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Course: FIN3105 Working Capital Management

Term paper

Working Capital Management and Firm Performance of Companies in Textiles &

Pharmaceuticals Industry in Bangladesh

Submitted to
Maliha Rabeta

Lecturer

Department of Business Administration in Finance and Banking

Faculty of Business Studies

Bangladesh University of Professionals

Submitted by
Afsana Sanjida Sahatabdi

ID: 2122151094

Section- A

Department of Business Administration in Finance and Banking

Faculty of Business Studies

Bangladesh University of Professionals Date of Submission: 09th October 2023

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Letter of Transmittal

09 October 2023

To

Maliha Rabeta

Lecturer

Department of Business Administration in Finance and Banking

Faculty of Business Studies

Bangladesh University of Professionals

Subject: Analysis of Working Capital Management and Company Performance in Bangladesh’s

Pharmaceutical and food Industries.

Dear Ma’am,

I beg most ardently to inform you that I am a student enrolled in the Finance and Banking
program, Batch of 2021, within the Department of Business Administration. I have conducted
an analysis titled, “Working Capital Management and Company Performance in Bangladesh’s
Pharmaceutical and food Industries”. My hard work and research have gone into proceeding
and submitting this research within my limited capability. I am confident that my paper
encompasses all the required elements and will align with your expectations. Therefore ma’am,
I eagerly await your valuable feedback which I can use further to improve my reports in the
future.

Sincerely,

Afsana Sanjida Shatabdi

ID: 2122151094

________
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Signature

Acknowledgment

Despite encountering several problems, I was able to overcome them thanks in large part to my
active efforts, as well as the excellent advice and ongoing support I received from Maliha
Rabeta Ma'am during the whole process. I want to use this opportunity to express my gratitude
and appreciation to everyone who helped to create this report. Any recommendations that
could improve the caliber of this report are appreciated, and I look forward to hearing from you
in the future.

Executive Summary:

This article is a thorough research that investigates the influence of working capital
management practices on company performance in Bangladesh's pharmaceutical and food
industries. Data was gathered for this study from a sample of 10 businesses in the food and
associated industries and 5 businesses in the Food tindustry. The Dhaka Stock Exchange website
and the individual websites of the chosen firms were used as the primary sources of secondary
data for this study. A variety of working capital indicators were analyzed as part of the research,
and this analysis helped to evaluate the firms' basic earning power (BEP) and, consequently,
their overall performance. Inventory Conversion Period (ICP), Payable Deferral Period (PDP),
Days Sales Outstanding (RCP), Cash Conversion Cycle (CCC), and Quick Ratio were the
independent variables examined in this research for ratio analysis. Basic Earning Power (BEP)
was the dependent variable in this study.
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1. Introduction……………………………………………………………………………………………………………………………05
1.1. Origin……………………..………………………………………………………………………………………………….05
1.2. Limitations…………………………………………………………………………………………………………………05
1.3. Objectives………………………………………………………………………………………………………………….06
2. Hypothesis Development…………………………………….………………………………………………………………..06
3. Methodology …………………………………………………………………………………………………………………………07

3.1. Data Analysis Components……………………………………………………………………………………………..07

3.2. Independent variables……………………………………………………………………………………………………07

3.3. Other Statistical Components………………………………………………………………………………………….07

3.4. Sample……………………………………………………………………………………………………………………………08.

3.5. Dependent Variables……………………………………………………………………………………………………….08

3.6. Source of Data…………………………………………………………………………………………………………………08

4. Market and industry analysis…………………………………………………………………………………………………08

4.1 Porter’s Five Forces………………………………………………………………………………………………………….08

5. Descriptive Statistics……………………………………………………………………………………………………………..08

5.1. Ratio Analysis…………………………………………………………………………………………………………………..09

5.2. Ratio Analysis

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1. Introduction:
1.1 Origin :
In industries like pharmaceuticals and food, working capital management is very important for a
company's financial health. Effective working capital management is crucial for maintaining
operations and attaining optimal performance in Bangladesh, where the pharmaceuticals and
food sector is substantial. Working capital, which is calculated as the difference between
current assets and current liabilities, is an indicator of a company's operational effectiveness
and short-term liquidity. Managing working capital is even more important in the context of
Bangladesh's pharmaceutical and food industries, where changing market conditions are the
norm. The ability of a business to satisfy short-term obligations and take advantage of business
possibilities is directly impacted by the effective management of components like accounts
receivable, inventory, and accounts payable. It's critical to strike the proper balance in these
areas to make sure that a necessary part.
Factors such as industry-specific regulations, market competition, and economic conditions can
influence the dynamics of working capital management in this sector. Research into the
practices and outcomes of working capital management in pharmaceuticals and food
companies in Bangladesh can contribute to a better understanding of how firms navigate these
challenges and optimize their financial performance.

