IMPACT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF THE

FOOD AND PERSONAL CARE PRODUCTS COMPANIES LISTED IN KARACHI

STOCK EXCHANGE.

By
Muhammad Idrees

Thesis submitted to the faculty of the Institute of Management Sciences, Peshawar, in Partial
fulfillment of the Requirements for the Degree of
BBS (Finance)

Institute of Management Science, Peshawar

2013-15

Certificate of Approval

I certify that I have read THE IMPACT OF WORKING CAPITAL MANAGEMENT ON

FIRM PROFITABILITY by MUHAMMAD IDREES, and that in my opinion, this work
meets the criteria for approving a thesis submitted in partial fulfillment of the requirements
for the BBS (Finance) 4th Semester at the Institute of Management Sciences, Peshawar.

Supervisor

Name: Ms. Maria Ishtiaq

Designation: Lecturer
Signature: _________________

Coordinator, Research and Development Department

Name: Dr. Owais Mufti

Signature: _________________

Declaration

I, hereby declare that the research submitted to R&DD by me is my own original work. I am
aware of the fact that in case my work is found to be plagiarized or not genuine, R&DD has
full authority to cancel my research work and I am liable to penal action.

Students Name: Muhammad Idrees

Date: 18/12/2015

Dedication

This Research is dedicated to my parents, Mr & Miss. Sardar Hussain, brothers and Friends
and respected teachers for their patience, support and encouragement. A special feeling of
gratitude for my brother Mr.HazratHussain, Daud Jan, M Essa Sardar and Chota M Yahya
Sardar.Thank you for your endless prayers and much needed support throughout my studies.

Abstract

Every firm strives to keep their business intact and running, to be vigilant in doing business
smoothly working capital proves to be of utmost importance. Its importance is proved by its
impact on a firms profitability. It is also called lifeblood of the firm because it is needed for
daily operations in a firm. The basic goal of the undergoing study is, to know the changes in
working capital in the profitability of sector of food and personal care products in Pakistan.
Secondary data are collected for a sample of 8 food and personal care products companies
that are listed in KSE for the period of 6 years from 2009-2014. To find the influence of
WCM on profitability, net operating profit and ROA are used as dependent variables. While
average collection period, inventory turnover in days, average payment duration and CCC are
used as independent variables. SPSS software is used to find the standard - deviation, mean
and correlation. E-views software is employed to find regression to know the relationship
specter. The result of this study depicts that WCM affect productivity in the profits of a firm
negatively. When the average collection period increases, then performance of the firm will
suffer negative, which drags down the profitability gauge down. It is because of the fact that
firms should not wait too long for their receivables. The negative relationship of inventory
turnover in days means that when the period of inventory is increased the profitability of the
firm will decrease. The study also indicates that with the decrease in CCC the efficiency of
the companies in earning profit will increase. So managers should have to develop the value
of the firms by decreasing the CCC to an optimal level. The business had also to manage the
working capital inefficiently.

Acknowledgement

I am grateful to Almighty ALLAH, Whose blessings have always been a source of

encouragement for us and who gave us the ability to complete this task. I also wish my
heartiest thanks to my parents who supported me financially as well as morally throughout
my academic career and pray for me all the time. I can never turn down their efforts they put
forward for my bright and prosperous future.
I also dedicate this dissertation to my friends who havesupported me throughout the process.
I will always appreciate all they have done,especially
I can never forget guidance the efforts of my humble teachers. I am very thankful to them
who helped me during the course of study and motivated me all the time. I am thankful to my
supervisor MS. Maria Ishtiaq for her kind support and help in this thesis.

Muhammad Idrees

List of Acronyms and Abbreviations

WCM

Working Capital Management

ACP

Average Collection Period

ITID

Inventory Turnover in Days

APP

Average Payment Period

CCC

Cash Conversion Cycle

JIT

Just In Time

EFOODS

Engro Food limited Pakistan

NATF

National Foods Pakistan

NOPK

Noon Pakistan Ltd

RMPL

Rafhan Maize Ltd

SCL

Shield Corporation Ltd

SHEZ

Shezan International Ltd

UPEL

Unilever Foods Pakistan Ltd

MFFL

Mithchells Fruit Ltd

Table of Contents

Declaration............................................................................................................................................ii
Dedication............................................................................................................................................iii
Abstract................................................................................................................................................iv
Acknowledgement.................................................................................................................................v
List of Acronyms and Abbreviations....................................................................................................vi
Table of Contents.................................................................................................................................vii
List of Tables........................................................................................................................................ix
Chapter 1: Introduction..........................................................................................................................1
1.1

Background of the study:.......................................................................................................2

1.2 Food and Personal care product sector (Pakistan)........................................................................4

1.3 Research Questions:.....................................................................................................................5
1.4 Research objectives:....................................................................................................................5
1.5 Limitation of the study.................................................................................................................6
1.6 Scheme of the study.....................................................................................................................6
Chapter 2:Literature review:..................................................................................................................7
Chapter 3:Methodology.......................................................................................................................14
3.1 Data set and sample...................................................................................................................14
3.2 Sampling technique...................................................................................................................14
3.3 Variables:...................................................................................................................................14

3.4 Research Hypothesis:.................................................................................................................16

