INFLUENCE OF WORKING CAPITAL MANAGEMENT
ON PERFORMANCE OF RUSSIAN WHOLESALE BUSINESSES

SVETLANA MAKAROVA
LOMONOSOV MOSCOW STATE UNIVERSITY, ECONOMICS FACULTY
SVTLMAKAROVA@GMAIL.COM
YELENA YERMAKOVA
LOMONOSOV MOSCOW STATE UNIVERSITY, ECONOMICS FACULTY
EEVPNZ@YANDEX.RU


Abstract. The present study analyses the influence of cash conversion cycle and its components on the profitability of Russian wholesale businesses. Conventional theory implies that a shorter cash conversion cycle benefits the business, a claim supported by numerous empirical studies, with some research, however, suggesting otherwise. The present paper uses regression analysis of panel data including 1 323 observations of 189 Russian wholesale businesses for the period of 7 years from 2009 to 2015. Linear econometric model results confirm that cash conversion cycle length is inversely related to profitability. Moreover, the paper makes an empirically based argument for managing each component of the cycle and demonstrates a negative influence of high levels of financial constraint and working capital ratio on profitability and a positive influence of company size, revenue and GDP growth rates.

Keywords: working capital management, cash conversion cycle, profitability, wholesale trade

JEL Classifications: G30, G31, G32

 

MAKAROVA, SVETLANA. YERMAKOVA, YELENA (2016) "INFLUENCE OF WORKING CAPITAL MANAGEMENT ON PERFORMANCE OF RUSSIAN WHOLESALE BUSINESSES". Journal of Russian Review (ISSN 2313-1578), VOL. 1(4), 24-36.

 


1. Introduction

 Working capital management is a subject fairly well-covered in scientific literature both in Russia and internationally. Many empirical studies have shown that working capital management does have a significant impact on a company’s profitability [Shin and Soenen, 1998; Deloof, 2003; Lazardis and Tryfonidis, 2006; Banos-Caballero et al, 2014; Garanina, Petrova, 2015]. However, the influence of cash conversion cycle and its components on profitability, also detected by these empirical studies, has not been examined.

Working capital management is very important in wholesale trading. One characteristic feature of this type of business is a higher current asset to total asset ratio [Banos-Caballero, Garcia-Teruel, Martinez-Solano, 2012]. It also has a longer net trading cycle, compared to other lines of business [Banos-Caballero, Garcia-Teruel, Martinez-Solano, 2012]. Moreover, wholesale businesses tend to have extensive inventories, often numbering thousands of items, high goods volume, substantial number of suppliers and customers, all of which makes the management of inventory, accounts receivable and accounts payable absolutely essential. Wholesale businesses sell their goods under deferred payment conditions to large numbers of various customers. They work with store chains, wholesale buyers and large and small retail customers. In this sphere it is vital to have a sound commercial lending policy for all sorts of debtors. This involves questions of payment deferral, full or partial down payment, and commercial discounting, but the most challenging issue is that of managing, as well as collecting, receivables of individual counterparties, since wholesale businesses work with large numbers of consumers. Such businesses run a very high risk of late payment by counterparties and uncollectable receivables, especially if they deal with small retailers. Therefore, for this kind of business, developing and implementing a commercial lending policy is the foundation of its profitability, growth, stability, and continuous liquidity. In addition to that, prioritising customer-friendly pricing, high customer service rate and quality, and long-term relationships with customers are all factors in its competitiveness.

Big wholesale firms are purchasing goods from a large set of manufacturers, which also enhances their competitiveness. In dealing with suppliers it is equally important to have a comprehensive policy. A wholesale business must, first of all, be scrupulous in analysing offers from suppliers of parity products, picking those that offer the greatest deferral of payment. Due to the special nature of wholesale business and the fact that it works with large numbers of consumers it is important to manage payables, to prevent debtor delays. Otherwise the company might damage its relationship with the suppliers, find itself on a stop-list with the next shipment, or be forced to pay penalties, fines, or delinquency charges. In matters of payables management, the most useful tool is, undoubtedly, an IT system.

