The relationship between cash gap and profitability: an emprical 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 and merchandising 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 evaluates 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.