1.2. Limitations:
Limitations in working capital management for pharmaceuticals and food companies in
Bangladesh may include challenges in accurately forecasting demand for raw materials, dealing
with fluctuations in commodity prices, and managing inventory efficiently. Additionally,
external factors such as regulatory changes and market uncertainties can impact the industry.
Firm performance may be affected by delays in payment cycles, which can strain cash flow.
Economic conditions and global events can also influence the availability and cost of working
capital. Balancing liquidity with profitability is crucial, and the industry's sensitivity to external
factors can pose challenges in achieving optimal working capital management.
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1.3.Objective:

a) Running a Hausman test.

b) Building a regression model
c) variables on basic earning power.
d) Conducting panel data analysis.
e) Ratio analysis

2. Hypothesis development
i) H11: There should be negative impact of CCC on BEP: The Cash Conversion Cycle represents
the number of days required for a company to convert its investments in inventory or other
assets into cash. A longer Cash Conversion Cycle implies reduced core profitability before taxes
and leverage, indicating a negative relationship.

ii) H13: There should be negative impact of Quick Ratio on BEP The Quick Ratio measures a
firm's ability to settle its short-term liabilities using its most liquid assets. An increased Quick
Ratio can hinder core profitability before taxes and leverage by tying up liquid assets rather
than utilizing them efficiently.

iii) H14: There should be negative of DSO on BEP: Days Sales Outstanding indicates the number
of days required for a firm to collect payment after a sale. An increase in DSO can extend the
Cash Conversion Cycle, leading to reduced profitability, as indicated by a lower level of BEP.

iv) H15: There should be negative impact of ICP on BEP Inventory Conversion Period represents
the time needed to convert raw materials into sales. The longer it takes for a business to
convert inventory into sales, the less profitable it becomes, resulting in a negative relationship.

v) H16: There should be positive impact of PDP on BEP: Payable Deferral Period measures
management's ability to delay payments to creditors. An increase in payment delays can reduce
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theCash Conversion Cycle and, in turn, enhance profitability. Hence, PDP and BEP have a
positive relationship.

3. Methodology:
The primary goal of this study is to examine how working capital management affects a
company's core profitability in the pharmaceutical and chemical sectors. To achieve the
aforementioned goal, research has been done on panel data using a variety of methodologies,
including regression, ratio analysis, quartile analysis, Pont analysis, and overall industry analysis

3.1. Data Analysis Components:

3.2. Independent variables:
For data analysis here used some Working Capital indicators, these are the explanatory
variables which can be either of following;

 CCC= Cash Conversion Cycle

 ICP= Inventory Conversion Period
 DSO= Days Sales Outstanding
 PDP= Payable Deferral Period
 Quick Ratio

The control Variables are’

 LnTA= Log of Total Asset

 Age: Company Age
β1= the degree of change in BEP for every 1unit of change in working capital indicator.
β2= the degree of change in BEP for every 1unit of change in the log of total assets
β3= the degree of change in BEP for every 1unit of change in the age of the company
β4= the degree of change in BEP for every 1unit of change in the fixed asset turnover of
the company
β5= the degree of change in BEP for every 1unit of change in the sponsor shareholding
of the company.
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3.3. Other Statistical Components: Mean, Median, Standard deviation, Regression analysis,
Graph and Chart, Quartile analysis.
3.4. Dependent Variables: BEP is the dependent variable. It is computed by dividing earnings
before interest taxes (EBIT) by Total Asset (TA). Here, BEP= EBIT/TA
3.5. Sample:
In the Pharmaceuticals and Food industries of the Dhaka Stock Exchange, 15 listed businesses
from the years 2012 to 2022 have been chosen as the sample for this study. Panel data from
2012 to 2022 from the annual reports of the listed firms is included in the study.
3.6. Source of Data:
The majority of the data was collected from the firms' annual reports from 2012 through 2022.

