CHAPTER NO.

1
I NTRODUCTI ON
1.1 INTRODUCTION
This study examines the impact of working capital management components on the
profitability of registered companies in Pakistan. In addition, the study determines how
the impact of working capital management components changes as macroeconomic
conditions change from a boom to a recession.
This chapter is organized as follos!
It brings light on working capital management as well as on the trade-off between liquidity
preservation and profit maximiation faced by companies.
It describes the problem statement under investigation and further expounds on the trade-off
emanating from managing working capital. It chronicles the main ob!ectives of the study and
is followed by section.
It specifies the key questions to be examined by the study. It also highlights the importance of
this study and pin-points the gaps in theoretical and previous studies that this research seeks to
fill in. "t the end of this section of the chapter outlines how the entire research paper is
organied.
1." CONTE#T O$ THE %TUD&
The thesis will provide a snapshot of how public listed firms manage their working capital
during both good and bad period. This management of working capital needs to be assessed
which is done with its effect on firm#s profitability. In this concern, the better working capital
is managed to help in maximiing higher profitability of a firm. Then on the basis of this
information the best way of managing working capital is assessed for both periods. $oreover
%
these periods are then compared and then find out whether companies have to change their
management concerning their working capital management during times of a crisis.
&orporate financial management primarily deals with three core areas that have a bearing on
firm#s financial goals. "s postulated by 'irer et al ()**+,, these three core areas of
corporate finance are as follows-
%, &apital budgeting, this captures the process of planning and managing a firm#s long-
term investments.
), &apital structure, it identifies mixture of long-term debt and equity maintained by a
firm.
., /orking capital management, which deals with management of a firm#s short-term
assets and liabilities0
$anufacturing industry of Pakistan mainly 1*2 of goods are produced by the large scale
industries which include cement, automobiles, sugar, textile, oil and gas and etc.
$anufacturing sector includes so many sub sectors3 therefore, in depth analysis is required for
the industry as a whole at micro level. "lthough agriculture contributes to the ma!or portion in
the economy of Pakistan but &ement sector also plays a vital role. &ement sector contributes
)2 to the overall 45P of Pakistan and %.2 to manufacturing sector. Production has increased
by %) percent to 66.+ million tons in )*%*-%%. The studies on both capital structure and
working capital management is rich in as far as explaining how these two corporate finance
areas directly affect firms profitability and liquidity.
1.' PRO()E* %TATE*ENT
The aim of this study is to examine does working capital management affect the firm profitability in
the cement industry of Pakistan.
)
1.+ O(,ECTI-E% O$ THE %TUD&
&ertify short-term liquidity
"rise of the short-term requirements
'inding the financing mix.
7sed the current assets and current liabilities for satisfactory working capital is
maintained.
To analye the Profitability ratio among current asset and current liabilities.
The other o./ecti0es are as follos!
(i, 8ne to empirically examine if working capital management components,
namely- cash conversion cycle, days sales in inventory, days payables outstanding,
current ratio, and capital structure impact on profitability of Pakistan listed firms.
(ii, 9econd to build a model that gauges how working capital management, particularly
cash conversion cycle, impact on profitability when the economy moves from a
boom to a recession.
(iii, Third to determine if the impact of working capital management components on
profitability of companies in the industrial sector and those in the rest of the other
sectors is different. The underpinning for this investigation of the impact in different
sectors is that, relative to the rest of the companies in the other sectors, companies
in the industrial sector (which comprise manufacturing and production led
firms, have significantly higher levels of current assets on their respective
balance sheets. Thus, the ob!ective is to examine if there is a difference in the
direction and extent of the impact on profitability if working capital levels change
from significantly high levels to relatively low levels.
.
1.1 RE%EARCH 2UE%TION%
The 3e4 56estions to .e in0estigated .4 this st6d4 are as follos!
i. 5o firm#s liquidity measures impact on profitability of Pakistan companies3 i.e. are
the working capital management variables statistically significant in explaining
variation in profitability0
ii. If statistically significant, what is the direction of the impact of each variable3 i.e.
is it a negative or a positive relationship0
iii. 5oes liquidity affect profitability of companies within the industrial sector and the
rest of the sectors different0
iv. Is there any difference in how working capital management impacts on
profitability as the economy moves from a boom to a recession0
v. 5oes capital structure impact on profitability of Pakistan firms, and if so, is the
relationship between capital structure and profitability positive or negative0
1.7 %I8NI$ICANCE O$ THE %TUD&
In addition to determining if working capital management components impact on
profitability of Pakistan firms, this study has many contribution-enhancing positive
features which include the following-
'irstly, this paper explores the level of the impact of working capital management on
profitability as market conditions change. 9pecifically, it separates the impact of working
capital management under both an economic downturn as well as under an economic
boom. This information will be helpful in trade credit policy formulation in that it will
give guidance to company corporate managers in implementing and adapting a suitable
trade &redit policy fitting for each market condition.
6
9econdly, the study investigates the relationship between capital structure and
profitability of Pakistan#s firms where limited empirical research exists. 4iven that
capital structure is viewed by a number of researchers to be the most vital of all the
aspects of capital investment decision, the study therefore examines its relationship with
profitability so as to give guidance to management in their attempt to identifying the
optimal capital structure of the firm that maximies market value.
Thirdly, the scope of the research has been stretched to explore if the selected liquidity
measures impact on profitability of companies in the industrial sector and those in the
rest of the other sectors different. This will give guidance to corporate managers in
adopting an appropriate trade credit policy applicable in their sector.
a, In a typical manufacturing firm, current assets exceed one-half of total assets.
b, :xcessive levels can result in a substandard ;eturn on Investment (;8I,.
c, &urrent liabilities are the principal source of external financing for small firms.
d, ;equires continuous, day-to-day managerial supervision.
e, /orking capital management affects the company#s price, risk, return.
1.9 OUT)INE O$ THE %TUD&
"t the beginning of the research Pro!ect mainly focuses on giving basic view of the research
and provides information on the outline, problems, and purpose and basic theories on the
working capital management. "fter that their main focus on the existing work by various
researchers and past empirical studies is discus. The next chapter provided details regarding
practically carrying out of the research and described data collection and analysis procedures.
The next research work gives details regarding the results of the research. &onclusion of the
research can be explained at last.
<
CHAPTER NO."
)ITERATURE RE-IE:
".1 INTRODUCTION
'irst studies on this area suggest the existence of a linear relation between working capital
management and firms# profitability. Thus, firms can maximie profitability and minimie
associated risks through an efficient management of working capital accounts. In fact,
manager#s goal is to improve financial performance through working capital policies.
/orking capital management has been a concern for all firms but small firms should give
more importance to this issue because they cannot afford to survive without cash. $any
researchers have worked on the same issue but pioneer study found that working capital
management strongly affects the corporate profitability. Therefore cement industries should
address this issue seriously. They suggested that conventional approach that is to invest high
in working capital can increase profitability. They investigated = performed the research to find
out the relationship between working capital management and firm#s profitability by taking
net trading cycle as a measure of working capital management on specific industry, the result
was not that substantial. "fter observing the nature and sie of the industry, they
recommended that forceful liquidity management increase the profitability.