3.5 Descriptive Analysis..................................................................................................................17
3.6 Quantitative analysis..................................................................................................................17
Chapter 4: Analysis..............................................................................................................................18
4.1 Data analysis and Discussion.....................................................................................................18
4.2 Descriptive Analysis..................................................................................................................18
4.3 Pearsons Correlation Coefficient Analysis................................................................................20
4.4 Regression analysis....................................................................................................................21
5.1 Recommendation.......................................................................................................................25
References...........................................................................................................................................26

List of Tables

Table 1:
Descriptive statistic ..19
Table 2:
Correlation.29
Table 3:
Panel OLS Regression for NOP...30
Table 4:
Panel OLS Regression for ROA...31

Chapter 1: Introduction

Working capital is critical for the company finance and is too much important for the
organization to continue their business for a long period of time. Working capital is
used in the daily transactions of the firm. The working capital directly deals with the
current assets and current liabilities which affect the companys ability of being liquid
in assets and productivity (Rehman & Nasr, 2007).
The studies greatly emphasize on the current asset management as compared to the
fixed asset management because a financial manager is responsible for the management
of current assets and current assets are the life blood of the business. The current assets
encompass cash, receivable, inventories and securities which can be easily turned into
cash andcurrent liabilities encircle account payables these should be paid within one
year. So being a manager of any company, working capital should be utilized in such a
manner that is not in too much excess because it will create problems such as; the
excess fund will not be utilized or invested to get more return.The main aim is to get
more return and too much low working capital will also create problems because it may
lead to bankruptcy and insolvency (Eljelly, 2004).
The main aim of the firm is to increase the shareholder wealth and performance of the
firm. If the managersdo not care about the profit, thenthe business will not stay for long
in the market. Similarly, ifmanagers do not care about the liquidity of the firm, it will
lead to the problem of insolvency; in such a situation many companies will close their
business. There are many surveys conducted that the managers spend their major time
on the problem of working capital. The reason is that current assets are employed in

investments for a limited span of time and it gets quickly converted into other forms of
assets. So the business has to keep the working capital balanced.

1.1 Background of the study:

In order to increase the company value, managers have to keepaprime level of working
capital. By expanding quantity of products, the revenue of firm from sales willincrease
and also the managers have to keep the receivables period short, otherwise it will not be
good for the company. Another component is the accounts payable: Managers have to
extend the payable period for the purpose to use the assets or cash for the betterment of
the company. But the late payments have inverse effects also because late payment is
costly. If the suppliers offer a discount for those who pay early, the business will lose
that opportunity.
So how can the business, manage its current asset? Such as cash, so the business has to
use that cash in a better way to generate maximum return for the company. If the
business has surplus cash, then that cash will be invested in other places, business or
marketable securities generate profit for the firm instead of keeping the cash useless.
Being a financial manager the managers have to manage the account receivable in a
best way mean to reduce the time period of collection. The business can collect their
receivable before time by offering cash discounts. Because the aged account
receivables are not good for the firm which could lead to the problem of bad debt.
Inventory is also an indispensable part of working capital and deemed as a current asset
and manager has to use it in such a way to increase the company performance. Thus a
manager has to go for (JIT) just in time means when business receivesorder from the
customer then the business have to purchase the raw materials etc. for the production,

however this is mainly for huge order. The account payable is an important component
to be treated in a best way for the companys performance. The business has to increase
the period of payments to the supplier in order to keep the cash in the business for other
purposes. But the late payments have drawbacks also because later on the payments
will be inflated for the company.Osisioma (1997) stresses that diligent working capital
management tell a good relationship among various divisions of working capital of an
organization
An important compass of WCM is the CCC. CCC is time in days by an entity to turn its
input into cash inflow i.e. time interval between payments to supplier and collection of
sale of finished goods (Deloof, 2003). A larger conversion cycle can increase
profitability of a company because it results in sales. While cash conversion cycle
(CCC) also decreases the companysproductivity by excess amount of inventories and
longer account receivable cycle increase the CCC, which eventually decrease the
profitability of the company. To use the working capital efficiently, business have to
speed up the cash collection and slow down the cash disbursement of the company. As
a result those companies which collect their receivables quickly and have shorter cash
conversion cycle (CCC) will have positive impact on the profitability.

1.2 Food and Personal Care Product Sector (Pakistan):

There are 21 companies of food and personal care products registeredwith KSE.
Pakistan is the 3rd largest producer of milk in the world. This sector contributes well in
GDP. Nestle Pakistan Limited produces milk, juice, baby food and many things. Nestle
is one of the top fast moving consumer goods companies (FMCG) witha market
capitalization of Rs378 billion. The sale of the company has increased from Rs34
billion in 2008 to Rs86 billion in 2013. The earning is also increased from Rs1.6 billion
to Rs6 billion.
In 2013, out of 50 food manufacturing companies 32 companies earn profit. The second
largest food company is Rafhan Maize limited. Its sales increased from Rs11 billion in
2008 to Rs24 billion in 2013 and its earnings also increased from 1.5 billion to 3 billion
in last five years. The Unilever is the other major company in the food and personal
care sector. According to the Unilever information, steps are taken to increase sale in
rural areas such as butter, soap, shampoos, tea and ghee etc. this distribution of items
makes the sales and profit of Unilever doubled. Sale from Rs31 billion in 2008 to Rs61
billion in 2013 and profit from Rs2 billion to Rs6 billion. There are many other
companies which contribute to the countrys economy.
Noon Pakistan Limited starts its operation in 1966 as a public company. Currently
3.727 million shares are held by the public. Last year the sale of the Noon Pakistan
Limitedwent down by 21.1 percent, which is Rs938.5 million as compared to 2013
which is Rs1, 069.2 million. National food limited start its operation in 1970. It is one
of the multi category food producing companies. The company produces 250 different
products. In 2012 the profit increased by 29.54 percent as compared to 2011. Engro

