (2012). Measuring the liquidity in terms of the company’s Credit Policies,
Cash Flow Management, and Cash Conversion Cycle study found a significant
impact from them on profitability.
Eljelly, (2004) has recognized the relationship between profitability and liquidity, and
its measured by the current ratio, cash gap (cash conversion cycle), net sales and net
operating income on a sample of 29 joint-stock companies in Saudi Arabia. The study
found that there is a significant negative relationship between the liquidity level of a
company and its profitability measured by the current ratio. The study also identified
that there is a positive relationship between company size and profitability. Net sale
and total assets have been chosen to measure company size. Large companies can get
high discounts, longer credit periods than small companies.
The study of working capital management as a financial strategy has been evaluated
by Owolabai, & Alayemi, (2004). The study is based on the Nestle Nigeria Plc

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 Journal of Accountancy & Finance

company. The sample data was selected for five years from 2004-2009. The effect of
independent variables of working capital management including current ratio and
receivable collection days on the Gross profit margin coefficient was used for
analysis. The results of the study have disclosed that there is a negative correlation
between the current ratio and profitability. This means that as the current ratio
reduces, the profitability of the firm will increase. On the other hand, the receivable
collection days were regressed against ROCE, this showed that there was a negative
correlation between collection days and ROCE. This indicates that receivable
collection days are reduced there will be an increase in profitability. The firm should
be followed by an aggressive management policy to manage working capital and
improve profitability.
Base on the above studies it can be identified that studies have used regression
analysis as the main tool to investigate the impact of liquidity management on
profitability. Furthermore, it seems that there are limited studies that have used mixed
method as their methodology. The remaining part of this review will analysis the
studies relating to Sri Lanka.
Kobika, (2018) has studied the relationship between the profitability and the liquidity
of listed manufacturing companies in Sri Lanka. The study covered 26 listed
manufacturing companies in Sri Lanka over a period of past 5 years from 2012 to
2016 and data extracted from annual reports. The analyzer has used net profit margin,
return on equity, return on assets, current ratio and quick ratio to measure the liquidity
and profitability position. The researcher has used correlation and regression analysis
to analyze data and found that liquidity has a negative and significant impact on
profitability of manufacturing companies in Sri Lanka. So, these findings may not
provide other qualitative factors to be considered when examining the liquidity and
profitability position of a company.
In addition to the above study Jayarathne, (2014), has investigated the impact of
working capital management on profitability over a period of 2008-2012. The
findings of the study reveals that the profitability is negatively associated with the
account receivable period, inventory turnover period, and cash conversion cycle. And
also, it was found that profitability is positively associated with the account payable
period. Besides, that he suggests that an increase in leverage leads to a decline in
profitability.
Similarly, the effect of changes in liquidity on the profitability of manufacturing
companies in Sri Lanka has been examined by Priya and Nimalathasan, (2013) for
the period of 2008 to 2012 using correlation and multiple regression analysis as an
analysis technique. The study has found a significant relationship exists between
liquidity level and profitability among the listed manufacturing companies in Sri
Lanka. It can be explained as Inventory Sales Period and Current Ratio have
significantly correlated with Return on Assets, and Operating Cash Flow Ratio has
significantly correlated with Return on Equity 5% level of significance.
Ajanthan, (2013) has evaluated the relationship between liquidity and profitability of
trading companies in Sri Lanka. The main objective of the study was to examine the

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

relationship between liquidity and profitability in trading companies in Sri Lanka.

This study has focused on identifying the functional relationship between profitability
and liquidity. The researcher has given appropriate recommendations to make a
management policy in profit-oriented trading companies in Sri Lanka. Such as
inventory management, receivable management, investment decisions, profit
maximization, shareholder wealth aspiration etc. The sample is limited to trading
companies in Sri Lanka. Therefore, the study is limited to the trading sector.
Niresh, (2012) has examined the trade-off between liquidity & profitability using a
study of selected manufacturing firms in Sri Lanka. The study is based on a sample
of 31 listed manufacturing firms in Sri Lanka over the past 5 years from 2007 to 2011.
Liquidity (Independent Variable) is measured by the current ratio, quick ratio, and
liquidity ratio. Profitability (dependent variable) measured by Net Profit, Return on
Capital, and Return on Equity. Correlation analysis and descriptive statistics have
been used to analyze data. The findings have suggested that there is no significant
relationship between liquidity and profitability among the listed manufacturing firms
in Sri Lanka.
Based on the above studies conducted in Sri Lanka, it can be identified that those
have considered only the quantitative methodology for their conclusions, which may
hinder the findings and the findings arrived from those studies. Because have been
highlighted the importance of using mixed method as a valuable tool to be applied for
studies. Furthermore, as revealed by the literature survey, it can be identified that
most of the researchers have used current ratio, quick ratio, liquidity ratio, cash
conversion cycle, assets ratios, and profitability ratios to calculate the financial
position of the company. Additionally, they have mainly used regression analysis.
Therefore, it is clear that the majority of the studies have been using quantitatively.
In contrast, the need for further studies using mixed methods can be identified as an
area to investigate. Especially in Sri Lankan context, the studies using mixed methods
are lacking.
METHODOLOGY
This is a single manufacturing company case study research. Therefore, the sample
consists of a selected manufacturing company in Sri Lanka. And also, this case study
follows the mixed methodology. Therefore, secondary sources have been used for
quantitative data and primary sources have been used for qualitative data. For
quantitative data, a single Sri Lankan manufacturing company has been chosen to
collect data, and this data for the study period of 2015 – 2019. This data was available
on the monthly management reports during the period of 2015 to 2019. Qualitative
data has been gathered from the management through the discussions (Interviews).
Interviewed data has relating to eight managers under several departments. They are
attached to the following designations such as Accountant, Finance Manager, General
Manager Finance and Admin, Manager Domestic Sales, National Sales Manager,
Assistant Manager Tender Sales, Manger Operations, and Manager Production
Supporting and Material.