/orking capital is an important tool for growth and profitability for company. /orking
&apital is being required at a certain level otherwise if the levels of working capital are
insufficient then, it could lead to shortages and problems with the day-to-day operations.
>
"." DE$INITION O$ ;E& TER*% AND CONCEPT%
:OR;IN8 CAPITA)
/orking capital can be defined as the difference between the current assets and the current
liabilities. It can be helpful in measuring both a company?s efficiency and its short-term
financial health. $athematically, it can be measured as-

The working capital ratio (&urrent "ssets=&urrent @iabilities, indicates whether a company
has enough short term assets to cover its short term debt.
The term Aworking capitalB refers to the investment in current assets which are required to
carry on the operations of the business ('irer et al, )**+,. Caveri (%D+<, refers to it as the
difference between current assets and current liabilities. $anaging the firm#s working capital
is a day-to-day activity that ensures that the firm has sufficient resources to continue its
operations and avoid costly interruptions.
%TUDIE% ON :OR;IN8 CAPITA) <*ANA8E*ENT=
The literature on working capital management uses various methods to explain and study its
meanings and outcomes. The significant part of the literature focuses on the relation between
working capital management and a firm#s profitability. 8ther studies have tried to analye the
determinants of the three parts of working capital management and others have focused more
on the different policies concerning working capital. These different methods will be described
in this paragraph and the ma!or studies concerning these methods will be discussed.
%. /orking &apital Issues
). 'inancing &urrent "ssets- 9hort-Term and @ong-Term $ix
1
.. /orking &apital &oncepts
6. &ombining @iability 9tructure and &urrent "sset 5ecisions
" firm creating and implementing a policy for determining the optimal amount of account
receivables has to take in account the following steps-
The first step is to create the comparison between the securing of sales and profits and the
amount of opportunity cost and administrative costs of the increasing account receivables.
The percentage and the amount of risk the firm is prepared to take when extending credit to a
customer, because this customer could default when payment is due. The third step the amount
of investment in debt collection management.
PROPERTIE% O$ :OR;IN8 CAPITA) *ANA8E*ENT ON A $IR*>%
PRO$ITA(I)IT&
The main body of the literature of working capital focuses on studying the relation between
working capital management and firm#s profitability. The detailed research plan = works
estimate working capital management, by trying to determine the effect of a firm#s working
capital management on its profitability. They argue that a working capital management
resulted in the highest profitability3 probably it must be the best way of managing working
capital that can be implemented. "ll these researches have used regression analyses using
different independent variables for profitability.
The working capital management has four different short term securities.
%. Inventory management
+
). "ccounts receivables
.. &ash management
6. "ccounts payable management
1. IN-ENTOR& *ANA8E*ENT
$ostly in manufacturing company#s inventory contain of raw materials, work in progress,
factory overhead and final products. "ll these levels of inventory need to be financed by the
efficient management which can increase a firm#s profitability. Ideal inventory levels depend
on sales, so sales must be the first step before target setting inventories can be made. Eesides
these errors in setting inventory levels lead to lost sales or inventory management, excessive
carrying costs plays a very important role. Therefore, firms use classy computer systems to
monitor their inventory system. Inventory management may be considered as outside the
main stream of finance, it is however necessary to highlight its importance and potential
effects to corporate profitability of manufacturing companies.
". ACCOUNT% RECEI-A()E%
In "ccounts ;eceivable $anagement 'irms wants to sell their products for cash than on
credit, but due to competitive pressure, firms prefer to sell their products on credit. Ey placing
these goods in the market and by reducing the stock an account receivable is created.
;eceivables management begins with suggestion on credit3 there main aim is to check on the
system, which is equally important. &orrect actions are mostly required, more so, the only
means of understanding if the condition is getting out of hand is with good receivable control
system.
Credit Polic4
" credit policy consists of the following four variables. &redit period is the length of time
given to buyer for payment of their purchases for example, the credit period might be one
month. &ustomers prefer longer credit periods, so delaying the period will motivate sales.
Fowever, long credit periods stretch the cash conversion cycle, hence draws more capital in
D
receivables which is costly. "lso, the longer a receivable is unpaid, the higher the probability
that the customer will default and the account will end up as a bad debt.
Disco6nts
The companies offer their customers discounts for the early payment. The discounts describe
the percentage reduction and how rapidly payment must be made to be eligible for the
discount. There are two benefits regarding offering discounts. 'irst, the discount amounts to a
price reduction and lower prices encourage sales. 9econd, discounts will cause some
customers to pay earlier than they otherwise, which will shorten the cash conversion cycle.
Gevertheless, discount mean lower prices, therefore lower revenues due to the quantity sold
increases enough to offset the price reduction. The gap between benefits and costs of discounts
must be balanced if a rational decision about them is to be made.
'. CA%H *ANA8E*ENT
"ll most businesses are conducted by their own nature. Therefore an integral part of working
capital management is the effective cash management level, which contains a method of
transfer of funds from where they come in, to where they are needed, depending nowhere it is
lacking and where it is in excess. To most of us Hcash# conventionally means money, bonds
and shares which can easily convertible in to cash including deposits in the bank. The financial
experts have mentioned in their research about cash holdings, deposits demand, and securities
that are easily convertible at a predictable price and thus are converted to bank deposits. That#s
why, AcashB as reported on balance sheets generally includes short -term securities, which are
also called Acash equivalentsB.
The following levels are used to optimie demand deposits holdings. There are three motives
for a company to hold cash-
%*
%. Transaction motive, a company needs certain level of cash to meeting their daily
transactions, such as payment for supplier, salaries and so on. &ash management ensures
company to meet their regular cash outflow.
). Precautionary motives describe the cash flow which is difficult for a company to predict
that#s why companies take steps to prevent from the unexpected cash flow in future because of
the huge gap between the firms and industries. &ash management can help to relieve the
problem of sudden cash needs, for example, raised cost of raw material and default of third
party.
.. 9peculative motives- business cannot predict about the future it can only speculate,
unexpected investment opportunities can increase, sufficient cash holding allows the company
to take advantage of these opportunities and grow in the future.
&ompanies can en!oy several benefits under holding sufficient cash. 9till, it cannot provide a
good business environment3 it can earn interest if they are used in the proper investment.
;esearchers have raised two questions in their investigation-
(i, There is an optimal cash level that can maximie firm value.
(ii, 'irm value can be reduced if the cash deviates from the optimal level.
;esults describe that there is a relationship between cash holding and firm value, which
means that optimal cash level that take advantage of firm value occur. It shows that firm value
will be decreased if the cash holding is different from this optimal level. The result shows that
Trade-off theory can also explain that there is an optimal level of cash holding which can
balance the marginal benefit and cost. These results show that having optimal cash holding is
the central task of cash management.
The researcher mentions that two constraints which decide how much cash a firm should
maintain.
