Effect of Inventory Management on Financial Performance of Listed Manufacturing Companies in Sri Lanka.

Inventories are essential assets of a company's production process. In order to prevent losses resulting from stock deficits and surpluses, control of such inventories is useful. The aim of this paper is to analyse the effect on financial performance of inventory management measured in terms of inventory conversion time and inventory turnover measured in terms of return on assets, cash flow from operations and market value added of listed manufacturing companies in Sri Lanka. A conceptual framework is designed to represent direct and indirect relationships among these constructs. This study adopted a quantitative research approach. Secondary data was collected for a period from 2014 to 2018 using published annual reports of Listed manufacturing Companies in the Colombo Stock Exchange, Sri Lanka. The sample size included 29 manufacturing companies and the sample was selected through the judgmental sampling technique. Results of this study show that inventory conversion period has a significant negative relationship on return on assets, cash flow from operations and market value added of a firm. Thus, lower the time taken to convert inventories to sales, higher the financial performance vice versa. However, the results indicate that inventory turnover is insignificantly related to financial performance of manufacturing companies in Sri Lanka. It is expected that the model further improves the knowledge on understanding the importance of inventory management on financial performance of a company. It could be valuable to the managers of a company to identify their role in managing inventories.