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 Journal of Accountancy & Finance

When considering the background of the company it was established in 1939 to

supply footwear to the British forces. The government set up the company under the
state department of industries to manufacture boots and accessories for the armed
forces. Step by step, the company was developed. The company started a new factory
to produce products and the company started new retails shops to release products to
the local market. After that, the company created history by being the first industrial
organization to export their products. The company has achieved various types of
awards during the history, such as presidential export award, exporter of the year
award, best designer award, global commerce excellence award, national business
excellence award, etc.
In 1990, under the companies' act, the government converted the corporation to a
government-owned business undertaking under the company was changed. Further,
under the institution privatization program, the government sold 90% of controlling
shares to another company. The Year 2003 was imperative for the company because
the company did a successful initial public offering after the listed on the main board
of the Colombo stock exchange. In 2007 the company’s shareholder structure has
changed. Another important case happens in 2008, the company moved its business
location to another place. In 2009, the company has been acquired by another
company. After that 2010 and 2011, the holding company acquired two companies.
End of the 2011-year, the selected company has three subsidiaries. In 2013 parent
company has acquired by another two companies and changed the parent company
name. In 2015 and 2016 the company ceased its two subsidiaries because of the
inefficient operation. And also, parent company ownership was re-changed during
2017. This company had to delist from the Colombo stock exchange because they
could not maintain the minimum public holding requirement.
Gradually the production and business operation of the company have shown negative
growth. During the current economic situation, company production and revenues
have decreased. And also, industrial factors were affected by the current situation.
Year by year company production, revenue, profitability, and liquidity position went
down. The company has shown a net loss in the previous year's financial statements.
Several factors were affected by this situation. Henceforth, one of the objectives of
this study is to explore, measure, and give appropriate recommendations for the
company's current business situation.
Based on the results of the literature survey, the following conceptual framework has
been developed.

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

Independent Variables Dependent Variables

Liquidity Profitability

Quick Ratio
Liquidity Ratio Return On Equity
Operating Cash Return On Assets
Flow Ratio
Return On Stated
Cash Conversion Capital
Cycle

Source: Author Complied

Figure 1: Conceptual Framework

Further, above mentioned independent variables are only representing the

quantitative factors. The study focuses on qualitative factors such as inventory
management, company technology, level of experience, receivable and payable
management. Afterwards, mix methodology has been used to analyze and interpret
data. The data collected from both qualitative and quantitative methods. Then the
study has used a triangulation technique to combined both results.
Base on the above conceptual framework, the following hypothesis, can be identified.
H0: There is no significant impact of liquidity on profitability.
H1: There is a substantial impact of liquidity on profitability.
As the quantitative data analysis, we used multiple regression analysis to investigate
the impact of liquidity management on profitability. It is imperative to identify that
profitability depends on the quick ratio, liquidity ratio, operating cash flow ratio, and
cash conversion cycle. We employ the regression analysis to find the impact of
liquidity on profitability (Bhaskar, 2014; Priya and Nimalathasan, 2013; Deloof,
2003; Niresh, 2012; Jayarathne, 2014).
The following regression models have used as a method
Profitability = f (QR; LR; OCFR and CCC)
ROE = β +β2QR +β3LR+β4OCFR+β5CCC+eit…………………………(1)
ROA = β +β2QR +β3LR+β4OCFR+β5CCC+eit…...……………………(2)
ROS = β +β2QR +β3LR+β4OCFR+β5CCC+eit…………………………(3)

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 Journal of Accountancy & Finance

Where,
β, β2, β3, β4, β5 are the regression coefficient and “eit” shows the error term.
ROE = Return on Equity
ROA = Return on Assets
ROS = Return on Stated capital
QR = Quick Ratio
LR = Liquidity Ratio
OCFR = Operating Cash Flow Ratio
CCC = Cash Conversion Cycle
Table 23 - Calculations of Liquidity Management and profitability Ratios
Liquidity Ratios

Quick Ratio (Current Assets - Inventory) / Current

Liquidity Ratio
Operating Cash Flow Ratio
Cash Conversion Cycle
Debtor Collection Period
Inventory Sales Period
Creditor Payment Period
Liabilities
(Cash in Hand + Short Term Investments) /
Current Liabilities
Cash Flow from Operations / Current
Liabilities
Debtor Collection Period + Inventory Sales
Period – Creditor Payment
(Average Trade Debtors / Turnover) * 365
days
(Average Inventory/Cost of sales) * 365
days
(Average Trade Creditors / Cost of Goods
Sold) * 365 days

Table 24 - Profitability Measurement Ratios

Profitability Ratios

Return on Assets (Profit after Interest and Tax / Total Assets)

* 100
Return on Equity (Profit after Interest and Tax / Equity) * 100
Return on Stated capital (Profit after Interest and Tax / Stated
capital) * 100

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

As the qualitative data analysis techniques, thematic analysis has been used to
analysis of quantitative data. Interviewed data can be made to information using the
thematic analysis which is demonstrated in Figure 3 as follows.

Receivable
Management
Inventory Payable
Management Management

Company Profitability Level of

Technology Experience

Figure 3 - Thematic Factors

Company Technology
In the practical business environment, a company needs a good ERP system and
technology to manage company operations. If not, the decision can be delayed,
cannot take accurate decisions, etc. when looking at the overall impact, it can be
converted loss in a business environment. Good technology manages the company's
overall process and it gives more benefits to the business.