(i, &ompensating balance
%%
(ii, 9elf-imposed balance,
(i, &ompensating balance
The balance which is required for the services that are rendered by banks to the firms is known
as compensating balance.
(ii, 9elf-imposed balance,
The balance which is calculated by considering factors like the need for cash, the predictability
of this requirement, the interest rate on marketable securities or the borrowing rate, and the
fixed cost of affecting a transfer between marketable securities and cash or effecting a loan
transaction. It is the balance which is self-imposed for the need of certain transactions.
8utcomes confirm that cash holding enable firms to take profitable investment opportunities,
which leads to the point that cash holding level of growth firm is higher than the matured
firms. They also find that the factors of cash holding are different between growth firms and
matured firms. &ash holdings in growth companies decrease with the raise of firms#
characteristics- sie, level of liquid assets and sort-term debt. Fowever, in matured firms,
cash level shows a positive relationship with firm sie and dividend pay-out and negative
relationship with firms# research and development expenses. /ith In a similar study, cash
holding level in firms from &anada is strongly affected by their market to book ratio, cash
flow, net working capital leverage, and firm sie explain the optimiation problem of meeting
demands for cash over time with cash deposit in bank or invested in stock. 9tudy shows the
solutions of optimal level of cash
'irm#s future performance in poorly corporate governance will be reduced since cash can be
dissipated very fast. 8n the opposite side, in well-governed firms, firms# future operating
performance will get a big improvement due to the negative impact of cash holding can be
cancelled out.
+. ACCOUNT% PA&A()E *ANA8E*ENT
%)
9uppliers offer trade in credit which create account receivable, opposite to that, customers
accept the trade in credit that will generate account payable. It arises when firms purchase
goods or services on credit3 it is the payment for salespersons for products, services
inventories and supplies. 8ne of the advantages of having trade credit from sellers is that
company can reduce some investment in working capital management and save some
resource. $aximiing the account payable and stretching the payment term could be a
competitive advantage for firms. In abroad, on average there are 1* percentage of the total
short term debt. <D percentage of these short term debt are recorded under account payable.
Fowever, the risk of maximiing account payables by having a longer credit period from the
supplier is that firms may not get a discount from their vendors or bad quality products or
service may get from suppliers, which can create unhealthy environment.
$INANCIN8 CURRENT A%%ET%! %HORT?TER* AND )ON8?TER* *I#
'ixed assets and the non-cyclical portion of current assets are financed with long-term debt
and equity (long-term profitability of assets to cover the long-term financing costs of the firm,.
&yclical needs are financed with short-term loans (under normal operations sufficient cash
flow is expected to cover the short-term financing cost,.
It depends on policies regarding payment for purchases, labor, taxes, and other expenses.
&ompanies are concerned with managing non-spontaneous financing of assets.
)I2UIDATIN8 NATURE O$ %HORT?TER* )OAN%
(i, 9ales become receivables.
(ii, ;eceivables are collected and become cash.
(iii, The resulting cash funds can be used to pay off the seasonal short-term loan and cover
associated long-term financing costs &yclic orders require the purchase of inventory
beyond current levels.
(iv,Increased inventory is used to meet the increased demand for the final product.
CO%T% -% RI%;% TRADE?O$$ <CON%ER-ATI-E APPROACH=
%.
(i, )ong?Ter@ $inancing (enefits
a, @ess worry in refinancing short-term obligations
b, @ess uncertainty regarding future interest costs.
(ii, )ong?Ter@ $inancing Ris3s
(i, Eorrowing more than what is necessary
(ii, Eorrowing at a higher overall cost (usually,
(iii, Res6lt
It point out that manager accepts less expected profits in exchange for taking less
risk
CO*PARI%ON :ITH AN A88RE%%I-E APPROACH
(i, %hort?Ter@ $inancing (enefits
a. 'inancing long-term needs with a lower interest cost than short-term debt
b. Eorrowing only what is necessary
(ii, %hort?Ter@ $inancing Ris3s
a. ;efinancing short-term obligations in the future
b. 7ncertain future interest costs
(iii, Res6lt
a. $anager accepts greater expected profits in exchange for taking greater risk.
RE)ATION (ET:EEN )IA(I)IT& %TRUCTURE AND CURRENT A%%ET
DECI%ION%
(i, " conservative policy of AhighB levels of current assets allows a more aggressive method
of financing current assets.
(ii, " conservative method of financing
(all-equity, allows an aggressive policy of AlowB levels of current assets.
%6
(iii,
The level of current assets and the method of financing those assets are interdependent.
".' :OR;IN8 CAPITA) *ANA8E*ENT CO*PONENT%
In the research paper observes a sample of )< companies listed in 9tock :xchange for a
period of four years from )**6-)**D. The primary focus of their study was to establish
whether there is a relationship that is statistically significant between profitability and the
cash conversion cycle and its components. They found that lower gross operating profit is
associated with an increase in the numbers of days of accounts payables. 'urthermore, they
conclude that managers can create profits for their companies by handling correctly the cash
conversion cycle and keeping each different component of cash conversion cycle to an
optimum level.
$I8. 1! OPERATIN8 AND CA%H CON-ER%ION C&C)E%
".'.1 CAPITA) %TRUCTURE
%<
&apital structure measures the extent to which a company is funded through debt
relative to equity. 'or the purpose of this study, the alternative way for capital structure is the
Adebt to equityB, which was easily available on 5ebt is expressed as both current and
long term debt. /hile the definition of short-term debt used in practice may include
operating debt (accounts payable and accrued liabilities,, short-term debt used in this
particular study excludes operating debt because-
(%, It is a function of the firm#s operations and which describe its essential business and
contractual relationship to its suppliers rather than outward creditors, and
(), The operating debt such as accounts payable is already accounted for in equation 6 above
(day#s payables outstanding. It can collapse the business relationship between suppliers
and demanders. 'inally it will affect firm#s profitability (4amelan, )**1,. 9ome elements of
account payable management, such as account payable policy, application of the policy and
checking result, can help manager ensure that efficiency of account payable management
reached (9aner, )*%%,.
".'." E#I%TIN8 AND RE)E-ANT )ITERATURE
In the studies there have been few researches on working capital management. Their research
work based on the different sectors of the economy. 9ana and 9hah ()**>, worked on oil and
gas sector. They acquired a very small sample of consisting only 1 firms and they concluded
that profitability and value of shareholders can be increased by managing the working capital
efficiently. Gair and "fa ()**1, in their research analye the relationship between
aggressive and conventional way of investing in working capital for )*< firms for %1 different
sub sectors. ;esults showed that there is an inverse relationship between aggressive approach
in working capital investment and the profitability of the firms. Gasr and ;ehman ()**1,
analyed the relationship between the profitability and components of working capital
management which includes no of days accounts receivable, no of days accounts payable no of
days inventory and cash conversion cycle. The result showed that there is inverse relationship
%>
between them. In the year Gair and "fa ()**+, analyed the working capital management
for )*6 firms.