food Pakistan is one of the largest food producing companies. 12 million people use the
Engro product every day. Being a largest producer the net sales of the company
increased from Rs9, 309357 to Rs9, 818834 in 2014.
Shezan started its operations in 1964 in Pakistan. It is one of the largest mango
producers in Pakistan. Shezan head office is located in Lahore Pakistan. Itslast year
profit increased from Rs3, 5281345 thousand in 2013 to Rs4, 221827 thousand in 2014.

EFOODS = Engro Food limited Pakistan

NATF

= National Foods Pakistan

NOPK

= Noon Pakistan Ltd

RMPL

= Rafhan Maize Ltd

SCL

= Shield Corporation Ltd

SHEZ

= Shezan international

UPEL

=Unilever Foods Pakistan Ltd

MFFL

= Mithchells Fruit Ltd

1.3 Research Questions:

Q1: How can working capital management effect profitability?
Q2: What are the different components which affect the profitability?
Q3: What is the relationship of ACP, APP, ITID and CCC with the profitability of the
company?

1.4 Research Objectives:

1) To find the relationship between WCM and performance of Pakistani food and
personal care product companies in profits.

2) To study the effect of various variables of WCM on the productivity of firms in

profits.
3) To know about the interdependence of CCC and the profitability of Pakistani
food and personal care product companies.

1.5 Limitation of the Study:

Our research study is just limited to the Pakistani food and personal care products
companies registered with KSE. It will not cover other sectors. All companies of food
sector are not included in the sample because data is not available.

1.6 Scheme of the Study:

The scheme of the study is below after the first chapter
Chapter No. 02- literature Review: In this portion, the synopsis of past studies related
to WCM is reported.
Chapter No. 03- Methodology: In this here the methodology used in this study and the
process of data collection is presented.
Chapter No. 04- Data analysis: This section contains analysis of the study.
Chapter No. 04- Conclusion and Recommendations: This part contains the end result
and recommendations which could be used as guidelines by other in future studies.

Chapter 2: Literature Review

There are many studies conducted just to know the effect of WCM on profitability of
companies. The previous studies indicate that a significant relationshipexists between
WCM and profitability of the firm. Many previous studies show negative correlation
b/w WCM and firm performance.
Chatterjee, (2012) studied the relationship of WCM and the way how the profitability
isaffected. The study shows that proper managing of working capital is important. If
businesses are willing to increase liquidity they will raise their level of working capital.
So it will be good for a company to maintain the profitability and liquidity balance. To
measure various components of WCM, sample size of 100 Indian companies is taken
for the period of two years 2010-2011. Multiple Regression and model of correlation
are used to estimate this research. The result implies that Indian firms and the WCM
exist a strong negative relation such as the cycle of conversion of cash. The study also
indicatesthe negative relation between profitability of Indian firms and its liquidity,but
Significant relation between size and profitability of the firms. So from this research
the conclusion is that the working capital needs to be managed properly, which may
increase the profit of the company by speeding up the collection and slowing down the
payments.
Panigrahi, (2013) studied the management of inventory and its impact on WCM of
cement companies of India. The basic purpose of this research had to estimate the
association between inventories conversion and companies performance in earning
profits. A sample of top 5 Indian cement companies for the period of 10 year from
2001-2010 is used. A regression model is used to know the impact of inventory

conversion period over gross operating profit. The result interprets the inverse
affiliation among inventory conversion period and firm profitability.
Enqvist, Graham and Nikkinen, (2013) studied the recent economic fiasco of 20072008 and its focus on policies regarding working capital. The study also tends to find
the role of the business cycle on working capital profitability. All finnished listed
companies of Finland has used as a sample for the period of 18 years. The result shows
that the active working capital management matter for the business, therefore it should
be included in firm financial planning.
(Deloof, 2003) studied the effect of WCM on thefirms ability to earn profit. According
to the study, firms have working capital with a large investment in cash.To have a
visible effect on firms productivity in profits; the working capital is to be arranged by
the business in a good way. The researcher employs the regression and correlation
models to know about the affiliation in inventories, account payables and gross
operating income and account receivables in days, The result shows that account
payable and the firms profitability is having a negative relation; indicates that firms
with low expense revenue can take long time to compensate for their dues.
Abdul Raheman with Mohamed Nasr (2007)conducted a research with aim to know the
influence of WCM on profitability of Pakistani firms. A sample of 94 Pakistani listed
firms is takenin the span of 6 years from 1999-2004. Study strives to know about the
effect of different components of WCM. The regression and correlation models are
employed for estimating. The result shows inverse relationbetween working capital
management and the variable profitability. When CCC increases the profitability will
be decreased but the manager have to increase the shareholders wealth, so managers
will decrease the CCC to the smallest level. The size and firms profitability possess a

