Hasanuddin Economics and Business Review

Vol. 2, No. 1 (June 2018): 1-17

WORKING CAPITAL MANAGEMENT ANDPROFITABILITY OF

MANUFACTURING COMPANYIN INDONESIA

Valiensi Utia, Sutisna, Nanny Dewi

Magister Management, Faculty of Economics and Business, Padjadjaran University

Abstract: Manufacturing companies in Indonesia are increasing in number in recent

years. Large growth should be balanced with good working capital management
due to the manufacturing company is carrying out buying of raw materialactivity,
afterward convert them into semi-finished goods and finished goods. Cycles from
purchasing goods, inventory management, debt repayment, product sales, cash
received will have effect on profitability.
Purpose of this study to determine whether working capital management affect
profitability of manufacturing companies publicly listed on Indonesian Stock
Exchange from 2010-2015. This study uses quantitative method by using linear
regression analysis tool on panel data.
Results of this study found that the component of working capital proved to affect
profitability of manufacturing companies Listed in Indonesian Stock Exchange.
Therefore the companiesshould be able to manage properly their working capital.
Manufacturing companies should improve their management pattern applied to
their current assets and current liabilities. Working capital management should be
performed by shortening cash conversion cycle, debt withholding, and by increasing
current assets value due to it proves to be able to improve profitability of the company.

Keywords: Manufacturing Company; Profitability; ROA;Working Capital

Management

*Corresponding author’s email: [email protected]

ISSN: 2549-3221 (Print) 2549-323X (Online)
DOI: 10.26487/hebr.v2i1.1441

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 Valiensi Utia, Sutisna, Nanny Dewi

INTRODUCTION Working capital can to detect the level of

liquidity and profitability. The same with
In Indonesia, manufacturing sector is cash flow management, the information
one of important sector and significantly contained in working capital can be used
contributes to national economic to predict the conversion of cash flow.
development. Manufacturing industry Management of company, besides of
sector is constituting a fairly stable important operational activities should
sector and became one of the country’s address its financial performance as
economic support amid the uncertainty well. In order to increase profits, increase
of world economy with a positive growth its investment, sometimes if it is not
rate. (Darmawan 2016) managed properly, it may even ignore
Manufacturing industry in Indonesia the aspect of liquidity and even increase
has experienced periods of economic debt level to any level that is not effective.
crisis and economic stable growth. It is In case not carefully managed this can
important for any company to increase result in liquidity problem, huge debt,
liquidity and cash flow especially during default payment and moreover lead to
slowing economic growth, cash has bankruptcy.
become very expensive resources to Profitability is a measure of company’s
borrow. Therefore, companies should worth and it is important in order to
not forget the fact that most of cash achieve the company’s goal of maximizing
is constituting part of working capital prosperity for shareholders. However
component. Therefore it is important performance has broad definition in
to bring new strategies in managing nature and not limited to finance only
cash flow effectively without affecting however also how the company’s efforts to
the relationship with major suppliers. combine operations, strategies, financial
Therefore, working capital management data in order to achieve its expected goal.
should acquire higher priority by That is one reason why working
managers. (Thuvarakan 2013). capital is a useful summary measure
In the manufacturing industry, any of assets and current liabilities. The
company purchases raw materials by advantage of measuring working
credit will create trade payables, further capital that it is not subject to season or
the raw materials are transformed into temporary movement among different
semi-finished goods and finished goods. current assets or liabilities. However this
It is then recorded in inventory for the advantage is also become weakness, due
goods. After finished goods, the sale is to working capital hides a lot of interesting
done, in case it is done by giving credit information such as cash converted into
will create accounts receivable. After the inventory, then become receivables,
receivables paid by the consumer, the and become cash again. However these
company will get the cash. This cycle is assets have different levels of risk and
called working capital management. At liquidity. Companies cannot pay bills
least there are few things to address i.e. with inventory or with receivables, it has
cash, receivables, inventories in the form to pay by cash. (Brealey, Myers & Allen,
of raw materials, semi-finished goods, 2011)
finished goods, accounts payable. All Working capital management is the
of those are current assets and current management between current assets
liabilities. and current liabilities and constituting
Working capital has an important an important area for the company and
role in measuring company performance. all financial managers usually make

