final report

1.0 ORGANIZATION OVERVIEW

1.1 Introduction:

Incepta Pharmaceuticals Ltd. is a leading pharmaceutical company in Bangladesh established

in the year 1999. The company has a very big manufacturing facility located at Savar, 35

kilometer away from the center of the capital city Dhaka. The company produces various

types of dosage forms which include tablets, capsules, oral liquids, ampoules, dry powder

vials; powder for suspension, nasal sprays etc. Since its inception, Incepta has been launching

new and innovative products in order to fulfill unmet demand of the medical community. The

focus was to bring more new technologically advanced molecules to this country. The

company specializes in value added high technology dosage form like sustained release

tablets, quick mouth dissolving tablets, barrier coated delayed release tablets etc. It has

established a modern research and development laboratory for the development of new

advanced dosage forms for various drugs and devices like poorly soluble drugs, dry powder

inhalers, coated pellets, modified release products, taste masked preparation etc.

Incepta quickly developed a very competent sales team, which promotes the specialties

throughout the country. The company virtually covers every single corner of the rural as well

as urban area of Bangladesh. It has its own large distribution network having 13 depots all

over the country. The company has a clear vision to become a leading research based dosage

form manufacturing company with global presence within a short period of time.

The Research and Development department for various dosage forms has been very well

developed. Incepta intends to bring newer products of advanced technology through research

hitherto unknown in this country.

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Figure 01: Growth Rate of Incepta Pharmaceuticals Compared to the industry

Beginning in 2000, Incepta Pharmaceuticals Ltd. has been launching new and innovative

products at a faster pace than its competitors. Up to June 2011 it has already launched more

than 317 generics with a total of 624 presentations. The company produces a wide variety of

dosage forms covering nearly all the major therapeutic classes.

During the last 11 years of operation it launched as many as 118 new generics for the first

time ever in Bangladesh. High focus on quality and timely introduction of much needed

essential medications previously unavailable in the country has enabled the organization to

become the second largest pharmaceutical company of the country.

1.2 Vision:

To become a research based global pharmaceutical company in addition to being a highly

efficient generic manufacturer. To discover and develop innovative, value-added products

that improves the quality of life of people around the world and significantly contributes

towards the growth of Bangladesh.

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1.3 Mission:

Provide people globally with high quality health care products at affordable prices in order to

improve access to medicine and to improve employees an enabling environment that facilities

realization of their full potential.

1.4 Ownership Pattern:

Incepta Pharmaceuticals Limited is the sister concern of the renowned Impress Group and the

business is running as fully private limited company. Directors of Incepta Pharmaceuticals

Limited own the majority shares. Incepta is not DSE listed in capital market yet, so it is

controlled by the internal board of director’s .So any kind of significant decision is taken by

the management.

1.5 Market Position of IPL:

Table 01. Top ten pharmaceuticals companies in Bangladesh in 2012

According to IMS health survey which is a US-based and the world's number one market

research organization and has been providing pharmaceuticals market intelligence to more

than 100 countries over the past 50 years, the market position of the top ten pharmaceuticals

companies in Bangladesh in 2012.

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Serial No.

Companies Market Position Of the Companies(Total 100%)

1. Square 17. 132. Incepta 9.78

3. Beximco 8.494. Opsonin Pharma 5.47

5. Reneta 5. 146. Eskayef 4.71

7. ACI 4.22

8. Acme Laboratories 4.079. Aristopharma 4.07

10. Drug International 3.97

Others 55.22%

Director

General Manager

Deputy General Manager

Assistant General Manager

Senior Manager

Manager

Deputy Manager

Assistant Manager

Executive Officer

Officer

Senior Officer

Managing Director

Assistant Officer

1.6 ORGANOGRAM OF IPL:

Figure 02: Organogram

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1.7 Exporting Countries:

Afghanistan, Belize, Bhutan, Congo, Costa Rica, Cambodia, Dominican Republic, El

Salvador, Ethiopia, Guyana, Georgia, Hong Kong, Honduras, Kenya, Myanmar, Mongolia,

Mauritania, Sri Lanka, Somalia, Togo, Tajikistan, Turkey, Ukraine, Vietnam, Nigeria.

1.8 Abstract:

Companies can use working capital management as an approach to influence their

profitability. This paper studies the impact of working capital management and its

components upon the profitability of Bangladeshi pharmaceuticals companies. Cash

Conversion Cycle, Average days of collection period, Inventory turnover period, Deferred

payables Period are used as a comprehensive measure for working capital management and

Gross Operating Profitability used as a measure for profitability.

The purpose of this study is to analyze the impact of working capital management on

companies’ profitability from Bangladesh County. The relation between the components of

the working capital management and profitability is examined using Pearson correlation

analyses and using a sample of 14 annual financial statements of companies covering period

2009-2010. The conclusion to our study is that there are positive relationship between

deferred payables period and corporate profitability. There is also positive relationship

between inventory turnover period and profitability. On the other hand, there are negative

relationship between average days of collection periods and corporate profitability. The

results also show negative relationship between cash conversion cycle and corporate

profitability.

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2.0 PROBLEM STATEMENT

2.1 Prologue:

In Bangladesh the pharmaceutical sector is one of the most developed hi-tech sectors within

the country's economy. After the promulgation of Drug Control Ordinance - 1982, the

development of this sector was accelerated. The professional knowledge, thoughts and

innovative ideas of the pharmaceutical professionals are the key factors for these

developments. Due to recent development of this sector it is exporting medicines to global

market including European market. This sector is also providing 97% of the total medicine

requirement of the local market. Leading pharmaceutical companies are expanding their

business with the aim to expand export market. Recently few new industries have been

established with high tech-equipment and professionals which will enhance the strength of

this sector.

In every organization, corporate finance deals with three decisions: capital structure

decisions, capital budgeting decisions, and working capital management decisions. Among

these three decisions, working capital management is recognized as an important concern of

the financial manager due to many reasons. For one thing, a typical manufacturing firm’s

current assets account for over half of its total assets. Working capital is also an important

issue during financial decision making since its being a part of investment in asset that

requires appropriate financing investment. However, working capital always being disregard

in financial decision making since it involve investment and financing in short term period.

Working capital management is the functional area of finance that covers all the current

accounts of the firm. Working capital management involves the relationship between a firm's

short-term assets and its short-term liabilities. The goal of working capital management is to

ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy

both maturing short-term debt and upcoming operational expenses. The management of

working capital involves managing inventories, accounts receivable and accounts payable

and cash.

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In the present day context of rising capital cost and scarce funds, the importance of working

capital needs special emphasis. It has been widely accepted that the profitability of a business

concern likely depends upon the manner in which its working capital is managed. The

inefficient management of working capital not only reduces profitability but ultimately may

also lead a concern to financial crisis. On the other hand, proper management of working

capital leads to a material savings and ensures financial returns at the optimum level even on

the minimum level of capital employed.

