Impact Of Working Capital Management Finance Essay

The intent of this survey is to look into the impact of working Capital Management on houses ‘ public presentation for non-financial establishments listed in Karachi Stock Exchange ( KSE-30 ) Index. A panel information has been used in this survey for 30 Kse-30 Index listed houses over a period for the twelvemonth 2009 to 2011. The consequences are obtained to place the relationship between working capital direction and houses ‘ public presentation. The findings show that working capital direction has important impact on houses ‘ public presentation and it is concluded that directors can increase value of portion holder and return on plus by cut downing their stock list size, hard currency transition rhythm and net trading rhythm. Increase in liquidness and clip period to supplier will besides take houses ‘ overall public presentations.

Cardinal Wordss: Working Capital Management, Firms ‘ Performance, KSE-30 Index.


Working capital direction play an of import function for increasing profitableness for working capital intensive every bit good as fixed capital intensive companies. Cash and stock list direction addition profitableness for working capital intensive companies and yearss working capital and debt ratio are of import to better profitableness for fixed capital intensive companies. ( Ching, Novazzi & A ; Gerab 2011 ) Manufacturing sector is the 2nd largest sector of Pakistan economic system. The portion of fabricating sector in GDP is 18.2 % in 2009. 18.6 % in 2010 and 18.7 % in 2011. ( Economy Surveys of Pakistan, 2008-2009, 2009-2010, 2010-2011 ) The aim of this paper is to look into the relationship between the Working Capital Management and Profitability for 30 fabrication companies listed on Karachi Stock Exchange ( KSE ) for three old ages from 2009 to 2011.

From the figure of old ages different foreign research workers Melita stephanou in Cyprus during 2010, Mehmet SEN in Turkey during 2009, Olufemi I. Falope in Nigeria during 2009, Osama Suhall Hayajneh in Jordanian during 2011, Prabath Suranga Marawakge in Sri Lanka Mohammad Alipour in Iran during 2011, Amarjit Gill in America during 2010, Kesseven Padachi in Mauritian during 2006 and Adina Flena Danuletiu in Alba County during 2010 have studied the impact of Working Capital Management on Profitability.

Degree of aggressiveness of working capital investing and funding policies are positively associated with each other but negatively associated with Profitability. ( Afza & A ; Nazir, 2008 and 2011 ) Working Capital Management has a relationship with profitableness and hazard of concern. Profitableness of a house can be reduced due to over investing in Working Capital which is the consequence of inefficient Working Capital Management. The house besides has to confront fiscal trouble, if there is deficient sum of Working Capital which is the consequence of inefficient Working Capital Management. Working Capital Management is affected by capital outgo. ( Appuhomi, 2008 ) The directors of the houses have to make an appropriate balance between Profitability and liquidness at the clip of pull offing working capital. The directors should earnestly concentrate on Working Capital Management for the addition in profitableness. ( Karaduman, Akbas, Ozsozgun and Durer, 2010 ; Bhunia & A ; Khan, 2011 ) This research helps the directors of fabricating companies to make a all right balance between aggressive and conservative direction of working capital.

Cash Conversion Cycle and its constituents Average Collection Period, Average Payment Time period and Inventory Turnover in Days are negatively associated with different steps of profitableness. ( Falope & A ; Ajilore, 2009 ; Hayajneh & A ; Yassine, 2011 ; Caritous, Elfani & A ; Lois, 2010 ) Profitableness has a negative relationship with figure of yearss Account Receivable and figure of yearss Inventory. ( Dong, Su, 2010 ) . Cash Conversion Cycle, Current Ratio, Average Collection Period and Inventory Period all these variables have inverse relationship with Return on Assets which is index of Profitability. ( Sen, Oruc, 2009 ) . Longer Inventory Turnover period and Average Collection Period leads to take down Profitability which is measured by Return over Assets ( Padachi, 2006 ) . Indexs of Working Capital Management like Average Collection Period, Inventory Turnover and Cash Conversion Cycle are negatively related to profitableness. But Average Payment Period has a positive relationship with profitableness. ( Alipour, 2011 ) .

The consequences of same variables can be different for different states and different sectors. Gill, Biger, Mathur ( 2010 ) there is no important relationship between Inventory turnover, Average Payment Time period and Profitability. There is a positive relationship between Cash Conversion Cycle and Profitability. Decrease in Average Collection Period decreases the hard currency spread which leads to increase in Profitability, so Average Collection Period has a negative relation with Profitability. Danuletiu ( 2010 ) If the companies of sample belong to different sectors so the relationship between steps of Working Capital Management and Profitability may be a weak relationship.

