Submitted to:

Miss Shabnam Khan

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 Abstract

Management of working capital which aims at maintaining an optimal

balance between each of
The working capital components, that is, cash, receivables, inventory and
payables is a fundamental part of the overall corporate strategy to create
value and is an important source of competitive advantage in businesses
(Deloof, 2003). The main objective of the study was to establish the
relationship between working capital management and financial performance
of manufacturing firms listed in KSE. The research used both descriptive and
quantitative research design. The population of interest in this study
constituted all manufacturing companies quoted at the KSE for the period of
five years from 2007 to 2011.The quantitative research approach was
employed to arrive at the findings of the study.

Contents
1. INTRODUCTION:.........................................................................................1
1.1 PURPOSE STATEMENT:..........................................................................3
1.2 Objective of the study:.........................................................................3
1.3 Hypothesis:..........................................................................................4
1.4 Significance of Study............................................................................4
1.5 Limitation & De-Limitation...................................................................5
2. Literature Review.......................................................................................5
3. Methodology..............................................................................................8
3.1 Paradigms............................................................................................8
3.2 Population............................................................................................8
3.3 Sample and sample technique.............................................................8
3.4 Methods of data collection.................................................................9
3.5 Analysis.............................................................................................10
3.6 Ethical consideration..........................................................................10
4. References...............................................................................................10

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 1. INTRODUCTION:
Working capital management is important because of its effects on the firms
profitability and risk, and consequently its value (Smith, 1980). Specifically,
working capital investment involves tradeoffs between profitability and risk.
Decisions that tend to increase profitability tend to increase risk, and,
conversely, decisions that focus on risk reduction will tend to reduce
potential profitability. Gitman (1974) argued that the cash conversion cycle
was a key factor in working capital management. Actually, decisions about
how much to invest in the customer and inventory accounts, and how much
credit to accept from suppliers, are reflected in the firms cash conversion
cycle, which represents the average number of days between the date when
the firm must start paying its suppliers and the date when it begins to collect
payments from its customers. Previous studies have used measures based
on the cash conversion cycle to analyze whether shortening this cycle has
positive or negative effects on the firms profitability.

Empirical evidence relating working capital management and profitability in

general supports the fact that aggressive working capital policies enhance
profitability (Jose et al., 1996; Shin and Soenen, 1998; for US companies;
Deloof, 2003; for Belgian firms; Wang (2002) for Japanese and Taiwanese
firms). This suggests that reducing working capital investment is likely to
lead to higher profits.

The working capital meets the short-term financial requirements of a

business enterprise. It is a trading capital, not retained in the business in a
particular form for longer than a year. The money invested in it changes form
and substance during the normal course of business operations. The need for
maintaining an adequate working capital can hardly be questioned. Just as
circulation of blood is very necessary in the human body to maintain life, the
flow of funds is very necessary to maintain business. If it becomes weak, the

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business can hardly prosper and survive. Working capital starvation is
generally credited as a major cause if not the major cause of small business
failure in many developed and developing countries (Rafuse, 1996). The
success of a firm depends ultimately, on its ability to generate cash receipts
in excess of disbursements. The cash flow problems of many small
businesses are exacerbated by poor financial management and in particular
the lack of planning cash requirements (Jarvis et al, 1996).
Effective management of working capital consists of two steps which
are planning for resources and controlling them. Both of these are required to
facilitate the firm in meeting its short term obligations and also to let the firm
avoid wastage of resources by over investment in current assets (Eljelly,

2004). . Not with standing these extraordinary developments Pakistans

economy posted a robust growth of 5.8 percent in 2007-08, as against 6.8
percent last year and this years target of 7.2 percent. When viewed in the
medium-term perspective, Pakistans growth performance is still striking,
with real GDP growing at an average rate of 7.0 percent per annum over the
last five years (2004-08). The growth of this magnitude not only shows its
resilience but also provides a source of optimism that regaining the growth
momentum through a combination of adjustments and reforms is very much
a plausible assumption. The NFA of the banking system registered a net
contraction of Rs.289 billion compared to an expansion of Rs.84 billion during
this period. This contraction in NFA is attributable to delays in the issuance of
GDRs, sovereign bonds, lower than expected receipts on account of logistics
support, decline in foreign investment, lower inflows from multilateral
institutions, and SBPs decision to provide foreign exchange to support a part
of oil payments even when the oil prices are at their historic high levels.
Credit to private sector grew by 14.9 percent during July 2007-May 10, 2008
against 12.2 percent in the same period of last year. The key factors
contributing to the recent acceleration in private sector credit growth were (i)
rise in working capital requirements due to higher input costs; (ii) the need