Thousand-strong inventories of goods purchased and sold by wholesale businesses demand higher logistics standards. It is especially important for businesses of this type to achieve greater accuracy in planning their inventory and sales volume, to adjust their procurement to consumer demand, to take timely inventory, to detect surplus inventory, preventing additional purchase of stock and, whenever possible, disposing of it, even at a significant discount, because of ongoing storage costs. For wholesale businesses, efficient inventory management is likewise a key competitiveness factor. Investment in low turnover assets forces a company to ‘bind’ its capital resources for too long, while driving up its storage and insurance costs, and introducing losses due to shrinkage, wantage, spoilage, depreciation etc. In the meantime, being unable to stock an in-demand product might force its clients to switch suppliers. It is necessary to evaluate individual inventory positions for storage efficiency and consumer demand. The task is often made more difficult by individual products having short shelf life or special storage requirements. This is the reason why wholesale business managers are imposing rates of stockturn and making sure their companies adhere to them. A wholesale business tries to keep in stock a wide range of goods to satisfy the demands of a wide range of consumers, while making the necessary profits. Managing one’s working capital gets particularly important in developing markets, owing to the fact that companies operating in developing markets are, on average, smaller in size, have a higher rate of debt arrears and less access to long-term financing [Abuzayed, 2011], which places greater emphasis on financing through trade credit.

Therefore, it seems important to determine in what way cash conversion cycle and its components influence the profitability of wholesale businesses. Such a study may allow one to determine how and to what extent a business can enhance its profitability by making its cash conversion cycle shorter. Moreover, it will show the relative importance of managing individual components of the cash conversion cycle.

2. Results of research into the effect of cash conversion cycle management on performance

 There are differing opinions on how efficiency of working capital management influences business performance. The conventional theory holds that a shorter cash conversion cycle benefits the company. This view is supported by numerous empirical studies. For example, Shin and Soenen, 1998; Deloof, 2003; Garcia-Terual and Martinez-Solano, 2007; and Gill, 2010 come to the conclusion that cash conversion cycle is inversely related to return on assets. This relationship was observed throughout different markets and time periods.

In particular, Shin and Soenen, 1998 used a sample of 58 985 US companies from 1974 to 1994 to show that cutting net trade credit increases profitability of the company. Even before that, L.A.Soenen, in 1993 was pointing out that one of the major factors in bankruptcy was low efficiency of working capital management.

Deloof, 2003 also detected a significant inverse relationship between cash conversion cycle and profitability. Analysing the length of cash conversion cycle, as well as that of its individual components (accounts receivable, inventory), in a sample of 1009 large Belgian nonfinancial companies for a period of 1992 to 1996, the study concludes that there is a statistically significant inverse relationship between profitability and working capital and its components turnover (in days). Deloof uses these results to recommend that companies cut their DAR (days accounts receivable) and DI (days inventory) parameters. It also notes that less profitable businesses have to wait longer for settlement.

The hypothesis that longer cash conversion cycle has a negative effect on company value is also confirmed by Enqvist, 2014. The study was using a sample of 1136 observations of businesses traded on the Helsinki Stock Exchange from 1990 to 2008.

A 2015 study by Garanina and Petrova, who used a sample of 720 Russian companies from different industries from 2005 to 2013, also found that for companies with positive cash conversion cycles an increase in CCC length must lead to a decrease in profitability. However, for companies with negative cash conversion cycles the relationship is reversed. Therefore, the study suggests that to increase profitability businesses should aim for a zero-length cash conversion cycle.

However, some empirical studies have been arriving at an opposite conclusion. For example, studying nonfinancial companies publicly traded at the Amman Stock Exchange from 2000 to 2008, Abuzayed, who had considered businesses that efficiently manage their working capital to be more profitable, nevertheless, found a direct association between cash conversion cycle and its components’ length on the one hand and the business’s profitability on the other hand. This, the researcher suggested, was due to the fact that flourishing businesses have fewer incentives, and therefore are less likely, to engage in working capital management.

A 2013 paper by Leyevik and Vorobyova arrived at the same conclusions by studying a sample of 1065 Russian food manufacturing businesses. Its authors offered two possible explanations for the observed significant direct CCC-profitability association. One is, that shortening their cash conversion cycle might not be the preferred source of financing of the sampled companies. The other is that more profitable businesses might afford more relaxed payment time limits for their customers, larger inventories and longer storage times, and early payments to their suppliers.