Different research workers have studied the relationship between Working Capital Management and Profitability in Pakistani Context. Raheman, Nasr ( 2007 ) Profitableness and Liquidity are two major aims of any concern. The directors have to accomplish the balance between these two aims. Both aims can non be enjoyed on the cost of each other. Independent variables Average Collection Period, Inventory Turnover in Days, Average Payment period, Cash Conversion Cycle and Current Ratio which are indexs of Working Capital Management are strongly negatively associated with Net Operating Profitability. Afza & A ; Nazir ( 2011 ) Working Capital Management is see as a back bone of house ‘s profitableness, hazard and its value. Different constituents of Working Capital Management such that stock lists, history receivables, hard currency and histories collectible should be managed expeditiously. Alam, Ali, Rehman, Akram ( 2011 ) Cash Conversion Cycle has negative relation with Return on Assets and Return on Invested Capital which are the steps of Profitability. Efficient direction of constituents of Cash Conversion Cycle will increase the Profitability. Current Ratio besides has a strong negative impact on the Profitability. Raheman, Afza, Qayyum, Bodla ( 2010 ) Performance of fabrication houses has direct relationship with the working capital direction. Cash Conversion Cycle Average Collection Period, Inventory Turnover in Days negatively related to net operating profitableness. Average Payment Time period has positive association with net runing profitableness.

With the survey of relationship between Working Capital Management and Profitability policy shapers and determination taking governments can pull off the on the job capital expeditiously. ( Chhapra & A ; Naqvi, 2010 ) The findings of that research help the directors to plan new policies and revise the bing policies for the betterment in countries of debts aggregation, debts payment, stock list direction, working capital direction, profitableness and liquidness of house. Furthermore the concerns of different nature can find the minimal sum of working capital which is required for any peculiar sector which is studied in that research.

Literature Review

Working capital is a major usage of financess but it besides plays a function of beginning of liquidness when house face the fiscal trouble. But working capital is neglected in fiscal literature with regard to both functions as a usage and beginning of financess. ( Fazzar & A ; Petersen, 1994 ) A hebdomad relationship exists between working capital direction and profitableness. ( Bhunia & A ; Khan, 2011 ) Some of import documents published in different diaries in different old ages are reviewed to research the relationship between working capital direction and profitableness as follow:

Cash Conversion Cycle

Wongthatsanekorn ( 2010 ) Cash transition rhythm is comprehensive step of effectual capital direction. It is the length of clip between concern ‘s existent hard currency outgos for end product and grosss of hard currency from the sale of end product. Hill, Kelly and Highfield ( 2010 ) a direct relationship exist between operating hard currency flow and hard currency transition rhythm.

Velmathi and Ganesan ( 2011 ) hard currency direction has an indirect relationship with stockholder value in Indian commercial vehicle companies such as Ashak Leyland Ltd. , Tata Moters Ltd. and Force Moters Ltd. Eljelly ( 2004 ) a strong opposite association nowadays between profitableness and liquidness indexs such as current ratio and hard currency transition rhythm. Cash transition rhythm is an appropriate step of liquidness with in sector as compared to current ratio. These consequences are valid for capital oriented companies such as fabrication and agribusiness sector. Cash transition rhythm is less utile step of liquidness for labour oriented companies such as service sector.

Mohamd and Saad ( 2010 ) hard currency transition rhythm show an reverse association with return on assets ( ROA ) and return on invested capital which are steps of profitableness. Uyar ( 2009 ) hard currency transition rhythm ( CCC ) has a strong indirect relationship with return on assets ( ROA ) which is an index of profitableness but CCC has a hebdomad association with return on equity ( ROE ) which is besides a step of profitableness. Firms with shorter CCC have no demand of external finance due to which their involvement cost becomes lower and profitableness additions.

Average Payment Time period

Banomyong ( 2005 ) the mean clip required to buy goods and do payments against these goods is known as mean payment period. Teruel and Solano ( 2007 ) mean payment period has no association with profitableness. Vijyakumar ( 2011 ) mean payment period and profitableness move in same way.

Jamal, Sarker and wang ( 2000 ) mean payment period depends on selling monetary value and unit cost. As difference between sale monetary value and unit cost increases the mean payment period becomes lower. Deloof ( 2003 ) in Belgian house ‘s mean payment period has an reverse association with a profitableness step ( Gross runing income ) .

Ramachandran and Janakiraman ( 2009 ) higher mean payment period leads to diminish in profitableness. Less profitable houses get the benefit of recognition footings. Stephen and Elvis ( 2011 ) indirect association exists between mean payment period and Gross Profit. Shaji and Palanichamy ( 2011 ) an reverse relationship exist between mean payment period and profitableness

Average Collection Period

Banomyong ( 2005 ) mean figure of yearss required to roll up the hard currency from the debitors generated from the recognition sale of goods or services is called mean aggregation period. Chowdhury and Amin ( 2007 ) Pharmaceutical companies listed on Dhaka stock exchange are efficient in liquidness and investing determinations because of efficient direction of hard currency, account receivables and collectible.

Velmathi and Ganesan ( 2011 ) history receivables has an opposite relationship with stockholder value in an Indian commercial vehicle company Force Moters Ltd. Malina and Preve ( 2009 ) the houses increase the history receivables when profitableness job occurs and diminish the histories receivables when financess are non available.

Mathuva ( 2010 ) an reverse relationship exist between mean aggregation period and profitableness. For the intent to go more profitable the houses should cut down the mean aggregation period. Ramachandran and Janakiraman ( 2009 ) the houses should cut down the hard currency spread which decreases the mean aggregation period which in bend increases the profitableness. Stephen and Elvis ( 2011 ) mean aggregation period has an reverse association with Gross Profit Margin. Chu ( 2009 ) big fabrication companies are efficient in roll uping debts from debitors, therefore mean aggregation period is lower and net income earning capacity is higher.

