Working capital management and its impact on the performance of Pakistani textile Industry

Submitted bySyed Hunain asghar1425606

salman khan1425600

majid javed kahut1425578

Department of management sciences, szabist-islamabad

ContentsChapter 1- Introduction21.1. Introduction21.2. Identification of the Gap:21.3. Problem Statement:21.4. Objective of the study:21.5. Significance of the study:31.6. Research Question:31.7. Delimitations:3Chapter 2-Literature Review32.1. Literature Review32.2. Theoretical framework:82.3. Proposed Hypothesis:8Chapter 3- Research methodology93.1. Research methodology93.1.1 Design of the study93.2. Population93.3. Sampling strategy:93.4. Unit of analysis:93.5. Time horizon:93.6. Instrumentation93.7. Statistical tests9

Chapter 1- Introduction1.1. IntroductionIn the success of the business, Working capital management has a very vital role, companies want to be highly liquid and as well as operational efficient at both time.Working capital management is related to the management of current assets. A firm with excessive amount of current assets can grab the opportunity in market at any time but a firm having lesser amount of current assets wont be able to invest in opportunity in front of it, there are number of ways to determine working capital Management i-e by cash conversion cycle and its sub variables and their effects on profitability. By adding the receivables with inventories and subtracting payables from them, we can calculate the cash conversion cycle (CCC) 1.2. Identification of the Gap:We selected first time using independent variable as Days payment outstanding, days receivables outstanding and days inventory outstanding and its effects on textile sector companies profitability. No such study has been conducted in this sector by using this variable as independent variables. 1.3. Problem Statement:The management of working capital is important to remain liquid enough to meet its sudden opportunity, can be short term and long term as well. But proper working management can cause increase in the profitability level of a firm as compared to others who does not manage its working capital? In this research project we will get to the solution to this problem statement by applying statistical techniques on panel data of 115 textile companies for time period of 5 years (2010 - 14).1.4. Objective of the study:The purpose of this study is to identify the effects of working capital management on the profitability of textile companies operating within Pakistan. The study is conducted with the help of the annual publication reports been issued by the State Bank of Pakistan. In this study we will also identify the variable which affects profitability. The study is conducted on this topic because it is necessary to identify the factors by which we can increase the profitability of a firm by simply increasing or decreasing them.1.5. Significance of the study:The significance of this topic and study is that to identify the best, more than one and minute ways which can cause boost in the profitability, working capital management includes different small areas whos timely and proper management can cause vital growth in profitability i.e. receivables, cash, inventories and liabilities etc. 1.6. Research Question:Our research question will be following:Is there any relationship between WCM and profitability of textile sectors firms in Pakistan?1.7. Delimitations:In this study we does not focusing on all sectors as its so difficult to study all the sectors. Our focus in this study is only textile sector of KSEWe in this study does not focusing on primary data as our research study can possible on secondary data so we are using secondary data in this study.One dimension study: we in this research dose not focusing on many dimensions like exploratory, causal or predictive we in this study focusing only on descriptive study as in this study our focus is on textile sector and we know all the related information about that sector and the characteristics of this sector.

