Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Implications of collection period variance in the construction industry

Implications of collection period variance in the construction industry Despite economic growth in the construction sector of the USA, profit margins are persistently low. An examination of collection practices of over 400 construction firms revealed a high number of firms with a collection period ratio above 30 days. This study aims to examines the variance between collection period ratio (days in accounts receivables, DAR) and days in accounts payables (DAP) and its correlation with profitability ratios [e.g. gross profit margin (GPM) and net profit margin (NPM)].Design/methodology/approachDescriptive statistics were used to observe trends over three years of financial reporting (2013 through 2016), while correlation statistics were used to understand relationship or association between the different financial ratios and the collection period variance (CPV). Respondent firms were stratified by the North American Industry Classification System, company type and revenue size.FindingsConventional theory holds that increasing financial expenses because of collections negatively impacts profitability. Therefore, the hypothesis of the study suggested a statistical correlation between the CPV and profitability measures. Results of the study, however, supported the null hypothesis. Reasons for the lack of correlation are considered as well as necessary follow-up studies before rejecting the hypothesis.Originality/valueNo such study was found specific to the construction industry, and as such, this study contributes to better understanding the implications of extensive collection periods. Further, this study contradicts assumptions about the behavior of the construction industry and the causal relationship between extensive collection periods and profitability. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Management of Property and Construction Emerald Publishing

Implications of collection period variance in the construction industry

Loading next page...
 
/lp/emerald-publishing/implications-of-collection-period-variance-in-the-construction-8Uiydkurw0

References (32)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1366-4387
DOI
10.1108/jfmpc-01-2018-0004
Publisher site
See Article on Publisher Site

Abstract

Despite economic growth in the construction sector of the USA, profit margins are persistently low. An examination of collection practices of over 400 construction firms revealed a high number of firms with a collection period ratio above 30 days. This study aims to examines the variance between collection period ratio (days in accounts receivables, DAR) and days in accounts payables (DAP) and its correlation with profitability ratios [e.g. gross profit margin (GPM) and net profit margin (NPM)].Design/methodology/approachDescriptive statistics were used to observe trends over three years of financial reporting (2013 through 2016), while correlation statistics were used to understand relationship or association between the different financial ratios and the collection period variance (CPV). Respondent firms were stratified by the North American Industry Classification System, company type and revenue size.FindingsConventional theory holds that increasing financial expenses because of collections negatively impacts profitability. Therefore, the hypothesis of the study suggested a statistical correlation between the CPV and profitability measures. Results of the study, however, supported the null hypothesis. Reasons for the lack of correlation are considered as well as necessary follow-up studies before rejecting the hypothesis.Originality/valueNo such study was found specific to the construction industry, and as such, this study contributes to better understanding the implications of extensive collection periods. Further, this study contradicts assumptions about the behavior of the construction industry and the causal relationship between extensive collection periods and profitability.

Journal

Journal of Financial Management of Property and ConstructionEmerald Publishing

Published: Oct 30, 2018

Keywords: Management accounting; Benchmarking; Construction financial management; Profit margins

There are no references for this article.