Inventory Conversion Period

Wongthatsanekorn ( 2010 ) mean clip period required to change over natural stuff into salable merchandise ( goods/services ) and so sale out that merchandise ( goods/services ) is called inventory transition period. Bhattacharya and Gaur ( 2011 ) finished goods stock list has an indirect relationship with profitableness. But natural stuff stock list and work in procedure stock list have no consequence on gross net income. Without effectual stock list public presentation competition with rivals is non possible.

Chowdhury and Amin ( 2007 ) higher volume of stock list is non an indicant of inefficient direction for Pharmaceutical companies in Bangladesh. A positive relationship exists between higher stock list degrees and public presentation. Mathuva ( 2010 ) a direct relationship exists between stock list transition period and profitableness. Higher stock list degree secures the uninterrupted production procedure and handiness of merchandise to clients.

Teruel and Solano ( 2007 ) profitableness and stock list turnover are negatively related to each other. Deloof ( 2003 ) age of stock list indirectly related to gross runing income which is an index of profitableness. Chu ( 2009 ) stock list transition period is lower for big fabrication companies because these are good in pull offing stock lists which increases the profitableness. Vijyakumar ( 2011 ) profitableness move upward when stock list transition period moves downward.


Profitableness means the ability to gain net income. Profitableness can be defined in footings of client satisfaction. Greater the client satisfaction higher the profitableness through the intervening function of client trueness and frailty versa. This relationship may be undistinguished in short tally due to some other factors but strongly positive in long tally. Customer satisfaction is a clip taking procedure so houses have to wait longer to go profitable. ( Bernhardt, Donthu & A ; Kennett, 2000 ; Hallowell, 1996 ) Anderson, Fornel and Lehmann ( 1994 ) Product quality leads to increase in profitableness through step ining function of client satisfaction. Theoretically a positive relationship exists between long life client and profitableness. But Reinartz and Kumar ( 2000 ) through empirical observation proved that it is non mandatory that long life clients generate more net incomes because long life clients pay merely mean monetary values and the cost of functioning the long life clients is non lower. Market orientation and market growing besides affect the profitableness to some extent. Marker orientation and market growing are the basic determiners of profitableness for trade good and non trade good concerns. Market orientation has a direct relationship with profitableness ( Narver and Slater 1990, 2000 )

For Australian houses a important direct relationship exists between profitableness and house ‘s size and capital degree. Few Australian houses have a strong direct association of profitableness with concentration. Gearing ratio has an opposite relationship with profitableness. ( Feeny, 2000 ) Performance of the house depends on the ownership construction and struggles of involvement of stockholders. Joh ( 2003 ) if features of house and industry remain same, profitableness positively associated with ownership concentration. If the difference degree between control rights and ownership rights is higher profitableness becomes lower. Future

profitableness can be defined in footings of dividend alterations. Nissim and Ziv ( 2001 ) Increase in dividend has a direct relationship with gaining capacity for coming two old ages, but negative alteration has no relationship with future profitableness if current and expected profitableness is controlled. Hill, Kelly and Highfield ( 2010 ) as the sale additions and recognition criterion are relaxed the net income becomes higher. Shaji and Palanichamy ( 2011 ) variables related to the house ( fiscal plus & A ; size of house ) and economic system related variables ( GDP & A ; involvement rate ) have strong direct relationship with profitableness.

Nazir and Afza ( 2009 ) if houses are aggressive toward the working capital investing and funding policies profitability moves downward. Caballero, Tervel and Solano ( 2011 ) SMEs have an optimum on the job capital degree which create a balance between costs and benefits. A concave relationship exists between working capital degree and profitableness. As the houses move off from the optimum degree profitableness decreases. If the major elements of working capital ( hard currency transition rhythm, Account receivables and Inventory ) managed efficaciously profitableness goes up. ( Sayaduzzaman, 2006 ; Rajesh & A ; Reddy, 2011 )


The consequences show that mean payment period has a negative relationship with profitableness which means providers of less profitable have to wait longer for payment. The houses should detain the payment to providers and put these financess saved financess for clip to increase the profitableness. Harmonizing to consequence mean aggregation period has a direct relationship with profitableness which means houses have relax recognition policy. The houses should roll up the debts from recognition client haste and put these collected financess which in bend profitableness moves upward. There is an reverse association of stock list transition period with profitableness which means less profitable houses take more clip to change over natural stuff stock list into finished goods or sale the finished goods. The houses should cut down the clip period from purchase of natural stuff to sale the finished goods.

There is a positive association of hard currency transition rhythm with profitableness and alteration in hard currency transition rhythm does non convey any major alteration in profitableness. The house should cut down the hard currency spread and put the financess collected from debitors which in consequence better the profitableness.

The houses are more conservative sing the direction of working capital, there is demand of aggressive attack for direction of working capital but liquidness of houses does non affected by aggressive attack.