positive relation, whileinsignificant relationships between firms debts and its

profitability.
Safdar, (2012)addressed the effect of WCM on Pakistan manufacturing firms
profitability. The researcher obtains 100 manufacturing firms as a sample from KSE for
10 year period, from 1999-2008. SPSS is used for regression and correlation. The
researcher concludes that there is a negative interdependency between WPMsvariables
and the firms ability to earn profit. It implies that an increase in the CCC, the firms
profitability will decrease and it also shows negative correlation b/w profitability and
liquidity. The estimation also shows a visibleinterdependencyamid the size of the firm
and profitability.
Sayanan, (2014) tended to find that the WCM acts as a major role in the firms
profitability and the WCM contributes positively to the firms value. Sample size of 80
Sri Lankan firms was taken from CSE in the span of seven years from 2OO3-2OO9.
This research is based on the secondary data and SPSS is used. The result interceptsan
inverse interdependency between dependent and all the independent variables. The
research also suggests that a manager can also increase the shareholders value, if they
manage the working capital in a wayto reducing the accounts receivables days and
inventories to the last level.
Umer and Nousheen, (2010) investigated the relationship between WCM and
profitability in Pakistans textile sector. In the study 55 textile companies in
Pakistanhave been employed as a sample for 6 years from 2003-2008 and SPSS is used
to run correlation, regression and ANOVA test. The result showsa positive relationship
between WCM and profitability in textile sector of Pakistan and negative relation to the
cost of debt. It means that increasing debt financing will decrease the firms

profitability. The result also helps the companies to manage working capital more
efficiently.
Annuar and Zariyawati, (2009) addressed the relationship between WCM and
profitability and it is one of the major components in the firm decision making. The aim
of the study is to know the influence of CCC on profitability of the firm. A group of
1628 firms is selected as a sample registeredin Bursa Malaysia for the span of 10 years
from 1996-2006. The pooled OLS regression analysis is used. The result is interpreted
as an insignificant relationship between the profitability of the firm and the cash
conversion cycle, increase in the CCCwill reduce profit of the firm. So the manager can
boost the profitability of the firm by decreasing the CCC.
Lozaridis and Tryfonidis, (2006) addressed the relationship between the WCM and
profitability. 131 companies from ASE from 2001-2004 is used as a sample. The goal
of the study is to know the interdependency of the CCC and profitability andits
components of the firm by using SPSS. The result shows negativity in interdependency
between CCC and firms ability to earn profit. So the negative relationship of account
receivables and firm profitability show that account receivables should be reduced to
reduce the cash conversion cycle. The managers increase the firm value by efficient
management of CCC and also keeping the various components such as receivables,
account payables and inventory to the optimum level.
Garcia and Mastinez-Solano, (2007) studied the relationship of WCM and profitability.
The aim of the study was to know the effects of WCM on profitability of (SMEs)to see
the influence of the CCC and its components. 8872 SMEs are taken as a sample for the
period of 7 years from 1996 to 2002 by using panel data forestimation. The result
shows a negative relationship between the CCC and profitability of SMEs. It shows

10

that a manager can increase the SMEs importance by dropping the inventories and the
number of days for which the accounts are outstanding. The profitability of SMEs also
increases by reducing the CCC.
Mohamand and Saad, (2010) studied the relationship of WCM and performance of
Malaysian companies. Secondary data were used and a sample of 172 Malaysian
companies has been taken from Bursa Malaysia for 5 years from 2003-2007. The
research is conducted to find the effect of working capital components on profitability,
such as CCC, current ratio (CR), current asset to total asset ratio, current liability to
total asset ratio, debt to asset ratio, return on assets and return on invested capital. In
study SPSS software is used for correlation and multiple regression analysis. The
conclusion showsa negative relationship between the variables of working capital and
performance of the firms. The firm performance can increase through firm planned and
effective thinking to run the organization more effectively.
Ganesan, (2007) studies the relationship of WCM and profitability of the firm from
telecommunication equipment industry. To study the relationship of WCM on firms
being profitable, correlation and regression is used. So to know the relationship 443
financial statements are taken as a sample from 349 telecommunication equipment
industries for 7 years from 2001-2007. The study concludes that there exists negative
interdependency between liquidity and firm being profitable. And WCM efficiency can
improve by decreasing days of working capital.
Hina, (2014) studied to know the influence of WCM on profitability. Glaxo Smith
Kline pharmaceutical company is taken as a sample listed in KSE for the period of 10
years from 1996-2011. The goal of the study is to see the relationship of different
variables such as return on assets ratio, account receivable turnover, creditors turnover,

11

inventory turnover and current ratio. To mean, median, correlation and regression
analysis, SPSS is used. The result showsa positive relationship between debtors
turnover (DOT) and return on assets (ROA), inventory turnover (ITO) and return on
asset (ROA) etc and no relationship between the current ratio of profitability. So
through proper management of working capital the performance of the company will
increase.
Nazir and Afza, (2009) studied the affiliation between WCM and financial policies and
its effect onthe performance of the firm. Secondary data were used and take from KSE.
204 Pakistani firms are taken as a sample for the period of 8 years from 1998-2005.
And the panel data regression model was used. ROAand Tobins qarecast-off to
evaluate the effect of aggressive working capital investment and financing policies. The
result of the study showsa negative relationship of the aggressive working capital
investment and financing policies with the performance of the firms. So for the
investors it will be good to have more value to those firms who manage their current
liability efficiently.
Padachi, (2006)studied the relationship among the WCM and its impacts on
profitability of the companies. In this study the return on assets were used as the
dependent variable in order to know the relationship with the profitability. 58 small
manufacturing firms aretaken as a sample used for 6 years from 1998-2003. SPSS is
used for regression analysis. The end result of this study showsthat the various
components of working capital have a positive impact on the profitability of paper and
printing industry.
Napompech, (2012) conducted research to know the result of working capital on firm
performance. The study also found that working capital is the lifeblood of the firms.