4. Market and industry analysis:

The pharmaceutical sector, in particular, has experienced notable growth, with Bangladesh
becoming a major exporter of pharmaceutical products. In the food industry, Bangladesh has a
diverse range of agricultural products, and the food processing sector has been gradually
expanding

4.1 Porter’s Five Forces:

Posters’ five factor assessing the state of market competition in any industry is Porter's Five
Forces. This too focuses on five distinct areas or forces, as the name implies. These include the
threat of new competitors, competition between current rivals, buyer and supplier bargaining
power, and the threat of substitutes.

5. Descriptive Statistics:
The mean, standard deviation and number of observations listed as follow
Table 1:
variable
sl name unit Mean SD N
47.1439 29.4395
1 Age year 4 8 165
2 TA Bdt 1.6E+10 1.6E+10 165
3.21E+0 2.38E+0
3 Inventory Bdt 9 9 165
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7.35E+0 3.25E+0
4 COGS Bdt 9 9 165
Account 6.47E+0 3.11E+1
5 recv. Bdt 9 0 165
1.58E+0
6 Account pay. Bdt 9 1.2E+09 165
Current 1.14E+1 9.47E+0
7 Asset Bdt 0 9 165
Current 6.54E+0 4.04E+0
8 liablity Bdt 9 9 165

5.1 Ratio Analysis:

Quick Ratio: Quick ratio that helps in assessing the firm’s ability to pay its short term liability

Median of Quick Ratio

2.5

1.5 F&A
pharmacuticals

0.5

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 1: Quick ratio of firms in Pharmaceuticals and Food

From the graph plotted above, it can be seen for the pharmaceutical industry that, the quick
ratio shows a dominating upward trend with a value of 2012 . The ratios are mostly below 1
which means that liabilities are higher. For pharmaceuticals industry quick ratios are always
below 1 which suggests that the amount of quick assets is lower than the current liabilities.
Though, the quick ratio shouldn't be usually more than 1 as it suggests that the firms have
excess of liquidity in hand, it should not even be too lower as well. In 2012 the series starts with
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a median value of 0.7803981 ends with a value of 0.85032959 in 2022. The pharmaceutical and
food industry has an overall tendency of less liquidity.

.
Inventory conversion period (ICP):
Inventory Conversion Period (1CP): The number of days between the time raw materials are
purchased and the time the finished goods are sold is indicated by the inventory conversion
period. The faster a raw resource can be transformed into a marketable good, the better it is.
The following graph displays the median ICP values for businesses in the pharmaceuticals and
food sector from 2012 to 2022:

Median Inventory Conversion Period

450
400
350
300
Food And Allied
250 Pharmacuticals
200
150
100
50
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure2: Inventory conversion period of firms In Pharmaceuticals and Food

From the graph plotted above, it can be seen for pharmaceutical industry that in 2012 the
series starts with a median value of 123.90 days and ends with a value of 111.10 days in 2022.
On the other hand for Food industry that in 2012 the series starts with a median value of
133.72 days and ends with a value of 270.3927273 days in 2022. For both the industries, the
values are below 200 days which means the firms in both the industries take less than a year to
convert their inventories into sales.
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Receivable Conversion Period (RCP):

Receivable conversion period refers to the time that is required to collect cash for the sales
made on credit. The lower the days required, the faster it is to convert the credit sales into
cash.

Days Sales Outstanding

160

140

120

100
Food
Pharmacuticals
80

60

40

20

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure3: Median of Days Sales Outstanding

From the median values it can be seen that the series starts with a value of 77.06 in 2012 and
ends with a value of 65.27 in 2022 for Pharmaceutical Industry showing a little inconsistent still
dominating downward trend. It means that the time required to convert receivable into cash is
decreasing gradually. For the food industry the series starts with a value of 21.78 in 2012 and
ends with a value of 65.67 days in 2022 showing an inconsistent trend. The median values
indicate that the receivable conversion period of pharmaceuticals is below 80 days on an
average.
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Cash Conversion Cycle (CCC):

From the graph plotted below, it can be seen that the median values of CCC for
Pharmaceuticals industry in the year 2012 is 191.97 days and at the end of 2022 the
value140.34 days. This means that the overall tendency of this industry is comparatively
consistent with some fluctuations. The lower the cycle is the better, as it suggests the speed of
converting the resources and investments in inventory into cash. the food industry shows a lot
of fluctuation and the trend is stable and portraying a dominating upwards trend.

