Liquidity Management Policies on Determinants of Profitability: A Study of High-Liquidity Turnover Non-Financial Companies in Sri Lanka

Abstract

Received: 12/08/2025 Revised: 20/11/2025 Liquidity management involves policies for investing in and financing the firm’s current Accepted: 10/02/2026 assets, and determining the optimal level is challenging for enhancing profitability. The study Published: 15/06/2026 examines whether high-liquidity turnover companies in Sri Lanka employ conservative or aggressive liquidity management policies to invest in current assets and secure short-term and long-term financing, and how these policies impact the firms’ profitability. The study’s sample comprised 56 high-liquidity turnover companies from the materials, capital goods, and retail sectors, and was divided into two samples: Sample A, representing product-oriented companies (materials and capital goods companies), and Sample B, representing productoriented and distributed-oriented companies across the three sectors. The analysis covered the period 2013 to 2022 using an E-Views panel regression. The overall findings of the study reveal that high-liquidity turnover firms have a conservative financing policy since the firms have short-term financing less than current assets, which is nearly half of the total assets. The increase of short-term financing creates liquidity risk and refinancing pressure, and therefore, high-cost volatility significantly reduces profitability. Furthermore, sale is the key factor in enhancing profitability. The study concludes that a firm should maintain current assets to settle the total amount of short-term liabilities and reduce short-term financing (following a conservative financing policy) to support enhanced profitability. Finding the best combination of current assets and short-term debt for increasing profitability is one of the major roles of the financial managers for long-term financial viability through considering the type of industry, firm factors, and skills for predicting fund flow. The findings support the stakeholders, such as shareholders, managers, and policy makers to selecting the best combination of liquidity management policies.