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for bridge financing to settle price differential claims of OMCs and IPPs; and
(iii) the higher fixed investment in the month of March 2008. (ECO SURVEY)

The management of a firms liquidity is necessary for all businesses, small,

medium or large.
When a business does not manage its liquidity well, it will have cash
shortages and as a result experience problems paying its obligations when
they fall due. Indeed, working capital starvation has generally been credited
as a major cause, if not the main cause of small business failure in many
developed and developing countries (Rafuse, 1996).
Much research work is available on this relationship but the selected sector
i.e. Textile Sector has not been under much consideration before this in
Pakistan, regarding the significance of working capital management. So,
much literature is not available in this sector in Pakistani context.

Working capital is very important part of business activities of any firm. For
the Textile sector as well, working capital management is of crucial value. So,
the aim of this study is to find out Does efficient working capital
management have any impact on the profitability of firms of Textile sector of
Pakistan? The remaining study is based on an analysis of previous literature
which provides the theoretical background for the study, research
methodology

1.1 PURPOSE STATEMENT:

The purpose of this study is to identify whether the performance of firms are
affected by working capital management in Karachi Stock Exchange (KSE-30)
Index companies. It has to establish the relationship between liquidity and
firms performance considering Return on Assets (R.O.A) and Return on
Equity (R.O.E). Purpose of this quantitative method study will be, firstly to
examine and compare the firm profitability and viewpoint about the impact
of working capital management on firm profitability in Pakistan and to further

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examine the other factors that support the impact of working capital
management on firm profitability. The study used secondary data collection
methods which will be obtained from financial statements which include
latest published annual reports, profit after tax, current assets, current
liabilities, fixed assets and long term debt and equity to be surveyed.

1.2 Objective of the study:

To examine the impact of ACP on working capital
To examine the impact of Inventory Turnover on working capital
To examine the impact of Gross Turnover on working capital

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Theoretical Frame Work:

Average
Collectio
n Period
Working
Inventor
Capital
y
Turnover
Gross
Turnover

Research Question

What is the relation between ACP & working capital?

What is the relation between Inventory Turnover & working capital?
What is the relation between Gross Turnover & working capital?

1.3 Hypothesis:

H1a: There is relationship between ACP & working capital

H1b: There is relationship between Inventory Turnover & working
capital
H1c: There is relationship between Gross Turnover & working capital

1.4 Significance of Study

This study is very important for the manager non-financial institute of KSE-30
index firms because it will help them to set tradeoff between their liquidity
and their performance of firms. They would come to know that at what
extend they should increase their liquidity in order make their performance
up to the mark. It will also help them to know the optimal level of receivables
and inventory level which will be helpful for their receivable control
management and their inventory control management. The remainder of the
paper is organized as follows. A review of the relevant literature regarding
the working capital management

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Their study was based on a longer time phase of 1975-1994. They suggested
that for generating greater volume of wealth for the shareholders of a firm, it
is very crucial to manage the working capital of that firm effectively and in
an efficient manner. They also recommended that profitability and net trade
cycle both are inversely related to each other.

Lyroudi and Lazaridis (2000) investigated the relationship of liquidity and

cash conversion cycle for the food industry of Greece. They concluded that a
considerable positive relationship exists among Cash Conversion Cycle and
current ratio, average age of inventory and average collection period. Also
they located an inverse relationship between CCC and average payment
period. They concluded that there was no statistically significant relationship
between variables used for liquidity measurement and that used for
profitability

1.5 Limitation & De-Limitation

The findings of this study may not also be generalized to all manufacturing
companies. This can be used as a reference to manufacturing companies in
developing countries since they face almost the same challenges due to the
same prevailing economic situations as opposed to manufacturing
companies in developed countries.