Both excessive and inadequate working capital is harmful for a firm. Excessive working

capital leads to un-remunerative use of scarce funds. On the other hand inadequate working

capital usually interrupts the normal operations of a business and impairs profitability. There

are many instances of business failure for inadequate working capital. Further, working

capital has to play a vital role to keep pace with the scientific and technological developments

that are taking place in the concerned area of pharmaceutical industry. If new ideas, methods

and techniques are not injected or brought into practice for want of working capital, the

concern will certainly not be able to face competition and survive. In this context, working

capital management has a special relevance and a thorough investigation regarding working

capital practice in the pharmaceutical industry is of utmost importance.

2.2 Problem of the Study:

Every organization irrespective of size and nature of business requires necessary amount of

working capital. Working capital is the most crucial factor for maintaining liquidity, survival,

solvency and profitability of business. The impact of working capital policies on profitability

is highly important because firms required a balance between risk and efficiency to achieve

an optimal level of working capital. Efficient working capital management involves planning

and controlling current assets and current liabilities in a manner that eliminates the risk of

inability to meet due short term obligations on one hand and avoids excessive investment in

these assets on the other hand.

Working capital management efficiency directly affects the profitability and liquidity of

firms. Therefore, efficient management of working capital is a fundamental part of the overall

corporate strategy to create shareholder value. In general, companies try to keep an optimal

level of working capital that maximizes their value. Some firms try to increase their profits at

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the cost of liquidity which can bring serious problems to the firm. Therefore, there must be a

trade-off between these two objectives of the firms. If we do not care about profit, we cannot

survive for a longer period. On the other hand, if we do not care about liquidity, we may face

the problem of insolvency or bankruptcy. For these reasons working capital management

should be given proper consideration and will ultimately affect the profitability of the firm.

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3.0 PURPOSE OF THE STUDY

The purpose of this research is to determine whether there is any relationship between the

working capital management and firm’s profitability or not in the pharmaceuticals industry in

Bangladesh.

A. Broad Objective

The broad objective of this research is to analyze “The impact of working capital

management on firm’s profitability in Pharmaceuticals industry in Bangladesh”.

B. Specific Objectives

The specific objectives are given below:

1. To find the current market situation of pharmaceuticals industry in Bangladesh

2. To have an overview on the organization “Incepta Pharmaceuticals Ltd.”

3. To find out the internal factors like strengths and weaknesses of Incepta

Pharmaceuticals Ltd.

4. To find out the external factors like opportunities and threats of Incepta

Pharmaceuticals Ltd.

5. To find the effect of inventory conversion period on the profitability of

pharmaceuticals industry in Bangladesh

6. To find the effect of receivables collection period on the profitability of


7. To find the effect of payable deferral period on the profitability of


8. To find the effect of cash conversion cycle on the profitability of pharmaceuticals

industry in Bangladesh

9. To find out the relationship of collection policy between Incepta Pharmaceuticals

Ltd. and the pharmaceuticals industry in Bangladesh.

10. To find out the relationship of receivables inventory policy between Incepta

Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.

11. To find out the relationship of payment policy between Incepta Pharmaceuticals


12. To find out the relationship of cash conversion cycle between Incepta


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4.0 LIMITATIONS OF THE REPORT

The duration is for making such report is not enough to learn about such a big sector

as well as organization like Incepta Pharmaceuticals Limited.

For non-availability of secondary data, it was not be possible to work on the basis of

board data.

It was be difficult to collect the information from various personnel for the job

constraint.

Lack of experiences acted as constraints in the way of meticulous exploration on the

topic.

5.0 LITERATURE REVIEW

While searching for previous research works, many research reports were found in the

internet and other publications. But no research has been made on the issue of impact of

working capital management on profitability in context of pharmaceuticals industry in

Bangladesh. Many researchers have studied working capital from different views and in

different environments. The following are very useful for this research:

Shin and Soenen researched the relationship between working capital management and value

creation for shareholders. The standard measure for working capital management is the cash

conversion cycle (CCC). Cash conversion period reflects the time span between disbursement

and collection of cash. It is measured by estimating the inventory conversion period and the

receivable conversion period, less the payables conversion period. In their study, Shin and

Soenen used net-trade cycle (NTC) as a measure of working capital management. NTC is

basically equal to the cash conversion cycle (CCC) where all three components are expressed

as a percentage of sales. NTC may be a proxy for additional working capital needs as a

function of the projected sales growth. They examined this relationship by using correlation

and regression analysis, by industry, and working capital intensity. Using a sample of 58,985

firm years covering the period 1975-1994, they found a strong negative relationship between

the length of the firm's net-trade cycle and its profitability. Based on the findings, they

suggest that one possible way to create shareholder value is to reduce firm’s NTC.

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Singh and Pandey (2008) had an attempt to study the working capital components and the

impact of working capital management on profitability of Hindalco Industries Limited for

period from 1990 to 2007. Results of the study showed that current ratio, liquid ratio,

receivables turnover ratio and working capital to total assets ratio had statistically significant

impact on the profitability of Hindalco Industries Limited.

In 1983 N. Hill, W. Sartoris and D. Ferguson conducted a survey of the accounts payable

managers of 1,479 firms of various sizes in various industries: 180 responses were received.

A major thrust of this survey was obtaining information on firm’s decision regarding two

methods of obtaining finance from accounts payable; skipping the discount and stretching

accounts payable. The survey revealed that the vast majority of firms generally take the

discount. In deciding whether to take the discount, the primary criterion of most firms is the

amount of the discount. This makes good financial sense, since the amount of discount (along

with the delay period from the discount date to the due date) determines the cost of skipping

as a source of financing.

Inventory plays an important role to determine the activities in producing, marketing, and

purchasing. Since inventory determines the level of activities in a company, managing it

strategically contributes to profitability (Hill & Sartoris, 1992). Supplier selection process

and inventory management are reciprocal to enable companies to deal with uncertainties of

consumer demand. Furthermore, a company’s ability to respond to demand is largely

dependent on how efficient the company manages inventories and how committed its

suppliers are to support a company’s production lines.

Accounts payable are one of the major sources of unsecured short-term financing (Gitman,

2009; Hill & Sartoris, 1992). Utilizing the value of relationship with payee is a sound

objective that should be highlighted as important as having the optimal level of inventories

(Hill & Sartoris, 1992). As a consequence, strong alliance between company and it suppliers

will strategically improve production lines and strengthen credit record for future

expansion.Profit may only be called real profit after the receivables are turn into cash. The

management of accounts receivable is largely influence by the credit policy and collection

procedure. A credit policy specifies requirements to value the worthiness of customers and a

collection procedure provides guidelines to collect unpaid invoices that will reduce delays in

outstanding receivables (Hill & Sartoris, 1992; Richards & Laughlin, 1980). Aligning the

receivable management between cash, inventory and payable management is relatively

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challenging and important and a stimulus to researchers’ studies to integrate the WCM

components.

