The Impact of Working Capital Management on Profitability: Evidence from Listed Companies in Sri Lankan Consumer Staples Sector.

This study aims to investigate the impact of Working Capital Management on Profitability with special reference to the Consumer Staples Sector firms in Sri Lanka. Further, this sector displayed a considerable growth potential in Sri Lanka. This study is adopted in a quantitative research approach. Data were drawn from a sample of 46 Consumer Staple Sector firms listed in the Colombo Stock Exchange (CSE) for a period of five years commencing from 2014/2015 to 2018/2019. To test the hypothesized relationships between the constructs, the panel data analysis is performed using STATA. The study found that the Inventory Conversion Period has an insignificant negative impact on Profitability. Receivables Collection Period negatively and significantly impact the Profitability. Further, the study observed that the Payables Settlement Period has an insignificant positive impact on Profitability and observed a significant positive impact of the Current Assets Ratio on Profitability. The findings are useful to investors, managers and shareholders when making decisions regarding the firm’s profitability under aforementioned sector. This study is a contribution to the existing body of knowledge on Working Capital Management and it impact on the Profitability of listed companies in the Sri Lankan Consumer Staples Sector since the researchers used the recent data in the data analyzing process. Further, this paper is limited to the analysis of data obtained for five years by forty-six companies only. The time period and sample can further be increased by future researchers in order to broaden up the scope of the study.


INTRODUCTION
Investors all over the world invest their money in a business to get some return on their investment in different forms of business. In small and medium businesses like proprietorship and partnership owners have direct or indirect control over the management of the business. Therefore, they are responsible for all the profits and losses. On the other hand, in the large multinational companies, the managers of the company manage the affairs of the company on behalf of owners and owners of the company need management to take such decisions which will give positive signals to the market, increase the value of the firm, and enhance the profitability. In order to fulfil these expectations, managers should pay attention to maintain their daily operations smoothly. This means they should keep eye on the concept of Working Capital Management. Hence, Working Capital Management is the method a company manages the relationship between assets and liabilities in the short term. The primary objective of Working Capital Management is to enable the company to maintain an adequate cash flow to meet its short-term debts. Therefore, Working Capital Management is an essential concept for every business organization to run its business efficiently. Every business organization in the world highly considered about the concept of Working Capital Management. But currently, e most of the businesses are faced with Working Capital Management issue due to the COVID-19 outbreak. According to Singhania and Mehta (2017), Working Capital is a measurement of operating liquidity, and it describes the short-term position of a company. Further, the inefficient handling of working capital can decline the strength of the entity. Financing decisions that are taken in the short-term, are the basis for the working capital management efficiency and it is necessary for maintaining a proper balance between liquidity and profitability of a firm. Moreover, WCM is all about managing current assets and current liabilities (Panda & Nanda, 2018). WCM is the day-to-day function of all management decisions that affect the size and effectiveness of the working capital (Kaur, 2010).
And the Profitability is the ability to make a profit from all the business activities of an organization. It shows how efficiently the management can make a profit by utilizing all the resources available in the organization (Sandhar & Janglani, 2013). Maintaining liquidity on daily basis in business operations is crucial. It is a difficult task for managers to make sure that the business is running in a well-organized and advantageous manner. There are inclinations for inequality of current assets and current liability which affects a firm's growth and profitability. Thus, the importance of Working Capital Management cannot be overemphasized in corporate finance due to its direct effect on the liquidity and profitability of the firm.
Therefore, this study is to investigate the impact of Working Capital Management on Profitability with special reference to the Consumer Staples Sector firms in Sri Lanka. Consumer Staples Sector is created to group together all the industries that consumers rely on for everyday necessities. Recently, the Sri Lankan market is boosted by gains in consumer staples by displaying considerable growth potential regarding the Consumer Staples Sector. According to the Global Industry Classification Standard (GICS) Lyngstadaas and Berg (2016) also found the result which is similar to the (Deloof, 2003). Recent research conducted by Kwatiah & Asiamah (2020) have found that inventory management, account receivables, account payables, cash conversion cycle, e current asset, current ratio, and firm size have positive effects on return on assets (ROA) and return on return on equity (ROE) whilst leverage affects them negatively. Further, the most recent study conducted by Alvarez, Sensini, and Vazquez (2021), also found a positive and statistically significant relationship between all components of Working Capital and Profitability. However, Makori and Jagongo (2013)  Further, the findings of this study will be beneficial to several stakeholders such as creditors, shareholders, and management of the selected firms when making decisions regarding the firms' profitability. Through this study, creditors can know whether these organizations are maintained an adequate fund to settle their payables or not. The management of the selected firms will have a better understanding of the firms' current working capital management and their profitability. To the shareholders, this study will be provided a better idea about the importance of working capital management as a critical component of profit generation.
From the academic perspective, in the Sri Lankan context, there's a lack of knowledge regarding this subject matter, especially in the Consumer Staples Sector. Thus, this study will be seen as a contribution to the existing body of knowledge on working capital management and its impact on the profitability of listed companies in the Sri Lankan Consumer Staples Sector. So, this effort will fill the knowledge gap in this area of study.
The paper proceeds from the above introduction with sections organized as follows: next section presents the review of related literature, followed by research methods, findings and discussion. Finally, it presents the conclusion.  Lazaridis and Tryfonidis (2006) Deloof (2003), Garcia-Teruel and Martinez-Solano (2007). Moreover, Tran, Abbott, and Yap (2017 ) have reported a similar result based on a sample of 200 Vietnamese SMEs. On the contrary, Gill, Biger, and Mathur (2010) Lazaridis and Tryfonidis (2006); Garcı´a-Teruel and Martı´nez-Solano (2007). Which means if a firm required more time to convert their inventory into cash their Profitability will be lower. However, research conducted by Gill, Biger, & Mathur (2010) and Alvarez, Sensini, & Vazquez (2021)have found a positive relationship between Inventory Conversion Period and Profitability.

