Abstract:
Working Capital (WC) is reckoned as the animating spirit of an entity's concern.
Consequently, it is imperative to accommodate the smooth running of operations in any
organization. Yet the non-banking financial sector encountered many issues regarding
managing cash as a component of WC and there is no consensus in the literature
regarding the link between Working Capital Management (WCM) and financial
performance. Hence, the objective of this study is to examine the impact of working
capital management on the financial performance of non-banking financial institutes in
Sri Lanka. WCM was measured using creditor’s payment period, debtors’ collection
period, cash conversion cycle, current ration, and financial performance was measured
using the return on assets and return on equity. Data were extracted from the annual
reports of non- banking financial institutes covering a period of eight years from 2011 to
2018. Ten non- banking financial institutes out of 63 were considered as the sample based
on the Fitch ratings. Data were analyzed through the Eviews statistical software using
Pearson correlation and random effect panel regression model. The results reveal that
there is a significant negative relationship between the debtor’s collection period and
financial performance. Further, it exhibits an insignificant positive relationship between
creditors’ payment period and cash conversion cycle and finally found that there is a
significant positive relationship between the current ratio and financial performance. In
line with the above findings, it is recommended that the non-banking financial institutes
maintain a shorter debtor’s collection period as much as possible and a higher current
ratio to enhance the financial performance. Further, it is recommended to adopt a
conservative working capital strategy while paying a higher attention to the current ratio
as the most affecting factor to the financial performance of non- banking financial
institutes in Sri Lanka.
Keywords: Working Capital Management (WCM), Financial performance, Return on
Assets (ROA), Current ratio and conservative strategy