Ghosh and Maji attempted to examine the efficiency of working capital management of

Indian cement companies during 1992 - 93 to 2001 - 2002. They calculated three index

values - performance index, utilization index, and overall efficiency index to measure the

efficiency of working capital management, instead of using some common working capital

management ratios. By using regression analysis and industry norms as a target efficiency

level of individual firms, Ghosh and Maji achieving that target level of efficiency by

individual firms during the period of study and found that some of the sample firms

successfully improved efficiency during these years.

Weinraub and Visscher (1998) discussed the issue of aggressive and conservative working

capital management policies by using quarterly data for the period 1984-93 of the US firms.

Their study considered 10 diverse industry groups to examine the relative relationship

between their aggressive/conservative working capital policies.

Their study concluded that the industries had distinctive and significantly different working

capital management policies. Moreover, the relative nature of the working capital

management policies exhibited remarkable stability over the 10-year study period. The study

also showed a high and significant negative correlation between industry asset and liability

policies and found that when relatively aggressive working capital asset policies are

followed, they are balanced by relatively conservative working capital financial policies.

Eljelly (2004) empirically examined the relationship between profitability and liquidity, as

measured by current ratio and cash gap (cash conversion cycle) on a sample of 929 joint

stock companies in Saudi Arabia. Using correlation and regression analysis, Eljelly found

significant negative relationship between the firm's profitability and its liquidity level, as

measured by current ratio.

This relationship is more pronounced for firms with high current ratios and long cash

conversion cycles. At the industry level, however, he found that the cash conversion cycle or

the cash gap is of more importance as a measure of liquidity than current ratio that affects

profitability. The firm size variable was also found to have significant effect on profitability

at the industry level.

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Garcia-Teruel and Martinez-Solano (2007) collected a panel of 8,872 small to medium-sized

enterprises (SMEs) from Spain covering the period 1996 - 2002. They tested the effects of

working capital management on SME profitability using the panel data methodology. The

results, which are robust to the presence of endogeneity, demonstrated that managers could

create value by reducing their inventories and the number of days for which their accounts

are outstanding. Moreover, shortening the cash conversion cycle also improves the firm's

profitability.

To test the relationship between working capital management and corporate profitability,

Deloof [5, p. 573] used a sample of 1,009 large Belgian non-financial firms for a period of

1992-1996. By using correlation and regression tests, he found significant negative

relationship between gross operating income and the number of days accounts receivable,

inventories, and accounts payable of Belgian firms. Based on the study results, he suggests

that managers can increase corporate profitability by reducing the number of day’s accounts

receivable and inventories.

In other study, (Lyroudi & Lazaridis, 2000) use food industry Greek to examined the cash

conversion cycle (CCC) as a liquidity indicator of the firms and tries to determine its

relationship with the current and the quick ratios, with its component variables, and

investigates the implications of the CCC in terms of profitability, indebtness and firm size.

The results of their study indicate that there is a significant positive relationship between the

cash conversion cycle and the traditional liquidity measures of current and quick ratios. The

cash conversion cycle also positively related to the return on assets and the net profit margin

but had no linear relationship with the leverage ratios. Conversely, the current and quick

ratios had negative relationship with the debt to equity ratio, and a positive one with the times

interest earned ratio. Finally, there is no difference between the liquidity ratios of large and

small firms.

In a study, Chowdhury and Amin (2007) attempted to evaluate working capital management

as practiced in the selected firms of the Pharmaceutical industry for the period from 2001 to

2005. From the analysis, they conclude that pharmaceutical firms operated in Bangladesh are

efficiently deal with their liquidity preferences and investment criteria and this is due to the

competitive nature of this industry.

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There are few studies with reference to working capital management in Pakistan like Afza

and Nazir (2008), who studied the factors determining the working capital requirements for a

large sample of 204 firms in sixteen manufacturing sub sectors during 1998-2006. Another

study by Afza and Nazir (2007) investigated the relationship between aggressive and

conservative working capital policies for a large sample of 205 firms in 17 sectors listed on

Karachi Stock Exchange during 1998-2005. They found a negative relationship between the

profitability measures of firms and degree of aggressiveness of working capital investment

and financing policies. Raheman and Nasr (2007) studied the relationship between working

capital management and corporate profitability for 94 firms listed on Karachi Stock Exchange

using static measure of liquidity and ongoing operating measure of working capital

management during 1999-2004. The findings of study suggested that there exist a negative

relationship between working capital management measures and profitability. Shah and Sana

(2006) used a very small sample of 7 oil and gas sector firms to investigate this relationship

for period 2001-2005. The results suggested that managers can generate positive return for

the shareholders by effectively managing working capital.

The relationship of cash conversion cycle with firm size and profitability for firms listed at

Istanbul Stock Exchange was studied by Uyar (2009) using ANOVA and correlation analysis.

The results showed retail/wholesale industry has shorter Cash Conversion Cycle (CCC) than

manufacturing industries.

Furthermore, study found significant negative correlation between CCC and profitability as

well as between CCC and firm size. Lazaridis and Tryfonidis (2006) investigated the

relationship of corporate profitability and working capital management for firms listed at

Athens Stock Exchange. They reported that there is statistically significant relationship

between profitability measured by gross operating profit and the Cash Conversion Cycle.

Furthermore, Managers can create profit by correctly handling the individual components of

working capital to an optimal level.

Padachi (2006) has examined the trends in working capital management and its impact on

firm’s performance for 58 Mauritian small manufacturing firms during 1998 to 2003. He

explained that a well designed and implemented working capital management is expected to

contribute positively to the creation of firm’s value. The results indicated that high

investment in inventories and receivables is associated with low profitability and also showed

an increasing trend in the short term component of working capital financing.

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In summary, the literature review indicates that working capital management impacts on the

profitability of the firm but there still is ambiguity regarding the appropriate variables that

might serve as proxies for working capital management. The present study investigates the

relationship between a set of such variables and the profitability of a sample of

pharmaceuticals companies in Bangladesh. Moreover, no research has been made on such

topic in context of pharmaceuticals industry in Bangladesh.

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6.0 CONCEPTUAL FRAMEWORK

6.1 Working capital

Working capital may be regarded as the life blood of business. Working capital is of major

importance to internal and external analysis because of its close relationship with the current

day-to-day operations of a business. Every business needs funds for two purposes.

Long term funds are required to create production facilities through purchase of fixed assets

such as plants, machineries, lands, buildings & etc

Short term funds are required for the purchase of raw materials, payment of wages, and other

day-to-day expenses. It is otherwise known as revolving or circulating capital.

Working Capital is nothing but the difference between current assets and current liabilities.

Working Capital = Current Asset – Current Liability.

Businesses use capital for construction, renovation, furniture, software, equipment, or

machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is

also used often by businesses to put a down payment down on a piece of commercial real

estate. Working capital is essential for any business to succeed.

The term "working capital" is often referred to "circulating capital" which is frequently used

to denote those assets which are changed with relative speed from one form to another i.e.,

starting from cash, changing to raw materials, converting into work-in-progress and finished

products, sale of finished products and ending with realization of cash from debtors.

6.2 Nature of Working Capital

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 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

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(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.