Level of Experience
Management level experience is more important to run the business smoothly. A
mature person has more knowledge to manage problems in the business process.
More knowledge and experience are giving the right direction to the company.

Inventory Management
Inventory management is a critical activity in the manufacturing company. Inventory
can be used to change the company's profitability. Several costs are related to
inventory. Therefore, inventory should be managed correctly.

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 Journal of Accountancy & Finance

Receivable Management
Receivable will create through credit sales. Receivables should be collected timely.
If not, the company has to select another financing method to manage liquidity
requirements.

Payable Management
Payable management is important. Company operations cannot be maintained
smoothly if there is not available enough attention to payable management. It is
affected by the company's goodwill as well.
FINDINGS AND DISCUSSIONS
The descriptive statistics (Shown in Table 3 below) show that the criteria used for
measuring profitability over the period under study, including return on equity, return
on assets, and return, stated capital mean value of -0.05 0.31, and 0.20, respectively.
The Range (Max-Min) values of profitability measures (Except cash conversion
cycle) are higher than those of liquidity measures. But cash conversion cycle days
are higher than the profitability measure. Thus, it reveals the high volatility of
profitability measures used in the study. Furthermore, the mean values of the quick
ratio, liquidity ratio, cash conversion cycle, and operating cash flow ratio were -0.03,
0.0015, -83.91, and 0.0023, respectively.
Table 25 - Descriptive Statistics of the Variables
N Minimum Maximum Mean Std.
Deviation
Quick Ratio 47 -2.64 2.18 -0.03 0.53
Liquidity 46 -1.07 0.89 0.0015 0.23
Ratio
Cash 47 -12196.40 13551.30 -83.91 3739.70
Conversion
Cycle
Operating 46 -1.29 1.02 0.0023 0.36
Cash Flow
Ratio
Return on 48 -2.28 17.62 -0.05 2.84
Asset
Return on 48 -4.69 22.82 -0.31 3.79
Equity
Return on 48 -3.50 40.44 0.20 6.19
Stated Capital
Source: Author Complied

Table - 4 describes the correlation and probability of the significance between

liquidity management and profitability. This study has indicated that DQR (First
Differentiated Quick Ratio) significantly correlated with ROA at a 1% level of
significance. At the same time, CCC and DCCC (First Differentiated Cash

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

Conversion Ratio) also significantly correlated with ROA at a 5% level of

significance.
Further, this study has indicated that DQR significantly correlated with ROE at a 1%
level of significance. At the same time DCCC also significantly correlated with ROE
at a 5% level of significance. Additionally, this study has indicated that DQR and
DCCC significantly correlated with ROS at a 1% level of significance. At the same
time CCC also significantly correlated with ROS at a 5% level of significance.
Finally, the rest of the other variables can be identified as not correlated.
Table 4 – Pearson Correlation Matrix
RO RO RO
Variable DQR DLR2 CCC DCCC DOCFR2
A E S
DQR 1
-----
DLR2 0.215 1
0.151 -----
CCC -0.173 -0.067 1
0.251 0.657 -----
DCCC 0.161 -0.105 0.505 1
0.285 0.486 0 -----
DOCFR2 -0.042 0.612 0.037 -0.135 1
0.783 0 0.809 0.372 -----
0.294* 0.369*
ROA 0.678* 0.18 -0.022 1
* *
0 0.231 0.048 0.012 0.884 -----
0.373* 0.99
ROE 0.671* 0.156 0.287 -0.023 1
* 3
0 0.301 0.053 0.011 0.879 0 -----
0.339* 0.99 0.98
ROS 0.678* 0.125 0.375* -0.023 1
* 2 3
0 0.407 0.021 0.01 0.878 0 0 -----
* Correlation is significant at the 0.01 level (2 tailed)
** Correlation is significant at the 0.05 level (2 tailed)
Source: Author Complied

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 Journal of Accountancy & Finance

Model summary
Before running the regression model, the analyzer has carried on the following
pretests to find data suitability, such as Multicollinearity Test, Unit Root Test, Serial
Correlation LM Test, Heteroskedasticity Test. After complying with all pretest
results, the following models have been carried out.
Correlation analysis was found the correlation between the current ratio and quick
ratio. Initially, the researcher has used the current ratio as an independent variable.
But in the analysis stage, the study has found a correlation between the current ratio
and quick ratio. Therefore, it was removed in the models. Current models are
constructed without the current ratio.
ROA Model (Model 1)
Table 5 - ROA Model Summary
Dependent Variable Coefficient Prob.
C 0.1982 0.2441
Quick Ratio 6.9347 0.0000***
Liquidity Ratio 2.8614 0.0065**
Operating Cash Flow Ratio -0.1206 0.8421
Cash Conversion Cycle -0.1206 0.1794
Model R2 Ad. R2 F-Stat Prob.
(F-Stat)
ROA 0.8647 0.8478 51.1137 0.0000
Note: *** - Significant at 1% Level, Significant at 5% Level
Source: Author Complied
In the model, one has measured the relationship between return on asset (profitability
measurement) and liquidity measures. This model has shown a significant positive
relationship with two independent variables, which has Quick ratio and liquidity ratio
which are significant at 1% level.
R2 value of model 01 has taken 0.8647 and that value of 86.47% explained observed
variability in return on assets by the difference in the independent variable. The
adjusted R2 compares the explanatory power of regression models that contain
different numbers of independent variables. Model 1 has an adjusted R2 value of
84.78% and it has explained overall explanatory power. The study has a higher F
value and below the 5% probability value (F value - 51.11 and P-value - 0). This
measurement has confirmed that the model 1 is better to estimate.

