Impact of Working Capital TOPIC : Management on Profitability

(Evidence from Pakistan)

SUBMITTED BY ID SUPERVISOR

: SAEED AKBAR : 9216 : SIR. ASIF MAHMOOD

Working capital management is important part in firm financial management decision. An optimal WCM is expected to contribute positively to the creation of firm value. To reach at optimal WC, firms manager should control the trade off between profitability and liquidity

accurately.
The purpose of this study is to investigate the relationship between WCM and firm profitability. Cash conversion cycle is used as measure of WCM. My study uses panel data of 44 Pakistani firms listed on KSE100 index for the period of 1990-2007 that consist of about each and every sector except banking, financial and insurance sector.

What is the relationship between Working Capital Management and firm profitability?

The purpose of my study is to investigate the impact of working capital management on profitability of Pakistani firms. The main objectives are:

Working Capital Management and Profitability

Impact of different components of WCM on profitability Liquidity and profitability Profitability and size Debt financing and profitability

For this research I have selected a sample of 44 top companies listed at Karachi Stock Exchange as on May 07, 2010. The time period covered is 18 years, which is from 1990 to 2007. These 44 companies represent each and every sector in Pakistan except banking, insurance and financial sector.

4.1 Data Collection

The data used in the study has been directly acquired from the State Bank of Pakistan Peshawar Brach. The data contains the balance sheets and profit and loss statements of the sample companies. 4.2 Sample Size I have selected 44 top companies of Pakistan to find out the relationship between working capital management and the profitability. The time period covered in this research study is from 1990 to 2007, which consists of 18 years.

4.3 Analysis
I have used MS Excel and SPSS softwares for descriptive and
quantitative analysis in my research study. 1. Descriptive analysis. (to find out the average, standard deviation, minimum and maximum values of different variables) 2. Statistical technique of regression. (to find the impact of WCM on the profitability of 44 sample companies of Pakistan)

Descriptive Statistics

N ACP AAI APP CCC ROA 727 727 727 727

Minimum .00 .00 .00 -548.23

Maximum 1138.80 791.96 1654.33 629.63

Mean 79.8977 64.3003 91.7372 50.1334

Std. Deviation 84.32592 67.42357 110.67745 107.87286

727
727

-2.93
.00

.87
13.37

.1297
8.3268

.22420
1.94755

LS
CR DR

727
727

.01
.00

295.59
6.39

2.0891
.1722

11.01344
.31589

Correlations

ACP ACP AAI APP CCC ROA LS CR DR Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation 1 .425** .617** .272** -.397** -.314** -.015 .428**

AAI .425** 1 .414** .337** -.058 -.478** .012 .068

APP .617** .414** 1 -.445** -.505** -.325** -.052 .588**

CCC .272** .337** -.445** 1 .206** -.149** .052 -.246**

ROA -.397** -.058 -.505** .206** 1 .134** .008 -.600**

LS -.314** -.478** -.325** -.149** .134** 1 -.195** -.179**

CR -.015 .012 -.052 .052 .008 -.195** 1 -.047

DR .428** .068 .588** -.246** -.600** -.179** -.047 1

Model Summary

Model 1

R .642a

R Square .412

Adjusted R Square .406

Std. Error of the Estimate .17278

a. Predictors: (Constant), DR, CR, AAI, CCC, LS, ACP, APP

ANOVAb Model 1 Regression Residual Total b. Dependent Variable: ROA

Sum of Squares
15.029 21.463 36.492

df 7 719 726

Mean Square 2.147 .030

F 71.922

Sig. .000a

a. Predictors: (Constant), DR, CR, AAI, CCC, LS, ACP, APP

Coefficientsa Unstandardized Coefficients Model 1 (Constant) .237 ACP AAI APP CCC LS CR DR a. Dependent Variable: ROA .039 6.012 .000 B Std. Error Standardized Coefficients Beta T Sig.

.000
.000 .000 -8.313E-5

.000
.000 .000 .000

-.097
.136 -.279 -.040

-1.413
2.636 -2.796 -.515

.158
.009 .005 .606

.000
.000 -.296

.004
.001 .027

-.008
-.029 -.417

.237
-.975 -11.095

.813
.330 .000

Variables
CCC CR DR Size

tcalc
.515 .975 11.095 2.37

Tabulated value of t at 5% confidence interval= 1.98

H01 Accepted
H02 Accepted H03 Rejected H04 Rejected

No relationship between WCM and profitability of firms in Pakistan. No relationship between liquidity and profitability of firms in Pakistan.

Negative relationship between debt used by Pakistani firms and profitability.

Positive relationship between the firm size and profitability of Pakistani firms.

They can increase their profitability by decreasing the debts They can increase their profitability by increasing their size

They can increase their profitability by managing their working capital

management practices efficiently.