Profitability and Expanding Collection Period in Bangladesh

Abstract

In this article, the authors investigate the relationship between profitability and receivables management of DSE listed non-financial firms in Bangladesh for the years 2000-2017. A cointegration model is used to examine the relationship between average collection period (ACP), return on assets (ROA), firm size, and debt ratio of firms. Impulse response analysis indicates that while the other variables quickly return to equilibrium, a shock to ACP or profitability seems to have a significant and durable impact on the relationship. A GMM model has also been used to estimate a regression that shows the impact of increasing ACP on profitability. The results strongly point to a cointegrating relationship and the critical role of receivables management on profitability. The article contributes to the existing literature by providing strong evidence that the average collection period is the most critical variable in addressing control of working capital management. However, this variable is the most difficult variable to manage, especially after there is an indication that it is worsening.