Median of Cash Conversion Cycle

500
450
400
350
300 Food & Allied
250 Pharmacutical
200
150
100
50
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Figure
4: Median of Cash Conversion Cycle
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Payable Deferral Period (PDP):

The payable deferral period shows how capable the management of a firm is in terms of
delaying payments to its debtors.

Payable Deferral PeriodT

160

140

120

100 food & Allied

pharmacuticals
80

60

40

20

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Figu
re 5: Median of Payable Deferral Period
For pharmaceuticals, in 2012, the value is 29.51 days and at the end of 2022 the value is 26.94
days. The median values of Food industry show a huge fluctuation owing to the practices of
different companies to delay payments and utility bills for a very long time. In 2021 its median
value was 91.93 and in 2022 was 48.64.

6. Correlation Matrix:
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Correlation is a statistical measure that illustrates how much two or more variables fluctuate in
relation to one other. A positive correlation exists when two variables rise or fall at the same
time; in a negative correlation, one variable rises while the other falls. The range ranges from -1
to 1, with -1 indicating a strong negative relationship and +1 indicating a strong positive
relationship.

BEP LnTA Age CCC QuickR~o DSO ICP

BEP 1.0000
LnTA -0.1541 1.0000
Age 0.0682 0.4268 1.0000
CCC -0.1633 -0.0665 -0.2789 1.0000
QuickRatio -0.0118 0.2778 -0.0006 0.0825 1.0000
DSO -0.0001 0.1787 -0.1748 0.5774 0.1254 1.0000
ICP -0.0106 -0.0183 -0.0964 0.1483 -0.1757 0.1502 1.0000
PDP -0.0372 -0.1107 0.0599 -0.0076 -0.1429 0.1408 0.8090

PDP

PDP 1.0000

By analyzing the correlation matrix of the above dependent variable BEP with respect to control
variables LnTA and Age, we could form an analysis. Here, although we can see that there is a
strong positive relation between RCP and CCC but it will not be considered significant as we are
analyzing the individual relation between each independent variable with the dependent
variable

Regression Analysis:
The regression equation is as follows based on the hypotheses to be tested:

BEPit= αit + β1WCit+ β2Ln TAit + β3Ageit +it

Where, BEP = Basic Earning Power

α = Constant

WC= Working Capital Indicator; can be either of the following:

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CCC = Cash Conversion Cycle

QRA = Quick Ratio

RCP = Days Sales Outstanding

ICP= Inventory Conversion Period

PDP= Payable Deferral Period

Ln TA = Log of Total Assets

Age = Age of the company

β1= the degree of change in BEP for every 1unit of change in Working Capital Indicator

β2= the degree of change in BEP for every 1unit of change in the log of total assets

β3= the degree of change in BEP for every 1unit of change in the age of the company

=Residual

6.1 . Hausman Test:

Hausman test is used to see if fixed effects model or random effects model is appropriate for
the data set. If the p value > 0.05 then random effect model is selected. If p value < 0.05 then
fixed effect model is selected.
Coefficients
(b) (B) (b-B) sqrt(diag(V_b-V_B))
fe re Difference Std. err.

LnTA -.1031264 -.0390931 -.0640333 .0173405

CCC -.0002928 -.000244 -.0000487 .0000807

Fixed-effects (within) regression: Fixed-effect regression rejects the null hypothesis and selects
the alternative hypothesis. Here, six different variables have been used as an indicator of
Working capital and the regression analyses are as follows:
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6.2. Testing Impact of CCC on BEP :

BEP Coefficient Std. err. t P>|t| [95% conf. interval]

LnTA -.1031264 .0227711 -4.53 0.000 -.1481325 -.0581203

Age .0058638 .002218 2.64 0.009 .0014801 .0102475
CCC -.0002928 .0001282 -2.28 0.024 -.0005462 -.0000393
_cons 2.235626 .4664508 4.79 0.000 1.313705 3.157547

sigma_u .19070754
sigma_e .25424819
rho .36005172 (fraction of variance due to u_i)

Regression shows that CCC and BEP have negative correlation for the firms of Pharmaceuticals
and Food industry. The relationship is significant as p value is less than .05. Age has positive
impact on BEP and is statistically significant. This means the firms become more efficient as
they age. Ln TA has negative relationship with BEP and the impact is also statistically
insignificant.