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

ROE Model (Model 2)

Table 6 - ROE Model Summary
Dependent Variable Coefficient Prob.
C 0.2194 0.3236
Quick Ratio 9.0790 0.0000***
Liquidity Ratio 2.9870 0.0259**
Operating Cash Flow Ratio -0.0940 0.9049
Cash Conversion Cycle 0.00009 0.1566
Model R2 Ad. R2 F-Sta. Prob. (F-Stat)
ROE 0.8719 0.8558 54.4279 0.0000
Note: *** - Significant at 1% Level, ** Significant at 5% Level
Source: Author Complied
In model ROE has measured the relationship between return on equity (profitability
measurement) and liquidity measures. This model has shown a significant positive
relationship with two independent variables, Quick ratio and liquidity ratio which are
significant at 1% and 5% level respectively.
R2 value of the model ROE has taken 0.8719 and that value of 87.19% explained
observed variability in return on assets by the difference in the independent variable.
The adjusted R2 compares the explanatory power of regression models that contain
different numbers of independent variables. Model 02 has an adjusted R2 value of
85.58% and it has explained overall explanatory power. The study has a higher F
value and below the 5% probability value (F value – 54.42 and P-value - 0). This
measurement has confirmed that the model is better to estimate.
ROS Model (Model 3)
Table 7 – ROS Model Summary
Variable Coefficient Prob.
C -1.2610 0.0212
Quick Ratio 15.7299 0.0000***
Liquidity Ratio 2.0511 0.2407
Operating Cash Flow Ratio 0.1027 0.9227
Cash Conversion Cycle 0.0004 0.0003***
Model R2 Ad. R2 F-Stat. Pro.
(F-Stat)
ROS 0.9129 0.9020 83.8268 0.0000
Note: *** - Significant at 1% Level
Source: Author Complied

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In the ROS model has measured the relationship between return on Stated Capital
(profitability measurement) and liquidity measures. This model has shown a
significant positive relationship with two independent variables, which has Quick
ratio and cash conversion cycle are significant at 1% level.
R2 value of model 03 has 0.9129 and that value of 91.29% explained observed
variability in return on assets by the difference in the independent variable. The
adjusted R2 compares the explanatory power of regression models that contain
different numbers of independent variables. Model 03 has an adjusted R2 value of
90.20% and it has explained overall explanatory power. The study has a higher F
value and below the 5% probability value (F value – 83.83 and P-value - 0). This
measurement has confirmed that the model is better to estimate.
As regression analysis shows a significant positive impact of Liquidity and
profitability measures, the null hypothesis was rejected and the alternative hypothesis
accepted
Table 8 - Hypothesis Testing
No Hypotheses Tool Results
H0 There is no significant impact of Regression Rejected
liquidity on profitability
H1 There is a significant impact of Regression Accepted
liquidity on profitability
Source: Author Complied
Qualitative Approach
Management Response and discussion
The researcher has followed the exploratory research design for this study to explore
the company’s liquidity management and profitability. Under this model, quantitative
techniques were used to analyze the monthly management reports data. Then
identified some limitations such as weak management decisions, weakness of
company policies, weak internal controls and practical environment changes etc.
These limitations cannot be captured through the quantitative analysis. Therefore, the
researcher moves on to qualitative factors. The researcher has conducted interviews
to collect management opinions about the company and its current business situation.
All the quantitative and qualitative outputs were given better direction to the study.
The company is trading on the consumer market. therefore, the company cannot hold
inventory for a long time of period. The company receives only two months of credit
period from suppliers. So, the company needs to sell inventory to customers and
collect cash during that time. Therefore, the company should be forecasted their sales,
before the purchasing inventory. Currently, the company financing working capital
through the short-term bank loans. If the stock cannot sell and collect cash on time,
it’s difficult to settle short term loans. The company’s primary issue is that most
debtors are relating to the government. The government is giving a period to business

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

and sometimes; it may be extended. Sometimes the company unable to deliver the
orders on time because of production issues and delivered goods can be rejected due
to not having good quality. Therefore, the company needs to increase the quality of
the delivery network. If not, the company has to bear some additional costs. Some
payments cannot delay such as salaries, electricity and water bills, etc. So, it has to
settle those upfronts. Since the company mostly has credit customers, it has a bit
lengthy cash conversion cycle. So, the company must manage the expenses financing
process very carefully. Because the company reaches the upper limits of the bank
loans, so it is challenging to finance the expenses by bank loans. Generally, it can’t
satisfy the company cash conversion cycle.
As per the opinions of respondents, on the current technology infrastructure of the
company, it is not up to date. Staff has no opportunity to access the management
information and there is limited information such as what is the exact product margin,
sales forecast information, and so many other things. A few months ago, the company
has a practice that documents against payment method. That means they settle the
bills immediately after goods are received from the suppliers. That’s not a good
practice. So, the respondent proposes them to practice documents against acceptance.
With that method, the company receives a credit period. So, the company has some
time to generate some income.
Management of inventory is highly important to the business. The statement of
respondent 1 has proven it. “There is a couple of components of the inventory cost.
Those are carrying costs and holding costs. We incur Rs. 14,000/= per day as our
fixed inventory holding cost. If we manage our inventory more efficiently definitely,
we can reduce the inventory holding cost and increase the company’s profitability”.
The importance of the debtor management can be proven by following respondent
statement. It can be proven by the following respondent statement which is given.
The respondent 1 has said that “if we haven’t received money from our debtors, we
have to finance our expenses through bank loans or creditors. At the current situation
of the company, it is bit difficult. On the other hand, the time value of the money will
reduce when debtors delay their payments. If we receive that payment quickly, we
can invest them and generate some income for the company. So, managing accounts
receivable is so much important.” The company is offering more time to settle the
payment for low-risk customers. Such as B2B customer and don’t give accounts
receivable period for the high-risk customers. And also, it’s can’t set a specific credit
period for government organizations. The company is not altering its customers
frequently. But they are monitoring their customers. An increase in sales does not
always increase profits. Because the company has a low product margin. If the
product margin is high, then it can be used to increase profits.
Under the management of account payables, according to the respondent 1, he has
clearly mentioned that the “Management of credits doesn’t mean we buy all the things
on a credit basis. We have to make a proper mixture of that. As an example, the
company can have creditors such as their suppliers, banks and etc. So, if we manage
my working capital by obtaining bank loans, we have to pay a higher interest rate