6.3 Classification of Working Capital

Working Capital may be classified in two ways:

Concept based working capital

Time based working capital

Figure 03: Working Capital Classification

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6.4 Need for Working Capital

Working capital is needed till a firm gets cash on sale of finished products. It depends on two

factors:

Manufacturing cycle i.e. time required for converting the raw material into finished

product; and

Credit policy i.e. credit period given to customers and credit period allowed by

creditors.

Thus, the sum total of these times is called an "Operating cycle" and it consists of the

following six steps:

Conversion of cash into raw materials.

Conversion of raw materials into work-in-process.

Conversion of work-in-process into finished products.

Time for sale of finished goods—cash sales and credit sales.

Time for realization from debtors and Bills receivables into cash.

Credit period allowed by creditors for credit purchase of raw materials, inventory and

creditors for wages and overheads.

6.5 Measurement of Working Capital

There are 3 methods for assessing the working capital requirement as explained below:

1. Percent of Sales Method

Based on the past experience, some percentage of sales may be taken for determining the

quantum of working capital

2. Regression Analysis Method

The relationship between sales and working capital and its various components may be

plotted on Scatter diagram and the average percentage of past 3-5 years may be ascertained.

This average percentage of sales may be taken as working capital. Similar exercise may be

carried out at the beginning of the year for assessing the working capital requirement. This

method is suitable for simple as well as complex situations.

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3. Operating Cycle Method

As a first step, we have to compute the operating cycle as follows:

Number of days accounts receivable (AR) = Average of accounts receivable / Sales* 365

Number of days accounts payable (AP) = Average of accounts payable / Cost of goods sold

*365

Number of days inventory (INV) = Average of inventory / Cost of goods sold * 365

Cash conversion cycle (CCC) = AR+ INV- AP

6.6 Advantages of Adequate Working Capital

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is

essential in the human body for maintaining life, working capital is very essential to maintain

the smooth running of a business. No business can run successfully without an adequate

amount of working capital. The main advantages of maintaining adequate amount of working

capital are as follows:

1. Solvency of the Business

Adequate working capital helps in maintaining solvency of the business by providing

uninterrupted flow of production.

2. Goodwill

Sufficient working capital enables a business concern to make prompt payments and hence

helps in creating and maintaining goodwill.

3. Easy loans

A concern having adequate working capital, high solvency and good credit standing can

arrange loans from banks and other on easy and favorable terms.

4. Cash Discounts

Adequate working capital also enables a concern to avail cash discounts on the purchases and

hence it reduces costs.

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5. Regular Supply of Raw Materials

Sufficient working capital ensures regular supply of raw materials and continuous production.

6. Regular Payment of Salaries, Wages and Other Day-To-Day Commitments

A company which has ample working capital can make regular payment of salaries, wages

and other day-to-day commitments which raises the morale of its employees, increases their

efficiency, reduces wastages and costs and enhances production and profits.

7. Exploitation of Favorable Market Conditions

Only concerns with adequate working capital can exploit favorable market conditions such as

purchasing its requirements in bulk when the prices are lower and by holding its inventories

for higher prices.

8. Ability to Face Crisis

Adequate working capital enables a concern to face business crisis in emergencies such as

depression because during such periods, generally, there is much pressure on working capital.

9. Quick and Regular Return on Investments

Every Investor wants a quick and regular return on his investments. Sufficiency of working

capital enables a concern to pay quick and regular dividends to its investors as there may not

be much pressure to plough back profits. This gains the confidence of its investors and

creates a favorable market to raise additional funds i.e., the future.

10. High Morale

Adequacy of working capital creates an environment of security, confidence and high morale

and creates overall efficiency in a business.

6.7 Disadvantages of Excessive Working Capital

Excessive Working Capital means ideal funds which earn no profits for the business and

hence the business cannot earn a proper rate of return on its investments. When there is a

redundant working capital, it may lead to unnecessary purchasing and accumulation of

inventories causing more chances of theft, waste and losses.

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Excessive working capital implies excessive debtors and defective credit policy which may

cause higher incidence of bad debts. It may result into overall inefficiency in the

organization. When there is excessive working capital, relations with banks and other

financial institutions may not be maintained.

Due to low rate of return on investments, the value of shares may also fall.

6.8 Disadvantages of Inadequate Working Capital

A concern which has inadequate working capital cannot pay its short-term liabilities in time.

Thus, it will lose its reputation and shall not be able to get good credit facilities.

It cannot buy its requirements in bulk and cannot avail of discounts, etc.

It becomes difficult for the firm to exploit favorable market conditions and undertake

profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and its creates

inefficiencies, increases costs and reduces the profits of the business.

It becomes impossible to utilize efficiently the fixed assets due to non-availability of

liquid funds.

The rate of return on investments also falls with the shortage of working capital.

6.9 The Management of Working Capital

While the performance levels of small businesses have traditionally been attributed to general

managerial factors such as manufacturing, marketing and operations, working capital

management may have a consequent impact on small business survival and growth (Kargar

and Blumenthal, 1994). The management of working capital is important to the financial

health of businesses of all sizes. The amounts invested in working capital are often high in

proportion to the total assets employed and so it is vital that these amounts are used in an

efficient and effective way. However, there is evidence that small businesses are not very

good at managing their working capital. Given that many small businesses suffer from under

capitalization, the importance of exerting tight control over working capital investment is

difficult to overstate.

Working Capital Management refers to the management of all types of current assets of the

business enterprise in which adequacy of current assets as well as the level of noninsurable

risk posed by current liabilities are optimally identified. It is concerned with the problems

relating to the administration of all aspects of current assets, current liabilities and the inter-

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relationships that exist between them. It aims at reducing the locking up of funds in working

capital so as to improve the return on capital employed (i.e. profitability in the business). It

seeks to formulate proper policies for managing current assets and liabilities as well as the

techniques for maximizing the benefits derived from it. The policies for managing the

working capital of a firm should be such that the firm can accomplish its three important

goals simultaneously-

Adequate Liquidity

Maximizing Profitability

Minimization of non-insurable risk and uncertainty

6.10 Strategies in Working Capital Management

In connection with the tradeoff between liquidity, risk and profitability a company may adopt

three types of working capital strategies:

Conservative Strategy

Aggressive Strategy

Moderate Strategy

The firm following conservative working capital strategy combines a high level of current

assets in relation to sales with a low level of short term financing. Excess amount of current

assets enable the firm to absorb sudden fluctuations in sales, production plans and

procurement time without disturbing the continuity in production. The higher level of current

assets reduces the risk of insolvency. But at the same time lower risk translates into lower

profit.

The firm following aggressive working capital strategies, on the other hand, would combine

low level of current assets with a high level of short term financing. This firm will have high

profitability and greater risk of insolvency.

The moderate firm would like to combine moderate level of current assets in relation to sales

with moderate level of short term financing to maintain a well balance between the risk of

insolvency and profitability.