Impact of receivables collection period on profitability
Samiloklu and Demirgu.ns (2008)

Relationship between Receivable Collection
Period and the Profitability is the important for the firms. The shorter the Receivable Collection Period, helps firms to be proactive in settling all payments and to broaden the investment opportunities in other projects to make a profit. Previous researches conducted by Deloof (2003)

Impact of payable settlement period on profitability
Research conducted by Garcia-Teruel and Martinez-Solano (2007) on the Effects of Working Capital Management on SMEs' Profitability is based on the panel of 8,872 SMEs for the period from 1996 to2002. The effect of Working Capital Management on SMEs' Profitability was tested by using the panel data methodology. The authors were unable to confirm that the Number of Days Accounts Payable affect SME's Return on Assets. Because they lost significance when they control for possible endogeneity problems. Gill, Biger, and Mathur (2010) Kwatiah and Asiamah (2020) with regards to the listed manufacturing firms in Ghana also reported a similar result.
The lower the Payable Settlement Period, the better the solvency of the enterprise is, the less it takes the working capital of other businesses and increases the reputation of the firm. Therefore, it shows the profitability of businesses in the future. However, the higher the Payable Settlement Period helps to increase the profitability in short term. As per the previous researches, researchers have found that the Payable Settlement Period has the positive relationship between Profitability Kwatiah & Asiamah (2020). And several studies were concluded that they were unable to confirm the relationship between Payable Settlement Period and Profitability Garcı´a-Teruel & Martı´nez-Solano (2007) and Gill, Biger, & Mathur (2010). Lyngstadaas and Berg (2016) have conducted research on Working Capital Management in Norway based on a sample of 21,075 Norwegian SMEs covering the period of 2010-2013 from using Panel Data treatment with fixed effect regression. They have found a negative relationship between Cash Conversion Cycle and Return on Assets. However, Abuzayed (2012) has conducted research on Working Capital Management and firms' performance in emerging markets with reference to Jordan. The study is based on a sample of listed firms in Jordan for the period from 2000 to 2008. This study has found that Profitability is affected positively by the Cash Conversion Cycle by using several estimation techniques such as panel data analysis, fixed and random effects, and Generalized Methods of Moments(GMM). The equal results have obtained from previous research conducted by Gill, Biger, and Mathur (2010) and Sharma and Kumar (2011) with reference to the USA and India respectively. The most recent research conducted by Kwatiah and Asiamah (2020) with regards to the listed manufacturing firms in Ghana also reported a similar result. Furthermore, recent research has conducted by Alvarez, Sensini, and Vazquez (2021) on impact of Working Capital Management on the Profitability of Argentine manufacturing firms and they have found a positive relationship between CCC and Profitability.