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compared to the creditors.” Above statement has clearly defined that the value of
supplier credit management.
Thus, it is depending on the supplier to supplier. But it is better to have more credit
trade rather than cash on delivery. Delaying payments has both good and bad results.
There are a few possible reasons for delaying payments. One is the company doesn’t
have money to settle the payments. Some companies delaying payments for
investment purposes. As well as skip some non-prioritized payments. So, it has to
identify clearly what payments we can delay a bit and what payment can’t delay such
as salaries for the employees and bank installments. It shouldn’t badly affect the
company’s reputation. Delaying payments are not affected by profitability. It is a
solution to fund shortage. Delaying payment is a temporary solution for cash flow
management.
In the current situation, respondent 1 of the company has accepted following
difficulties have been affect to the business when managing the liquidity. “The main
problem is we can’t request further loans from the banks because we are in the upper
limit regarding the bank loans. So, it is difficult to manage the liquidity by bank
loans. Another problem is we haven’t received the collection from debtors as I target.
As well as the outstanding balance that we have to pay for our suppliers is high. Other
thing is our stock controlling part is weak. They are holding the outdated inventories
and they haven’t proper disposal plan regarding those types of stocks.” According to
the respondent’s designation and responsibility, he has taken following remedies to
above mentioned liquidity problem. “I have negotiated with different banks to
increase our facility (loan limits). We provide incentives for our debtors if they settle
their payments early. As well as we delayed some payments. We monitor our debtors
aggressively and try to collect those as quickly as possible.”
This study has investigated about the relationship and impact between liquidity
management and profitability. Most of the researchers have followed one
methodology and limited independent variables (Chandrabai and Praveen, 2020;
Jeyanthi and Kumar, 2019; Alarussi, 2018; Kobika, 2018; Priya and Nimalathasan,
2013). Further, there is enough studies available with quantitative methodology
(Chandrabai and Praveen, 2020; Durrah, 2016; Bhaskar, 2014; Jayarathne, 2014;
Niresh 2012). So, this study has been used both methodologies to explore the research
problem. Eljelly, (2004) has found that there has a significant negative relationship
between the liquidity level of a company and its profitability measured by the current
ratio. But Ajanthan, (2013) has found the relationship between liquidity and
profitability using the current ratio, quick ratio, and liquidity ratio. However, this
study has found a positive significant relationship in the model ROA and ROE with
quick ratio and liquidity ratio. Overall model ROA and ROE is explained by 86%
and 87% respectively. Further company credit policy, inventory management, debtor
management and working experience of the relevant officers must be considerable.
Owolabi, (2012) has recommended that managers can increase profitability by putting
in place a good credit policy, short cash conversion cycle, and an effective cash flow
management procedure.

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CONCLUSION
The main objective of the study is to investigate the impact of liquidity management
on the performance of a selected manufacturing company in Sri Lanka and to explore
and evaluate the current Liquidity and profitability position of the selected company.
This study becomes significant as a mixed method study relating to liquidity and
performance as most of the studies have focused only on a quantitative methodology.
Hence, quantitative and qualitative methods have been employed in this study using
monthly management reports from the year 2015 to the year 2019.
The results of the study found that there is a significant positive relationship between
profitability measures (ROA and ROE) and liquidity measures (Quick ratio and
Liquidity ratio). The profitability measured through return on Stated Capital has
shown a significant positive impact from liquidity measured by quick ratio and cash
conversion cycle.
Majority of the management responses are accepted that there is an impact from
liquidity on profitability. If the company has enough liquidity, it can be used to do
investments, paying suppliers, and not required to change the business loan. Good
liquidity will reduce the borrowing cost and will be supported to run the business
smoothly.
Further management discussions evidenced the company’s technology, operating
system, management-level experience and knowledge, company’s culture, good
supplier and customer base, micro and macro environment are affected to the business
process directly. Hence, these factors should be managed smoothly as they are
affected to the liquidity position and profitability of the company.
In summary, considering the findings, it can be concluded that there is a significant
positive impact from liquidity on the profitability of the selected company which
evidenced that the company should consider their liquidity position in order to
maintain a high level of profitability of the company. However, factors such as
experience, culture, technology etc. also matter to decide the impact of liquidity on
profitability.
Based on the conclusion, we can provide the following suggestions to the selected
company to improve the liquidity and profitability.
Follow the strict policy for fund management
When releasing the fund's company should be able to identify the importance of the
requirement and Prioritize the payments. If Fund should be managed effectively, it
should minimize the borrowing cost to run a business smoothly.

Make internal controls for payments

Prioritize the payment and identify the most essential payments for the business. The
company should manage its suppliers well. Because supplier can increase their price,
add conditions, and stop the material delivery. This will be affected by to collapse
manufacturing process and will help to manage the goodwill of the company

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Make internal controls for Inventory management

Inventory is a key item in the business. it can be used as profit manipulation. The
company has a huge inventory and they are large amount of holding cost per day
(management response). Therefore, management should focus on inventory
management.