Such results, although controversial, have a certain logic behind them. On the one hand, high level of working capital can improve financial performance for a number of reasons. For example, having an easy credit policy stimulates sales (Banos-Caballero, 2010), promotes long-term relationships with clients (Ng, 1999), and guarantees quality of products (Lee, Stowe, 1993). Having a large inventory prevents supply problems (Blinder and Naccini, 1991), lowers the risk of price fluctuations, minimises revenue losses from potential material shortages.

Yat, high levels of investment in working capital can have a negative effect of binding the finances that could otherwise be recycled and generate profit. As noted by Soenen, active investment in working capital may even cause bankruptcy, since financing it leads to higher expenditure and credit risk for the company. Favourable terms for receivables may lead to losses from increased volume of overdue debts, as well as from increased prompt payment discounts. Experiences of contemporary Russian businesses confirm that a lot of companies go bankrupt over errors in their management of accounts receivable and late payments by counterparties. Another negative effect is the fact that storing large inventories drives up expenses like rent and building security (Kim and Chung, 1990). Moreover, as noted by Autikaite and Molay, 2011, an increase in the volume of working capital means it has to be financed. Therefore, high level of working capital makes a company more dependent on external financing, increasing its financial expenses and risks, which makes financing it through stockholders and creditors more expensive. Ganessan, 2007 also concludes that increased investment in working capital leads to increased financing requirement and higher cost of capital. This negative effect of working capital investment on company value is also clear to Moussawi et al, 2006.

In summary, existing research offers no unified opinion on what influence cash conversion cycle length and quality of management of individual working capital components can have on a company’s financial performance and profitability. Therefore, the present empirical study undertakes to identify the effect of receivables and payables management on the key financial indices of wholesale businesses, and to determine the nature of the effect that the length of cash conversion cycle has on profitability of firms in this industry.

3. Hypotheses

The present empirical study would test the following hypotheses:

Hypothesis 1: Days accounts receivable (DAR) and days inventory (DI) values have a significant and negative effect on the profitability of a wholesale business, while days accounts payable (DAP) has a significant and positive effect.

Hypothesis 2: Cutting the length of the cash conversion cycle has a significant and positive effect on the profitability of a wholesale business.

4. Time period

The study analyses a period of 7 years, from 2009 to 2015. This was chosen because picking a balanced sample over a longer time period would have meant too few businesses to consider. Conversely, choosing a shorter time period would have given more companies, but these would include very short-lived businesses into the sample, which would make the CCC-profitability association unstable.

The original sample included 196 wholesale companies (Russian Industry Classification codes G 51, 50.10.1, 50.10.3, 50.40.1, 50.40.3, 50.30.1, 50.30.3, 50.40.1, 50.40.3). Eliminating extreme values narrowed the list down to 189 companies. Therefore, the number of observations for this study was 1323.

5. Principal and complimentary factors of working capital management that affect profitability

The hypotheses were tested using measures of profitability as dependent variables and measures of working capital management as independent variables. Also added were control variables that the existing research holds to have a significant influence on the dependent variables.

Figure 1. Variables used

6. Dependent variables

All of the variables used by researchers studying this subject can be divided into two groups: accounting variables and market variables.
Accounting variables usually consist of either return on assets (ROA) or gross operating income/profit (GOI/GOP). Far less frequently used are alternative variables like return on net operating assets (RNOA) [Garanina, Petrova, 2015], return on investment (ROI) [Nobanee, 2011], return on invested capital (ROIC) [Mohamad, 2010].

Market variables are typically represented by Tobin’s Q, calculated as a company’s equity market value plus liabilities book value, divided by its equity book value [Afrifa, 2016; Banos-Caballero et al, 2014; Mohamad, 2010; Wang, 2002]. Some studies may also feature alternative market variables like a company’s annual excess returns adjusted for company size and MV/BV [Aktas, 2015; Almeida, 2014].

The dependent variable used in the present study was chosen to be the measure of a company’s ability to draw income from the use of its assets:

  1. ROA = Net Income / Average Assets – return on assets, measuring the company’s ability to effectively use its assets.

7. Independent variables

As illustrated by Figure 1, the present study aims to identify the influence of both principal and complimentary (control) determinants of working capital management on the financial performance of companies. This section aims to substantiate the influence of individual factors and to describe the way of measuring them for the purpose of this study.