Impact of cash conversion cycle on profitability
Therefore, most of the previous researchers have found that the firms have the positive relationship between Cash Conversion Cycle and Profitability.

Impact of current assets ratio on profitability
Most of the studies have conducted by previous researchers did not pay much attention to the Current Assets Ratio in their studies. According to the previous literature, Lyngstadaas and Berg (2016) have found a positive significant relationship between Current Assets Ratio and Profitability in their study regarding Working Capital Management in Norwegian SMEs. Similar results were found in the most recent research conducted by Kwatiah and Asiamah (2020) with regards to the listed manufacturing firms in Ghana. On the contrary, some researchers have found a negative relationship between Current Assets Ratio and Profitability in the Sri Lankan context. For instance, Jahfer (2015) has found that the Current Asset Ratio is having a negative association with Profitability with reference to the research on the Effects of Working Capital Management on Firm Profitability in manufacturing companies listed in CSE in Sri Lanka. In addition to that, Anandasayanan (2011) has found a significant negative relationship in research on Current Assets Ratio and Corporate Profitability with regards to the quoted public companies in Sri Lanka. Moreover, Current Assets Ratio is used as a control variable in these studies.
As per the previous researches, most of the studies have found that the Current Asset Ratio has the positive relationship with the Profitability. But in Sri Lankan context, most researchers have found the negative relationship between Current Asset Ratio and the Profitability. e Empirical studies in sri lanka Anandasayanan (2011) (Aminu & Zainudin, 2015). However, in this study, the Cash Conversion Cycle Theory has been considered.

Cash conversion cycle theory
The Cash Conversion Cycle theory was developed by Richards & Laughlin, (1980). They have explained how firms can ensure a shorter operation cycle to reduce the implications of poor Working Capital Management. Hence, this measures the length of time between a company's purchase of inventory and the receipts of cash from its account's receivables. The Cash Conversion Cycle theory can be used by the management of firms to forecast how long a firm's cash remains tied up in its operations. The Cash Conversion Cycle theory is the core theory that explains Working Capital Management concerning all concepts and components, spanning from raw materials to finished products and outputs indicating inventory levels as well as to receivables, payment, and the cash component (Kwatiah & Asiamah, 2020). The Cash Conversion Cycle analysis provides more clear insights for managing a firm's working capital position in a manner that will assure the proper amount and timing of funds available to meet a firm's liquidity needs.

RESEARCH METHODS
The main objective of this research is to determine the impact of Working Capital Management on the Profitability of listed companies in the Sri Lankan Consumer Staples Sector. The research is mainly a correlational study that focuses on testing hypotheses. To achieve the research objectives, the researchers have followed by a positivism research paradigm and used the deductive reasoning approach. Moreover, this research was performed in a quantitative research approach since it is used quantitative research methods for data analysis purposes.

Data and sample
Sharma and Kumar (2011) India Jahfer (2015) Sri Lanka Products. This study is adopted to the total population as the sample of the study. Accordingly, the current study is performed as a population study. Six companies were removed from the total population (52 firms) due to unavailability of data. Therefore, final sample consists of 46 consumer staple sector companies which are listed in the CSE. The present study is collected data at the firm level and used the secondary data from the audited annual reports of sample companies for a fiveyear period commencing from the financial year 2014/2015 to 2018/2019 which provided the panel of 230 observations.  (Kwatiah & Asiamah, 2020). Figure 1 presents the conceptual Framework of the study. e

Figure 1: Conceptual Framework
Accordingly, based on the conceptual framework following hypotheses were developed to achieve its research objectives. Five hypotheses were named as A, B, C, D and, E to clear identification.