Make internal controls for Debtor management

Management takes a debtor review meeting each month. The collection is more
important to the business. If collection is not collected, the company has to borrow
loans from the bank and it creates additional borrowing costs. Therefore, the company
should consider extra control for debtor management.
Wastage management
The company has no proper wastage system to remove their wastages. The
management of the company should revisit the current practice of selling to another
party.

Product differentiation and design changes

This company is manufacturing consumable goods. Therefore, the company should
focus on customer preferences. The products should change by at least six months
once.
The main limitations of the study are sample is limited to forty-eight of monthly
management reports and not using market performance measures to measure the
company performance. Therefore, we suggest to increase the sample of the future
studies and can conduct multiple case studies. Furthermore, we suggest to incorporate
market performance measures to measure the company performance.
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profitability: a mixed research method approach. (Doctoral disseratation,
Bournemouth university).
Ajanthan, A., 2013. A Nexus Between Liquidity & Profitability: A Study of Trading
Companies in Sri Lanka. European Journal of Business and Management.
Alarussi, A., 2018. Factors affecting profitability in Malaysia. Journal of Economic
Studies, 45(3), pp. 442-458.
Ben-Caleb, E. O. U. &. U. U., 2013. Liquidity Management and Profitability of
Manufacturing Companies in Nigeria. IOSR Journal of Business and Management,
Volume 9, pp. 13-21.
Bhaskar, B. &. J. C., 2014. Modeling liquidity management for Indian FMCG firms.
International Journal of Commerce and Management, pp. 334-354.
Bulin, S. B. A. &. H. S. M., 2016. Impact of Working Capital Management on Firm’s
Profitability. International Journal of Accounting & Business Management, 4(2), pp.
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Chandrabai. G.V & Praveen. T, 2020. RELATIONSHIP BETWEEN THE

LIQUIDITY AND PROFITABILITY OF SELECT HEAVY ENGINEERING
PUBLIC SECTOR COMPANIES. International Journal of Mechanical and
Production Engineering Research and Development (IJMPERD), June, 10(3), pp.
7303-7314.
Deloof, M., 2003. Does Working Capital Management Affect Profitability of Belgian
Firms?. Journal of Business Finance & Accounting, pp. pp.573-587.
Durrah, O. R. A. J. S. &. G. N., 2016. Exploring the Relationship between Liquidity
Ratios and Indicators of Financial Performance: An Analytical Study on Food
Industrial Companies Listed in Amman Bursa. International Journal of Economics
and Financial Issues.
Eljelly, A., 2004. Liquidity – Profitability trade off: An emperical. International
Journal of Commerce and Management, pp. 48-61.
Garanina, T. &. B. O., 2015. Liquidity, cash conversion cycle and financial
performance: case of Russian companies. Investment Management and Financial
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Hussein, A., 2009. The use of triangulation in social sciences research: Can
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wor,, 1(8), pp. pp.1-12.
Jayarathne, T. A. N. R., 2014 February. Impact of working capital management on
profitability: Evidence from listed companies in Sri Lanka. s.l., s.n., p. 27.
Jeyanthi. J and Ramesh Kumar. K, 2019. Liquidity and Profitability analysis of
Ramco cements limitee. The International journal of analytical and experimental
modal analysis, September, Volume XI(Issue IX), pp. 1442-1450.
Kobika R, 2018. Liquidity management and Profitability: A case study analysis of
listed manufacturing companies in sri lanka. Global Scientific Journals, September,
6(9), pp. 484-494.
Niresh, J. A., 2012. Trade-off between liquidity & profitability: A study of selected
manufacturing firms in Sri Lanka. Researchers World, 3(4), p. 34..
Owolabai, S. A., & Alayemi, S.A., 2004. The Study of Working Capital Management
as a Financial Strategy (A Case Study of Nestle Nigeria PLC). Asian Journal of
Business and Management Sciences, pp. 1-8.
Owolabi, S. A. &. O. S. S., 2012. Liquidity management and corporate profitability:
Case study of selected manufacturing companies listed on the Nigerian stock
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Priya, K., & Nimalathasan, B., 2013. Liquidity Management and Profitability: A Case
Study of Listed Manufacturing Companies in Sri Lanka. International Journal of
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Home Models. Agency for Healthcare Research and Quality, February .

APPENDIXES
Appendixes 1 – Interview Transcription
Interviewer: good morning sir
Interviewee: good morning
Interviewer: can I know your position in the company?
Interviewee: I am the head of finance or we can call as the finance manager of this
company and My duty is managing the overall financial activities of the company.
Interviewer: How many years of experience do you have in your current position?
Interviewee: Since 2018 I have been working here. So, I have one year and three
months' experience so far in this position.
Interviewer: How many years of general experience do you have?
Interviewee: In general, I have 17 years’ experience in the industry. Mainly I have
audit-related experience mostly.
Interviewer: As per your thinking which component of working capital management
is more relevant under the following components. How is it prioritized?
1. Inventory Holding Period
2. Account Receivable Period
3. Account Payable Period
4. Cash Conversion Cycle
Interviewee: Right, we can go one by one here. When talking about the importance
of the inventory holding period to my company, if we sell our products vastly, we
will receive cash immediately. On the other hand, we are in the consumable market,
so we can’t hold our inventory for a longer period of time. If we consider the property
developing industry, those people can hold their inventory even for a one- or two-
years period of time. But we can’t do that. Our cycle is we receive only two months’
credit period from our suppliers. So, we have to match our sales for that and we have
to generate revenue for two months. Our inventory consists of the mainly shoes and
raw materials. That is where mainly we invest our cash. So, we have to forecast our