"lthough researchers have studied the relationship between the components of working capital
management and the corporate profitability with reference to Pakistan but it#s required to be
increased. There is less relationship found between the two variables. This goal has been a
motivational force to do a research on the cement sector of Pakistan. 'or this purpose sample
of %D cement firms listed on Carachi stock exchange has been taken during %DDD-)**D.
".'.' :OR;IN8 CAPITA) *ANA8E*ENT PO)ICIE% AND $IR*
PRO$ITA(I)IT&
;esearches on the relationship between /&$ and firms# performance, started through the
analysis of a linear relation. /orking capital investment involves a trade-off between
profitability and risk, demanding the understanding that decisions which can increase
profitability.
'irstly, overproduction reflecting an intention to cut prices or extend more credit terms to
boost sales and=or overproduction to decrease cost of goods sold (&49, expense. "fter
knowing that extending credit terms results in creation of Aday#s sales in receivablesB, it is
therefore unlikely that day#s sales in receivables, in addition to other working capital
management components can be manipulated in boosting sales=earnings of a firm. 9econdly,
timing the sale of assets (both non-current assets and current assets, which form part of
working capital management, to report gains. Thirdly, decreasing the discretionary selling,
general, and administrative (94I", expenses to increase income. 'inally, decreasing research
and development (;I5, expenses.
The above mentioned activities indicate that working capital management components may be
manipulated by firms in boosting sales=earnings. /hile this manipulation may be undertaken
by firms, the primary focus of this study is not to examine how working capital
%1
management components are manipulated by firms in boosting sales=earnings but to examine
the relationship between various working capital management components and profitability of
Pakistan firms listed on the C9:.
Ta.le 1 ? )inear Relationship .eteen :or3ing Capital Acco6nts and :or3ing
Capital
Profita.ilit4 Ris3
Acco6nts
Pa4a.le
In0entories
Acco6nts
Recei0a.le
:C* In0est@entA
)ength
)inear Relation
Conser0ati0e
Polic4
Lower Lower Shorten
Higher
levels
Extend
Higher Investment
/Longer
Aggressi0e
Polic4
Higher Higher :xtend
Lower
levels
Shorten
Lower
Investment/Shorter
".+ CONC)U%ION O$ )ITERATURE RE-IE:
The result of the preceding literature review on working capital management is that while
working capital management components may impact on profitability of firms, there is
uncertainty regarding both the appropriate variables that might serve as alternatives for
working capital management as well as on the direction of the impact of different components
on profitability. In his research, $athura ()*%*, finds that there exists a highly significant
positive relationship between the period taken to convert inventories into sales and
profitability, which finding is contrary to that of 5eloof ()**., whose study findings conclude
that there is a negative relationship between day#s sales in inventory and profitability. This
therefore shows that there is no clear-cut direction of the relationship between any of the
variables of working capital management and firms profitability. The differences in the
direction of the impact could be attributable to any one of the following factors-
(%, 5ifferent characteristics of firms per country,
%+
(), 5ifference in the nature of the industries selected in different studies, and
(., 5ifferences in the economic conditions for the selected time frames.
"lso noted in literature review is that there is no clear-cut direction on the impact of capital
structure on profitability from one country to another. 'or example, findings by 9alawu ()**D,
show a negative relationship in clear contrast with findings by 5e "ngelo and $asulis (%D+*,
that show a positive relationship.
The other consideration noted in literature review is that working capital management
components can be manipulated by firms in boosting sales. This however is not the focal point
of this study.
%D
CHAPTER NO.'
RE%EARCH *ETHODO)O8&
'.1 INTRODUCTION
The data used in the study is uniquely accounting based data mainly contained in the firm#s
financial statements. The financial statements are obtained from different sources-
%. Internet
). 9tock :xchange
.. 5ifferent Eooks
6. Teachers 4uidance
<. Eusiness Gewspapers
>. 5ifferent researchers
The following ratios were extracted from Internet (%, days sales in inventory, (), days sales
in receivables, (., days payables outstanding, and (6, current ratio. ;atios extracted from
9tate Eank of Pakistan are the debt to equity ratio and the operating profit margin. The other
variables such as cash conversion cycle and dummy variables were calculated from the
extracted data.
'." *ETHOD O$ DATA CO))ECTION
The secondary data necessarily required to perform the research was gathered from the official
sites of the cement firms. "dditionally, some of the required data was abstracted from the
)*
library of 9tate Eank and Carachi stock exchange. ;emaining of the data is collected from
annual reports, 9tate Eank of Pakistan analysis reports and economical surveys.
'.' %A*P)E %IBE
There are %D &ement industries listed at Carachi 9tock :xchange out of which %< are selected.
$any firms are not included whose data was not available or observations were missing for
few years. The research data research consisted of %% years annual data of the variables used in
research. ;esults of data of all the variables belonged to period starting from fiscal year %DDD
to fiscal year )**D because this is the period where many of new cement industries were
installed and many of them were shut down due to other reasons. There are total )*D
observations.
DATA CO))ECTION
The sample consists of *. companies from cement factory of @ahore. The reasons that the
sample focuses on cement factory is because cement factory is very important in current
environment. /orking capital management plays an essential role in their business operation.
Therefore, their performance is highly related with their working capital management. /ith
sufficient working capital management, cement companies can maximie their financial
flexibility and increase liquidity which can bring more value for firms.
%ECONDAR& DATA
The secondary data has been obtained from the Internet. 8ther sources are as follows--
Internet
9tock :xchange
5ifferent Eooks
Teachers 4uidance
Eusiness Gewspapers
5ifferent ;esearch
)%
'.+ -ARIA()E% AND HO: THE& ARE *EA%URED
"s mentioned in chapter %, the explanatory variables to be used as proxies of working capital
management are-

(%, &ash conversion cycle,
(), 5ays sales in receivables,
(., 5ays sales in inventory,
(6, 5ays payables outstanding
(<, &urrent ratio
(>, :xplanatory variable to be explored by the study is capital structure (whose proxy in this
study is debt to equity ratio,.
(1, Jariable in the study is the market condition, which is used to examine the difference
and the extent (if any, of the impact of working capital, particularly cash conversion cycle,
on profitability as economic conditions change.
/hile this study explores the impact of the above-mentioned seven variables on profitability,
it is noted that this list of the selected variables is not complete as there are a number of
liquidity and capital structure measures that may impact profitability. The choice of
explanatory variables is based on the following factors-
%, "lternative theories related to working capital management (for example, one theory
stating that a longer cash conversion cycle increases firm profitability given that it leads to
higher sales, and the opposing theory stating that corporate profitability decreases as cash
conversion cycle elongates, particularly if the costs of higher investment in working
capital rise faster than the benefits of holding more inventory and=or granting more trade
credit to customers, and
), /orking capital management variables used in previous studies conducted in other
geographic !urisdictions such as 4reece, Eelgium, 7.9., Cenya, and Turkey.