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Thus, the considerations of assets and financial mixes are very much crucial to the working

capital management of a firm. The working capital strategy as stated above can be shown in

the following diagram:

Figure 04: Strategies of Working Capital

SOURCE: Fees, P.E. (1978). “The Working Capital Concept, Accounting Theory: Text and

Readings L.D Mac cullers & R.G. Schroeder (Ed.), JohnWiley & Sons

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7.0 RESEARCH QUESTIONS AND HYPOTHESIS

7.1 Research Questions

For conducting the research, the following propositions are identified:

Proposition-1

Receivable collection period is believed to have a negative impact on the firm’s profitability

Proposition-2

Inventory conversion period is believed to have a negative impact on the firm’s profitability

Proposition-3

Payable deferral period is believed to have a positive impact on the firm’s profitability.

Proposition-4

Cash conversion cycle is believed to have a negative impact on the firm’s profitability to

reach the desired objective the following research questions have been set. The following

questions have been tried to satisfy with proper justification.

Research Question No. 1: What is the effect of inventory conversion period on profitability?

Justification: Every firm wants to convert its inventory on sales in short time. But due to

various reasons, they may not be able to do so. So, it is very important to know, if the

companies take too time in this conversion, what will be the impact of it on the profitability

of the company. Thus, this question helped to identify the impact of inventory conversion

period (in days) on the profitability.

Research Question No. 2: What is the effect of receivables collection period on profitability?

Justification: The collection time sold products need to short, because it has a strong effect on

the overall performance of the firm. There are many organizations that follow various

techniques to collect the due in short period of time. So, it is very important to know what

will be the effect of receivables collection period on the profitability.

Research Question No. 3: What is the effect of payable deferral period on profitability?

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Justification: If the firm can able to defer the bill from the creditors, the firm can use it

money for few more days. So, this question helped to identify the impact of deferring the

payment on the profitability of the firm.

Research Question No. 4: What is the effect of cash conversion cycle on profitability?

Justification: The cash conversion cycle is the days between disbursing cash and collecting

cash in connection with undertaking a discrete unit of operations. The Cash Conversion Cycle

(CCC) measures how long a firm will be deprived of cash if it increases its investment in

resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed

by growth. So, this question helped to find out the impact of cash conversion cycle on the

profitability.

Research Question No. 5: What is the association of collection policy between Incepta

Pharmaceuticals Ltd and pharmaceuticals industry in Bangladesh?

Justification: This question helped to identify the collection policy that is followed by Incepta

Pharmaceuticals Ltd. and its association with the pharmaceuticals industry in Bangladesh.

Research Question No. 6: What is the association of payment policy between Incepta


Justification: The association of payment policy between Incepta Pharmaceuticals Ltd. and

the pharmaceuticals industry in Bangladesh was known by developing this question.

Research Question No. 7: What is the association of inventory policy between Incepta


Justification: This question helped to identify the association of inventory policy between

Incepta Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.

Research Question No. 8: What is the association of cash conversion cycle between Incepta


Justification: This question helped to identify the association of cash conversion cycle

between Incepta Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.

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7.2 Hypothesis

From the above propositions, research objectives and research questions the following

hypotheses can be formulated which are tested in this research.

Hypothesis 1

Null hypothesis: There is no impact of receivables collection period on profitability in the


Alternative hypothesis: There is a significant impact of receivables collection period on

profitability in the pharmaceuticals industry in Bangladesh

Hypothesis 2

Null hypothesis: There is no impact of payable deferral period on profitability in the


Alternative hypothesis: There is a significant impact of payable deferral period on


Hypothesis 3

Null hypothesis: There is no impact of inventory conversion period on profitability in the


Alternative hypothesis: There is a significant impact of inventory conversion period on


Hypothesis 4

Null hypothesis: There is no impact of cash conversion cycle on profitability in the


Alternative hypothesis: There is a significant impact of cash conversion cycle on profitability

in the pharmaceuticals industry in Bangladesh.

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Hypothesis 5

Null hypothesis: There is no association of collection policy between Incepta Pharmaceuticals


Alternative hypothesis: There is a significant association of collection policy between Incepta

Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh

Hypothesis 6

Null hypothesis: There is no association of payment policy between Incepta Pharmaceuticals


Alternative hypothesis: There is a significant association of payment policy between Incepta


Hypothesis 7

Null hypothesis: There is no association of inventory policy between Incepta Pharmaceuticals


Alternative hypothesis: There is significant association of inventory policy between Incepta


Hypothesis 8

Null hypothesis: There is no association of cash conversion cycle between Incepta


Alternative hypothesis: There is a significant association of cash conversion cycle between

Incepta Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.

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8.0 RESEARCH METHODOLOGY

8.1 TYPE OF RESEARCH

Since the research’s broad objective is to find out whether working capital management has

any significant impact on profitability or not in the perspective of pharmaceuticals industry in

Bangladesh, this is a causal research. The study applied co-relational research.

8.2 BASIC RESEARCH METHOD

An exploratory research was carried out to define the research objectives. Mainly secondary

data analysis technique was used in the research. Basing on the finding from different

previous reports, the hypotheses were formed.

8.3 SAMPLING PLAN

Sampling is almost to do a complete census of most population. A properly designed sample

is more efficiently managed, less costly and can provide the level of information necessary

for the desired objectives. In this research, the steps followed in the sampling design are

briefly discussed in the subsequent sections.

8.3.1 Target Population

Sampling design begins by specifying target population. The broad objective of this research

is to find out whether there is any relationship exists between working capital management

and firms’ profitability in the pharmaceuticals industry in Bangladesh. For this purpose, the

target population for this research is all the small, medium and large local and multinational

pharmaceuticals companies in Bangladesh which is about 250. According to Bangladesh

Association of Pharmaceutical Industries (BAPI), there are 149 pharmaceuticals companies

in Bangladesh.

8.3.2 Sampling Frame

A sampling frame is a representation of the elements of the target population. It consists of a

list or set of directions for identifying the target population. Though the population includes

all the pharmaceuticals companies in Bangladesh; but the sampling frame mainly in this

research includes the companies located in Dhaka city.

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8.3.3 Sampling Technique

To avoid misclassification of firms the research has concentrated only on the pharmaceutical

firms in Bangladesh. The research is based on probability and also non-probability sampling

method. Out of the probability sampling methods, random sampling has been used. Because

in case of knowing the impact of working capital management on profitability there is an

equal and known chance of being selected for each member of the populations. And after that

convenience sampling method has been followed from the random sampling.

8.3.4 Sample Size Determination

According to Bangladesh Association of Pharmaceutical Industries (BAPI), there are 149

pharmaceuticals companies in Bangladesh. The steps followed in determining sample size are

briefly discussed in the subsequent sections.

Total Number of Population (N): Total number of population is 149

Confidence Level: The confidence level 90% (for 90% Z =1.64)

Precision level (d): Precision level is 10%

Proportion (p): It is the ratio or percentage. It is 0.5 because it is maximum

Estimated Proportion of Failure (q): Estimated proportion of failure is 0.5 (1-p)

So the sample size is:

N Z2pq

n =

Nd2 + Z2pq

149X1.642 X 0.5 X 0.5

=

149 X 0.102 + 1.642 X 0.5X 0.5

= 40.64807

As the limitations of time, it was not possible to collect all the information from the above

sample firms. Thus, 9 companies were chosen for conducting the research.

