Cash Conversion Cycle and Firm Performance in Nigeria: A Sectoral Analysis

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue VI, June 2022 | ISSN 2454–6186

Cash Conversion Cycle and Firm Performance in Nigeria: A Sectoral Analysis

NWOKOYE, Gladys Anwuli (Ph.D)
University of Benin, Edo State, Nigeria

ABSTRACT

This paper sought to investigate the effect of cash conversion cycle proxied as: days inventory turnover (DIO), days payables outstanding (DPO) and days sales outstanding (DSO), on the performance of quoted firms in two sectors in Nigeria. This was done within a multivariate framework, using pooled OLS and multivariate panel regression technique and with data that covered the 2010 to 2020 reference period. The results obtained were generally well behaved in that they largely conform to presumptive expectations. The empirical evidence show, for example, that days inventory turnover (DPO) and days sales outstanding (DSO) affect movements in firm performance negatively among firms in the consumer goods sector, though only the DSO variable show significant impact. The same variables affect the sampled firms in the manufacturing sector differently. Results show that the days payable outstanding (DPO) and the days sales outstanding (DSO) variables affect performance of the sampled manufacturing firms positively but insignificant and significantly negative impact respectively. The days inventory turnover variable on the other hand, was found to show positive and significant effect on performance of firms in the consumer goods sector, whereas, it affects the sampled firms in the manufacturing sector negatively but in a significant manner. The outcomes therefore suggest the need for optimal cash conversion cycle policy such that has growth tendencies as options. Strategies recommended to abate or minimize the risk of losing sales and customer loyalty include: optimal working capital, improved liquidity, offer of trade credits, proper monitoring of inventory and repayment periods to guarantee enhanced firm performance.

Keywords:  Cash Conversion Cycle, Days Inventory Outstanding, Days Payable Outstanding,      Days Receivable outstanding and Firm Performance

1.0    INTRODUCTION

Working capital management decision is core to financial management as it is essential to the survival of any organization; it impacts on the firm’s profitability and liquidity risk, and consequently its value (Hossain, 2020). Working capital management is a simple mechanism for ensuring the ability of the firm to fund the difference between short-term assets and short-term liabilities. However, liquidity and profitability are two sides of the same coin because they work in opposite directions. Increasing the liquidity of the firm will reduce the profitability of the firm and vice versa (Hoang, 2015).

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