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To study an impact of working capital management on profitability of crescent
textile mills limited during the financial years 2014-2016.

Submitted By

Manzoor hussain


Supervised By

Sir Yasine zia

Institute of Business Management Sciences

University of Agriculture,

pg. 2

Manzoor hussain 2013-ag-4835

Research report submitted for final evaluation in partial fulfillment of the requirements for the degree of


It is certified that, the research report and the work contained in it conforms to all the standard set by the
Institute for the evaluation of any such work

Yasine zia (Supervisor).





Institute of Business Management Sciences

University of Agriculture, Faisalabad

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All the praises for Allah almighty who has granted human being the crown of creation, endowed
him with the knowledge and wisdom. After Allah, the last Prophet Mohammad (PBUH) who brought for
us revolution unlimited knowledge and civilized the human being.

I am very thank full to Allah Almighty who gave me the courage to complete this complex task
and to my ever caring and loving parents whose prayers helped me to reach this stage of my life.

The work presented in this manuscript was accomplished under the inspiring guidance, generous
assistance and supervision of sir Yasine zia, Institute of Business management Sciences University of
Agriculture Faisalabad. She had given the author guidance and advice with great patience. Her criticism
and suggestions as well as her editorial corrections had been of much value during the report write up.

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Table of Contents














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pg. 6
The main aim of this study is to investigate the relationship between working capital management
(WCM) and firms profitability.WCM plays an important role in financial management decisions. An
optimal WCM is expected to contribute positively to creation of firms value and magnification of its
Return on assets is used as dependent variable while independent variables are also used, Inventory
Conversion Period (ICP), Average Collection Period (ACP), Average Payment Period (APP), Cash
Conversion Cycle (CCC) are used independent variables these variables are also used to investigate their
effect on profitability. The secondary data in the form of annual reports of Crescent textile mills limited
has been downloaded from its official website.

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Management of working capital is considered to be that management of current assets. The management
of current assets includes inventory, receivables, trade debtors, liquid assets like cash and bank balances.
The management of fixed and current assets however differs in three important ways:
(1)In managing fixed assets, time is a very important factor; consequently, discounting and
compounding techniques play a significant role in capital budgeting and a minor one in the management
of current assets.
(2)A huge holding of current assets especially cash, strengthens the firms liquidity position (and thereby
reduces risk) but also reduces the overall profitability. Thus, a risk and return trade-off is involved in
holding current assets.
(3) Levels of fixed as well as current assets depend upon expected sales, but it is only current assets
which can be adjusted with sales fluctuations in the short run. Thus, the firm has a greater degree of
flexibility in managing current assets

Working Capital Classification:

There are two concepts of Working capital:
Gross working capital: Refers to the firms investment in current assets. Current assets are the
assets which can be converted into cash within an accounting year and include cash, short term
securities, debtors,(accounts receivable or book debts)bills receivable and stock (inventory).

Net working capital: Refers to the difference between current assets and current liabilities. Current
liabilities are those claims of outsiders which are expected to mature for payment within an accounting
year and include creditors (accounts payable) bills payable and outstanding expenses..Net working
capital can be positive or negative. A positive net working capital will arise when current assets exceed
current liabilities. A negative net working capital occurs when current liabilities are in excess of current
The two concepts of working capital gross and net are not exclusive; rather they have equal
significance from the management viewpoint.
The Gross Working Capital concept focuses attention on two aspects of current assets management.

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1. How to optimize investment in current assets.
2. How should current assets be financed?

The level of investment in current assets should avoid two-danger points excessive and equate
investment in current assets. Investment in current assets should be just adequate, not more or less, to the
needs of the business firm, Excessive investment in current assets should be avoided because it impairs
the firms profitability, as idle investment earns nothing. On the other hand inadequate amount of
working can threaten solvency of the firm because of its inability to meet its current obligations. It
should be realized that the working capital needs of the firm may be fluctuating with changing business
activity. The management should be prompt to initiate an action and correct imbalances

Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests
the extent to which working needs may be financed by permanent sources of
funds. Current assets should be sufficiently in excess of current liabilities to constitute margin or buffer
for maturing obligations within the ordinary operating cycle of business. In order to protect the interests,
short-term creditors always like a company to maintain current assets at a higher level than current
liabilities. A weak liquidity poses threat to the solvency of the company and makes it unsafe and
unsound. A negative working capital means a negative liquidity and may prove to be harmful for the
companys reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets
therefore, prompt and timely actions should be taken by management to improve correct the imbalances
in the liquidity position of the firm.

