THE RELATIONSHIP BETWEEN CASH GAP AND PROFITABILTY: AN EMPIRICAL STUDY FROM TURKEY

Abstract

Purpose- Cash gap or cash conversion cycle  refers to the time interval between the date when a company pays cash out for the inventory it purchases and the date it receives cash from customers for the same inventory. That interval must be financed.  Management of cash conversion cycle is vital issue in corporate financial management since it directly affects the profitability of the firms. The purpose of this study is to analyze the relationship of cash gap and corporate profitability.

Methodology- The data set includes all manufacturing firms listed in Borsa Istanbul (BIST) for the year 2017. The financial sector firms are excluded since their financial statements have different aspects. Regression and correlation analyses are conducted to examine the relationship between the cash gap and profitability.

Findings- The results of the study evaluate how cash conversion cycle affects the profitability and show if there is a statistical significance between profitability the cash conversion cycle.

Conclusion- Managers of the companies that handle the cash conversion cycle correctly and keep each different component (accounts receivables, accounts payables, inventory) to an optimum level can create profits and seems successful from the views of investors.  The study also contributes to the literature on the issue of relationship between cash gap and the firm’s profitability.

Keywords

• Cash gap,working capital management,profitability,Borsa Istanbul,cash cycle

References

1. Akınyomi, J. O. (2014). Effect of cash management on profitability of Nigeian manufacturing firms. International Journal of Marketing and Technology, Vol.4, Issue 1, January 2014, 129-140.
2. Ebben, J. J., Johnson, A. C. (2011). Cash conversion cycle management in small firms: relationships with liquidity, invested capital, and firm performance. Journal of Small Business and Entrepreneurship, 24(3): 381-396.
3. Lazaridis, I., Tryfonidis, D. (2006). Relationship between working capital management and profitability of listed companies in the Athens stock exchange., http://ssrn.com/abstract=931591
4. Garcia-T., P. J., Martinez-Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, Vol. 3 No. 2, pp. 164-177.
5. Gill, A., Biger, N., Mathur, N. (2010). The relationship between working capital management and profitability: evidence from the United States. Business and economics journal, 10(1), 1-9.
6. Mathuva, D. (2009). The influence of working capital management components on corporate profitability: a survey on Kenyan listed firms. Research Journal of Business Management, Vol 3: pp:1-11.
7. Muscettola, M. (2014). Cash conversion cycle and firms’s profitability: an emprical analysis on a sample of 4226 manufacturing SMEs of Italy. International Journal of Business and Management, Vol.9,No:5, 2014, 25-35.
8. Napompech, K. (2012). Effects of working capital management on the profitability of Thai listed firms. International Journal of Trade, Economics and Finance, 3(3), 227.

9. Uwuigbe, O., Uwuigbe, U., Ben-Caleb, E. (2012). Cash management and corporate profitability: a study of selected listed manufacturing firms in Nigeria. Acta Universitatis Danubius: Oeconomica, 8(1).
10. Zakari, M., Saidu, S. (2016). The impact of cash conversion cycle on firm profitability: evidence from Nigerian listed telecommunication companies. Journal of Finance and Accounting, 4(6), 342.