2. Literature Review

Gill, A., Biger, N. & Mathur, N. (2010). The relationship between working
capital management and profitability evidence from the United States,
journal of business and economics, vol.10, pg #1-9. The paper seeks to
extend the findings regarding relationship between capital management and
profitability. A negative relationship between profitability and average days

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of account receivable and a positive relationship between cash conversion
cycle and profitability. On the basis of findings of this paper, we conclude
that profitability can be enhanced if firms manage their working capital in a
more efficient way. Mathuva, D. (2010). The influence of working capital
management components on corporate profitability: A survey on Kenyan
listed firms. Journal of business management, vol. 14(2), pg #1-11. This
study aimed at examining the influence of working capital management
components on corporate profitability on Kenyan listed firms. Management of
the firm cans create value for their shareholders by reducing the number of
days accounts receivable and by increasing their inventories to a reasonable
level. Firm can be able to gain sustainable competitive advantage by means
of effective and efficient utilization of the resources of the organization
through a careful reduction of the cash conversion cycle to its minimum.
Alipour, M., (2011). Working capital management and corporate
profitability: Evidence from Iran, Journal of world applied sciences, vol. 12(7),
pg # 1093-1099. The main objective of this research is studying the
relationship between capital management and profitability. working capital
management has a great effect on the profitability of the companies and the
managers can create value for the shareholders by decreasing receivable
accounts and inventory and the managers must look for the methods that by
means of them and correct management be effective on the profitability of
the companies Mohammad, N. (2010). Working capital management: The
effect of market valuation and profitability in Malaysia, Journal of business
and management, Vol.5 (11), Pg#140-147. The study aims to explore the
effects of working capital component i.e. cash conversion cycles, current
ratio, current asset to total asset ratio, current liabilities to total asset ratio,
and debt to asset to the firms performance by looking at firms value. The
result shows that there are significant negative association between working
capital variables with firms market value and profitability. Thus it highlights
the importance of managing working capital requirements to ensure an
improvement in firms market value and profitability and this aspect must

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from part of the companys strategic and operational thinking in order to
operational thinking in order to operate effectively and efficiently. Afza, T.
(2008). working capital approaches and firms returns in Pakistan, Journal of
commerce and social sciences, Vol. 1(1), pg#25-36. To examine the impact
of aggressive and conservative working capital policies on the profitability of
the company. On the basis of findings of the research, it can be conclude that
there are significant relations between WCM with firms performance as
findings suggested that, working capital components and performance in
Malaysia disclose both positive and negative association. The study reveals
that out of five components selected for the study, CATAR shows positive
significant relationships with TobinQ, ROA and ROIC.

Zariyawati, M., Annuar, M. & Rahim, A. (2009). Working capital

management and corporate performance: case of Malaysia, journal of
modern accounting and auditing, Vol. 5(11), pg# 47-54. The intention of this
study is to examine the relationship between working capital management
and firm profitability.

Working capital management is an important part in firm financial

management decision. The ability of the firm to continuously operate in
longer period is depends on how they deal with investment in working capital
management. The optimal of working capital management could be achieved
by firm that manages rade off between profitability and liquidity. Haq, I.,
Sohail, M., Zaman, K. & Alam, Z. (2011). The relationship between
working capital management and profitability: A case study of cement
industry of Pakistan, journal of social science, vol2(2), pg#365-372. This
study empirically examines the relationship between working capital
management and profitability by using data of fourteen companies in
cement industry in the Khyber Pakhtonkhuwa Province (KPK) of Pakistan. The
result concludes that there is a moderate relationship between working
capital management and firms profitability. Future research should
investigate generalization of the findings beyond the Pakistan manufacturing

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sector. The scope of further research may be extended to the working capital
components management including cash, Marketable securities, receivables,
and inventory management. Sayaduzzaman, MD. (2006). Working capital
management: A study on British American Tobacco Bangladesh company Ltd,
Journal of Nepalese business studies, vol. 3(1), pg#78-84. To examine the
management pattern of inventory in the BATBCL during 1999-2003. To
analyze and evaluate receivables management along with its impact on
working capital management. To analyze cash position and the efficiency
with which the same is managed during the period. To assess the current
liability positions and the efficiency with which the overall working capital is
managed. To suggest some measures for improvement in working capital
management of BATBCL. Working capital management of BATBC Ltd. is
highly effective. The project is very much profitable. There is available
internal source of fund due to satisfactory amount of period during the period
under study. Mill has no problem in management of inventory, debtors, cash
balances and current liabilities. The liquidity position of the company is also
very much satisfactory due to good turnover of current assets, inventory
debtors and cash balances. The company enjoys good facility of cash credit
and other working capital loan from different commercial banks. There is no
difficulty in repayment of current liabilities out of the operating profit.