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

future sales accurately. Otherwise, we will have to face some difficulties to settle the
inventory bills. When we consider our company scenario, we finance our working
capital expenses through short term bank loans. if we are unable to sell our products
on time it’s really difficult to settle those loans. That is an issue of this company
relating to the inventory.
Then the account receivable period, the main issue of our company is the majority of
our debtors are government organizations. So, they give us a plan for a certain period
of time including the products they need from us and their quantities. So, we have to
go according to that plan. Otherwise, their credit period will extend. Assume that they
gave us an order to deliver on the 31st of this month. Sometimes we unable to deliver
the order on time because of our production issues. Sometimes we delivered it but it
is not having expected quality by them. When we deliver the order, they do a quality
inspection and if it is not having enough quality they will return back. That is a bit
time-consuming task. Because of that get delays further to receive our payments. But
we have to settle the payments for our creditors on time. That is a real issue. On the
other hand, we have to refinish that returned order. For that, we have to incur some
additional expenses. It is really difficult to do that without an income. If we can
deliver products on time with the right quality, we will receive our accounts on time
and we can manage our working capital smoothly.
When we talk about the account payable, basically we have a two-month account
payable period for our creditors. We can’t delay some payments such as salaries,
electricity and water bills, etc. So, we have to settle those upfront. As well as some
vendors’ limit provide goods for a credit basis due to the current situation of the
country. So, I face some difficulties to finance those immediate expenses and manage
our working capital cycle.
The last fact is the cash conversion cycle. Since we mostly have credit customers, we
have a bit lengthy cash conversion cycle. So, we must manage our expenses financing
process very carefully. Because our company reaches to the upper limits of the bank
loans, so it is extremely difficult to finance the expenses by bank loans. Generally, I
can’t satisfy with our cash conversion cycle.
Interviewer: Please indicate how to affect the following areas to an effective WCM
in the company
1. Technology (operating/ERP system)
2. Experience and job position
3. Money (Cash position)
Interviewee: These also we can consider one by one. The first thing is technology.
The current technology infrastructure of the company isn’t up to date. We can’t access

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the management information and there is limited information such as what is the exact
product margin, sales forecast information, and so many other things. So, we have to
rethink and update our technology.
Then experience and job position are very important to an effective WCM in the
company. As the finance manager, I always push our director board to increase our
credit period at least for two months and I participate in the debtor’s review meetings
and follow up the collections. Also, I prepare the cash flows on a daily, weekly and
monthly basis and circulate them into the board. Apart from that we usually organize
special sales programs to increase our sales and I negotiate facilities with banks. For
example, in my early days when I was joining this company, they practice documents
against payment method. That means they settle the bills immediately after goods
received from the suppliers. That’s not a good practice. So, I propose them to practice
documents against acceptance. With that method, we receive a credit period. So, we
have some time to generate some income. The experience which I gain trough out my
career definitely helpful for these things.
Interviewer: Do you think that the management of inventory level is important for
increasing the company’s profitability? Why or why not?
Interviewee: Yes. It is highly important. There is a couple of components of the
inventory cost. Those are carrying costs and holding costs. We incur Rs. 14000 per
day as our fixed inventory holding cost. If we manage our inventory more efficiently
definitely, we can reduce the inventory holding cost and increase the company’s
profitability.
Interviewer: Do you think that the management of accounts receivable is important
for increasing the company’s profitability?
Interviewee: Yes. As I said earlier, if we haven’t received money from our debtors,
we have to finance our expenses through bank loans or creditors. At the current
situation of the company, it is a bit difficult. On the other hand, the time value of the
money will reduce when debtors delay their payments. If we receive that payment
quickly, we can invest them and generate some income for the company. So,
managing accounts receivable is so much important.
Interviewer: Does the company set a specific level of accounts receivable period?
Interviewee: Yes. But It depends on the customer. We give more time to settle the
payment for low-risk customers. Such as B2B customers and we don’t give accounts
receivable periods for the high-risk customers. On the other hand, we can’t set a
specific credit period for government organizations as well.
Interviewer: Does the company alter its accounts receivable period frequently?

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Interviewee: No such change happens frequently. But we monitor our customer's

status and if we identify a certain customer is living dangerously, we discontinue or
we limit his credit period.
Interviewer: Do you think that the increase in sales always results in an increase in
profitability. If it is not, why?
Interviewee: The simple answer for this is no. we can’t expect an increase in
profitability all the time when we increase our sales. We can’t expect an increase in
profitability although we increase our sales if the company product margin is very
low. On the other hand, if we sell the products which have a high contribution margin,
definitely we able to increase the profitability by expanding the sales volume.
Interviewer: How to affect accounts receivable management on the profitability of
your company?
Interviewee: When we talk about accounts receivable management, we have to collect
that money as quickly as possible in order to increase profitability.
Interviewer: Do you think that the Management of accounts payable is important for
increasing the company’s profitability?
Interviewee: Yes. Management of credits doesn’t mean we buy all the things on a
credit basis. We have to make a proper mixture of that. As an example, the company
can have creditors such as their suppliers, banks and etc. So, if we manage my
working capital by obtaining bank loans, we have to pay a higher interest rate
compared to the creditors. So, you can understand that it is better to have a credit
period by negotiating with the suppliers rather than financing those things through a
bank loan. So, as a finance manager, I should have to create an appropriate mixture
of the creditors depends on the situation.
Interviewer: Does the company always ask for longer trade credit from suppliers?
Interviewee: We can’t say here as longer trade credit. We request a credit period from
our suppliers when we negotiate with them. So, it is depending on the supplier to
supplier. But it is better to have more credit trade rather than cash on delivery.
Interviewer: Does the company delay in paying suppliers, what kind of effects
generate to the day-to-day transactions?
Interviewee: This has both good and bad effects. There are a few possible reasons for
delaying payments. One is we don’t have money to settle the payments. Some
companies delaying payments for investment purposes. As well as we skip some non-
prioritized payments. So, we have to identify clearly what payments we can delay a
bit and what payment we can’t delay such as salaries for the employees and bank
installments. It shouldn’t badly affect the company’s reputation.