12

The aim of the study is to find the influence of WCM on profitability of the companies.
For this purpose regression analysis is used and a sample of 255 companies takesfrom
the TSEfor three years from 2007-2009. The result of this study shows negative
correlation between gross operating profit, inventory conversion period and receivable
collection period. This shows that the values of the companies decreasing by CCC,
inventory conversion period and receivable collection period.
Gill, Biger and Mathur, (2010) investigated the relationship between WCM and
profitability of the firm. To study the relationship of American firms for this 88 firms
are taken as a sample from NYSE for 3 years from 2005-2007. To mean, median,
standard deviation, regression and correlation SPSS is used. The previous study showsa
negative relationship between CCC and gross operating profit, but the study of
American firm showsa positive relationship between CCC and gross operating profit.
The study also shows that when the collection of account receivable is slow the
profitability will be low. The study also shows that no significant relationship
existsbetween gross operating profit ratio and firm size.
Thuvarakna, (2013) the study was conducted in the UK and they are also interested to
know the impact of working capital management on the profitability of different
industries. The core aim of the study is to find out the relationship of different working
capital components and profitability. ie CCC, receivable in days, payable in days,
inventory days, debt and size. To know the relationship a sample of 97 companies is
taken 60 from manufacturing, 20 from construction and 17 from telecommunication.
These companies aretaken from LSE for 6 years from 2006-2011. The Pearsons
correlation and regressionare used in this study. The study concludes that there is no
significant relationship betweenthe working capital components and profitability.

13

Chapter 3: Methodology

3.1 Data set and Sample:

The research is conducted on the basis of secondary data because it is difficult for an
individual to collect data from different industries because of different reasons. The
data were collected from the Karachi stock exchange. There are 21 companies of food
and personal care products listed on the KSE. In this research sample of 8 companies
from food and personal care products is selected due to non-availability of data. This
data is collected from the KSE and the website of the companies for the period of 6
years from 2009-2014. The statistical technique has to be applied to foresee the
relationshipsamong WCM and profitability of Pakistani food and personal product
companies.

3.2 Sampling Technique:

A statistical technique that is used in the study is the random sampling technique.

3.3 Variables:
The variables are chosen by studying previous researches on WCM.
Following are the list of dependent and independent variables.
Net operating profitability (NOP) was useddependent variable and alsoto gauge the
performance of the companies.
Average collection period (ACP), inventory turnover in days (ITID), average payment
period (APP), and the cash conversion cycle (CCC) are used as a proxy and
independent variables..

14

Net operating profit:

Net operating profit is defined as operating income adds depreciation and over total
asset subtractinga financial asset.
NOP = Operating profit + depreciation/total assets financial assets
Average collection period (ACP):
When receivables are divided by sale and multiply by the number of days in years 365.
It will give an average collection period.
ACP = accounts receivable / sale*365
Inventory turnover in days (ITID):
It is calculated when inventory is divided by the cost of goods sold and multiply
withthe number of days in a year.
ITID = inventory / CGS *365
Average payment period (APP):
When account payables are divided by purchases and multiply by the number of days
in one year, then it results inthe average collection period.
APP = account payable / purchases *365
Cash conversion cycle (CCC):
By adding average collection period with inventory turnover in days and subtracting
averagepayment period gets cash conversion cycle as a result.

15

CCC = average collection period + inventory turnover in days - average payment

period

3.4 Research Hypothesis:

The main determinant of the study was to know about the relationship of profitability
and WCM, for this the following hypotheses are to be used. There will be Null
Hypothesis Ho verses alternative Hypothesis H1.
Hypothesis 1
Ho1: There is a significant sway of WCM on the profitability of Pakistani food and
personal care products companies.
H11: There is no visible effect of WCM on the profitability of Pakistani food and
personal care products companies.
Hypothesis 2
Ho 2: There is a negative relationship of components of WCM on profitability of
Pakistani food companies.
H12: There is a positive relationship of components of WCM on profitability of
Pakistani food companies.
Hypothesis 3
Ho3: There is a negativecorrelation of CCC with the profitability of the companies.
H13: There is a positivecorrelationof CCC with the profitability of Pakistani food and
personal care products companies.

16

3.5 Descriptive Analysis:

Descriptive analysis is to be used in this study. In descriptive analysis, SPSS software is
used in order to know about average, standard deviation, minimum and maximum
values of different components. The minimum and maximum values can be employed
in order to know the difference between the variables in order to get more information.

3.6 Quantitative Analysis:

In Quantitative analysis Correlation and Regression models are used.First Pearson
correlation is used and then Regression in order to know the relationship of the variable
with the profitability. The method that is usedfor analysis is the Pooled ordinary least
squares and panel data is in the Pooled regression. For this analysis, SPSS and E-views
software is used.

17

Chapter 4: Analysis
4.1 Data Analysis and Discussion:
This study has to present 2 types of analysis one is descriptive and other is quantitative.
These two types analyses will be discussed below.