1. DAR = AR / Sales * 365 – days accounts receivable, representing the average time it takes the company to collect the money for goods sold.

This factor is expected to have a negative effect on financial performance, because greater DAR values indicate longer wait for customers’ payments and inefficient management of receivables. Nevertheless, the studies available have shown this index to influence the financial performance both negatively [Aregbeyen, 2013; Deloof, 2003; Enqvist, 2014; Garcıa-Teruel at al, 2007; Gill, 2010; Lazaridis 2006; Raheman, 2007], and positively [Abuzayed, 2011; DeLoof, 1996; Nobanee, 2009, Ramachandran, 2009].

2. DI = Inventories / Cost of goods sold *365 – days inventory, representing the number of days it takes the company to sell an average-sized inventory.

On the one hand, this factor has a negative impact on financial performance, as high inventory levels may signal overstocking, as well as extra storage, insurance, and rent expenses. On the other hand, high inventory levels mitigate the risk of shortage of goods for current operations. Besides, wholesale businesses are usually purchasing goods in large lots, while selling in small ones, which makes their typical inventory balance rather high. This may lessen the negative influence of high inventory levels on performance. Still, the most common finding is that its influence is negative [Deloof, 2003; Enqvist, 2014; Garcıa-Teruel, 2007; Lazaridis, 2006; Pais, 2015; Raheman, 2010; Vahid, 2012], even if some studies found it otherwise [Abuzayed, 2011; Makori, 2013; Nobanee, 2009].

3. DAP = AP / Purchases *365 – days accounts payable, representing the average time it takes the company to repay its creditors.

This factor is expected to have a positive effect on financial performance, because higher DAP values suggest that the company is able to defer its payments longer, thereby getting free credit from its suppliers [Lazaridis, 2006; Makori, 2013; Nobanee, 2009]. However, a number of studies found the indices in question to be negatively related [Abuzayed, 2011; Aregbeyen, 2013; Deloof, 2003; Garcıa-Teruel, 2007; Padachi, 2006; Pais, 2015; Raheman, 2007]. This may be due to the fact that less profitable businesses tend to delay payment on their debts longer [DeLoof, 1996], and that businesses paying their suppliers late forfeit their early payment discount [Aregbeyen, 2013]. Therefore it would be important to establish the way in which this factor influences the Russian wholesale businesses.

4. = DAR + DI - DAP – cash conversion cycle length (in days), which reflects the efficiency with which the company is managing its working capital, and represents cash turnover, from the moment cash is disbursed to purchase inventory to the moment the company collects payment from its sale.

The vast majority of studies indicate an inverse relationship between cash conversion cycle and profitability, which makes sense, given the expected effect of its components. A contrary view is represented by Abuzayed, 2011; Gill, 2010; Nobanee, 2009; and Leyevik and Vorobyova, 2013. In particular, Abuzayed, explains this by saying that flourishing businesses have fewer incentives, and therefore are less likely, to engage in working capital management. Leyevik and Vorobyova, 2013 gives two possible explanations. One is, that shortening their cash conversion cycle might not be the preferred source of financing for the sampled companies. The other is, that more profitable businesses might afford more relaxed payment time limits for their customers, larger inventories and longer storage times, and early payments to their suppliers.

There are studies that do not analyse the influence of individual components of the cash conversion cycle on financial performance at all, choosing instead to use the cycle itself as the only index (Banos-Caballero, 2012; Wang, 2002; Yazdanfar, 2014). This is justified, as these components may be lacking in significance individually, even if CCC itself shows significant influence owing to the effect of its cumulative value.

5. CATA = current assets / total assets – this ratio helps to assess how aggressively the company manages its current assets
CLTA = current liabilities / total assets – this ratio helps to assess how aggressively the company finances its working capital

There are other things to look at when trying to analyse the influence of working capital on financial performance besides the company’s CCC value, for example, its choice of policy for managing and financing its working capital.

