Abstract:
In light of the recent economic crisis, understanding how internal financial
management, particularly liquidity control, interacts with external economic shocks
is vital for sustaining business performance. While prior research has explored the
link between liquidity and profitability, limited attention has been given to this
relationship during periods of economic crisis defined in the Sri Lankan context. The
period 2019 to 2023 marked by severe foreign exchange shortages, inflationary
pressures, and supply chain disruptions, particularly within the manufacturing sector.
The analysis is based on panel data from ten manufacturing firms listed on the
Colombo Stock Exchange over the period 2019 to 2023. Liquidity is measured using
the current ratio and quick ratio, and profitability is assessed through return on assets,
return on equity, and return on sales. A dummy variable captures the presence of
economic crisis periods. The study applies a random effects panel regression model,
selected based on the Hausman Test, to evaluate the effects of these variables on firm
profitability. Findings reveal that while liquidity ratios exhibit a positive association
with profitability indicators, their impact is statistically insignificant. Surprisingly,
the economic crisis variable shows a significant positive effect on all three
profitability measures, which may be explained by firms’ adaptive responses such as
cost-cutting, efficiency gains, reliance on local sourcing, and increased demand for
domestic products due to import restrictions. These results suggest that during crisis
periods, manufacturing firms may adopt strategic adjustments such as cost reductions
and operational efficiencies that ultimately enhance profitability despite challenging
external conditions. The study contributes to empirical literature by highlighting the
nuanced role of economic crises in influencing firm performance beyond traditional
financial indicators. It underscores the importance of agile financial planning and
robust liquidity strategies during macroeconomic instability. The findings offer
practical insights for corporate decision makers and policymakers, and call for further
research incorporating broader firm specific and macroeconomic factors to better
understand profitability dynamics in emerging markets.