4.2 Descriptive Analysis:

Here this analysis of the ongoing studydisplays the mean and standard deviation of
different components. Descriptive study also shows the maximum and minimum values
of the components which indicate that how can the variables achieve its maximum and
minimum values.
The below table represent a true picture of descriptive statistics of eight non-financial
firms of food and personal care product sector of Pakistan for the period of 6 year
from 2009-2014. The descriptive statistics of the research present the mean value of
return on asset 10.54% and standard deviation 10.19%. It also represents that the firm
profitability can move to both sides by 10.19%. It also shows that for a firm in a year
the maximum value of return on assets is 29.16% and the minimum value is -10.01%.

18

Table 1: Descriptive Statistics

N

Minimum

Maximum

Mean

Std. Deviation

48

-10.01

29.16

10.5494

10.18652

ACP

48

.40

57.77

14.1763

13.48106

ITID

48

12.00

168.67

81.4013

42.55142

APP

48

15.33

213.00

61.8592

43.42887

CCC

48

-162.00

138.56

33.7183

64.31906

Valid N (listwise)

48

ROA

The data show that the extreme time taken by the firms to assemble its receivable is 58
days and the least time for the collection is 1 day. The firm takes 81 days on average to
sell the inventory with the standard deviation of 43 days. The minimum time taken by
the firms to exchange its inventory into a sale is 12 days while the maximum period is
169 days. The companies pay its payment on average of 62 days witha standard
deviation of 43 days. The least time taken by the firm to pay the suppliers is 15 days
andsupreme days for the payment are 213 days. In the study CCC is used as a proxy for
to know the proficiency of working capital can take assnormal of 34 days and witha
standard deviation of 64 days.

4.3 Pearsons Correlation Coefficient Analysis:

In the research the Pearsons correlation is employed for the purpose to know the
relationship of WCM andthe firms ability of being profitable. If the working capital is
managed efficiently, the profitability of the firm will increase. When the time period
between the procurement of raw-materials and the assembly of receivables is lengthy
19

the profitability will be decreased but if this time period is short, the profitability of the
firm will increase.
The analysis of correlation result has to be started from the average collection period
and net operating profit. The outcome of correlation shows that average collection
period has a negative coefficient -0.298 and a p-value is (0.040) which is very
significant at = 5%. So from this result, it is concluded that when the average
collection period is increased, it will affect the profitability inversely means that the
profitability will decrease. When the ACP is decreased the profitability will increase.
The result of correlation with the inventory turnover in days shows that the inventory
turnover has negative coefficient -0.423 and p-value is (0.0003) which shows that the
result is extremely significant at = 5% once again. This result shows that if the time
period of conversion inventory into a sale is long the profitability of the firm will be
low and if this time period is short the profitability of the firm will be higher. The result
of correlation with average payment period is same. The APPhas a negative coefficient
of -0.229 with a p-value of 0.017 which is highly significant at = 5%. Itindicates that
small profitable companies can wait for a long time to pay the due payments. The result
of correlation of the cash conversion cycle is same to that of other variables. The CCC,
which measure WCM hasa negative coefficient of 0.025 with p-value 0.047 which
indicate that it is significant at = 5%. From this it is concluded that if the cash
conversion cycle is high the firm profitability has be low. And when the CCC is
decreased, the company profitability will increase.
The correlation analysis of the return on asset is same to that of the result of net
operating profit, but the only coefficient and p-value are changed. And it is not as much
significant to that of net operating profit. In some cases, the correlation also shows
positive significance with average collection period and CCC, which is 0.060 with p20

value 0.087. These specify that if firms take extrapause to collect its receivables, this
will increase its CCC.
From this analysis, it is found that ifthe firm has the ability to cut its time period, then
the firm is more competent in handling working capital. And the proficiency of the firm
hasincreased the profitability.

4.4 Regression Analysis:

In research the regression is used for the intention to know the impact of WCM on
profitability of the firm. The data (pooled) regression is used because it is good to use
in studying the underlying forces of adjustment and the panel data provides better
results to identify and measure the effect from that of the pure cross-section and time
series data.

4.5 Regression Model: Pooled Ordinary Least Squares Estimation:

In research the two dependent variables are used that are net operating profit and return
on asset. The pooled panel data is used as of 48 firm year observations. In the research
a number regression coefficients are used for the independent variables.
The model used here for the pooled least squares method is given below.
NOP I t =0 + 1(ACP i t) + 2 (ITID I t) + 3 (APP I t) + 4 (CCC I t) +
The result of the regression model that are used here shows that the coefficient of
average account receivables is 5.65 which is highly significant at . = 5%. The result
indicates that if the account receivables has increased or decrease it will show a significant
effect on the profitability of the company. The result of ITID which is used in the study as
an independent variable that shows thecoefficient of inventory turnover remains 26.34
which is extremely significant = 0.0000. This result of inventory turnover shows that if the