The influence of working capital and liabilities management policy on profitability has been the subject of many studies and appears to be a matter of dispute. On the one hand, pursuing an aggressive policy might be beneficial for the company’s profitability, despite the risk of its losing in revenue if it cuts its trade credit and inventory too far [Shin and Soenen, 1998; Jose, 1996; Wang, 2002]. On the other hand, a disciplined policy might likewise increase profitability by stimulating demand, improving customer relationships, lowering the risk of disruption of operations, cushioning against price fluctuations. In particular, a number of studies [Afza, 2008; Raheman, 2010; Mohamad, 2010] found that profitability is positively influenced by a conservative approach to both managing and financing one’s working capital.

8. Control variables

Since a company’s profitability is influenced not only by the quality of its working capital management but also by other important determinants, these too must be included in a study to get more accurate results.

1. LEV = debt / total assets – leverage, which reflects the degree in which the company has borrowed money.

This measure is expected to influence financial performance both positively (by attracting cheaper financing) and negatively (because high level of debt increases the company’s risk making further external financing harder and costlier). Most studies found high level of debt to have a negative effect on profitability [Charitou, 2010; Enqvist, 2014; Garcıa-Teruel, 2007; Lazaridis, 2006; Makori, 2013; Raheman, 2010; Vahid, 2012].

2. SIZE = ln (Sales) – size of the company, as a function of its profits

There are various theories on how the size of a company may influence it profitability. On the one hand, the influence is expected to be negative, since large businesses are already close to their optimal level and have only a period of slow development, or even falling profits, ahead of them, while small businesses develop rapidly and are quickly growing in terms of profitability. On the other hand, large businesses have an advantage over small enterprises due to economies of scale, which suggests a positive association between size and profitability. Moreover, large businesses have the advantage of getting cheaper credit.

Although most evidence-based studies show a positive association [Abuzayed, 2011; Eljelly, 2004; Garcıa-Teruel, 2007; Gill, 2010; Makori, 2013], some researchers, nevertheless, see a negative effect of company size on profitability [Aregbeyen, 2013; Banos-Caballero, 2012; Mun, 2015].

3. GROWTH = (Salest-Salest-1) / Salest-1 – revenue growth rate

Revenue growth rate is expected to have a positive influence on the profitability of a company. This is supported by numerous studies [Abuzayed, 2011; Afrifa, 2016; Aregbeyen, 2013; Banos-Caballero, 2012; Deloof, 2003; Garcıa-Teruel, 2007; Nobanee, 2009; Vahid, 2012].

4. CR = Current Assets / Current Liabilities – working capital ratio

The conventional theory holds that there is a certain tension between liquidity and profitability. Since working capital ratio is a static measure of liquidity, it is expected to be inversely associated with profitability, as confirmed by numerous studies [Aregbeyen, 2013; Mohamad, 2010; Raheman, 2007; Sen, 2010].

5. FITA = Financial investments / Total assets

Financial investments can increase profitability if the assets, in which the company invested are performing better than its current operations. However, profitability will decline if the assets are performing poorly. This significant association was identified by a number of studies: Deloof, 2003 or Lazaridis, 2006 indicate that the influence of financial investments is positive; Raheman, 2007 found it to be negative, while Abuzayed, 2011 and Gill, 2010 failed to observe any significant association.

6. GDP = GDP growth

Researchers working in this sphere often turn their attention not only to company-specific variables, but to macroeconomic measures. Thus, GDP growth is supposed to have a positive influence on the performance of individually analysed firms. This hypothesis is corroborated by the results obtained by Abuzayed, 2011, Garcıa-Teruel, 2007, and Pais, 2015. Enqvist, 2014 argues that the inverse CCC-profitability association becomes more significant when the economy is in decline and diminishes when the economy is booming. The same is true for the association between profitability and cash conversion cycle components. This suggests that GDP growth may be a relevant variable for the present study.