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8.4 SELECTED COMPANIES FROM SAMPLE

In this research, nine companies were sampled for conducting the research. In case selecting

the companies, the convenience method was followed. These nine companies are:

Serial No. Company Name

1. Square Pharmaceuticals Ltd

2. Beximco Pharmaceuticals Ltd.

3. Incepta Pharmaceuticals Ltd.

4. IBN Sina Pharmaceutical Industry Ltd.

5. Renata Limited

6. Nuvista Pharma Ltd.

7. Drug International Limited

8. Beacon Pharmaceuticals Limited

9. Ambee Pharmaceuticals Ltd.

Table 02: Selected Companies from Sample

8.5 SOURCES AND METHOD OF DATA COLLECTION

Data were mainly collected from secondary sources. The secondary data was collected from

company annual report, different publications, and websites. In conducting the research,

some private limited companies were chosen. In that case, a questionnaire was prepared for

collecting the secondary data from different organizations.

8.6 ANALYSIS PLAN

In this research I have provided two types of data analysis; descriptive and quantitative

8.6.1 Descriptive Analysis

Descriptive analysis is the first step in this research. It helped to describe relevant aspects of

phenomena of cash conversion cycle and provide detailed information about each relevant

variable. SPSS software has been used for analysis of the different variables in this study.

SPSS for Windows is probably the most widely used computer software for analysis of

quantitative data for social scientists. SPSS, which originally was short for Statistical Package

for the Social Sciences, has been in existence since the mid-1960.

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8.6.2 Causal Analysis

In this analysis two methods were applied. Firstly correlation models, specifically Pearson

correlation to measure the degree of association between different variables under

consideration. Secondly, to account for the effects of other construct, multivariate linear

regression is applied for the hypotheses. This measure provided more information on the

correlation structure between constructs and therefore facilitates a further step in hypotheses

testing.

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9.0 ANALYSIS AND INTERPRETATIONS

9.1 EMPIRICAL DATA RELATED TO PHARMACEUTICALS INDUSTRY IN

BANGLADESH

9.1.1 Descriptive Statistics

Descriptive statistics shows the average, and standard deviation of the different variables of

interest in the study. It also presents the minimum and maximum values of the variables,

which help in getting a picture about the maximum and minimum values a variable.

Table 03 provides descriptive statistics of the collected variables. All variables were

calculated using balance sheet (book) values. The book value was used because the

companies did not provide any market value related to the variables that we used in this

study. The explanatory variables are all firm specific quantities and there is no way to

measure these variables in terms of their 'market value.' Furthermore, when market values are

considered in such studies, there is always a rather legitimate question of the date for which

the 'market values' refer. This is rather arbitrary. Hence, 'book values' as of the date of the

financial reports is considered.

Descriptive Statistics of Pharmaceuticals Industry in Bangladesh

Variables Minimum Maximum Mean Std. Deviation

AR .180 92.803 30.799 25.457

AP 5.182 411.223 49.078 80.992

INV 28.918 937.168 295.4008 266.367

CCC 20.177 917.046 277.1203 237.447

LnS 18.001 23.151 21.0461 1.381

DR .096 .805 .5252 .2148

FFATA .003 .378 .1278 .0992

GrossPr .050 .922 .4675 .2814

Table 03: Descriptive Statistics

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Here,

Number of days accounts receivable (AR)= Average of accounts receivable / Sales*

365

Number of days inventory (INV) = Average of inventory / Cost of goods sold * 365

Number of days accounts payable (AP)= Average of accounts payable / Cost of goods

sold *365

Cash conversion cycle (CCC) = AR+ INV- AP

Natural Logarithm of sales (LOS) = ln (sale)

Debt ratio (DR)= Total debt/ Total assets

Fixed financial assets to total assets (FFATA) = Fixed financial assets/ Total assets

Gross operating profitability (GrossPr) = ( Sales – Cost of goods sold)/ (Total assets –

Financial assets)

Table 03 gives descriptive statistics for nine Pharmaceuticals Companies in Bangladesh for a

period of three years from 2007 to 2009 and for a total 27 firms- year observations.

Looking at this table, it is seen that the average value of net gross operating profitability is

46.75% of total assets, and standard deviation is 28.14%. This figure means that the value of

profitability can deviate from mean to both sides by 28.14%. The maximum and minimum

values of gross operating profitability are 9.22% and 5% respectively.

Information from descriptive statistics also indicates that the mean of cash conversion cycle

that used as a proxy to check the efficiency in managing working capital is 277 days and

standard deviation is 237 days.

The average of number of day’s accounts receivable is 31 days with standard deviation 26

days. Minimum time taken by a company to collect cash from customers is 1 day while the

maximum time for this goal is 93 days.

The average time of paying to suppliers is 49 days and the standard deviation is 81 days.

Maximum time taken from firm to pay for their suppliers is 411 days while minimum time

taken for this purpose is 5 days.

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Moreover, it takes an average 295 days in order to sell inventory with standard deviation of

266 days. Maximum time taken by a firm is 937 days, while minimum time to convert

inventory into sales is 29 day.

Natural logarithm of sales that measure the size of the firm is used as a control variable. From

Table 03 it is seen that the mean of logarithm of sales is 21.0461 and standard deviation is

1.381. The maximum value of log of sales for a firm in a year is 23.151 while the minimum

value is 18.001.

Debt ratio is used to check the relationship between debt financing and the profitability. It is

also used as a control variable. The result of descriptive statistics indicates that the average of

debt ratio is 52.52% with standard deviation of 21.48%. The maximum debt ratio financing

used by a firm is 80.5% which is unusual because of debt lager asset. However, it is also

possible if the equity of the firm is negative. While the minimum of debt ratio is 9.6%, this

means that there is a company that uses a little debt in its operation.

Finally, the fixed financial assets to total assets ratio is used to check the ratio of fixed

financial assets to the total assets of pharmaceuticals industry in Bangladesh. It is also

utilized as a control variable. The mean value for this ratio is 12.78% with a standard

deviation of 9.92%. The maximum value of financial assets to total assets is 37.8% and the

minimum value for this purpose is 3%.

9.1.2 Correlation Analysis

The descriptive statistics show the working capital measures and its variations among the

firms in sample industry. The correlation analysis is done to analyze the association between

the working capital management and profitability. To examine the relationship among these

variables, Pearson correlation coefficients are calculated.

The Table 04 shows the correlation matrix with Pearson correlation coefficients.