21

increase or decrease occurred in the ITID it will havea significant effect on the
performance of the firms.
The third variable which is average payment periodis used as an independent variable. So
finding of the study shows that the coefficient of average payment is -14.87 which is
negative and is highly significant = 0.0112. It directs that if the increase or decrease
occurred inthe payment period,it will have a significant effect on the profitability of the
firms.The cash conversion cycle is also used as an independent variable. The CCC is

calculated by adding ACP and ITID and by subtracting the average payment period.
The cash conversion cycle is mainly used for the purpose to check the proficiency of
WCM. The result expresses the coefficient of the cash conversion cycle, negative
which is equal to -0.14129 and is highly significant = 0.0001. This result indicates that
if the CCC is increase or decrease it will affect the profitability of the firm significantly.
The second dependent variable is used that is ROA (return on asset) is also discussed
below,
ROA it =0 + 1 (ACP it) + 2 (ITID it) + 3 (APP it) + 4 (CCC it) +
The return on asset is the second dependent variable with the four independent
variables. Such as average collection period, inventory turnover in days, average
payment period and cash conversion cycle. The result of the study is same to that of net
operating profit, but only the value coefficient and confidence interval is changed. So
the coefficient of average collection period is equal to 8.05 and is highly significant =
0.0057. For the inventory turnover in days the coefficient is 48.90 and is highly
significant 0.0000. The study shows that the coefficient of APP is negative, which is
-40.39 and extremely significant = 0.0001. The fourth is cash conversion cycle its
coefficient is also negative, which is -0.3167 and is highly significant = 0.0000. The
majority of the studies shows an inverse association between CCC and profitability of
the companies.
22

So the result indicates that all the independent variables which are average collection
period, inventory turnover in days, average payment period and the cash conversion
cycle show highly significant relation with the NOP and return on asset which is below
5%.
From result, it is concluded that the R-square value is equal to 48% in both the net
operating profit and return on asset. It means that a 48% change in profitability was
occurred because of working capital management components. The working capital
management components that are used in this research are average collection period,
inventory turnover in days, average payment period and the cash conversion cycle. So
48% change in profitability occurs because of these four WCM components.

Chapter 5: Conclusion

The study is conducted for the purpose to know the relationship of WCM and
profitability of the firm. Many Pakistani firms invest most of its money in working
capital. So if the managers of the firm manage the business working capital efficiently,
profitability of the company will increase. The study, shows that there is negative

23

relationship between net operating profit and return on asset and average collection
period, inventory turnover in days, average payment period and the cash conversion
cycle. The study also indicates that managers of the firm can increase the value of
shareholders by decreasing the number of days of receivables and inventory to the
tiniest level. The low profitability firm delays its payments. As it is known that by
increasing the payment period will increase the profitability of the firm because firms
can invest that amount and earn interest on that amount. But due to late payment losses
are incurred because firms will lose the discount opportunity which the suppliers may
provide.
It is concluded that Alternate hypothesis (H11) which is that WC have a significant
impact on the performance of the firms. So the alternate hypothesis is accepted while
null hypothesis (Ho1) is rejected. The second alternate hypothesis (H12) indicate the
negative relation between working capital components and profitability of the
companies. So study acceptsthe alternate hypothesis and reject the null hypothesis
(H02). Because reducing the cash collection period and inventory conversion period, the
profitability of the firms increases.

The third alternate hypothesis (H 13) shows a

negative relationship between CCC and the firm profitability.

Study acceptsthe

alternate hypothesis and reject the null hypothesis (H 03) because with the decline in the
CCC, the profitability of the company increases.
The conclusion of this research is same as that of the previous researches conducted in
this area. The previous researches by (Deloof, 2003), (Eljelly 2004), (Abdul Raheman
and Mohamed Nasr, 2007), (Safdar, 2012), (Annuar and Zariyawati, 2009) the result of
all these shows negative relationship of WCM with the profitability of the firm
including the different components such as average collection period, inventory
turnover in days, average payment period and the cash conversion cycle etc.

24

From above results, it is concluded that if a firm wants to be more strengthened than it
needs to manage its working capital competently and diligently. The working capital
management means to manage the current assets and current liabilities of the business.
So if the managers manage its current assets and current liability in a proper mannerit
will increase the profitability of the company.

5.1 Recommendation:
Previous researches conducted on some area provide opportunities for the future
researches. In future more work is needed to be done on working capital management
in Pakistan. This study focuses on Food and Personal Care Products sector, while in the
future the sector may be changed along withthe increase or decrease in the sample size
and years. Thisstudy employs six variables while other studies should increase the
number of variables to gain further insight into this area of study. Thedeterminant of
profitability is net operating profit and return on asset in this study. In future, it should
be return on Equity and gross profit margin, etc. to widen the area and understanding
about this topic.

References

1)

Raheman, A., & Nasr, M. (2007). Working capital management and

profitabilitycase of Pakistani firms. International review of business research
papers, 3(1), 279-300.

2)

Afza, T., & Nazir, M. S. (2008). Working capital approaches and firms returns
in Pakistan. Pakistan Journal of Commerce and Social Sciences,1(1), 25-36.

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3)

Napompech, K. (2012). Effects of working capital management on the

profitability of Thai listed firms. International Journal of Trade, Economics and
Finance, 3(3), 227-232.

4)

Raheman, A., Afza, T., Qayyum, A., & Bodla, M. A. (2010). Working capital
management and corporate performance of manufacturing sector in
Pakistan. International Research Journal of Finance and Economics, 47(1),
156-169.

5)

Agha, H. (2014). Impact of Working Capital Management on

Profitability.European Scientific Journal, 10(1).

6)

Mohamad, N. E. A. B., & Saad, N. B. M. (2010). Working capital management:

The effect of market valuation and profitability in Malaysia.International
Journal of Business and Management, 5(11), p140.