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different decisions in order to get good Inventory increase due to the company
results. purchases goods to be produced again to
Several previous studies have shown become semi-finished goods or finished
different results. This can be shown with goods. Purchases made on credit will
the following graph: create debt until the payment settlement
is done. Usually there is a time lag
Figure 1 Graph Relationship of WCM between items received up to payment.
and Profitability Some suppliers may give a discount
if the payment is made in cash and
before the due date and others may not
do it. There are also suppliers who set
certain minimum quotas to buy goods
from them. From the policies taken by
management to inventory management
and debt management there is cost to be
borne and considered when determining
the most optimum strategy for the
company.
If the company sets a low-level
inventory there are several things that
From the graph described above, can happen. Companies buy in small
the author sees that the relationship amounts consequently the price offered
between working capital management by the supplier becomes more expensive
to profitability shows different results. than buying in large quantities. The
The studies were conducted by taking company also needs to consider the
samples from several industries in opportunity that may be lost if the
different countries. stock is small when the demand in the
The Author believes that for Indonesia market is big, how big the impact of loss
especially in the manufacturing industry of sales and profit opportunities due to
is still an open space for study. Indonesia production that cannot be done due to
is a developing country, the result can out of stock.
be different from previous study that If the company sets a high-level
investigates in another countries. The inventory, risks that may need to be
manufacturing industry in Indonesia considered among other things are cost
is also characterized by working capital of storage, defected goods, insurance,
management between small companies and other related costs.
and large companies may vary and the In case of debt management, if the
impact on profitability also varies when company does not make payments with
compared with other industries both in debt the company needs to consider
Indonesia itself and industry in other payments in other ways. Timely payments
countries. There could be a company may leave the company overwhelmed
considered small in other countries if the repayment period is faster than
however in Indonesia with the same type the money receiving period from sale of
is considered as big company. goods. However, there is another aspect
Work capital management is that companies need to consider as some
an integration between inventory suppliers may discount when company
management, accounts payable and paying earlier and also the company
accounts receivable. (Temtime, 2015). reputation needs to be considered if the

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 Valiensi Utia, Sutisna, Nanny Dewi

company delays payments too long. publicly listed on Indonesian Stock

After the goods are purchased, the Exchange. It can be described as follows:
company processed the goods and give 1. To recognize that ratio of total current
added value to consumers. To perform assets to total assets have positive
a production process, the company effect on company profitability (ROA).
requires not only material, but also 2. To identify ratio of total current
labor and other costs associated with the liabilities to total assets have negative
production process. effect on company profitability (ROA),
After finished goods are produced then 3. To identify that current ratio affect
sold to consumers. Companies need to negatively on profitability of the
consider some aspects such as providing company (ROA).
discounts to loyal customers, sales 4. To determine the cash ratio has
schemes can be cash or receivables with a positive effect on corporate
a certain period. Companies need to be profitability (ROA).
cautious too, especially if the consumer 5. To identify that cash conversion cycle
is often late to pay or the distributor just affect negatively on profitability of the
does not distribute the product well. It company (ROA).
will cause problems in the company’s 6. Does Working Capital jointly affect on
cash receiving as well as profitability. profitability.
Therefore, the author is interested
to study working capital management The research purpose is to contribute
and its relationship to profitability of positively to management about working
manufacturing industry in Indonesia. capital management and impact to
Data is selected from companies publicly company profitability
listed in Indonesian stock exchange
due to the data is easily acquired from 2. Literature Review
existing media such as Indonesian Capital 2.1 Working Capital Management
Market Directory, Internet, journals, and 2.1.1 The meaning of Working
relevant books. Capital Management
Research questions are
1. Does the ratio of total current assets According to Monica (2017), Working
to total assets have a positive effect on capital is a measure of operating liquidity
company profitability (ROA)? and defines short-term conditions of the
2. Whether the ratio of total current company and inefficient management of
liabilities to total assets affects working capital may worsen the company
negatively on company profitability strength.
(ROA)? According to Dalayeen (2017),
3. Whether current ratio affects Working capital measures the company’s
negatively on company profitability ability to sustain its activities without
(ROA)? threatening liquidity. Working capital
4. Does cash ratio have a positive effect management is often considered as a
on company profitability (ROA)? tool to sustain business competence in
5. Whether cash conversion cycle affect carrying out its operational activities.
negatively on company profitability Working capital according to J. Fred
(ROA)? Weston and Thomas E. Copeland is the
This study aims to determine whether difference between current assets and
working capital management affect on current liabilities. Therefore working
profitability of manufacturing companies capital is an investment in cash,

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securities, receivables and inventories support to the company business