6.3. Impact of Quick Ratio on BEP:

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BEP Coefficient Std. err. z P>|z| [95% conf. interval]

LnTA -.0390931 .014759 -2.65 0.008 -.0680203 -.010166

CCC -.000244 .0000997 -2.45 0.014 -.0004393 -.0000487
_cons 1.060586 .3310428 3.20 0.001 .4117544 1.709419

sigma_u .07198096
sigma_e .25941089
rho .07149002 (fraction of variance due to u_i)

Regression shows that Quick Ratio and BEP have positive correlation for the firms of
Pharmaceuticals and Food industry. The relationship is insignificant as p value is greater
than .05.

6.4. Impact of RCP on BEP:

BEP Coefficient Std. err. t P>|t| [95% conf. interval]

LnTA -.1127198 .0232629 -4.85 0.000 -.158698 -.0667416

Age .0064386 .0022484 2.86 0.005 .0019947 .0108826
QuickRatio .0043071 .0077633 0.55 0.580 -.0110366 .0196509
_cons 2.359502 .4782132 4.93 0.000 1.414333 3.304671

sigma_u .18528574
sigma_e .25850335
rho .33938882 (fraction of variance due to u_i)

Regression shows that RCP and BEP have negative correlation for the firms of Pharmaceuticals
and Food industry. This means that increase in RCP decreases BEP which is in line with the
alternative hypothesis. The relationship is significant as p value is less than .05.

6.5. Impact of ICP on BEP:

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BEP Coefficient Std. err. t P>|t| [95% conf. interval]

LnTA -.122209 .0234509 -5.21 0.000 -.1685589 -.0758592

Age .0067628 .0022279 3.04 0.003 .0023594 .0111663
DSO .0003668 .0001901 1.93 0.056 -8.87e-06 .0007425
_cons 2.518372 .478533 5.26 0.000 1.572571 3.464173

sigma_u .19075032
sigma_e .25551718
rho .35786365 (fraction of variance due to u_i)

Regression shows that ICP and BEP have negative correlation for the firms of Pharmaceuticals
Food industry. This means that increase in ICP decreases BEP which is in line with the
alternative hypothesis. The relationship is significant as p value is less than .05.

6.6. Impact of PDP on BEP:

BEP Coefficient Std. err. t P>|t| [95% conf. interval]

LnTA -.1122283 .0231223 -4.85 0.000 -.1579287 -.066528

Age .0064417 .0022486 2.86 0.005 .0019974 .010886
PDP -.0000381 .0000679 -0.56 0.576 -.0001723 .0000961
_cons 2.359864 .4781821 4.94 0.000 1.414756 3.304972

sigma_u .18583249
sigma_e .25849732
rho .34072182 (fraction of variance due to u_i)

The F value = 0.0000 which is less than 0.05 and hence the model is statistically valid.
Regression shows that PDP and BEP have negative correlation for the firms of Pharmaceuticals
and Food industry. This means that increase in PDP decreases BEP which is not in line with the
alternative hypothesis. The relationship is not significant as p value is less than .05
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7. Major Findings:

Variable Expected Sign Actual Sign Significance

Age Positive Positive Significant
LnTa Postive Negative Insignificant
CCC Negative Negative Significant
Quick Ratio Negative Negative Significant
DSO Negative Negative Significant
ICP Negative Positive Significant
PDP Positive Positive Significant

8. Conclusion: The main goal of this study was to evaluate how companies in the Dhaka
Exchange-listed Pharmaceutical and Food industries manage their working capital and how
such management affects the efficiency of their operational operations. The main
conclusions of this study are that working capital management significantly affects a
company's overall success. Effective management of a company's working capital frequently
results in improved performance. Many factors, including cash conversion cycles, days sales
outstanding, inventory conversion times, and the company's age, have consistently shown
importance in affecting profitability. Several parties may use the study's findings, but
investors in particular might use them to find viable investment targets with reliable
operations. Several parties may use the study's findings, but investors in particular might
use them to find possible investment targets with reliable working capital management
procedures. This study can enlighten business executives, employees, lawmakers,
regulators, analysts, and investors about the effects of working capital management on a
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company's success in the Pharmaceutical and Food sectors. In conclusion, this research can
serve as a helpful resource for upcoming researchers as a secondary source of knowledge.