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Interviewer: Do you think that managing the level (Delay payments) of trade payables
increase the company’s profitability? Why or why not?
Interviewee: I don’t think so. Delay payment is a solution for the fund shortage. But
I don’t think it affects much to the profitability. If you are delaying your payments
over your credit period, it isn’t good for the company’s goodwill. But you have to
enjoy your full credit period favorable manner. Delaying payment is a temporary
solution for cash flow management.
Interviewer: Do you think that the management of the cash conversion cycle is
important for increasing the company’s profitability?
Interviewee: Definitely. As I told you earlier, If I can reduce the number of days in
between from production to receive cash for a certain product I haven’t face many
issues. For example, when we consider a service company, most of the services they
offer for a cash basis. So, their cash conversion cycle is zero. They can invest that
money and earn more profits.
Interviewer: Does the company set a target cash conversion cycle?
Interviewee: That doesn’t happen here. But when we negotiate with our credit buyers,
we talk to them and try to collect that money within a certain period of time. But there
is no specific target.
Interviewer: Does the company alter its cash conversion cycle frequently? Does the
company is changed its weekly cash budgets?
Interviewee: As I mentioned earlier, we don’t have a specific cash conversion period.
So, it’s can’t alter. But we give incentives for the debtors if they make their payments
early and if they delayed it, we give them a penalty.
Interviewer: What are the problems that you are facing, while you maintaining a
liquidity position in the company?
Interviewee: The main problem is we can’t request further loans from the banks
because we are in the upper limit regarding the bank loans. So, it is difficult to manage
the liquidity by bank loans. Another problem is we haven’t received the collection
from debtors as I target. As well as the outstanding balance that we have to pay for
our suppliers is high. Other thing is our stock controlling part is weak. They are
holding the outdated inventories and they haven’t proper disposal plan regarding
those types of stocks. These are the practical problems mainly I have faced so far in
this company.
Interviewer: What are the actions that you have made to maintain the company’s
liquidity position?

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 Liquidity Management and Profitability: A Case of Manufacturing Company In Sri Lanka

Interviewee: I have negotiated with different banks to increase our facility (loan
limits). We provide incentives for our debtors if they settle their payments early. As
well as we delayed some payments. We monitor our debtors aggressively and try to
collect those as quickly as possible.
Appendixes 2 – Interview Summery
Respondent 2
When considering the company’s accounting system, experience, and designation of
the management, it is affected in different ways. Company has no fully integrated
ERP system. Therefore, most of the inventory calculations are doing manually. Then
the profitability can be changed through manual inventory movements. Current
system is not capturing some efficiencies and captured efficiencies may be
overestimated. And also, Experience of management more important to manage the
company’s overall activity. When staff is coming up the more experience, it is easy
to manage working capital and other tasks in the company. Moreover, the designation
of the management level is important to manage working capital. Because senior
management level should have more knowledge and skills than the middle and low
level of management.
When considering factors that are affected by the working capital management of the
company, the inventory holding period and accounts receivable period are more
important. Because these factors are link with cash position directly. Furthermore, the
payable period can be managed through negotiations with suppliers.
Currently, the company is in a low liquidity position. Therefore, the company is using
short term loans and long-term loans to manage working capital requirements. A low
cash position is worse for the company's working capital.
Inventory is a key element of the company. Profitability can be changed through the
changing inventory level. The company has a reorder level for inventory. But most
of the time it is changed with the orders. Therefore, the company is purchasing buffers
stock for orders. The company is changing its inventory level after some reasonable
time period. Currently, the company is evaluating its leather inventory once a week.
Because leather is the main raw material of the company. And also, the company is
evaluating another inventory once six months. Currently, the company has a huge
inventory. As a result of the huge stock company loss was recorded as reduced.
The accounts receivable period is directly not linked with the profitability of the
company. There is a direct relationship between sales value and profitability. As well
as there is an indirect relationship between the receivable period and profitability.
Currently, the company is selling its products to the B2B category and Forces
category. The company is offering 60 days credit period for its general customers.

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And also, the company is offering 90 days’ credit period for selected customers,
because of the maintain sales and retention, new customers. Forces collections are
changed with the annual budget. Therefore, that collection will collect between 90 to
120 days. There is no relationship between increasing sales and increasing
profitability at any point. Because other cost elements including fixed costs are
affected by the company’s overall profitability. The company currently put a
provision for over 90 days of debtors, therefore this may be affected by the
profitability in a negative way.
There is no direct or indirect relationship between accounts payable and profitability.
But accounts payable is directly link with working capital. Suppliers are giving 45
days to the company. When all the materials are received to the company fully with
expected quality, the company has to pay its supplier value. The company manages
its creditors through the negations. When delaying payments, the company can
manage its working capital and cash flow. This method helps to manage the day-to-
day liquidity requirements without going to business loans.
The cash conversion cycle is not directly affected by the profitability of the company.
Cash conversion is calculated by using an inventory holding period, accounts
receivable period and accounts payable period. Therefore, the overall cash conversion
cycle is affecting the profitability negative and positive way with the changes in the
above-mentioned factors. The company has no target cash conversion cycle. But the
company has a weekly budget for its weekly expenses. Further, this budget is changed
each week. The company’s weekly collection plan is depending on the above-
mentioned weekly budget.

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