Chapter 2-Literature Review2.1. Literature ReviewCompanies put their capital in fixed and current assets i.e. land, building, equipment and short term investment (working capital).there are three types of investing in working capital: aggressive, moderate (or matching) and conservative. Aggressive is when working capital is characterized by high risk and return, Moderate or matching is when working capital is characterized with medium level of risk and as well as return and the conservative possess lowest or minimum risk and return.In this study non-financial companies are selected to support the research project the data of non-financial textile companies is taken from the State Bank of Pakistan annual report publications, to utilize the data different variables and sub variables were identified. Days Inventory Outstanding (DIO), Days Receivable Outstanding (DRO), Days Payable Outstanding (DPO) were used as independent variable and sub-parts of Cash Conversion Cycle (CCC) which in this case will work as dependent variable and independent variable for profitability in the form of working capital. Deloof (2003) investigated the relationship of working capital management and corporate profitability with sample of 1,009 large Belgian non-financial firms for the period of 1992-96. The conclusion suggested that there was significant negative relationship between gross operating income and the number of days account receivables, inventories and account payables of Belgian firmsAzam and Haider (2011) conducted a study with a purpose to identify the performance of firms with respect to working capital management in Karachi Stock Exchange (KSE-30) index companies. They analyzed data period of 2001 2010. In the result of the study it was derived that inventory turnover in days has negative relationship with return on assets and return on equity which is firms performance which on the other hand means that companys performance can be increased by reducing inventory in days.Mousavi and Jari (2012) conducted a research work on the relationship of working capital management and firms performance in this work they took proxies both for performance and working capital management i.e. Return of Assets, Return of Equity respectively. The result of their study concluded that there was significant relation between profitability and components of working capital.Ahmed (2013) conducted a research project on impact of working capital management on performance. The result suggested that the Current Assets over Total Assets showed significant relationship with Return on Asset (ROA) and Return on Equity (ROE) which were used as a proxy for profitability.Raheman, Afza, Qayyum and Bodala (2010) also worked in this regard their study: working capital management and corporate performance of manufacturing sector in Pakistan. Study includes that Cash Conversion Cycle (CCC), Inventory Turnover in Days have significant effect on the performanceErikrehn (2012) researched on effects of working capital management on company profitability, the researcher took data so that to compare Finnish and Swedish firms in terms of working capital, the correlation and independent t-test analysis showed that there is significant negative relation between net trade cycle and profitability as it is with the cash conversion cycle (CCC) this conclusion derived is in-line with Marc Deloof (2003).KhalafTaani (2012) conducted a research work on impact of working capital management policy and financial leverage on financial performance , vairables used were Net income , Return on Assets , return on equity. The research result concluded that working capital management policy has no significant impact on the return on assets (ROA) and return on equity (ROE).Lazaridis, Tryfonidis (2004) also working on relationship between WCM and Profitability, the variables identified were the components of CCC and proxies of profitability. The result showed significant results between CCC and profitability.Uyar (2009) studied the relationship of CCC with the Firm Size and Profitability for the firm,The study showed that there is significant negative relationship between CCC and Profitability & as well as Cash Conversion Cycle with Firm Size.Mohamad and Saad (2010) conducted a research work on working capital management effects on the financial performance. The variables used were current assets to total asset ratio (CATA), current assets to current liabilities ratio (CACI), current liability to total assets ratio (CLTA), return on assets (ROA), return on equity (ROE) and cash conversion cycle (CCC).Karaduman et al (2011) also worked in the same field, the variables were choose i-e ROA and CCC. The end result illustrated that the cash conversion cycle has significant positive relationship on return on assets which is profitability level of a company.Gill (2010) seeks to the relationship between a firms working capital management and profitability, the result indicated that there is significant relationship between cash conversion cycle and profitability, which is measured through gross operating profitDong and Soo (2010) also evaluated the relationship between working capital management and companys profitability, The result derived was negative relationship between profitability and cash conversion cycle.Neab and Noriza (2010) worked on to find the relationship between Working Capital Management (WCM) and financial performance of firms. The end derived result was negative in relation with working capital variables and the firms performance.SaswataChatterjee (2010) focused on the importance that how both fixed and current assets play role in the successful running of any organization. The dimensions of working capital management included in this research which is quick ratios, current ratios, cash conversion cycle on the net operating profitability of the UK companies.Mathuva (2009) studied the impact of working capital management on the performance.Sen. M (2009) examined the ISE (Istanbul Stock Exchange) listed firms and checked out the relationship with the working capital. According to them there is negative relationship among variables which were cash conversion cycle and its components and profitabilityTerual and MartinezSolano (2007) also provided the empirical relationship between both the variables. After the analysis it was found out that the negative relationship between the profitability and the number of days accounts receivable and days of Inventory. But it did not provide the exact impact of no. of days account payable effect on profitability.Ganesan (2007) selected telecommunication equipment industry to study the effectiveness of working capital management.Filbeck G. et al. (2005) investigated the data of 26 industries, we determine that these measures for working capital vary extensively with in industry with the passage of time.Afza, T. and MS Nasir (2007) found no significant relationship between working capital management policy and financial performance among the 208 public limited companies listed in the Karachi Stock Exchange.Wajahat Ali and Syed HammadUl Hassan (2010) study of 37 listed companies showed no significant relationship between profitability and working capital management policy when grouped as aggressive, defensive or conservative based on cash conversion cycle.Raheman at al (2010) conducted a research work on the relationship of working capital management and firms performance.Oghloo and jence (2008) conducted a research project on impact of working capital management on performance. Multiple Regression techniques and correlation techniques were implemented on the data to derive the result.Annuar et al (2007) also studied working capital management and corporate performance, the panel data methodCharitou and Elfani (2010) conducted research and it showed that Results show that leverage and operating cash flow has significant relationship with net liquidity balance and working capital requirement.Czyzewski and Hicks (1992) research showed that working capital management policy has no significant impact on profitability.Charitouet at al (2010) also worked on same field, the cash conversion cycle (CCC) and components of Profitability were used as variables.Jose at al. (2003) studied the corporate return and CCC, The result concluded that lower cash conversion cycle which is due to aggressive liquidity management is associated with higher profitability level.amilolu and Demirgne (2008) conducted a study, empirical findings of the study show that account receivables period, inventory period and leverage affect firm profitability level negatively, while growth in sales affects firm profitability positively.Dong (2010) analyzed the profitability and liquidity is affected by working capital management.