deducted by current liabilities used to operation.
protect current assets. Raheman et al. (2010) states that
2.1.2 Purpose of Working Capital the efficiency of managing working capital
The purpose of working capital is very important for manufacturing
management is to balance between companies. Management of working
liquidity and profitability of any capital directly affects the company’s
company’s operational activities. liquidity and profitability.
Liquidity is a preliminary condition to
convince that a company can meet its 2.1.4 Calculation of Working
short-term liabilities and continue its Capital
activities for corporate profit.Working According to Richard & Laughlin
capital Management ensures that the in Temtime (2015), the CCC (Cash
company has sufficient cash to pay short- Conversion Cycle) is method of
term debt and corporate operational measuring working capital by calculating
activities. the time to convert the money spent to
2.1.3 The Importance of Working become earned money.
Capital Cash Conversion Cycle (CCC) =
Zariyawati said that working Inventory Period (INP) + Account
capital is an important issue in corporate Receivable Period (ARP) – Account
financial decisions. Management of Payable Period (APP)
working capital is the company’s effort to
maintain the company’s liquidity in order Cash Conversion Cycle (CCC) =
to the company’s daily operations may Inventory Period (INP) + Account
run well, meanwhile on the other hand Receivable Period (ARP) – Account
the company can still fulfill its short-term Payable Period (APP)
obligations. Company managers who can
not manage their working capital well
have an impact on the company’s growth
and profitability that will ultimately lead
the company to financial distress and
bankruptcy.
Singh& Pandey (2008) stated
that working capital plays an important
role in the company’s funding decisions
especially related to the company’s
liquidity aspects. Wijaya &Murwani
(2010) stated that the main goal of the Figure 2 Operation Cycle of
company is to increase the value of the Manufaturing Company
company. Companies should always try Number of days in inventory: The
to make the right financial decisions average number of days that a company
with the aim of increasing profits and holds inventory of good before sales or
optimizing the value of the company. production (Kroes & Manikas, 2014).
Dong & Su (2010) explains that one Inventory days are [inventories*365] /
of the important financial decisions for a cost of sales.
company is working capital management. Number of days in receivables: The
The main objective of working capital average number of days that a company
management is to provide adequate takes to collect revenue from outstanding

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 Valiensi Utia, Sutisna, Nanny Dewi

sales (Kroes & Manikas, 2014). Trade Temtime (2015),

receivable days can be calculated as Accounts Chuan-Guo Li,
[accounts receivable*365] /sales. 1 Receivable et.al.(2014),
Period (ARP) Raheman, et.al.
Number of days in payables: The (2010)
average number of days a company
takes to pay creditors (Kroes & Manikas, Temtime (2015),
Chuan-Guo Li,
2014). Trade payable days are [accounts 2
Inventory
et.al. (2014),
Period (INP)
payable*365]/purchases. Raheman, et.al.
(2010)
Debt approach. There are two ways
to measure leverage being used in the Accounts Temtime
literature regarding the relationship 3 Payable Period (2015),Raheman,
(APP) et.al (2010)
between profitability and WCM. First, by
dividing the total debt / total assets. This Cash Temtime (2015),
method is used by Raheman and Nasr 4 Conversion Raheman, et.al
Cycle (CCC) (2010)
(2007), Shin and Soenen (1998). Second,
another method, accounts payable is Wijaya, Anggita
Current Asset/
issued and calculated by dividing the 5
Total Asset
(2012), Rahemen,
et.al (2010)
short-term bank loans added by long-
term bank loans and divided by total Wijaya, Anggita
Current
assets. Deloof (2003). 6 Liabilities/
(2012), Rahemen,
et.al (2010), Shin &
Current ratio method, measured by Total Asset
Shoenen (1998)
dividing between current assets with
current liabilities. Shin and Soenen Total Current
Wijaya, Anggita
Asset/Total
(1998). 7
Current
(2012), Rahemen,
et.al (2010)
In addition, fixed financial asset can Liability
be used by dividing fixed financial assets
Wijaya, Anggita
with total assets. This variable is used Total
(2012), Rahemen,
8 Liabilities/
by Deloof (2003), Raheman and Nasr Total Asset
et.al (2010) Shin &
Shoenen (1998)
(2007).
According to Deloof (2003), Wijaya, Anggita
Total Cash/
fixed financial assets are shares in 9
Total asset
(2012), Banos-
Caballero (2013)
other companies that are intended
to contribute to the activities of the (Current Asset
companies operating them so as to build 10
- Current Chuan-Guo Li, et.al
Liabilities)/ (2014)
lasting relationships and loans (debt) are Current Asset
secured with the same purpose.
Measuring working capital can be
done by using the following variables:
company invest significant cash to
working capital and use debts as source
Table 1 Study Variabel in Working of fund important to manage company
Capital and Name of Authors Whose profit
Using It Raheman and Nasr (2007) suggest
According to Deloof (2003) majority manager to increase shareholder value
by reducing minimum level receivable
VARIABEL
NAME OF
days and inventories days.
NO WORKING
AUTHOR Variables used are Current Asset
CAPITAL
to Total Asset, Current Liabilities to

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Total Asset, Current asset to Current ROA is a well-known traditional

