Industrial Engineering Letters www.iiste.org ISSN 2224-6096 (Paper) ISSN 2225-0581 (online) Vol.6, No.4, 2016 33 Cash Conversion Cycle Management in Auto Mobile Industry: Relationship with Firm Performance, Leverage, Liquidity and Capital Employed Naveed Ahmad 1 Naila Sarwar 2 1. Department of Business Administration, Lahore Leads University, Pakistan 2. Mphill Scholar, Department of Business Administration, Lahore Leads University, Pakistan Abstract The business entities seek for different tools to maximize the shareholder wealth. The management of cash conversion cycle is one of the tools that play an essential role to generate maximum earnings to business firm. The recent paper is an effort to find out the different determinants that persuade cash cycle in automobile division in Pakistan. This industry provides employment opportunities to more than 192000 people directly and 1200000 indirectly. The data of eleven companies from this sector is analyzed to establish a relationship between profitability, leverage, capital employed, liquidity and cash conversion cycle. The data selected for this purpose ranges between 2008 and 2013. Multiple linear regression model is adopted for results. The outputs confirm that a negative considerable relation exists between return on assets, liquidity and cash cycle, whilst leverage and capital employed present a positive significant association with cash conversion cycle. Keywords: Cash Conversion Cycle (CCC), Profitability, Liquidity, Leverage (debt) and Capital Employed 1. Introduction Cash conversion cycle (CCC) is tool that is used to check the performance of a company with respect to its capital management. CCC is an imperative financial metric because it depicts organizational performance in financial terms and these results can be drawn from that data which is available in financial statements. One important aspect of finance is to collect cash immediately from account receivables and postpone the outflow of cash towards creditors. A firm with petite CCC vis-a-visextensive CCC typically highlights the organization is receiving cash immediately and paying on the date. Similarly, an organization with a shorter CCC is demonstrating efficient management of internal operations and ultimately it brining’s liquidity in its operations. CCC evaluates the time duration of funds that tied up with inventories and receivables, less the time duration that belongs to the payment of suppliers. Although companies and specially their financial managers mostly focus on long term investment and gave less attention towards working capital management but now firms are trying to focus on their short term investment because it help them to transfer one investment to other investment rapidly. Today companies are countering numerous challenges like prompt change in demands, cost behavior, market competition and specially their goal of maximizing shareholder’s wealth. Organizations are indulged in the usage of number of methods like Supply chain management (SCM) for achieving their goals. This method has the power to improve the three key components of financial performance which are profitability, growth and capital utilization. Though SCM is a good method to control their operations but CCC helps them to evaluate the efficiency of the management with respect to capital management. The idea of C2C leads towards the authenticity that a reduction in the time slot of CCC will lead toward operational as well as financial improvement while the reduction of C2C time can be achieved without increasing sales and reducing cost as well (Soenen 1993). Traditionally there are two measures were taken to check the liquidity position of an organization such as current and quick ratio but according to the (Aziz and Lawson 1989) and (Largay III and Stickney 1980)the results of these measures are questionable. In this paper the liquidity of automobile sector is checked on the basis of net balance position while net balance position expressing excess or shortage of cash after financing in working capital needs and fixed assets. (Hager 1976) was the person who introduced this dynamic liquidity measure with a name of CCC. 1-Background of the industry Pakistan’s automotive industry sector is depicting more growth as compare to other sectors because demand of all type of vehicles increasing day by day. Automotive industry is the second largest tax payer after the oil and petroleum sector of Pakistan. Though Pakistan is indulged to produced number of vehicles but still mostly vehicles, auto spare parts and components are imported from foreign countries which ultimately increase cost of production. This sector is providing jobs more than 192000 people directly and 1.2 million indirectly. The total investment in this sector is more than Rs 98 billion while it contributes Rs 63 billion as an indirect tax. Though in Pakistan there are 10 cars for 1000 people and this ratio is less than the other emerging economies but in