8/12/2019 Ali Farhan,Asignment#2(Summary of Working Capital Management & Profitability

1/2

Subject:

Project and Dissertation

Topic:

Summary of Working Capital Management &

Profitability

Submitted To:

Sir Kashif Hamid

Submitted By:

Maryam Naeem

Roll # 207

BBA-8TH

SEM

Department:

Business administration

G.C University Faisalabad

8/12/2019 Ali Farhan,Asignment#2(Summary of Working Capital Management & Profitability

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Working Capital Management and Profitability case of Pakistani

firms

SUMMARY

Working capital management has effect on liquidity and profitability of the firm. In this research

a sample of 94 Pakistani firms listed on Karachi stock exchange has been taken for a period of 6

years from 1999-2004.The study showed the effect of working capital management including

average collection period, inventory turnover in days, average payment period, cash conversion

cycle and current ratio on the net operating profitability of Pakistani firms.

Debt ratio, size of the firm and financial assets to total asset ratio have been used as controlvariables. Efficient working capital management involves planning and controlling of current

asset and current liabilities in such a manner that diminish the risk of inability to meet due short-

term obligations and avoids excessive investment in these assets. The ultimate objective of the

firm is to maximize the profit as well as preserving liquidity. If company does not care about

profit it cannot survive for a longer period and if company does not care about liquidity it may

face insolvency or bankruptcy.

Firms may have an optimal level of working capital that maximizes their value. Large inventory

and trade credit policy may lead to high sales. Larger inventory reduces the risk of stock-outs.

Working capital management can also be measured by cash conversion cycle (the time lagbetween expenditures for purchases of raw material and collection of finished goods). The longer

the time lag the larger the investment in working capital.

A longer cash conversion cycle might increase profitability because it leads to higher sales. The

Pearsons correlation and regression analysis, pooled least square and general least square with

cross section weight models are used for analysis. The results showed that there is a strong

relationship between working capital management and profitability of the firm. It means that as a

cash conversion cycle increases it will lead to decreasing profitability of the firm and it can

create a positive value to shareholders by reducing cash conversion cycle up to a possible

minimum level.

The results showed that there is negative relationship between liquidity and profitability and

there is positive relationship between size of the firm and its profitability and there is also

negative relationship between debt used by firm and its profitability.