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Correlation Matrix

GrossPr AR AP INV CCC LnS DR FFATA

GrossPr

PearsonCorrelation 1.00 -.437(*) .163 -.359(*) -.505(*) .273 -.253 .553(**)

Sig. (2-tailed) .033 .447 .0085 .012 .196 .234 .005

AR

PearsonCorrelation 1.00 -.052 .185 .332 -.399 .277 -.541(**)

Sig. (2-tailed) .810 .388 .113 .053 .190 .006

AP

Pearson Correlation 1.00 .568(**) .290 .101 -.012 .019

Sig. (2-tailed) .004 .169 .640 .955 .931

INV

Pearson Correlation 1.00 .948(**) -.382 .254 -.414(*)

Sig. (2-tailed) .000 .065 .230 .044

CCC

Pearson Correlation 1.00 -.506(*) .319 -.529(**)

Sig. (2-tailed) .012 .128 .008

LnS

Pearson Correlation 1.00 -.832(**) .142

Sig. (2-tailed) .000 .509

DR

Pearson Correlation 1.00 .085

Sig. (2-tailed) .692

FFATA

Pearson Correlation 1

Sig. (2-tailed)

Table 04: Correlation Matrix

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* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).

The first, starting with the analysis of correlation results between the average collection

periods (AR) and operating profitability. The result of correlation analysis shows a negative

coefficient -.437, with p value of .033. It shows that there is a significant at α = 5%. This

means that if number of days accounts receivable increase, it will make operating profitability

decrease. Correlation result between inventory turnover in days (INV) and the operating

profitability also indicate the same type of result. The correlation coefficient is -.359 and p-

value t is .0085. It has significant at significant at α = 5%. It explains when the firm takes less

time in selling inventory will negatively affect its profitability of the firm.

On the other hand, correlation result between number of days accounts payable (AP) and the

gross operating profitability is a positive. The correlations coefficient is .163 and p value

is .447.

The cash conversion cycle that is used as a comprehensive measure of working capital

management also has a negative correlation with the gross operating profitability with

coefficient -.505 and p value is .012. It also shows a significant at α = 5%. This demonstrates

that paying suppliers longer and collecting payments from customers earlier, and keeping

products in stock less time, are all associated with an increase in the firm’s profitability.

Result from analysis also shows a positive correlation between natural logarithm of sales that

is used to measure the size of firm and the operating profitability. Its coefficient correlation is

.273 with p value 196. This shows that as size of the firm increases, it will not significantly

affect its profitability.

From the analysis, it is found that there is a positive relationship between the fixed financial

assets to totals assets and gross operating profitability. Its coefficient correlation is .553with p

value 0.005. It shows highly significant at α = 1%. It explains that as fixed financial assets to

totals assets increases, gross operating profitability also increases.

Result from the analysis also shows a negative correlation between debt ratio that is used to

measure the leverage of firm and the operating profitability. Its coefficient correlation is -.253

with p value .234. This shows that as the debt ratio increases, it will not significantly affect

the profitability.

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To sum, results from analyzing of correlations indicate that there is a negative between cash

conversion cycle, number of days accounts receivable, number of days inventories with the

profitability of firms are consistent with the research of Deloof (2003) and Raheman and Nasr

(2007). However, in their study, they indicated a negative relationship between number of

day’s accounts payable and profitability. Contrast, this research shows a positive relationship

between number of day’s accounts payable and profitability. This analysis suits with result of

Lazaridis and Tryfonidis (2006).

9.2 Empirical data related to Incepta Pharmaceuticals ltd.

9.2.1 Descriptive Statistics

Descriptive Statistics OF IPL

Variables Sector MeanStd.

Deviation Minimum Maximum

Receivables Collection Period

Incepta 6.9460 1.9855 5.5420 8.3500

Industry 30.5317 3.3399 26.7917 33.2170

Payable Deferral Period

Incepta 248.2430 230.4885 85.2630 411.2230

Industry 50.6941 24.1713 34.0180 78.4147

Inventory Conversion Period

Incepta 601.6960 474.4290 266.2240 937.1680

Industry 302.6730 97.4150 240.2553 414.9287

Cash Conversion Cycle

Incepta 360.4000 245.9274 186.5030 534.2970

Industry 282.5155 70.4567 233.821 363.3057

Gross Operating Profitability

Incepta .6235 .4221 .3250 .9220

Industry .4717 .0507 .4247 .5254

Table 05: Comparison between statistics of Company and Industry

Table 05 gives descriptive statistics for Incept Pharmaceuticals Ltd. as well as

pharmaceuticals industry in Bangladesh for a period of three years from 2007 to 2009.

From this table, it is seen that the average of number of days accounts receivable of IPL is

almost 7 days with standard deviation 2 days. Minimum time taken by IPL to collect cash

from customers is 5 days while the maximum time for this goal is 8 days. On the hand,

37 | P a g e

average the receivable collection period of the industry is 31 days with a standard deviation

of 4 days.

The average time of paying to suppliers is 248 days and the standard deviation is 230 days.

Maximum time taken from firm to pay for their suppliers is 411 days while minimum time

taken for this purpose is 85 days. The average payable deferral period for the industry is 51

days and the standard deviation is 24 days.

The average time to convert inventories into sales for the pharmaceuticals industry is 302

days and the standard deviation is 98 days. On the other hand, IPL takes an average 601 days

in order to sell inventory with standard deviation of 474 days. Maximum time taken by IPL is

937 days, while minimum time to convert inventory into sales is 266 days.

In case of Incepta Pharmaceuticals Ltd. the mean of cash conversion cycle that used as a

proxy to check the efficiency in managing working capital is 360 days and standard deviation

is 245 days. On the other hand, the mean of cash conversion cycle is 283 days and the

standard deviation is 71 days for the pharmaceuticals industry.

Information from descriptive statistics also indicates that IPL’s average value of net gross

operating profitability is 62.35%, and standard deviation is 42.21%. This figure means that

the value of profitability can deviate from mean to both sides by 42.21%. The maximum and

minimum values of gross operating profitability are 92.20% and 32.50% respectively. The

industry’s average gross profitability is 47.17% and the standard deviation is 5.07%.

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1.0 SUMMARY OF FINDINGS

10.1 Findings related to pharmaceuticals industry in Bangladesh

The findings that are related to sampled pharmaceuticals industry in Bangladesh are

described bellow according to the components of working capital management.

10.1.1 Receivable Collection Period

An interesting data is found in case of a firm while conducting this research which is the

minimum days to collect the payment from the customers is 0.180. It indicates that this firm

is so effective in collection the payments or the firm is not willing to provide products in

credits.

From Pearson Correlation Matrix it was found that there is a negative relationship between

average collection period and the profitability of the firm. If number of days accounts

receivable increase, it will make operating profitability decrease. The regression analysis also

sketched the same type result of Pearson Correlation. This concludes that there is a negative

impact of receivables collection period on profitability in the pharmaceuticals industry in

Bangladesh.

10.1.2 Payable Deferral Period

There is a vast difference between the minimum level and maximum level of Payable

Deferral Period in pharmaceuticals industry in Bangladesh. Maximum time taken from firm

to pay for their suppliers is 411 days while minimum time taken for this purpose is 5 days. It

indicates that there is a firm which takes too much time to pay the vendors and there is a firm

which pays the vendors in shorter period of time.

