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Impact of Working Capital Management on the Profitability of Firms: Case of Pakistan’s Cement Sector

Salman Sarwat 1, Danish Iqbal 2, Baseer A. Durrani 2, Khalid H. Shaikh 2, and Farhana Liaquat 2
1. BBSUL, Karachi, Pakistan
2. Bahria University, Karachi Campus, Pakistan

Abstract—Working capital is the life blood for an organization; no business can be run successfully without it. Since there is an inverse relationship between liquidity and profitability therefore a firm should maintain a delicate balance of working capital so that smooth operations can be conducted without disturbing the profitability. There are studies proving both, relevancy and irrelevancy of working capital management with profitability. Recently, researchers have analyzed working capital management component wise. The aim of this study is also to find out the component wise connection between the effective management of working capital and productivity in the context of Pakistan’s cement sector. Panel data of 18 companies listed in KSE from cement sector from 2007 to 2011 is collected. Profitability of Companies, being dependent variable, is gauged through Return on assets (ROA). Efficiency of working capital management is calculated through six accounting ratios. Panel Least square method of regression is applied for analysis. Results suggest that assets turnover ratio (ATO), current ratio (CR) and size of the firm (SLS) have positive and significant affiliation with the return on assets (ROA). Inventory, account receivable and payable, the most important elements of working capital, found insignificant. Thus, it can be inferred from this research that in cement sector of Pakistan, efficiency of working capital management does not play any significant role in enhancing the profitability of firms.

Index Terms—efficient working capital management, components of working capital, profitability

Cite: Salman Sarwat, Danish Iqbal, Baseer A. Durrani, Khalid H. Shaikh, and Farhana Liaquat, "Impact of Working Capital Management on the Profitability of Firms: Case of Pakistan’s Cement Sector" Journal of Advanced Management Science, Vol. 5, No. 3, pp. 238-244, May 2017. doi: 10.18178/joams.5.3.238-244
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