Ta.le "! -aria.les 6sed in the st6d4
Jariable "bbreviation
&ash &onversion &ycle &&&
5ays 9ales in ;eceivables 59;
))
5ays 9ales in Inventory 59I
5ays Payables 8utstanding 5P8
&urrent ;atio &;"
5ebt to :quity ;atio 5T:
8perating Profit $argin 8P$
5ummy Jariable - :conomic
&onditions
5K
5ummy Jariable - Industry 5KK
CASH CONVERSION CYCLE
The variable is used as a measure to gauge profitability. It measures the net time interval
between actual cash expenses on a firm#s purchase of productive resources and the ultimate
recovery of cash receipts from product sales. It is measured as follows-
&&& L 59; M 59I N 5P8
In turn, the three components of cash conversion cycle are specified below.
DA&% %A)E% IN RECEI-A()E%
This component of the cash conversion cycle measures the number of days it takes to collect
cash from debtors. ;esearch state that day sales in receivables measure the effectiveness of
the firm#s credit policy. It indicates the level of investment in receivables needed to maintain
the firm#s sales level and is measured as follows-
59;L (Trade ;eceivables = 9ales, O .><
DAYS SALES IN INVENTORY
The second component of the cash conversion cycle measures the number of day#s inventory
is held by the company before it is sold. The less number of days sales in inventory indicate
that inventory does not remain in warehouses or on shelves but rather turns over rapidly from
the time of acquisition to sale. This ratio is measured as follows-
59I L (Inventory = &ost of 4oods 9old, O .><
DAYS PAYABLES OUTSTANDING
).
The other component of the cash conversion cycle measures the number of days a firm takes
to pay its suppliers. Thus, this ratio represents an important source of financing for
operating activities. The ratio is measured as follows-
5P8 L ("ccounts Payable = Purchases, O .><
The two other variables to be used in the study which do not form part of the cash
conversion cycle are given below-
CURRENT RATIO
&urrent ratio is the best-known and widely used ratio that measures short-term liquidity. In
essence, it measures the ability of the firm to meet its short-term obligations. /hile it might
be good for a firm to have a high current ratio as it indicates liquidity, it may also indicate
inefficient use of cash and other short-term assets. This ratio is measured as follows-
&urrent ;atio L &urrent "ssets = &urrent @iabilities
CAPITAL STRUCTURE
&apital structure measures the extent to which a company is funded through debt
relative to equity. 'or the purpose of this study, the alternative for capital structure is the
Adebt to equityB, which was readily available on Internet. 5ebt is expressed as both
current and long term debt. /hile the definition of short-term debt used in practice may
include operating debt (accounts payable and accrued liabilities,, short-term debt used in
this particular study excludes operating
5ebt because-
(%, It is a function of the firm#s operations and its essential business and contractual
relationship to its suppliers rather than external lenders, and
(), The operating debt such as accounts payable is already accounted for in equation 6
above (day#s payables outstanding,. The Adebt to equityB ratio is expressed as follows-
)6
5ebt to :quity L (Total 5ebt = Total :quity,
DEPENDENT VARIABLE: PROFITABILITY
'inally, the dependent variable used is operating profit margin (8P$,. 7nlike other
researchers such as Gasr and ;ehman ()**1, who used return on investment (;8I, as
a profitability measure, this study uses operating profit, consistent with researches by
5eloof ()**., and Eiger et al ()*%*,.
8perating profit margin measures profitability of sales resulting from regular business and
measures the proportion of a company?s revenue left over after deducting direct costs
and overhead and before taxes and other indirect costs such as interest. It is selected in this
research as a profitability measure primarily because it is an operating ratio and relates with
operating explanatory variables used in the study, e.g. cash conversion cycle and days sales in
inventory.
The 8P$ formula is as follows-
8P$ L (8perating Income = 9ales, O %**
'.1 -ARIA()E% TO (E %TUDIED
DEPENDENT -ARIA()E%
NOI ? Net operating inco@e is <sales Ccost of goods sold=A <total assets=
Get operating income is used as a profitability and performance measure in this research. It
also used G8I as a comprehensive measure of profitability in their researches. They identified
I measured that working capital management significantly affects the profitability of the firm.
INDEPENDENT -ARIA()E%
In this research three comprehensive components of working capital management Inventory
policy, Payment policy and Trade credit policy are define I describe in detail. $any
researchers used same components for analying working capital management.
% ? %ales are eDpressed in @illions of P;R.
9ales are used in the research to measure the sie of the firms. It is assume that if the sie of
the firm is large the firm will earn more profit. ;esearchers also included sale as a measure of
)<
firm sie and found positive and highly significant relation between sales and corporate
profitability.
%8 ? %ales groth is <c6rrent 4ear>s sales ? last 4ear>s sales=Alast 4ear>s sales.
9ales growth is added in the research to measure the investment growth opportunity in the
industry. It included sales growth in his research and found positive and highly significant
relation with profitability.
CR ? C6rrent ratio is c6rrent assetAc6rrent lia.ilities.
&urrent ratio is taken as the measure of liquidity in the firm. $ore the liquidity of the firm less
will be investment in working capital and firm will easily pay its immediate liabilities and
creditors but on other hand more liquidity means that less investment in inventory causes less
sales volume. It is observed that current ratio have direct and significant relationship with
profitability.
8R ? 8earing ratio is total fiDed lia.ilit4Atotal capital e@plo4ed.
4earing ratio is used to measure the leverage of the firm. 7sed gearing ratio in the research
and find negative relationship with profitability it means higher the debt less the profit.
NDAR ? No of da4s acco6nts recei0a.le is <AAR D '71=Asales.
Go of days accounts receivable is included as a component of working capital management.
4enerous credit terms can increase sales as it allows more time for customers to check the
goods from the supplier before paying the cost. &ustomers en!oy advantage from longer credit
terms as compare to taking a loan from financial institution. "s a result no. of days accounts
receivable significantly affect the profitability of the firm.
NDI ? No of da4s in0entor4 is <in0entor4 D '71=Acost of goods sold.
'irms have different optimal level of investing in working capital some invest bulk quantity
some invest low quantity. Ceep an eye on one side low inventory result in high liquidity but
on other side keeping high inventory saves firm from stock out and also result in more sales.
)>
$any researchers have included G5I as one of the component of working capital management
as G5I has a negative relation with G8I and significantly affect the profitability. The inverse
relation shows that low profit means less sales and less sales result in more inventory.
NDAP ? No of da4s acco6nts pa4a.le is <AAP D '71=Ap6rchases.
Go of days accounts payable is also an important component of working capital management.
&ompanies en!oys more liquidity and gets the chance to examine the quality of goods before
paying to their suppliers if they pay late but on other hand they miss the discount offered by
the suppliers which they can avail by prompt payment. Padachi ()**>, and 5eloof ()**., in
their researchers found that no of days accounts payable significantly affect the profitability of
the firm.