It may be emphasized that both gross and net concept of capital are equally important for
the efficient management of working capital. There is no specific rule as to how current assets should be
financed. It is not feasible in practice to finance current assets by short-term sources only, a judicious
mix of long term and short-term finances should be invested in current assets.

Determinants of Working Capital:

The following is the description of factors which generally influence the working capital requirements of

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1. Nature of Business:
Working capital requirements of a firm are basically influenced by the nature of its business. Trading
and financial firms have a very small investment in fixed assets, but require a large sum of money to be
invested in working capital Retail stores, for example, must carry large stocks of a variety of goods to
satisfy varied and continuous demands of their customers. Some manufacturing business, such as
tobacco manufactures, paper industry and construction firms also have to invest substantially in working
capital and nominal amount in fixed assets. In contrast public utilities have a very limited need for
working capital and have to invest abundantly in fixed assets. Their working capital requirements are
nominal because they may have only cash sales and supply services. Working capital requirements of the
manufacturing concern fall between the two extreme requirements of trading firms and public utilities.
2. Sales and Demand Conditions:
The working capital needs of a firm are related to its sales. It is difficult to precisely determine the
relationship between volume of sales and working capital needs. In practice, current assets will have to
be employed before growth takes place. It is, therefore, necessary to make advance planning of working
capital for a growing firm on a continuous basis.
Sales depend on demand conditions. Most firms experience seasonal and cyclical fluctuations in the
demand for their products and services. These business variations affect the working capital
requirements. When there is an upward swing in the economy, sales will increase; correspondingly
investment in inventories and debtors will also increase and the requirement of working capital wills
also increase and the firms generally resort to substantial borrowings. On the other hand, when there is a
decline in the economy, sales will fall and level of inventories and debtors will also fall, in such cases
firms try to reduce their short-term borrowings.

3. Technology and Manufacturing Policy:

The manufacturing cycle comprises of the purchase and use of raw materials and the production of
finished goods. Longer the manufacturing cycle, larger will be the firms working capital
requirements .For e.g. the manufacturing cycle in the case of , depending on its size, may range between
six to twenty-four months. On the other hand manufacturing cycle of products such as detergent
powder, soaps, chocolate etc. Maybe a few hours.. An extended manufacturing time span means a larger
tie-up of funds in inventories. Thus, if there are alternative technologies of manufacturing a product, the
technological process with the shortest manufacturing cycle may be chosen. A strategy of constant

production may be maintained in order to resolve the working capital problems arising due to seasonal
changes in the demand for the firms product.
4. Credit Policy:
The credit policy of the firm affects the working capital by influencing the level of debtors .The credit
terms to be granted to customers may depend upon the norms of the industry to which the firm
belongs .A liberal credit policy, without rating credit-worthiness of the customers, will be detrimental to
the firm and will create a problem of collecting funds later on. In order to ensure that unnecessary funds
not tied up in debtors, the firm should follow a rationalized credit policy based on the credit standing of
customers and other relevant factors.
5. Availability of Credit:
The working capital requirements of a firm are also affected by credit terms granted by its creditors. A
firm will need less working capital if liberal credit terms are available to it and also the availability of
credit from banks also influences the working capital customers and other relevant factors.
6. Operating Efficiency:
The operating efficiency of the firm relates to the optimum utilization of resource sat minimum costs.
The firm will be effectively contributing in keeping the working capital investment at al lower level if it
is efficient in controlling operating costs and utilizing current assets. The use of working capital is
improved and pace of cash conversion cycle is accelerated with operating efficiency.

7. Price Level Changes:

Generally, rising price levels will require a firm to maintain higher amount of working capital. Same
levels of current assets will need increased investment when prices are increasing. Thus, effect of rising
prices will be different for different companys .Some will face no working capital problem, while
working capital problems of others may be aggravated.
There are many aspects of working capital management, which make it an important function of the
financial manager:
Time: Working capital management requires much of the financial managers time.
Investment: Working capital represents a large portion of the total investment in assets.
Criticality: Working capital management has great significance for all firms but it is very critical
for small firms.
Growth: The need for working capital is directly related to the firms growth.
Need for Working Capital:
The need for working capital to run the day-to-day business activities cannot be overemphasized. We
will hardly find a business firm, which does not require any amount of working capital.
A firm should aim at maximizing the wealth of its shareholders. Earning a steady amount of profit
requires successful sales activity. The firm has to invest enough funds in current assets for generating
sales. Current assets are needed because sales do not convert in to cash immediately. There is always an
operating cycle involved in the conversion of sales into cash.
The firm should maintain a sound working capital position. It should have adequate working capital to
run its business operations. Both excessive as well as inadequate working capital positions are
dangerous from the firms point of view. Excessive working capital means idle funds which earn no
profits for the firm. Paucity of working capital not only impairs the firms profitability but also result in
production interruptions and inefficiencies.