2.2. Theoretical framework:

Fig:

WORKING CAPITAL MANAGEMENT1. DRO2. DPO3. DIO

CCCProfitability

The matrices used by working capital management are: Days Receivable Outstanding (DRO), Days Payables Outstanding (DPO), and Days Inventory Outstanding (DIO) these are some matrices which works as independent variables for Cash Conversion Cycle (CCC) and CCC works as working capital and working capital management works as independent for profitability.2.3. Proposed Hypothesis:H1: There is a significant and positive relationship between Working Capital Management and profitability.HO: There is an insignificant relationship between Working Capital Management and profitability.

Chapter 3- Research methodology3.1. Research methodology 3.1.1 Design of the study Research design is one of the most important part of a research, which show the path to the researcher to achieve the ultimate objective of the research. We have carefully developed the research design for our research. In this research the data will be collected from 115 registered textile firm of Pakistan. Furthermore for better arrangement and collection of data simple random sampling technique will be used. 3.2. Population All the textile firms of Pakistan, which are directly registered with Karachi Stock Exchange.3.3. Sampling strategy:In order to better arrangement and collection of data we will use simple random sampling method to collect the data. The sample size we use in this research study is 115 firms of textile sectors. This sample size covers almost 70% of the textile sector. The duration covered in our study is 5 years which is from 2010 to 2014 for this analysis3.4. Unit of analysis:We are studying textile sector of Pakistan in which our sample size is 115 firms which is listed firms of KSE.3.5. Time horizon:Estimated time to complete our thesis keeping in view other core subjects work 2 3 months will required.3.6. InstrumentationPooled OLS Regression model will be used for implementation to get results through SPSS software.3.7. Statistical testsSimple linear regression test will be implied in order to test the hypothesis, further more Correlation and descriptive analysis will be conducted to know the relationship between the independent variables and dependent variables.

