Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.11, No.14, 2020 9 An Evaluation of Inventory Management Practices Impact on Return on Asset: A Study on Beverage, Food and Tobacco Sector Listed Companies of Sri Lanka V.Sritharan 1* S.Sivalingam 2 1. Department of Accounting university of Jaffna, Jaffna, Sri Lanka 2. Faculty of graduate studies, university of kelaniya, kelaniya, Sri Lanka Abstract Inventory is a vital part of current assets mainly in manufacturing and business concerns. Huge funds are committed to inventories as to ensure smooth flow of production and to meet consumer demand. Inventory management plays a crucial role in balancing the benefits and cost associated with holding inventory. Effective and efficient inventory management goes a long way in survival of a business firm. Inventory management practices effects on return on asset of the companies in beverage food and tobacco sector in Sri Lanka Colombo stock exchange at a great scope. A panel data from 2012 to 2016 was gathered for the analysis from the annual reports of 20 beverage food and tobacco sector firms considered. The multiple regression model was applied in the data analysis to find out the relationship between inventory management practices and return on asset. The variables used include inventory conversion period, operating cycle, current ratio, cash conversion cycle and return on assets. The results provide a significant positive relationship between inventory conversion periods and return on asset. In addition to that, cash conversion cycle was found significant negative relationship with the profitability measures of return on asset. Keywords: Inventory Management; Beverage Food and Tobacco sector; Return on asset DOI: 10.7176/RJFA/11-14-02 Publication date:July 31 st 2020 1. Introduction Inventory plays a significant role in the growth and survival of all organizations. Managing assets of all kinds can be viewed as an inventory problem; the principles used in inventories can also be applied to cash and fixed assets too. Usually, the literature of inventory focuses on production and procurement as the principal determinants of corporate inventory policy and management. In this sense, the trade-off between ordering costs and holding costs characterizes the transactions approach to inventory management represented by the Classic (s, S) policy model and Economic Order Quantity (EOQ) models of inventory developed many decades ago. In recent years, as the field of operations management has developed, many new concepts have been added to the list of relevant inventory control topics (Koumanakos, D 2008), The Effect of Inventory Management on Firm Performance). The just-in-time (JIT), material requirements planning systems (MRP) and enterprise resource planning (ERP) methods while another emerging stream of studies postulates that the characteristics of a firm’s demand and marketing environments also play an important role in determining optimal corporate inventories and these are more management-oriented. Notwithstanding the theoretical or practical shortcomings inherent in these concepts and techniques, their application in real business life should have an effect in firms’ performance (Koh et al., 2007). Building on this intuition, our purpose of this study is to explore the impact (if any) of inventory management on Sri Lankan Beverage Food and Tobacco company’s profitability. Inventory conversion period (ICP), current ratio (CR) operating cycle (OC) and cash conversion cycle (CCC) serve as our proxy for the implementation of inventory management whereas Return on Asset was used as the profitability of beverage food and tobacco Companies of Sri Lanka. Most literature texts declare that cost minimization or profit maximization is the main criteria for optimal inventory management, for example, an inventory manager’s goal is modeled at minimizing cost or maximizing profit while satisfying customers’ demands. The combined impact of demand planning, inventory optimization, and profit maximization can result in huge savings through reduced inventory in the system, lower clearance costs and better financial efficiencies. However, it is a large effort and it impacts a large number of users in an enterprise. Too much inventory consumes physical space, creates a financial burden, and increases the possibility of damage, spoilage and loss. Furthermore, excessive inventory frequently compensates for inefficient and sloppy management, haphazard scheduling, poor forecasting, and inadequate attention to the process and procedures. Conversely, too little inventory often disrupts business operations, and increases the probability of poor customer service. In many cases good customers may become furious and take their business somewhere else if the desired product or service is not immediately available. In the operations management literature, the question of how much inventory a firm should keep has been extensively studied even though there is dichotomy in the views given that inventory is both an asset and a liability.