There are different approaches for the management of working capital. Two basic policies of working
capital management are namely aggressive working capital management policy and conservative
working capital management policy. An aggressive investment policy with high levels of fixed assets
and low investment in current assets may generate more profits for a firm. On the other hand it also
accompanies a risk of insufficient funds for daily operations and for payment of short term debts.

A conservative investment policy is opposite to it with less investment in fixed assets and more in
current assets. For financing of working capital aggressive policy implies that current liabilities are
maintained in a greater portion as compared to long-term debts. High level of current liabilities requires
more resources to be in liquid form to pay back debts earlier. But current payouts bear less rate of
interest and hence can cause more savings. In conservative working capital financing policy a greater
portion of long-term debts is used in contrast to current liabilities.

As seeing to textile area, it is the backbone of economy of nation .textile sector play a important part in
economic progress as it major need after food. Textile part is giving advantage to increase in GDP to

high rate in country. Textile sector is also improving in taxes rate by improving in taxes rate by
importing and exporting goods.

The performance of textile sector mostly linked with the cost effective management of cost is essential
and retain of working capital because innovative technological machinery is used in textile sector that
companies have to import which increase the cost .so it is extraordinary point for the companies to
manage their short term and long term assets and debts.

There has been numerous research conducted on this sector but s year passes the conditions changes
like inflation deflation or changed condition of our country affect the profitability and its feature .

Research objective:
The objective of study is to show the impact of working capital management on
the profitability of crescent textile mills limited. Textile sectors the biggest sector is
like the backbone of our economy so it is important to find out that how we can
make its working capital management much effective to increase profitability. The
research also aims to help investor to effectively handle their financial resources in

short run.

Research problem

1) Does working capital management affect profitability of textile sector of Pakistan?

2) To analyze the reasons for increase / decrease of working capital requirements of the Company.

3) To suggest the improvements in the company

Many researchers have studied working capital from different views and in different environments. The
following study was very interesting and useful for our research:

Literature review:
Barot Haresh (2012) observed that a negative relationship between account receivables and
corporate profitability and a positive relationship between accounts payable and profitability. The
Researcher concludes that the firms properly manage their cash, accounts receivables, accounts
payables, and inventories in proper way, will ultimately increase profitability of these firms.
Biswajit Bose (2013) found that out of seven ratios (such as working capital turnover ratio, net
current assets to total assets ratio, inventory turnover ratio, cash position ratio, current ratio), only cash
position ratio has positive influence on return on total assets and the remaining has negative correlation
with return on total assets and also found that return total assets is negatively associated with days of
working capital.
Hina Agha (2014) found that creditors turnover ratio, debtors turnover ratio and inventory turnover
ratio have a positive significant impact on return on assets and there is no significant impact of current
ratio on return on assets.
Working capital management can be considered as an important source of profitability of a firm. Many
researchers investigated the impact of working capital management on profitability. This past research
demonstrated that efficient working capital management leads to greater profitability. Smith (1980)
conducted a study on Profitability and Liquidity and suggested that working capital management
directly influence risk and profitability of a firm. Hence it can be inferred that effective working capital
management can increase the financial strength of a business. Soenen (1993) also performed an analysis
of working capital management and its relationship with financial performance. His study was based on
US firms and after the study he suggested that if the length of net trade cycle increases then it affects the
return on investment negatively.
The Working Capital management is regarded as an essential part of financial management of a firm
(Joshi, 1995). Lamberson (1995) observed the impact of economic activity on the Working Capital
Management Policy. For this he took a sample of 50 small firms of US for a time period of 12 years i.e.
1980-1991. He found that economic expansion do not cause an increase in the investment of working
capital during a specific period. Finally he suggested that there exists a slight impact of any change in
economic activity on working capital management of these firms.