Liabilities, Total Cash to Total Asset, and
PROFITABILITY
Cash Conversion Cycle. NO
VARIABEL
AUTHOR
Variable Accounts Receivable
Period (ARP) Inventory Period (INP), Profitability Temtime (2015)
1 Return on Asset ,Chan Guo etc
Accounts Payable Period (APP) are not (ROA) (2014)
studied separately but include on Cash
Conversion Cycle is ARP + INP – APP. Gross Operating
Temtime (2015)
2 Profit to Total
Total liabilities/Total Asset is not used Asset (GOPTA)
,Deloof (2003)
too due to the reseachfouce on current
liabilities, so longterm liabilities not 3 Tobin’s q (TBQ) Temtime (2015)
examined. Study Chan Guo li (current
Return on
asset - current liabilities)/current asset 4 Invested Capital
Wijaya, Anggita
(2012)
is not used due to this reseach is not (ROIC)
examined company strategy on different Return on Capital
level of working capital. 5 Employed Dalayeen (2017)
(ROCE)

2.2 Profitability
2.2.1 The meaning of Profitability
Profitability is a measure of a accountability measure of profitability
company’s wealth. This is important in (Katchova & Enlow, 2013). ROA includes
order to achieve the company’s goal of measuring profitability from total
maximizing wealth for shareholders. investment of the firm.
2.2.2 Calculation of Profitability Gross operating profit (GOPTA) is
Temtime (2015) states however to another proxy for profitability. Abuzayed
measure profitability can be done by (2012) investigate the impact of WCM
using several methods, i.e. accounting on profitability through GOPTA. Banos-
ratio, by measuring market valuation, Caballero et al. (2013) also use GOPTA as
or by measuring perception of a subject a proxy measure of profitability. GOPTA
(non-financial subject). Accounting ratio also connects the company’s operations
being used such as return on asset, return with CCC and its components (Banos-
on investment, return on equity, gross Caballero et al., 2013). Deloof (2003),
operating profit, and earnings per share. Profitability is measured by Gross
Measurement of market valuation such Operating Income, i.e. Sales - COGS /
as market value added and Tobin’sq. (Total Asset - Financial Asset). Financial
Measuring non-financial subjective Assets are shares in other companies,
such as measuring customer satisfaction, which are constituting a significant part
employee morale, product quality of total assets.
and other nonfinancial performance Tobin’s q (TBQ) is a market assessment
measurements. Return on asset(ROA), that measures that companies and
gross operating profit to total asset potential investors are often used to
(GOPTA), and Tobin’sq (TBQ) measure evaluate the value of a company’s market
profitability from a different perspective. replacement. Tobin’s q represents Value
Profitability can be measured using added by management above the the
the following variables: companyassetvalue, (Abuzayed, 2012)
Table 2.2Study Variable on ROIC is measured by referring to
Profitability and Author Name Whose Mohammed & Saad study (2010) that is
Using It. by dividing net profit to total debt added

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 Valiensi Utia, Sutisna, Nanny Dewi

by total equity. Qurashi&Zahoor (2017) study

The variable used in this study is conducted on pharmaceutical companies
Gross Operating Profit or sometimes in England using financial data 2009-
called Gross Operating Incomedue to 2014 which measure impact between
it emphasizes on company activity at working capital with the firm size,
operating level and company activity as profitability, leverage, operating cycle,
a whole is assessed by ROA (Return on growth, and economic scale indicated
Asset) method due to ROA is a measure that working capital have negative effect
that is often used in many study and the to company size, and positively effect
data is easily acquired from Indonesian on growth and economic scale. While
Stock Exchange. the operating cycle, profitability, and
Besides, ROIC refers to study of leverage showed less significant results
Wijaya, Anggita (2012), its formula on working capital.
net profit divided by total debt added Monica (2017) in her study tried
by equity and the resultwill be equal to to investigate functional relationship
ROA. Total assets = total debt + total between working capital investment and
equity. ROCE = Earnings Before Interest profitability of business entities. The
and Tax (EBIT) / Capital Employed is sample consists of companies registered
also not being used due to the author in developing countries in Asia.
wants to examine the company value by Countries selected in this demography
its operation and entirely. are India, Pakistan, Myanmar, Sri
Lanka, Bangladesh, Singapore, Thailand,
2.3 Impact of Working Capital Malaysia, Indonesia, Vietnam Hong
on Company Profitability Kong, Japan, China, S. Korea and Taiwan.
This study aims to examine the effect These countries provide an overview
of working capital components on the of market dynamics in developing
profitability of companies publicly countries in Asia and the results can be
listed in Jakarta Stock Exchange. interpreted to provide results in general
Manufacturing companies convert raw for the impact of WCM on profitability.
materials into finished goods and sell it. This study shows that profitability and
This business process requires a relatively WCM are related in a nonlinear way. The
long cash conversion period so it is study shows that there is a relationship
necessary to manage the working capital between working capital and profitability
properly. The problem in this study is that resembles ‘U’ and ‘U upside down’
the existence of two different views that for companies from different countries
explaining relationship between working being examined. For companies from Sri
capital and corporate profitability from Lanka, India, Indonesia, Malaysia and
those of previous study. Singapore, lower rates of working capital
According to Qayyum et al. (2010), the are positively related to profitability
company can have low working capital whereas for firms from China, Pakistan,
for the purpose of increasing profit Bangladesh, Hong Kong and South
means there is a negative relationship Korea, higher levels of working capital are
between working capital and corporate positively related to profitability. While
profitability. in the remaining companies in Thailand,
Meanwhile, according to Raheman Taiwan and Vietnam are not in the form
et al. (2010), considered that a large of U or U upside down. Research on the
working capital would have a positive relationship between working capital and
impact on corporate earnings. profitability in non-financial companies