Table 1. Independent variables and their expected effect on profitability

Variable Description Formula Expected effect on profitability
DAR days accounts receivable AR / Sales *365 Negative
DI days inventory Inventories / Cost of goods sold *365 Negative
DAP days accounts payable AP / Purchases *365 Positive
cash conversion cycle length (in days) DAR + DI - DAP Negative
CATA current assets to total assets ratio current assets / total assets Positive
CLTA current liabilities to total assets ratio current liabilities / total assets Negative
 LEV leverage debt / total assets Negative
 SIZE company size ln (Sales) Positive
 GROWTH revenue growth rate (Salest-Salest-1) / Salest-1 Positive
 CR working capital ratio Current Assets / Current Liabilities Negative
 FITA financial investments to total assets ratio Financial investments / Total assets Positive
 GDP GDP growth rate GDP growth Positive

9. Descriptive statistics

The data in the sample have the following characteristics:

Variable Mean Median St. dev VAR 5% 95% Min Max
ROA 1.98326 1.42651 9.37863 4.72889 -7.11793 13.4235 -133.124 68.1947
GOI 40.6223 33.4214 39.8307 0.980512 7.30215 90.6848 -105.930 188.893
DAR 81.1159 56.5575 112.237 1.38366 13.4548 192.609 2.11388 1489.31
DAP 83.5772 56.7237 99.0951 1.18567 12.8194 227.665 -460.739 1512.94
DI 79.6210 56.8494 89.4938 1.12400 7.15575 226.865 0.497606 1170.12
CCC 77.1597 55.6411 134.446 1.74243 -8.66958 209.746 -1024.62 1530.48
CATA 76.4031 83.0904 22.7108 0.297250 30.1335 99.6608 2.80985 100.000
CLTA 53.3616 52.8586 27.2757 0.511148 13.3774 91.9057 2.12362 100.000
LEV 49.2293 48.7128 23.1543 0.470336 15.2716 82.5463 0.552755 225.604
CR 182.250 141.683 132.725 0.728259 76.1701 433.909 3.54401 1507.00
FITA 13.7656 4.43046 19.8947 1.44525 0.00000 60.5909 0.00000 94.7140
GROWTH 12.3461 9.04725 42.1518 3.41418 -37.9435 68.8060 -91.4521 555.083
SIZE 14.4317 14.2435 1.72087 0.119242 12.1318 17.2325 7.18007 22.1898
GDP 10.4745 9.75593 9.30713 0.888555 -5.98309 20.8572 -5.98309 20.8572

The table demonstrates that the businesses sampled are, on average, characterised by positive profitability. Median length of cash conversion cycle components is 50 to 60 days. Consequently, CCC has a median value of 56 days, and a mean value of 77 days. Working capital constitutes a significant portion (a mean of 76%) of total assets, while current liabilities are at the mean of 53% of total assets. Therefore the underlying working capital management policy appears to be moderate, with a tendency towards being disciplined rather than aggressive.

Long-term and short-term loans and credits constitute about one half (49%) of total assets. Current liquidity ratio is at the mean of 1.82, which is somewhat below the standard 0.2 but within the recommended 1.5 to 2.5 bracket. The level of financial investments is, on average, higher than expected (14%), which proves that the control variable was an important addition to the study. Revenue growth is largely stable (9%).

Standard deviation and variance are moderate, which indicates average internal scatter, once the extreme 1% of values is eliminated.

10. Testing Hypothesis 1 (Influence of CCC components on profitability)

Hypothesis 1: Days accounts receivable (DAR) and days inventory (DI) values have a significant and negative effect on the profitability of a wholesale business, while days accounts payable (DAP) has a significant and positive effect.

In order to test the first hypothesis the influence of individual cash conversion cycle components on profitability was analysed using the following model:

The model was chosen using the Durbin–Wu–Hausman test which allows a choice between a fixed effects model and a random effects one, as well as a test for group differences in regression intercepts which makes it possible to choose between a fixed effects model and a pooled regression one. Both showed that a fixed effects model was preferable, which was to be expected given the nature of the data.