In conducting the regression analysis, it is found that the payable deferral period positively

affects the profitability of the firm.

10.1.3 Inventory Conversion Period

Like number of days accounts payable, there is a massive difference between the minimum

and maximum level of inventory conversion period in pharmaceuticals industry in

Bangladesh. It indicates that there is a firm which takes much time in stock out the

inventory.

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The Pearson Correlation and regression analysis shows that when the firm takes more in

selling inventory will adversely affect its profitability of the firm.

10.1.4 Cash Conversion Cycle

Cash conversion cycle that used as a proxy to check the efficiency in managing working

capital is 277 days and standard deviation is 237 days which is too long for a industry. This

shows the lack of efficiency.

There is a negative effect of cash conversion cycle on profitability in the pharmaceuticals

industry in Bangladesh which is found both from the Pearson Correlation and regression

analysis.

10.2 Findings related to Incepta Pharmaceuticals ltd.

A comparison has been made between Incepta Pharmaceuticals Ltd. and the pharmaceuticals

industry in Bangladesh. The findings of these comparisons are given here.

10.2.1 Receivable Collection Period

The receivables collection period of Incepta Pharmaceuticals Ltd. is almost 7 days which less

than the average of the pharmaceuticals industry in Bangladesh. It means that the company is

so efficient in collecting their receivables. The result of ANOVA test indicates that there is a

significant association of collection policy between Incepta Pharmaceuticals Ltd. and the

pharmaceuticals industry in Bangladesh.

10.2.2 Payable Deferral Period

The payable deferral period of pharmaceuticals industry in Bangladesh is 51 days whereas

IPL has the average of 249 days. This indicates that IPL takes time to pay its customers.

There is no significant association payment policy between Incepta Pharmaceuticals Ltd. and

the pharmaceuticals industry in Bangladesh which is found from the result of SPSS.

10.2.3 Inventory Conversion Period

The average days to inventories into sales of IPL are 602 day. On the other hand, the industry

average is 302 days. This shows that IPL takes more time to stock out the inventory. The

result of SPSS explains that there is no association of inventory policy between Incepta


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10.2.4 Cash Conversion Cycle

The cash conversion cycle of IPL is higher than the pharmaceuticals industry in Bangladesh.

It implies that IPL takes much time to convert its resources into cash. The SPSS result

indicates that there is no significant association of cash conversion cycle of Incepta

Pharmaceuticals Ltd. with the pharmaceuticals industry in Bangladesh.

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11.0 CONCLUSION AND RECOMMENDATIONS

11.1 Conclusions

Working capital management is important part in firm financial management decision. The

ability of the firm to operate continuously for longer period depends on how they deal with

working capital. The optimal of working capital management is could be achieve by firm that

manage the tradeoff between profitability and liquidity. The purpose of this study is to

investigate the relationship between working capital management and firm profitability. Cash

conversion cycle is used as measure of working capital management.

This paper support for existing literatures such as Shin and Soenen (1998), Deloof (2003),

Raheman and Nars (2007) and who found a strong negative relationship between the

measures of working capital management including the number of days accounts receivable,

number of days inventories and cash conversion cycle with corporate profitability. Moreover,

this paper also adds to finding of Lazaridis and Tryfonidis (2006) who claimed that there was

a positive relationship between number of days accounts payable and profitability.

The negative relationship between corporate profitability that measured by gross operating

profitability and cash conversion cycle that used as measuring efficiency of working capital

management shows that cash conversion cycle is longer, profitability is smaller. Result from

analysis of relationship between working capital management and profitability on

pharmaceuticals industry in Bangladesh also indicates that there is a negative between

number of days accounts receivable, number of days inventories and profitability. So it can

be concluded that if the firms properly manage their cash, accounts receivables and

inventories in a proper way, this will ultimately increase the profitability.

This would also assist policy-makers and educators to identify the requirements of, and

specific problems faced. However, the sample size and the period of time for this study is

compared to some of the previous studies made about the relationship between working

capital management and profitability (Deloof, 2003, Shin and Soenen, 1998). So, the sample

does not highly stand for population. Moreover, the study only refers to internal factors but

not consider external factors as industry dummy, level of economic activity. Future research

could further explore in order to overcome these limits.

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11.2 Recommendations

From the research, it is found that all the components of working capital have a significant

effect on the profitability in the pharmaceuticals industry in Bangladesh. Again in case of

Incepta Pharmaceuticals Ltd. , only collection policy has a significant association with the

pharmaceuticals industry in Bangladesh. The payment policy, inventory policy, and cash

conversion cycle have no significant association with the pharmaceuticals industry in

Bangladesh.

The cash conversion cycle for both the pharmaceuticals industry in Bangladesh and Incepta

Pharmaceuticals Ltd. is too high. As the cash conversion cycle has the negative relationship

with the profitability, this cycle should be short as much as possible without hurting the

operations, This would improve profits, because the longer the cash conversion cycle, the

greater the need for external financing, and that financing has a cost.

The following ways can be followed to improve the cash conversion cycle.

Cash conversion cycle can be shortened by reducing the inventory conversion period

by processing and selling goods more quickly. The inventory conversion period for

IPL and the industry is too long. So, the managers can increase profitability by

stocking out inventories more quickly.

By lengthening the payables deferral period by slowing down the firm’s own

payments, cash conversion cycle will be shortened. IPL’s payable deferral period is

already too high so it should not be revised. On the other hand, in case of industry,

some firms can take time to pay its vendors.

←←←←←←←←←←←←←←←←←←Ω→→→→→→→→→→→→→→→→

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REFERENCES

1. IMS Health Survey- http://pps.imshealth.com

2. Official Website- http://www.inceptapharma.com/

3. General Information- www.wikipedia.org

4. Financial Data from Sample firm Websites-

www. squarepharma .com. bd / , http://beximco-pharma.com,

www. ibnsinapharma .com/ , www. renata - ltd .com/

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Deloof, M. (2003). Does working capital management affect profitability of Belgian firms?

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Eljelly, A. M. (2004). Liquidity-profitability tradeoff: An Empirical Investigation in an

Emerging Market. International Journal of Commerce and Management, 14(2), 48-61.

Filbeck, G., & Krueger, T. (2005). Industry related differences in working capital

management. Journal of Business, 20(2), 11-18.

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http://www.renata-ltd.com/

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http://beximco-pharma.com/

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http://www.wikipedia.org/

http://www.inceptapharma.com/

Garcia-Teruel PJ, Martinez-Solano PM, (2007). Effects of working capital management on

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Abbreviation

API= Active Pharmaceutical Ingredient

QAD=Quality Assurance Department

IPL=Incepta Pharmaceuticals Ltd.

WC=Working Capital

WCM=Working Capital Management

CCC=Cash Conversion Cycle

AR= Number of Days Accounts Receivable

AP= Number of Days Accounts Payable

INV= Number of Days Inventory

DR=Debt Ratio

LnS=Logarithm of Sales

FFATA= Fixed Financial Assets to Total Assets

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final report

Documents