Working capital management and profitability relationship has been explored by many other researchers
as well. Deloof (2003) analyzed 1009 non-financial firms of Belgium. He found that gross operating
profit of a firm is negatively related to inventory turnover and average collection period. Hence, he
recommended that financial managers can try to improve profitability by enhancing average payment
period and by curbing inventory turnover and average collection period. He also recommended that
profitability is strongly related to working capital management of a business. Through a study on Saudi
Arabian companies, Eljelly (2004) discovered that the profitability and cash gap have a significant
negative relationship with each other. Malik, Sur, and Rakshit (2005) evaluated Indian pharmaceutical
industry. They discovered that profitability and liquidity do not have any significant relationship for
these firms.
Afza and Nazir (2007) studied 263 firms of Pakistan for a time phase of six years i.e. 1998-2003. They
stated that adopting inefficient working capital management policies affects the profitability negatively.
Afza and Nazir (2008) reviewed their pervious study to estimate the impact of different types of working
capital management policies on financial performance of firms in different sectors. For this they used a
sample of 263 non-financial firms belonging to 17 different sectors listed at KSE from1998 to 2003. The
secondary data was collected from the financial reports of selected companies and also from the
publications of State Bank of Pakistan. There are two types of working capital management policies
namely aggressive working capital management policy and conservative working capital management
policy. In aggressive working capital management policy a firm places less amount of capital in current
assets to earn more profit from fixed assets, whereas in conservative working capital management policy
firms use more capital as current assets. For the measurement of the degree of aggressiveness they used
current liabilities to total assets ratio (CLTAR) and current assets to total assets ratios (CATAR). To
locate the impact of these policies on the performance of firms they used Return on Equity (ROE) and
Return on Assets (ROA). Results were found by using regression analysis. They found an inverse
relationship between degree of aggressiveness of these policies and profitability
Decision relating to working capital and short term financing are referred to as working capital
management. These involve managing the relationship between a firms short term assets and its short
liabilities. The goal of working capital is ensure that the firms is able to continue its operations and that
it has sufficient cash to satisfy both maturing short term debt and forth coming operational expenses an
important working capital decision is associated with the level of investment in current assets.

Determining the most favorable level of investment in current assets involves an exchange between
costs that increase with current assets and costs that go down with current assets. (Solomon, 2010)

The present study is based on secondary data collected from secondary source named
as annual reports of Crescent textile mills limited has been downloaded from its official website. After
reviewing theoretical literature, the following best fitted variables have been driven to measure the
impact of working capital management on profitability of crescent textile mills limited.

Variables Explanation: In this study, we undertake profitability (ROA) as a dependent variable and
the inventory conversion period (ICP), the average collection period (ACP), the average payment period
(APP), and the cash conversion Cycle (CCC) are used as independent variables, and are considered for
measuring working capital management. All the dependent and independent variables stated below have
been used to test the hypotheses of study.

Return on Assets (ROA): Profitability is measured by return on assets, which is defined as

the ratio of earning after tax to total assets. ROA is used as a dependent variable. The return on assets
determines the management efficiency to use assets generates earnings. It is a better measure since it
relates the profitability of the company to the asset base.

Inventory Conversion Period (ICP): ICP calculates how quickly the inventory is converted into
sales. Its an excellent measure of the efficiency of the company in managing the inventory. The
important decision regarding inventory is that how much amount of cash should tied up in inventory
while meeting the other operations and functions of the business and demands of customers. It is
calculated as 365/ (Cost of goods sold/average inventory).

Average Collection Period (ACP): It is used as proxy for the working capital collection policy is
an independent variable. ACP is calculated by dividing trade debtors by sales and
multiplying the result by 365. It indicates the time taken to collect cash from

customers. The higher the value, the more will be the investment in account

Average Payment Period (APP): APP used as proxy for the working capital
collection policy is an independent variable. It is the time taken to pay the firms
suppliers. The longer the time period the more advantageous for the firm so that
funds can be put to other uses. It can be calculated as trade creditors /

Cash Conversion Cycle (CCC): Taking together inventory conversion period, average collection
period, and average payment period, cash conversion cycle is calculated. It is used as a comprehensive
measure of working capital management is another independent variable. It considers the amount of
time to sell the inventory, collect the receivables and to pay bills. It is expected to have a negative
relationship with profitability as a lower value of cash conversion cycle shows less investments in
current assets and also signifies higher liquidity, which easily converts its short term investments in
current assets to cash while higher value of cash conversion cycle signifies greater investment in current
assets and therefore shows the greater need of financing of current assets. It is calculated as adding
inventory conversion period with average collection period and deducting average payment period.
Empirical Analysis:
In this section, the empirical results are presented from quantitative data analysis
using regression analysis.
Descriptive Statistics analysis: Descriptive analysis presented the mean and standard deviation of
the different variables of interest in this study and also presents the minimum and maximum values of
Variables which help in getting a picture about the maximum and minimum values a variable has

Table I: Summary Statistics of the Research Variables of crescent

textile mills limited.