'.7 DETER*ININ8 ECONO*IC (OO* AND RECE%%ION
PERIOD%
;esearch states that the slowdown in economic activity resulting in business cycle shrinkage
was generated by the 7.9. housing price decline, its effects were extremely enlarged
throughout the world. Fe states that stock prices lost more than half of their value. Elanchard
()*%%, further states that although growth in advanced economies and emerging market
countries is different and that emerging market countries had less negative growth than
advanced countries, -).<2 and -62 in the last quarter of )**+ and the first quarter of )**D
respectively, compared to -1.+2 and -1.D2 respectively for advanced countries (reflecting the
fact that emerging countries have higher average growth than advanced countries, the
decrease in growth was however roughly the same for both groups. Thus, the sharp decline
in output in both groups marked a global crisis.
)1
'.9 RE%EARCH DE%I8N
$y research is based upon to find out the resources needed for working capital management in
profitability of cement factories in Pakistan. The targeted population for this research belongs
to different areas of expertise as well as from different location of @ahore. The data which was
collected from the people chosen for this research and then the collected data was analyed to
produce desired results.
*ETHODO)O8&
The main purpose of this research is to find out what kind of relationship between firm value
and working capital management affects firm value by using the sample from &ement 'actory.
The relationship will be examined by running ordinary addition. The Impact of /orking
&apital $anagement on 'irm Jalue :vidence from &ement factory.
There are five types of variables--
%. &urrent ratio
). Turnover ratio
.. @everage ratio
)+
6. &urrent asset to Total assets
<. &urrent liabilities to Total asset
3.7.1 *ODE) %PECI$ICATION
To analyses the impact of working capital management on profitability, the study
uses the following methods- (i, descriptive statistical analysis wherein a description of
features of the data in the study such as mean and standard deviation of each variable is
presented3 (ii, correlation matrix, which measures the degree of association between all the
variables under consideration. In essence, the matrix explores whether or not the relationship
between variables is positive or negative, in addition to determining the degree of the
association between variables under consideration3 and (iii, regression analysis is used to
gauge the extent to which a unit change in each respective explanatory variable has on
profitability, while other independent variables are held fixed. Pooled ordinary least squares
method is used in regression analysis, wherein time series and cross-sectional
observations is combined in determining the causal relationship between profitability
variable and the independent variables used in the study.
'.9." 8ENERA) RE8RE%%ION *ODE)
The impact of working capital management components on profitability is modeled using the
following general regression equation-

=
=
The intercept of e!ation
"oefficient of #
it
)D
The research uses panel data regression analysis of cross-sectional and time series data. In
line with studies determines the impact of working capital on profitability using pooled
regression ordinary least squares, wherein each respective variable for all the companies
under study and for all the corresponding years is pooled together in a single column in
running the ordinary least squares regression models. /hile some researchers used fixed
effects regression model, which, according to the variations in profitability within firms, this
study uses the pooled ordinary least squares regression model which explains the variations in
profitability between firms. The choice of the model is underpinned by the fact that the aim
of this research is not necessarily to examine variations in profitability within firms but to
examine variations in profitability between all firms listed on the C9: during an economic
recession as well as during an economic boom. "ccording to Gasr and ;ehman ()**1,,
pooled regression model is one where both intercepts and slopes are constant, wherein cross-
section firm data and time series data for each variable are pooled together in a single
column.
4iven that &&& in equation % is made up of other ratios used in the study, namely 59;, 59I
and 5P8, to avoid multicollinearity problem, defined by Coop ()**>, as a problem that arises
if some or all of the explanatory variables are highly correlated with one another, in addition
to avoiding problem wherein an exogenous explanatory variable impacts on another
explanatory variable within the same regression model and therefore distorting impact of both
explanatory variables on independent variable, the study uses different model
specifications wherein the model containing &&& ratio is separated from the one containing
59;, 59I, and 5P8 ratios.
'.9.".1 *U)TIP)E )INEAR RE8RE%%ION%
The outcomes have been drawn by applying multiple linear regressions on the data.
.*
*odel %6@@ar4
Model R R
Squar
Adjusted R
Square
1
.594
a
.353 .324
NET OPERATIN8 INCO*E
The model has ad!usted ;-squared of *..)6 that means approximately .).6 2 of the variance
in the dependent variable G8I was accounted for by the model and >1.> 2 of the variance
remained unexplained.
The dependent variable of the research was G8I therefore3 the &oefficients table was required
to be analyed and interpreted.
'.E DIA8NO%TIC TE%T%
5iagnostic tests are robust statistical tests carried out to verify if the data used have met the
assumptions underlying the ordinary least squares regression and where possible to
remove problems associated with panel time series data. 9ome of the problems of panel time
series data include heteroskedasticity, multicollinearity, and auto-correlation, among others.
The diagnostic tests carried out in the study are detailed below.
'.E.1 TE%T $OR HETERO%;EDA%TICIT&
8ne of the main assumptions for the ordinary least squares regression is the similarity of the
variance of the residuals. If the variance of the residuals is non-constant, then the
residual variance is heteroskedasticity making the regression estimates, namely coefficients
and standard errors, to be biased if the models are not re-specified or variables not
transformed. "s per equation %% below, heteroskedasticity means that the variance of the
error term is not constant overtime.
P for all i,
.%
This study uses the Ereusch-Pagan test in all the two regression model specifications to
verify whether or not heteroskedasticity is present in the models. The null hypothesis is that
the variance of the residuals is homogenous. Tables 6 and < below present the Ereusch-Pagan
test results for heteroskedasticity for model specification I and II respectively. The results
show that the variance of the error term in each model specification is not constant, which if
not corrected leads to biased standard errors. The presence of heteroskedasticity was however
controlled by using the ArobustB command when performing both regressions, resulting in
generation of Arobust standard errorsB. ;esearchers state that the Arobust standard errorsB
address the problem of errors that are not independent and identically distributed and that
the use of Arobust standard errorsB does not change the coefficient estimates provided by
the ordinary least squares, but change the standard errors and significance tests.
'.E." TE%T $OR *U)TICO))INEARIT&
Eoth regression models were tested for multicollinearity. The primary concern with
multicollinearity is that, as the degree of multicollinearity increases, the regression
model evaluation of the coefficients become unstable and the standard errors for the
coefficients can get inflated. The variance inflation factor (JI', is used to detect whether one
predictor has a strong linear association with the remaining predictors (the presence of
multicollinearity,. @aaridis and Tryfonidis ()**>, proclaim that JI' measures how
much of the variance of an estimated regression coefficient increases if predictors are
correlated. $ontgomery and Peck ()**1, suggest that when JI' is greater than 6-+, then the
regression coefficients are poorly estimated. In this study, we used the JI' command when
regressing profitability against the explanatory variables. The predictors had resultant
variance inflation factors ranging between %.6 and ..1 across both model specifications as
shown in Table > below. The results indicate that there is absence of multicollinearity between
predictors in the regression models. Tolerance, defined as %=JI', is the inverse of JI'.
.)
Ta.le +! -ariance Inflation $actor
4iven that the cash conversion cycle is made up of other ratios used in the study, namely
days sales in receivables, days sales in inventory, and days payables outstanding,
to avoid multicollinearity problem, the two model specifications were developed separating
one model containing the cash conversion cycle from the other containing days sales in
receivables, days sales in inventory, and days payables outstanding.
