A CASE STUDY ANALYSING THE IMPACT OF VARIOUS WORKING CAPITAL CYCLE PATTERNS ON FIRM PROFITABILITY

Abstract

Theoretically, the relationship between working capital cycles and profitability is negative, so if a company has excess liquidity and a lengthy cash conversion cycle (CCC), this may have a negative impact on its profitability. Thus, optimal working capital policy is recommended by previous studies. This study empirically analyses impact of practising the various working capital cycle policies and liquidity levels can have on the profitability of a business. For this, the financial data of Britannia Industries Limited (Britannia) over a 32-year period starting from 1889-90 to 2020-21 found most suitable, so it is categorised into three phases, where phase 1 represents a negative CCC policy (GWCC<TPC= - CCC), phase 2 represents a positive CCC policy (GWCC>TPC= + CCC), and phase 3 represents either zero CCC policy or a combination of both of the above (GWCC=TPC). Moreover, to empirically investigate the financial data of all three phases, descriptive statistics and inferential statistics are applied. The findings confirmed that the working capital cycle policy has a positive impact on Britannia's profitability in Phase 1, where the Current Ratio (CR) is at lowest. Britannia's profitability significantly affects negatively in Phase 3, where the CR is at highest. Moreover, the profitability is significantly unaffected in Phase 2, where CCC is positive, and CR is reported 1.10 on average, which means that the current assets are almost entirely financed by current liabilities. Therefore, it can be said that Phase 1 may be good in terms of profitability and Phase 3 may be good in terms of liquidity, but the strategy of Phase 2 is the best because during this phase, the company is able to nullify the impact of liquidity on profitability, implying an optimization of liquidity position and efficient use of funds.