Variable Mean Std. deviation Minimum Maximum
ROA 0.018443 0.001304812 0.01769 0.01995

ICP 53 5.196152423 50 59

ACP 73 13.11488 59 85

APP 36.33333 3.05505 33 39

CCC 89.33333 14.64013 76 105

Table I presents the summary statistics of the research variables used in the presented study for 3 years
observations were used. The mean value of return on assets is 0.019 percent with a standard deviation of
0.002 percent. The mean of inventory conversion period is 53 days (approximately one month and
twenty three days) with a standard deviation of 5.19 days. The mean accounts collection period is 73
days (approximately two and half month) with a standard deviation of 13.11 days and also shows that on
average the firms take 36.33days (approximately one month and seven days) to pay its creditors with
standard deviation of 14.65 days. The mean cash conversion cycle is 89.33 days. The firms have seen
their profitability by almost 35 percent.

Correlation Analysis:
Correlation analysis is attempts to determine the degree and direction of between
two variables under study. If the variables have the cause and effect relationship, they have high degree
of correlation between them.

Table II: Correlation Matrix for all the Dependent and Independent Variables of crescent textile
mills limited.
ICP -0.5 1
ACP 0.034 0.792406 1
APP -0.94491 0.755929 0.998337 1
CCC -0.78872 0.92675 0.963524 0.946497 1

Table II shows both the Pearson correlations among the observed variables. The ROA is negatively

related with inventory conversion period (-0.5) average payment period (-0.94491) cash conversion
cycle (0.244). While, positively correlated with average collection period (0.034). The negative
relation between ROA and ICP can explained by the facts that firms which maintain low inventory
levels because of the cost of possible interruptions in the production process. The positive relation
between ROA and ACP is consistent with the view that more the time taken by customers to pay their
bills, the low cash is available to replenish the inventory hence not leading to more sales which result to
decrease in profitability. The negative relation between ROA and APP can be due to payment will be
made to supplier before time and firm have not cash purchase more inventory and run the other
operation. Further, cash conversion cycle is negative related to ROA which means that the time of
collection of sales of finished products can be too long so that increasing this time decreases

By observing the relationship between return on assets and all other research variables that
affect the firms profitability in the crescent textile mills limited through the descriptive statistic analysis
and correlation test, we can find that average collection period is positive relationship with return on
assets but statistically is near to significant. Even though, average the results show that for overall
crescent textile mills limited, has impact on profitability of the firm.
These results suggest that managers can create value for their shareholders by reducing the number of
days accounts receivable and increasing the account payment period and inventories to a reasonable
maximum and also suggests that managers of these firms should spend more time to manage cash
conversion cycle of their firms and make strategies of efficient management of working capital. We may
further conclude that these firms properly manage components of working capital like cash, marketable
securities, receivables and inventory management should be explored and their relationship with more
proxies of profitability should be examined.

Barot Haresh, Working Capital Management and Profitability: Evidence from India- An Empirical
Study, GFJMR, 2012, Vol. 5, pp.1-9.
Biswajit Bose, The Impact of Working Capital Management Practices on Firms Profitability,
International Journal of Applied Research Studies, 2013, Vol. 2 (6), pp. 1-16.
Hina Agha, Impact of Working Capital Management on Profitability, European Scientific
Management on Profitability, European Scientific
Gitman, L.J. Principles of Managerial Finance (11th ed.). Pearson Education. USA. 2005.
Daniel Mogaka and Ambrose Jagongo, Working Daniel Mogaka and Ambrose Jagongo, Working
Empirical Evidence from Manufacturing and Construction firms listed on Nairobi Securities Exchange,
Kenya, International of Accounting and Taxation, 2013, Vol. 1(1), pp. 1-14.
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Journal of Commerce and Social Sciences, 2014, Vol.8 (1), pp. 134-148.
International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563
Vol. 4, No.5, October 2014
Business and Economics Journal, Vol. 2012: BEJ-60