'.F %U**AR&
This chapter described the procedural approaches followed in examining the impact of all
selected working capital management components on the profitability of C9: listed
companies. In particular, the approaches used in the study are- (%, descriptive statistics, (),
correlation matrix, and (., regression analysis. ;egression model specification I was
developed to examine the impact on the variable (profitability, by five working capital
management variables, namely cash conversion cycle, current ratio, debt to equity, years, and
economic conditions. 8n the other hand, model specification II is used to retreats profitability
against days sales in inventory, days sales in receivables, days payables outstanding, and
industry. The models were separated into two so as to avoid problem given that the cash
..
*odel
%pecification
I
-I$
Jariable JI' %=JI'
&&& ..%. *..%D6+++%+
&;" ).6) *.6%.)).%6
5T: %.6) *.1*6))<.<)
5 %.D+ *.<*<*<*<*<
&&&O5K ..1. *.)>+*D><%<
$ean JI' ).<.>
-I$
Jariable JI' %=JI'
59I )..6 *.6)1.<*6)1
59; ).+1 *..6+6.)*<>
5P8 ..<. *.)+.)+>%%D
&&&O5KK ..%< *..%16>*.%1
$ean JI' ).D1)<
conversion cycle is made up of day#s sales in inventory, day#s sales in receivables and
days payables outstanding.
5iagnostic tests were carried out to verify if the data used have met the assumptions
underlying the ordinary least squares regression and where possible to remove problems
associated with panel time series data. "lthough the diagnostic results show presence of
heteroskedasticity in both models, this problem was however controlled by using Arobust
standard errorsB resulting in non- spurious regression results, which are presented in &hapter 6
below.
CHAPTER NO G+
PRE%ENTATION O$ RE%U)T%
This chapter presents results obtained by the models. 'irst, descriptive statistics showing
relevant phenomena such as median and mean of variables used in the study are presented
under section 6.). It is followed by section 6.. which presents the conventional
correlation matrix which measures the degree of association between different variables
under consideration.
9ection 6.6 presents the regression analysis which outlines an in-depth examination of the
causal relationship between profitability of Pakistani firms and the various explanatory
variables under consideration. The regression analysis uses pooled ordinary least squares
regression to determine the influence of the various explanatory variables under consideration
on profitability. @astly, a summary highlighting key findings of the study is presented under
the last section.
+.1 DE%CRIPTI-E %TATI%TIC%
.6
Table < below presents descriptive statistics of the collected variables. It shows the mean,
median and standard deviation of the variables used in the study. In addition, it shows the
minimum and maximum values of each respective variable which essentially gives an
indication of how wide ranging each respective variable can be.
TA()E 1! DE%CRIPTI-E %TATI%TIC%
$
o
%
i
%
e
%
a
%
e
S
t
5ays 9ales
in
%

%
.
6
)
+
+
%
<
1
D
5ays 9ales
in
%

%
.
6
>
%
)
%
+
%
*
5ays
Payables
%

%
D
<
<
1
%
%
+
1
*
5ebt to
:quity
%

-
)
*
.
).
6
*
.
*
.
8perating
Profit
%

-
1
%
6
)
)
-
%
1
+
&ash
&onversion
%

-
%
)
+
%
.
%
<
%
)
&urrent
;atio
%

*
.
%
.
.
..
)
.
.
.
+.1.1 INTRODUCTION
It specifies the collected variables. It shows the minimum and maximum values of each
variable.
It can be explained below-
+." DE%CRIPTI-E %TATI%TIC%
'or the descriptive statistics, we begin with the correlations matrix although describing the
relationship between variables it does not identify the causes. Therefore, the estimated
correlations between explanatory variables and profitability show a higher correlation
between profitability.
'or &:8#s characteristics, presented in Table >, firms in our sample are managed mainly by men
(>+.+2,3 within respect to &:8#s age, %%.<)2 are aged between )* and )D3 .D2 are aged between
.* and .D3 .%.++2 are between 6* and 6D and the remaining %1.<+2 are aged between <* and >*.
Therefore, is possible to conclude that firms in our sample are managed by middle aged men. "lso
ma!ority of &:8s are (D>.1>2,. ;egarding &:8#s educational level, 6).*+2 they present a low
educational level3 )6.++2 has a medium educational level3 %1.6D2 present high educational level
.<
GENDER Frequency Percent
Male 73,596 68.81%
Female 33,365 31.19%
AGE Mean Frequency Percent
20 to 29 26.60 12,327 11.52%
30 to 39 34.56 41,732 39.02%
40 to
49
44.13 34,099 31.88%
50 to 60 54.09 18,803 17.58%
EDUCATION Frequency Percent
Very Low 16,630 15.55%
Low 45,010 42.08%
Medium 26,614 24.88%
High 18,707 17.49%
and %<.<<2 present a very low educational level, showing that the ma!ority of &:8s in our sample
never attended or completed elementary school, followed by &:8s with high school diploma or
vocational school degree. . /e also restrict the sample to &:8s aged between )* and >*, ending
up with a total of %*>,D>% observations, corresponding to 6%,<.> firms.
TA()E 7 ? CEO>s Characteristics
+.' CORRE)ATION *ATRI#
/ith an efficient working capital management, firm value should be higher. The market value
shows a negative relationship which is consistent with the expected relationship. This
positively related to the firm value, it shows that a firm value will go up if firms can keep their
payable longer. This relationship confirms the hypothesis that if the time lag between
purchasing the raw material to collecting the sale of finished goods is shorter, and then firm
.>
value will be higher. The positive and significant relationship between current ratio and cash
conversion cycle matches the result in the investigation and verified that Amore firms with
high current ratio and longer cash conversion cycleB,. That#s why with efficient working
capital management, firms# liquidity will be improved, which is shown as lower current ratio.
+.+ RE8RE%%ION ANA)&%I%
In order to have further investigation the impact of working capital management on firm
value, regression analysis is followed. The results of the impact of working capital
management on firm value including other control variables, which described in methodology
section. The Impact of /orking &apital $anagement on 'irm Jalue- :vidence from &ement
factory.
In the regression
(%, The relationship between firm value and 5ays 9ales 8utstanding, which is the alternative
of company#s receivable policy, is tested. The result shows a negative relationship between
them. 7nfortunately, this result is not significant from ero in the sample firms.
In regression
(), 5ays Inventory 8utstanding negatively and highly significant reacts to firm value. It
implies that an increase in 5ays Inventory 8utstanding.
(., " positive relationship between firm value and 5ays Payable 8utstanding is tested, and
the positive sign is consistent with the sign that I expected. Fowever, this result is not
consistent with the result in but the relationship is insignificant as the regression.
(6, The result does present that a cash conversion cycle is negatively related to firm value, and
it is highly significant. It confirms that with an efficient working capital management, shorter
cash conversion cycle, firm value will increase. In order o have a future understanding of the
impact of working capital management on firm value, especially how working capital
management affect firm value.