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in these countries shows that positive Banos-Caballero (2013), the

profitability is related to working capital relationship between working capital and
for Taiwan and Vietnam and negative for U-shaped performance, meaning that
Thailand. there is an optimal level of investment
Dalayeen Study (2017) conducting in working capital to balance the costs
on real estate industry in Jordan shows and benefits in the effort to maximize
that there is a significant impact between company performance.
working capital management and Based on the above background
profitability. description, the author would like to
Mustafa et al (2015) examines the study the impact of working capital
efficient management of working capital components on the profitability of the
and its impact on the profitability of company.
small firms and large firms, the result
is that when comparing small firms 2.4 Hypothesis
and large firms, it turns out that its 3. Research Methods
working capital management has H1
an impact on profitability but their CATAR (Ratio total current asset
sensitivity is different, and more impact to total asset) affect positively on
on profitability for large companies. company profitability (ROA)
H2 CLTAR (The ratio of total current
Therefore advisable for managers of
large corporations to double their efforts liabilities to total assets) negatively
on effective working capital management affects company profitability
in order to encourage profitability. (ROA).
Study on working capital and its impact H3 Current ratio affects negatively on
on company performance, among others, company profitability (ROA)
by Yogendrarajah (2014) investigating the H4 Cash Ratio has a positive effect on
impact of working capital management company profitability (ROA)
and financial performance of trading H5 CCC (Cash conversion cycle) has
companies concluded that working a negative effect on company
capital management has a strong impact profitability (ROA)
on financial performance. Working Capital jointly affects
Chuan-guo Li et al (2014) studied profitability
Working Capital Management, Corporate
Performance, and Strategic Options on This research uses quantitative
the wholesale and retail industry in China method using linear regression analysis
concluded that the strategic choice in the tool of panel data. Panel data regression
management of working capital affects is a regression analysis using panel data
on performance. According to Kim et that is a combination of cross section
al., 1998, the decision of working capital data and time series data and is used to
affects the company’s performance provide an overview of the relationship
significantly and found that firms with between the dependent variable and
greater value require investments in the independent variable. Panel data
working capital than smaller firms. Shin regression is more efficient and provides
et al (1998) argues that firms with larger more information than multiple linear
profits are not motivated to manage regression methods. As for the object of
working capital. So there is negative research is a manufacturing company
relationship between working capital listed on the Jakarta Stock Exchange
and company performance. from 2010 to 2015. This study uses

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 Valiensi Utia, Sutisna, Nanny Dewi

purposive sampling method Effect Model. Third, Classical assumption

Before the regression test, the data test such as normality, multicollinearity,
will be tested classical assumption, heteroscedascity, and autocorrelation.
including normality test, multicollinearity Fourth, Define Statistical Research
test, autocorrelation test and Hypothesis. Fifth, Statistical test such as
heterokesdastisitas test. Steps for the F-test, T-test, Coefficient of determination
research is first, define object of study (R2), and Pearson Correllation test
to variable x and y. Second, estimate the
panel data regression model : Common
Effect Model, Fixed Effect Model, Random 4. Findings
Table 3.1 Table of Regression Result, T Test and Conclusion

Coefficent of
NO Variable X Hypothesis Sig.t X Result Correlation Conclusion
Regression
CATAR
Positive effect,
positively affect
1 CATAR 0.2408 - Ho Reject 0.241** significant, weak
on profitability
correlation
(ROA)
CLTAR Negative effect,
negatively affect significant,
2 CATAR - 0.2339 - Ho Reject -0.360**
on profitability moderate
(ROA) correlation

current ratio Negative effect,

Current negatively affect significant,
3 - 0.0033 0.085 Ho Reject 0.317**
Ratio on profitability moderate
(ROA) correlation

Cash rasio
Positive effect,
positively affect
4 Cash Ratio 0.1009 0.044 Ho Reject 0.566** significant, strong
on profitability
correlation
(ROA)
Cash conversion
Negative effect,
cycle negatively
significant,
5 CCC - 0.0002 affect on 0.001 Ho Reject -0.310**
moderate
profitability
correlation
(ROA)