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Zariyawati, M. A., Annuar, M. N., Taufiq, H., & Abdul Rahim, A. S. (2009).
Working capital management and corporate performance: Case of
Malaysia.Journal of Modern Accounting and Auditing, 5(11), 47-54.

8)

Juan Garca-Teruel, P., & Martinez-Solano, P. (2007). Effects of working capital

management on SME profitability. International Journal of managerial
finance, 3(2), 164-177.

9)

Ganesan, V. (2007). An analysis of working capital management efficiency in

telecommunication equipment industry. Rivier academic journal, 3(2), 1-10.

10)

Padachi, K. (2006). Trends in working capital management and its impact on

firms performance: an analysis of Mauritian small manufacturing
firms.International Review of business research papers, 2(2), 45-58.

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11)

Chhapra, I. U., & Naqvi, N. A. (2010). Relationship between efficiency level of

working capital management and profitability of firms in the textile sector of
Pakistan.

12)

Nazir, M. S., & Afza, T. (2009). Impact of aggressive working capital

management policy on firms profitability. The IUP journal of applied
finance,15(8), 19-30.

13)

Lazaridis, I., & Tryfonidis, D. (2006). Relationship between working capital

management and profitability of listed companies in the Athens stock
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14)

Zubairi, H. J. (2011, July). Impact of working capital management and capital

structure on profitability of automobile firms in Pakistan. In Finance and
Corporate Governance Conference.

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Sial, M. S., & Chaudhry, A. (2012). Relationship between Working Capital

Management and Firm Profitability: Manufacturing Sector of
Pakistan.Available at SSRN 2105638.

16)

Thuvarakan, S. (2013). Impact of Working Capital Management on Profitability

in UK Manufacturing Industry. Available at SSRN 2345804.

17)

Anandasayanan, S. (2014). Working Capital Management and Corporate

Profitability: Evidence from Panel Data Analysis of Selected Quoted
Companies in Sri Lanka. Available at SSRN 2385940.

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Gill, A., Biger, N., & Mathur, N. (2010). The relationship between working
capital management and profitability: Evidence from the United States.Business
and Economics Journal, 10(1), 1-9.

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19)

Panigrahi, A. K. (2013). Negative Working Capital and Profitability: An

Empirical Analysis of Indian Cement Companies. International Journal of
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Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital
management on firm profitability in different business cycles: Evidence from
Finland. Research in International Business and Finance, 32, 36-49.

28

Table 2:
Correlations

ACP
ACP

Pearson
Correlation

ITID

.298*

.060

.037

.406

.024

.040

.687

48

48

48

48

48

48

Pearson
Correlation

.303*

-.127

.723**

.423**

.236

Sig. (2-tailed)

.037

.391

.000

.003

.107

48

48

48

48

48

48

Pearson
Correlation

.123

-.127

-.663**

.229

.138

Sig. (2-tailed)

.406

.391

.000

.117

.351

48

48

48

48

48

48

-.326*

.723**

-.663**

.025

-.134

.024

.000

.000

.865

.364

48

48

48

48

48

48

-.298*

-.423**

-.229

-.025

.827**

.040

.003

.017

.045

48

48

48

48

48

48

-.060

-.236

.138

-.134

.827**

.087

.107

.351

.364

.000

48

48

48

48

48

N
Pearson
Correlation
Sig. (2-tailed)
N
NOP

ROA

.326*

CCC

NOP

.123

APP

CCC

.303*

Sig. (2-tailed)
ITID

APP

Pearson
Correlation
Sig. (2-tailed)
N

ROA Pearson
Correlation
Sig. (2-tailed)
N

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

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

Table 3:
29

.000

48

Panel OLS
Dependent Variable: NOP
Method: Panel Least Squares
Date: 12/07/15 Time: 23:28
Sample: 2009 2014
Periods included: 6
Cross-sections included: 8
Total panel (balanced) observations: 48

Variable

Coefficient

Std. Error

t-Statistic

Prob.

LNACP
LNAPP
LNITID
CCC
C

5.653077
-14.87851
26.34343
-0.141297
-15.58485

1.677111
5.616013
4.834534
0.033444
6.631439

3.370724
-2.649301
5.449013
-4.224902
-2.350147

0.0016
0.0112
0.0000
0.0001
0.0234

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.489699
0.442229
4.644234
927.4631
-139.1791
10.31599
0.000006

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

7.673750
6.218507
6.007462
6.202379
6.081122
0.896851

Table 4:
Panel OLS
Dependent Variable: ROA
Method: Panel Least Squares
Date: 12/07/15 Time: 23:37
Sample: 2009 2014
Periods included: 6
Cross-sections included: 8
Total panel (balanced) observations: 48
Variable

Coefficient

Std. Error

t-Statistic

Prob.

LNACP
LNAPP
LNITID
CCC

8.053007
-40.39712
48.90077
-0.316765

2.766336
9.263419
7.974396
0.055164

2.911073
-4.360929
6.132222
-5.742198

0.0057
0.0001
0.0000
0.0000

30

C
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

-6.741389
0.482591
0.434460
7.660504
2523.383
-163.2008
10.02660
0.000008

10.93833

-0.616309

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

31

0.5409
10.54938
10.18652
7.008365
7.203282
7.082024
0.965123