The empirical models
To achieve the purpose of the study, present study has employed panel data analysis. In order to justify the most appropriate panel data analysis model from pooled OLS, Fixed Effect, and Random Effect Models, the F Test, LM Test, and Hausman Test were used. Therefore, the study found the fixed-effect model as the best-suited model for ROA and GOP. Accordingly, regression equations are illustrated for both ROA and GOP as below.
(1)ROA it =β 0 +β 1 ICP it +β 2 ARP it +β 3 APP it +β 4 CAT it +β 5 FSIZE it +β 6 SGROWTH it +ε it i (2)GOP it =β 0 +β 1 ICP it +β 2 ARP it +β 3 APP it +β 4 CAT it +β 5 FSIZE it +β 6 SGROWTH it +ε it ii Accordingly, ICP used as the proxy for the Inventory. The efficient management of inventory ensures a stable working capital. Therefore, the researchers used ICP in order to measure its impact on Profitability. ARP is used as a proxy for the Accounts Receivables. Proper maintenance of account receivables provides additional importance and efficient collection of accounts receivables to determines both profitability and liquidity of the firm. APP used as a proxy for Accounts Payable which is a partial component of the Working Capital Management. Therefore, Accounts Payable is ultimately supported to measure the efficiency of Working Capital Management. CAT is used as the independent variable, and it is an important measure of liquidity. Using above mentioned proxies provide support to test the research objectives in an accurate manner. Further, the researchers used widely applied two measurements of Profitability: ROA and GOP. These measurements are used by the previous influential studies conducted by (Deloof, 2003) , (Lyngstadaas & Berg, 2016) , (Altaf & Shah, 2018) and, (Kwatiah & Asiamah, 2020).
Also, to reduce the potential biases on results, the researchers control the firm characteristics including Firm Size and Sales Growth. The selection of the control variables is based on the previous research conducted by (Charles, Ahmed, & Joshua, 2018). According to Charles, Ahmed, and Joshua (2018), explained Firm Size and Sales Growth are significant determinants of Profitability. Therefore, to reduce the potential biases on results, the researchers control the firm characteristics including firm size and sales growth. Most researchers used the natural logarithm of total assets or the natural logarithm of sales to measure the firm size, for instance; (Sharma & Kumar, 2011;Tran, Abbott, & Yap, 2017 ;Kwatiah & Asiamah, 2020). But the current study, Profitability (Dependent Variable) is measured through ROA and the second control variable (Sales Growth) is measured by sales. Therefore, to eliminate the correlation issue firm size is measured by the natural logarithm of market capitalization instead of using the natural logarithm of total assets or the natural logarithm of sales.

FINDINGS AND DISCUSSION
This study analyzed the data using panel data methodology iii . With the selection of the appropriate model, this study used the descriptive statistics to identify the behavior of the entire variables of the study. Further, study used an inferential statistic, correlation, and multiple regression analysis to check the direction, strength, and significance of all variables in the study.

Descriptive statistics
According to With the selection of the fixed-effect model as the best-suited model for ROA and GOP, this study tested four main assumptions of panel data analysis: testing multicollinearity, heteroscedasticity, autocorrelation, and crosssectional dependence to confirm that the data fits the basic assumptions of the regression model.
In this study, the researchers tested the correlation between the ICP, ARP, APP, CCC, and CAT. And also, tested with the Firm Size and Sales Growth (Control Variables). However, the researchers obtained the multicollinearity issue between CCC and ICP, CCC and ARP.As a remedy for that, researchers removed CCC from the model. e  After removing the high correlated variable from the model, the researcher runs the model without the highly correlated variable. Thus, the researchers obtained the tested result without the multicollinearity issue. Accordingly, all correlations valued in the correlation matrix table 3 are much closer to zero. This means there is no issue of multicollinearity, thus enhanced the reliability for regression analysis. (Table 3 presents the matrix of correlation of the study.) In order to test the heteroscedasticity for ROA and GOP, this study used the Modified Wald test for Groupwise heteroskedasticity. According to the results, the test rejects the null hypothesis and concluded heteroscedasticity as P-value is less than 0.05 (P=0.0000).
The Researchers run the "Wooldridge test" to check the Autocorrelation for ROA. According to this output, the null hypothesis where there is no serial correlation in the model has been accepted, since the Prob > F = 0.0666 which is higher than 0.05. Therefore, the result concludes that this model has no serial correlation (Autocorrelation). The Researchers also run the "Wooldridge test" to check the Autocorrelation for GOP. According to this output, the null hypothesis has been rejected, since the Prob > F = 0.0000 which is less than 0.05. Hence, the result concludes that this model has serial correlation (Autocorrelation).
In order to test the cross-sectional dependence for ROA and GOP, this study used the Pesaran test. The results of this test concluded crosssectional dependence as p values for ROA and GOP are less than 0.05 which is 0.0001for both models.