3. Methodology

3.1 Paradigms

There are three types of Paradigms

1. Positivism
2. Interpretivism
3. Pragmatism

We are using positivism because we are examining cause n effect

relationship. The research used both descriptive and quantitative research

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design. The major purpose of descriptive research was to provide information
on characteristics of a population or phenomenon.

3.2 Population

Population of my research study is all manufacturing companies quoted at

the KSE for the period of five years

3.3 Sample and sample technique

There are two sampling techniques: Probability & Non Probability and we
will use probability sampling technique. Only firms that had continuously
traded over the period 2007 to 2011 were considered in the study

3.4 Methods of data collection

There are 2 methods of data collection.

a) Interview

Interviews are a useful method to investigate issues in an in depth way.

Discover how individuals think and feel about a topic and why they hold
certain opinions. Investigate the use, effectiveness and usefulness of
particular library collections and services. Inform decision making, strategic
planning and resource allocation

The main advantages of interviews are:

They are useful to obtain detailed information about personal feelings,

perceptions and opinions. They allow more detailed questions to be asked.
They usually achieve a high response rate and respondents' own words are
recorded.

b) Questionnaire

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Questionnaires are very cost effective when compared to face-to-face
interviews. This is especially true for studies involving large sample sizes
and large geographic areas. Written questionnaires become even more cost
effective as the number of research questions increases. Questionnaires are
easy to analyze. Data entry and tabulation for nearly all surveys can be
easily done with many computer software packages. Questionnaires are
familiar to most people. Nearly everyone has had some experience
completing questionnaires and they generally do not make people
apprehensive. Questionnaires are less intrusive than telephone or face-to-
face surveys. When a respondent receives a questionnaire in the mail, he is
free to complete the questionnaire on his own time-table. Unlike other
research methods, the respondent is not interrupted by the research
instrument.

The study used secondary data collection methods which will be

obtained from financial statements which include latest published
annual reports, profit after tax, current assets, current liabilities,
fixed assets and long term debt and equity to be surveyed.

3.5 Analysis

Pearson and spearmans Correlation, Regression and Descriptive Statistics

test have been applied in this research.

3.6 Ethical consideration

The subjects of study will be briefed about the nature of study before
collecting data. The data provided by the respondents will be kept
confidential. Further, the data collected from students, peers and immediate-
supervisor about the motivation and performance of individuals will also be
kept confidential and will only be used for research purposes.

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 4. References

Gill, A., Biger, N. & Mathur, N. (2010). The relationship between

working capital management and profitability evidence from the united
states, journal of business and economics , vol.10, pg #1-9
Mathuva, D. (2010). The influence of working capital management
components on corporate profitability: A survey on Kenyan listed firms.
Journal of business management, vol. 14(2), pg #1-11

Alipour, M., (2011). Working capital management and corporate

profitability: Evidence from Iran, Journal of world applied sciences, vol.
12(7), pg# 1093-1099

Mohammad, N. (2010). working capital management: The effect of

market valuation and profitability in Malaysia, Journal of business and
management, Vol.5(11), Pg#140-147

Afza, T. (2008). working capital approaches and firms returns in

Pakistan, Journal of commerce and social sciences, Vol. 1(1), pg#25-36

Zariyawati, M., Annuar, M. & Rahim, A. (2009). Working capital

management and corporate performance: case of Malaysia, journal of
modern accounting and auditing, Vol. 5(11), pg# 47-54

Haq, I., Sohail, M., Zaman, K. & Alam, Z. (2011). The relationship
between working capital management and profitability: A case study of
cement industry of Pakistan, journal of social science, vol2(2), pg#365-
372

Sayaduzzaman, MD. (2006). Working capital management: A study on

British American Tobacco Bangladesh company Ltd, Journal of Nepalese
business studies, vol. 3(1), pg#78-84

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