Test result partially found that of the company. The relationship CATAR
CATAR positively affect the profitability and profitability (ROA) is positive and
of companies (ROA). The results of this weak means only 24.1% CATAR affect on
study support research conducted by profitability (ROA).
Raheman et.al (2010) who found that Partial test results found that CLTAR
CATAR has a positive and significant had a significant negative effect on
impact on corporate profitability. This company profitability as measured by
indicates that the composition of current ROA. This result is in accordance with
assets is greater then it will increase the research hypothesis which states
profitability of the company. This is that there is a negative and significant
due to any aggressive company that has influence between Current Liabilities to
increase in current assets means that the Total Assets Ratio against Profitability.
company has large cash, therefore the Current liabilities to total assets ratio are
working capital of the company will be used to view working capital funding.
greater and this will be able to increase The greater the use of large debt will
the company’s sales so directly and cause the capital structure to become
proportional to the increase profitability larger and stronger, therefore increasing

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the CLTAR ratio and will enable of CR (Current Ratio) and profitability
companies to expand and increase the (ROA)is positive and moderate meaning
company’s sales, therefore profitability only 31.7% CR affect the profitability
of the company will indirectly increase. (ROA) and the rest is influenced by other
The results of this study support the factors.
research conducted by Raheman et.al The test results partially found that
(2010) that the current liabilities to total Cash Ratio has a significant positive effect
assets (CLTAR) negatively affect the on corporate profitability as measured by
profitability of the company’s operations. ROA. Cash ratio is one of liquidity ratio,
The relationship CLTAR and profitability which aims to measure a company’s
(ROA) is negative and moderate ability to meet its short-term obligations.
meaning only equal to 36.0% CLTAR Several previous studies stated that Cash
effect on profitability (ROA) and the rest ratio has a positive and significant effect
influenced by other factors. on company profitability such as research
Test result partially found that the (Wijaya, Anggita, 2012). The relationship
current ratio affected significantly CsR (Cash Ratio) and profitability (ROA)
negative on company profitability as is positive and strong mean only equal to
measured by ROA. This result is in 56.6% CsR effect on profitability (ROA)
accordance with the research hypothesis and the rest influenced by other factors.
which states that there is negative and The partial test result found that
significant effect of Current Ratio to the cash conversion cycle (CCC)
Profitability. This indicates that a large haseffected negatively and significant
current ratio will decrease company on profitability (ROA). The results are in
profitability due to greater current assets accordance with Raheman et.al (2010);
that are able to cover current liabilities Deloof (2003) and the Lazaridis and
that are soon due, then the company Tryfonidis (2006) study that consistently
experienced many assets unemployed found relationship between CCC and
and not being used to increase sales. profitability. Companies with shorter
The results of this study are in line with CCC terms are likely to reap bigger profits
the theory that profitability is inversely when compared to companies with
proportional to liquidity (Horne and longer CCC periods. This phenomenon
Wachowicz, 2012). The higher the can be explained as follows: companies
current ratio of a company means less that have short CCC time are able to
risk of failure of the company in fulfilling collect the cash needed for the company’s
its short-term obligations, which will day-to-day operations, therefore no need
certainly reduce profitability. The to use external sources of funding which
results of this study are in accordance means there is no cost to borrow funds,
with some previous studies (Azam. then company profitwill increase. The
and. Haider. 2011). In this study the relationship of CCC and profitability
relationship between the current ratio on (ROA) is negative and medium meaning
ROA shows negative relationship. Some only 31.0% CCC effect on profitability
studies show different results. Research (ROA).
(Rahemen. 2010), (Shoenen Shin.1998), While the ROA indicates that there is
(Dalayeen, 2017) shows that current significant and simultaneous influence
ratio has a positive effect on profitability. between working capital consisting of
Muhammad and Saad (2010) study CATAR (ratio of total current assets
shows that current ratio negatively to total assets), CLTAR (The ratio of
affects profitability. The relationship total current liabilities to total assets),

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 Valiensi Utia, Sutisna, Nanny Dewi