4.0. ReferencesDeloof, M. (2003). Does Working Capital Management Affect Profitability in Belgian Firms? Journal of Business Finance & Accounting, Vol. 30 (3/4), 573587.Muhammad Azam., &IrfanHaider, (2011).Impact of Working Capital Management on Firms Performance.Interdisciplinary Journal of Contemporary Research in Business, Vol. 3, No 5.Zahra Mousavi., &AzamJari, (2012). The Relationship between Working Capital Management and Firms Performance. International Journal of Humanities and Social Science, Vol. 2, No 2.Irfan Ahmed, (2013). Impact of Working Capital Management on Performance. International Conference on Business management (ISBM: 978-969-9368-06-6)Abdul Raheman., Abdul Qayyum., TalatAfza., & Ahmed Bodla, (2010).Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan.International Research Journal of Finance and Economics, ISSN 1450-2887, Issue 47.Erik Rehn., (2012). Effects of Working Capital Management on Company Profitability.Department of Accounting, Hanken School of Economics Helsinki.KhalafTaani., (2012). Impact of Working Capitan Management Policy and Financial Leverage on Financial Performance: Empirical Evidance from Amman Stock Exchange Listed Companies. International Journal of Management Science and Business Research, (ISSN: 2226-8235), Vol. 1, Issue 8. LoannisLazardis.,&DimitriosTryfonidis (2000). The relationship Between working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Business Finance & Accounting, 30 (3) (4), P. 585.Uyar, A. (2009). The Relationship of Cash Conversion Cycle with Firm Size and Profitability: An Empirical Investigation in Turkey. International Research Journal of Finance andEconomics. 24.Binti Mohammad nor Edi Azhar&NorizaBintiMohdSaad (2010). Working Capital Management: The Effect of Market Valuation and Profitability in Malaysia. International Journal of Business and Management, Vol. 5, No. 11.Gill, A., Biger, N., Mathur, N. (2010). The relationship between working capital management and profitability: Evidence from the United States. Business and Economics Journal, 10, 1-9.Dong , H ., J.Su . 2010 . The relationship between working capital management and profitability : A Vietnam case .International Research Journal of Finance and Economics ,Issue 49 .Mohammad Neab and Noriza BMS. (2010), Working Capital Management: The Effect of Market Valuation and Profitability in Malaysia, International Journal of Businessand Management, Vol. 5, No. 11, Page 140-147.SaswataChatterjee (2010), Impact of Working Capital Management on the Profitability of the Listed Companies in the London Stock Exchange,www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1587249Teruel PJG. & Pedro MS. (2007), Effect of Working Capital Management on SME Profitability, International Journal of Managerial Finance, Vol. 3, No. 2 Page 164-177.Ganesan (2007), An Analysis of Working Capital Management Efficiency intelecommunication Equipment Industry.Rivier Academic Journal.vol. 3(2), pp. 1-10.Filbeck G. & Thomas M.K. (2005), An Analysis of Working Capital Management Results Across Industries, Mid-American Journal Of Business, Vol.20, No.2, Page 11-18.Afza, Talat&MianSajidNazir, 2008. Working Capital Approaches and Firms Returns in Pakistan, Pakistan Journal of Commerce and Social Sciences, Vol.1, pp.25-36.Wajahat Ali and Syed HammadUl Hassan. 2010. Relationship between profitability and working capital policy of Swedish companies. Essays.se, Retrieved from Swedish University Essays.Raheman ,Abdul . , Afza ,Talat . , Qayym ,Abdul . , MahmoodAhmad .( 2010 ) Working Capital Management and Corporate performance of manufacturing sector in Pakistan . International Research Journal of Finance and Economics .issue 47 ,pp . 151 163 .Czyzewski, A.B., and D.W. Hicks, (1992). Hold Onto Your Cash. Management Accounting.27-30.Charitou ,MelitaStephaniu . , Elfani ., Marita . , Lois ,Petros . ( 2010 ) . The effect of WorkingCapital Management on firms Profitability : Empirical evidence from an Emerging Market . Journal of Business and Economic Research .Vol .8 , No . 12 ,pp . 63 68 .Jose, M. L., C. Lancaster, and J. L. Stevens, (1996).Corporate Returns and Cash Conversion Cycles.Journal of Economics and Finance. 20(1), 33-46.Samiloglu, F. and K. Demirgunes, (2008). The Effects of Working Capital Management on Firm Profitability: Evidence from Turkey. The International Journal of Applied Economics andFinance. 2(1), 44-50.Dong , H ., J.Su . 2010 . The relationship between working capital management and profitability: A Vietnam case .International Research Journal of Finance and Economics ,Issue 49 .

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