+.1 %U**AR&
.1
The outcome of the preceding presentation of observed results is that there exists statistically
significant relationship between liquidity measures and profitability of Pakistani firms listed
on the C9:. In particular, the results reveal a negative relationship between cash conversion
cycle3 a key substitution of working capital management that measures the net time interval
between actual cash expenditures on a firm s purchase of productive resources and the
ultimate recovery of cash receipts from product sales, and profitability. This negative
relationship suggests that managers can create value for the shareholders of the firm by
reducing the cash conversion cycle to an extent that it enhances firm profitability.
"lso, results show that other measures of working capital management used in the study,
namely- day#s sales in receivables, day#s payables outstanding, current ratio, and debt to
equity ratio have explanatory power in explaining variation in profitability. These four
variables all have inverse relationship with profitability.
.+
CHAPTER NO G1
DI%CU%%ION AND CONC)U%ION
1.1 INTRODUCTION
This chapter discusses and compares results of the study with findings by other studies
elsewhere that explored the relationship between working capital management and firm
profitability.
It highlights relations between findings of this study and those of previous studies.
'urthermore, the section provides suggestions on what could be the primary differences
between findings of this study and those of previous studies. It concludes the chapter and is
followed by framework which suggests further work to be done in comparison with this study.
1." DI%CU%%ION
&ement sector which is the second biggest sector in manufacturing sector of Pakistan
contributes to the economy significantly. Ceeping in mind the importance of cement sector in
.D
the economy of Pakistan ob!ective of this research is to analye the effect of working capital
management on firm#s profitability in the cement sector of Pakistan. To carry out the research
data from %D cement industries which are currently listed at Carachi 9tock :xchange is
analyed. The results shows that profitability of cement industries are significantly affected by
the efficient management of working capital and working capital management play a vital role
in creating a value for the shareholders.
1.' CONC)U%ION
The main purpose of the study is to draw the results about the firm#s profitability in the
working capital management. This study investigates how relatively large public listed
companies in the can manage their working capital in the most profitable way, during non-
crisis periods and during a crisis period. /orking capital is studied as a whole, but its parts are
also studied individually. The non-crisis period and crisis period are then compared with each
other and differences are highlighted.
The aim of this research is to test whether firm value can negatively relate to cash conversion
cycle in the sample of cement factory, and how working capital management affects firm
value.
1.+ I*P)ICATION%
$any recommendations can be drawn from the above research results. :very cement factory
should give due importance to working capital management. &ement industries should make
such collection and payment policies which are in favor of the firm and existing policies
should be thoroughly reviewed. &ement industries should decrease there payment and
receivable cycle. This can only be done when there will be professional management. The
results suggest that cement industries should keep optimum level of inventory and cash
conversion cycle. This could only be possible when cement industries will give due
importance to every component of cash conversion cycle. &ement industries should hire
professional human resource to take decisions related to finance. 9ince the sample comes from
cement industry and the study consider the feature of cement industry that deferred revenue is
6*
an important element of working capital. The application of the result from cement industry
can be limited to other industry. 9econdly, the sie of sample is rather small. The accuracy of
result can be affected. 5ue to the limitation of database, there are only )D> observation are
available, this can be the drawback of study. Thirdly, there may some outliner exist in the
sample, which may cause skewness in the result.
There are many cement industries where only one person is looking after the whole
department. In order to maximie the profit cement industries should manage there working
capital efficiently.
1.1 $UTURE RE%EARCH
:very sector in manufacturing sector should be analyed at micro level for efficient working
capital management so it can be understand that which factors affects the working capital
management more and how working capital management can increase profitability in different
sectors of our country. The scope of future investigation can be extended to focus on the detail
of relationship between each component of working capital management and firm value or
other performance. :specially focus on 5ays 9ales 8utstanding and 5ays Payable 8utstanding
since they are not significant in this airline industry study. $ore substitutes of firm value and
working capital management can be applied into the research in order to make sure findings are
more accurate.
6%
RE$ERENCE%
"li I "hsan, /orking &apital $anagement Policies of 'irms- :mpirical :vidence from
Pakistan
"l-$walla, $., Athe impact of working capital policies on 'irm#s profitability and value- the
case of QordanB,
&ampello, $., 4raham, Q.;. I Farvey the impact of working capital policies on 'irm#s
profitability and value.
&onstraints in china- does working capital management make a difference0
&onversion &ycles&'o!rnal of Economics and (inance& )*+,-. ..-6>.
'ilbeck, 4. and Crueger, A"n "nalysis of /orking &apital $anagement ;esults
ProfitabilityB, 9witerland Qournal of Eusiness,
(inancial St!dies ,* +/-. >>%->D%.
Qose, $. @., &. @ancaster, I Q. @. 9tevens.(%DD>,. &orporate ;eturns and &ash
@aaridis, I. I 5. Tryfonidis. ()**>,. ;elationship between /orking &apital $anagement and
Profitability of @isted &ompanies in the "thens 9tock :xchange. 'o!rnal of (inancial
%anagement and 0nalysis& ,1 +,-. )> N .<.
@ong, $.9., I.E. $alitI 9.". ;avid.(%DD.,. Trade &redit, Ruality 4uarantees, and
Padachi, C. ()**>,. Trends in /orking &apital $anagement and its Impact on 'irms#
Performance- "n "nalysis of $auritian 9mall $anufacturing 'irms. International 2eview of
3!siness 2esearch 4apers. )+)-, 6< - <+.
Peel, $. Q. /ilson, G. IFaworth, &. ". ()***,. @ate payment and &redit management in the
small firm sector- 9ome :mpirical :vidence. International Small 3!siness 'o!rnal
Petersen, $.". I ;.4. ;a!an. (%DD1,. Trade &redit- Theories and :vidence. 2eview of
6)
Product $arketability. (inancial %anagement )) +5-. %%1-%)1.
Profitability. (inancial 4ractice and Ed!cation 6 +)-. .1-6<
;ivi, 9yed Qamil "hmed. ()**D,. &ement industry in Pakistan problems and potentials. 9ai,
5ing. "lessandra, 4uariglia. I Qohn Cnight. ()*%*,. Investment and financing
9hah, ". I ". 9ana.()**>,. Impact of /orking &apital $anagement on the Profitability of
8il and 4as 9ector of Pakistan. E!ropean 'o!rnal of Scientific 2esearch. ,7+/-. .*% - .*1.
9hin, F.F., I @. 9oenen.(%DD+,. :fficiency of /orking &apital and &orporate
8niversity of 9xford. ISS$ ,5:,;*516.
7yar, ". ()**D,. The ;elationship of &ash &onversion &ycle with 'irm 9ie and Profitability-
"n :mpirical Investigation in Turkey. International 2esearch 'o!rnal of (inance and
Economics, )6.
/ang, S.Q. ()**),. @iquidity $anagement, 8perating Performance, and &orporate Jalue-
:vidence from Qapan and Taiwan. 'o!rnal of %!ltinational (inancial %anagement& ,). %<D-
%>D.
6.
APPENDICE%
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