Current ratio, Cash Ratio and CCC (Cash resulted in the company not being able to
conversion cycle) on ROA’s profitability. meet sales to consumers and eventually
In general, the company’s working the company became loss. A losing
capital strategy is divided into 3 i.e. company must cover fixed costs and if a
agressif, moderate, and conservative. fixed asset purchase is made,and it will
Managers who implement aggressive be financed with funding sources such
strategies, implement the lowest current as debt which is certainly have interest
asset strategyand bravely implementing charge. Conservative manager, on the
the strategy by trying to take maximum contrary will set up high current assets
advantage of current debt. That’s compared to total assets and moderate
how managers aggressively manage managerwill be in between.
the company. In implementing this Therefore the higher CATAR means the
strategy. liquidity risks will increase and manager is implementing a conventional
companies that run this strategy often strategy. And the lower CATAR means
face situations such as not being able the manager is applying an aggressive
to repay maturing debts. On the other strategy,the following is the result of
hand, due to number of current assets manufacturing industry in Indonesia.
at the lowest level, the rate of return on CLTAR (Current Liabilities to Total
investment will increase (if the company Asset Ratio). An aggressive manager will
does not go bankrupt). Companies that apply a strategy to maximize short-term
use risk strategies are high risk and their debt and use it to finance the company’s
refund rate is very high. (Amiri, Esmaeil current assets however this does not
2014) mean not to use long-term debt at all due
Conservative managerwill apply a to fixed assets can be acquired by long-
different strategy than an aggressive term debt. (Jhankhany and Parsaeian.
manager. Conservative managers will (2001) RaymondP (1986)). While
reduce their short-term debt rates and conventional manager actually does not
prefer to use long-term debt in managing like to use short-term debt and prefer
their current assets. Meanwhile some long-term debt and if the manager is very
would prefer to use other sources of conventional,the manager will prefer to
funds such as shareholder capital rather use other sources of fund besides debt.
than borrow. The higher the CLTAR means the
While moderate managers will manager is applying an aggressive
implement a strategy that is a combination strategy. And the lower CATAR means the
of aggressive strategy and conservative manager is implementing a conventional
strategy.CATAR (Current Asset to Total strategy.
Asset Ratio). Focus on the management CR (Current Ratio means Current
of current assets to total assets. Manager Asset to Current Liabilities). This ratio is
will consider the optimal management of related to the level of corporate liquidity
their current assets in accordance with and describes the ability of the company
the strategy applied to the company. For to pay its short-term debt at maturity.
an aggressive manager, current assets The greater the current ratio. means
such as cash, securities and inventory the company is getting more liquid and
will be set as small as possible. As a means the company’s ability to pay its
result of small assets that are very liquid short-term debt better.
like cash and securities, companies will Therefore the higher the CR means the
have difficulty paying debts due. The manager is implementing a conventional
regulated inventory policy is small, also strategy. And the lower CR means the

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Hasanuddin Economics and Business Review
Vol. 2 No. 1 (13-17)

manager is applying an aggressive will apply a high CCC. While conventional

strategy. managerwill apply low CCC.
CsR (Cash ratio = total cash to total The following is the result of
assets). Managers will manage cash descriptive analysis of each variable in
optimally, however an aggressive cash manufacturing industry in Indonesia.
management style will tend to reduce Maximum and minimum values show the
cash to total assets. While conventional resultof each variable when compared in
managers will save in the form of greater the manufacturing industry in Indonesia
cash to maintain the level of liquidity. whether the trend is aggressive or
Coudrec (2005) company holds large conventional. While Mean (average) is
amounts of cash in order to maintain the average behavior of working capital
the company’s liquidity level and avoid Table 4.1 Statistical Descriptive Result of Study
financial destress. If external funding is Variables (Working Capital)
difficult and expensive then the company CATAR CLTAR CR CSR CCC
will use internal funding sources in the Mean 0.54 0.34 2.15 0.09 138.29
form of cash to finance investment in Median 0.55 0.31 1.52 0.05 97.50
fixed assets and other current assets of the Maximum 0.95 0.85 13.08 0.49 652.32
company so as to increase the proftability Minimum 0.12 0.03 0.40 0.00057 42.48
of the company. However, the policy Std. Dev 0.18 0.17 1.76 0.10 108.53
have their pros and cons, by maintaining
large cash then the risk of the company management with tolerance of less or
will be small, so the rate of return is also more as standard deviation. Therefore
small. (Chan.Guo 2014) states that the we will be able to infer from the data
relationship between cash flow to total and categorize the strategy whether the
assets and working capital is negative company is conventional, moderate or
in the market terminal strategy. When aggressive.
the company’s operating cash increases After identified the result of
due to business activity, the company descriptive analysis of manufacturing
has a good working capital capability industry in Indonesia, we will be able to
so that the
company keep Table 4.2 Strategy of Working Capital Management

its working CATAR CLTAR CR CSR CCC

capital small. From To From To From To From To From To
Therefore the aggresive 0.12 0.37 0.51 0.85 0.40 0.39 0.00 0.09 246.82 652.32
r e l a t i o n s h i p Moderate 0.37 0.72 0.17 0.51 0.39 0.39 0.09 0.19 29.77 246.82
between cash conservative 0.72 0.95 0.03 0.17 3.92 13.08 0.19 0.49 - 42.48 29.77
to total assets
(CR) to working capital is not significant. categorize into conservative, moderate
Therefore the higher the CsR or aggressivestrategy.
means the manager is implementing a Descriptive analysis of the data will be
conventional strategy. And the lower the Table 4.3Table of Regression Result and Working
Capital Strategy
CsR means the manager is applying an
ROA Strategy
aggressive strategy.
CATAR CLTAR 0.54 0.34
CCC (Cash Conversion Cycle) is the
Current Ratio 0.55 0.31
time company takes to spend money
Cash Ratio 0.95 0.85
to produce goods until the time the
CCC 0.12 0.03
company earns money from sales.
(Temtime, 2015). An aggressive manager Absolute value from regression