Regression results for ROA
According to the regression model (Table 4), e the P value is 0.0000 which is less than 0.05. Thus, the overall model is statistically significant. In this study, the R square value is 0. 3551. This means 35.51 % variance of profitability is explained by ICP, ARP, APP, CAT, FSIZE, and SGROWTH. However, 64.49% of the variance of profitability is explained by other variables that are not included in this study.

Regression results for GOP
According to the regression model (Table 5), P-value is 0.0000 which is less than 0.05. Thus, the overall model is statistically significant. In this study, the R square value is 0. 6383. This means 63.83% variance of profitability is explained by ICP, ARP, APP, CAT, FSIZE, and SGROWTH. However, 36.17% of the variance of profitability is explained by other variables that are not included in this study.
The coefficient value for ICP is -0.0003. That means increasing one day of ICP causes to decrease GOP by 0.0003, while other independent variables remain constant. This result is not significant at any level. Therefore, HA1 is not supported. Accordingly, there is negative insignificant impact of ICP on Profitability (GOP). According to the regression model, the coefficient value for e ARP is -0.0008. That means increasing one day of ARP causes to decrease GOP by 0.0008, while other independent variables remain constant. Result is significant at 1% level. Therefore, this study concluded that there is a significant negative impact of ARP on Profitability (GOP). Above hypotheses testing was made based on the significance level of the relationship between the dependent variable and the independent variables. Hypotheses tested by using the P-value (significant value) of each coefficient of independent variables. The confidence interval of accepting hypotheses is 95%. To achieve this confident interval, Pvalue should be equal to or less than 0.05. If it is not equal to or less than 0.05 alternative hypothesis is not supported. Accordingly, this study found several findings after the testing developed hypotheses. The study found that the Inventory Conversion Period has negative but insignificant impact on Profitability (both ROA and GOP). This means if a firm has lower ICP it caused to increase the Profitability. This is good for the firms, and they can utilize their cash in profit generating activities and can reduce the other cost relating to the inventory maintenance. Therefore, Consumer Staples Sector firms should pay more attention on reducing the ICP to obtain more profitability. This result is aligned with the research conducted by (Garcı´a-Teruel & Martı´nez-Solano, 2007) and (Gill, Biger, & Mathur, 2010). Even though, this result is consistent with the aforementioned researches, but it is differing with the recent study conducted by (Kwatiah & Asiamah, 2020 Moreover, the study observed that the Payables Settlement Period has an insignificant positive impact on Profitability. This is good for the companies in short term. But when it comes to the long term, if a firm can pay their debts easily rather than taking more time, they can enhance the trustworthiness with their suppliers and can build a good reputation among them. This would be more beneficial to get more profitability in future. The same results were obtained by (Gill, Biger, & Mathur, 2010). However, this result is contradictory to some previous studies in literature. Because most of researchers found that APP has a negative impact on Profitability for instance: (Deloof, 2003); (Lyngstadaas & Berg, 2016;Tran, Abbott, & Yap, 2017 ). Other than these findings, the researchers were unable to confirm the impact of Cash Conversion Cycle on Profitability since the variable was removed due to the multicollinearity issue. And finally, the researchers found that there is a significant positive impact of the Current Assets Ratio on Profitability. Current Asset Ratio is rarely used by previous researchers in their studies. And this result was confirmed by the previous studies conducted by (Lyngstadaas & Berg, 2016) ,and (Kwatiah & Asiamah, 2020