Table 2. Hypothesis 1 test results

Significant variable: ROA Model prior to elimination of insignificant variables Model after elimination of insignificant variables
Variables Coefficient
(Std. error) 
Significance Coefficient
(Std. error) 
Significance
const 11.6266
(7.8526) 
  11.5786
(2.1539)
   ***
DAR -0.0397
(0.0054)
  *** -0.0396
(0.0054)
   ***
DAP 0.0267
(0.0043)
  *** 0.0267
(0.0043)
   ***
DI -0.0184
(0.0054)
  *** -0.0184
(0.0053)
   ***
CATA 0.1323
(0.0256)
  *** 0.1323
(0.0254)
   ***
CLTA -0.1694
(0.0123) 
  *** -0.1694
(0.0123)
   ***
LEV -0.2232
(0.0147) 
  *** -0.2232
(0.0147)
   ***
CR -0.0096 
(0.0023) 
  *** -0.0096
(0.0023)
   ***
FITA 0.0733
(0.0257) 
  *** 0.0733
(0.0255)
   ***
GROWTH 0.0299 
(0.0048) 
  ***  0.0299
(0.0048)
   ***
SIZE -0.0033
(0.5219)
  - -  
GDP 0.0377 
(0.0190)  
** 0.0377
(0.0190)
   **
LSDV R-squared 0.6314 0.6314
Within R-squared  0.4497 0.4497
LSDV F(200. 1122)  9.6113 9.6682  
-value (F) 7.8e-144 2.5e-144

The table above demonstrates that the components of the cash conversion cycle are significant, and that the negative or positive character of their coefficients is as expected. This suggests that it is important to manage each component of the cash conversion cycle. Indeed, DAR and DI values do have a significant and negative influence on the profitability of a wholesale business, while DAP has a significant positive influence. Therefore each component of the cash conversion cycle has a role to play according to how well it is managed.

11. Testing Hypothesis 2 (Influence of CCC on profitability)

Hypothesis 2: Cutting the length of the cash conversion cycle has a significant and positive effect on the profitability of a wholesale business.

To test the second hypothesis the influence of the cash conversion cycle on profitability was analysed using the following model:

This model was also tested with Durbin–Wu–Hausman and a test for group differences in regression intercepts helpful in choosing a suitable model, both of which pointed to a fixed effects model as preferable.

Table 3. Hypothesis 2 test results

Significant variable: ROA Model prior to elimination of insignificant variables Model after elimination of insignificant variables
Variables Coefficient
(Std. error) 
Significance Variables  Coefficient
(Std. error)
const 7.0962
(7.3814) 
  9.5256
(2.1567) 
  ***
CCC -0.0052
(0.0024) 
  ** -0.0054
(0.0023) 
  **
CATA 0.1672
(0.0254)
  *** 0.1682
(0.0252) 
  ***
CLTA -0.1845
(0.0123) 
  *** -0.1850
(0.0122) 
  ***
LEV -0.2105
(0.0149) 
  *** -0.2107
(0.0149) 
  ***
CR -0.0075
(0.0023) 
  *** -0.0075
(0.0023)
  ***
FITA 0.0618
(0.0262) 
  ** 0.0606
(0.0260) 
  **
GROWTH 0.0312
(0.0047) 
  *** 0.0314
(0.0046) 
  ***
SIZE 0.1705
(0.4954) 
    -  
GDP 0.0384
(0.0193) 
  ** 0.0393
(0.0191)
  **
LSDV R-squared 0.6143 0.6143
Within R-squared 0.4242 0.4241
LSDV F(200. 1122) 9.0970 9.1500
-squared (F) 2.1e-135 7.3e-136

The above demonstrates that for ROA the hypothesis is proven true: CCC is significant, and cutting its length has a positive effect on profitability. In addition to that, factors with a negative effect are leverage and current ratio, while financial investments, revenue and GDP growth have a positive effect, as was expected.

12. Conclusions

In summary, the present study has identified a negative impact of days accounts receivable and days inventory values on profitability of the Russian wholesale businesses, and a positive effect of days accounts payable values. This confirms Hypothesis 1 and is in agreement with the expected nature of their influence, as identified and econometrically substantiated by a number of other studies [Lazaridis, 2006; Raheman, 2007; Vahid, 2012; Pais, 2015].

The second step of the study identified a negative impact of cash conversion cycle length on profitability, which confirms Hypothesis 2 and follows the findings of most empirical studies undertaken for various markets and time periods [Shin and Soenen, 1998; Deloof, 2003; Garcia-Terual and Martinez-Solano, 2007; Gill, 2010; Enqvist, 2014].

Moreover, the chosen variables proved to be significant for the majority of models constructed. All of this allows one to assert that there exists a negative effect on profitability from high levels of financial constraint and working capital ratio, as well as a positive effect from company size, revenue and GDP growth rate.

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dle 10.2