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 Valiensi Utia, Sutisna, Nanny Dewi

processed further to categorize strategy profitability (ROA). This means

for each variable. Result shows as follow: that the greater the current
CATAR on ROA 0.2408 will be liabilities of the company and the
optimal if managed aggressively. This company will have a large current
means that the ratio between current debt burden and this will reduce
assets to total assets of 0.12 up to 0.37 or the profitability.
12% - 37% of current assets to total assets 3. Current ratio negatively affects
of the company and aggressive strategies corporate profitability (ROA).
category will have a positive effect on This means the greater ratio
profitability (ROA). current assets to the company’s
CLTAR on ROA 0.2339 will be current debt will increase the
optimal if moderately managed. This profitability (ROA).
means that the ratio of current liabilities 4. Cash Ratio positively affect
to total company assets of 0.17 to 0.51 or profitability of the company (ROA)
17% - 51% of current liabilities to total means the greater the company’s
assets of the company and moderate cash ratio to its current debt will
strategy category will affect negatively on increase the profitability (ROA).
profitability GOPTA. 5. CCC (Cash conversion cycle) has
CR (Current Ratio) on ROA shows a negative and significant impact
the value of 0.0033. This means that the on company profitability (ROA)
company is managed with aggressive CR means that the greater the value
methods. of CCC ratio will be lower the
CsR (Cash Ratio) in ROA regression profitability of the company and
shows the value of 0.1009. This means the lower the cash conversion
that the company manages Cash Ratio cycle, the higher the profitability.
moderately. 6. Significant and simultaneous
CCC (Cash Conversion Cycle) onROA influence of working capital
regression shows the value of 0.0002 consisting of CATAR (Current
means the company manages cash ratio assets total ratio to total assets),
conventionally. CLTAR (The ratio of total current
liabilities to total assets), Current
ratio, Cash Ratio and CCC (Cash
5. Conclusion and Suggestion conversion cycle) on profitability
5.1 Conclusion ROA of the company.
This study was conducted on 7. Optimum working capital
manufacturing industry group management will vary its strategy
with sample of 59 companies. The for each variable. CATAR is
results show that: managed aggressively, CLTAR
1. CATAR (Ratio of total current is managed conservatively or
assets to total assets) has a positive moderately, Current Ratio is
effect on corporate profitability managed aggressively, Cash ratio
(ROA). This means the greater is managedmoderately, and CCC
the ratio of the company’s current is managed conservatively in
assets the greater the company order to achieve profitability.
profitability.
2. CLTAR (The ratio of total 5.2 Implication of the Study
current liabilities to total assets) Result of this study found that the
negatively affects the company’s working capital component proved to

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Hasanuddin Economics and Business Review
Vol. 2 No. 1 (15-17)

affect profitability of manufacturing the companies under this study.

companies in BEI (Indonesian
Stock Exchange). Therefore those 5.4. Suggestion
companiesshould be able to manage Further study should be more
their working capital. Companies research and development due to there
within the manufacturing industry are still lack of research in Indonesia
group should improve the management related to efficiency of working capital in
pattern applied to their current assets relation to profitability of the company.
and current liabilities. Working Further study should be done by adding
capital management should be done more research samples, adding more
comprehensive and integral among variables such as ratio of receivables
those financial components. The right and inventories.Further study should be
combination needs to be done by done by taking into account the strategies
shortening the cash conversion cycle and for every company at the level of its
withholding debt as it proves to increase aggressive, moderate, conventional or
the profitability of the company. In combination of financial and nonfinancial
addition, working capital management strategies in each company as well as in
should be done by increasing the value different industries.
of current assets and withholding debt as Further study should not only using
it proved enable to increase profitability. financial report data to analyze working
Management combines strategies i.e. capital, strategy and profitability of the
CATAR is managed aggressively, CLTAR companieshowever performing other
is managed conservatively or moderately, research methods such as interviews,
Current Ratio is managed aggressively, survey or distributing questionnaires to
Cash ratio managedmoderately, and the management of the company in order
CCC is managed conservatively in order to know more about working capital
to achieve optimal profitability. management in all those companies
being studied. All companies should be
5.3. Limitations of Research analyzed one by one and find solutions
Results of this study is still far from related to effective working capital
perfection,due to there are limitations management and the most appropriate
such as: strategy for each company in order to
1. Number of samples of this study is achieve optimal profitability
limited to 59 manufacturing firms
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