Keyword

Working capital, Inventory turnover in days, Average collection/payment period, Cash conversion cycle, Gross operating profitability

Abstract

Purpose: The main objective of the study is to examine whether there is an effective management over components of working capital in the manufacturing sector of Pakistan. 
Design/Methodology: Data is collected from the annual reports of 94 Pakistani non-financial firms listed on Pakistan Stock Exchange (PSX) for the period of 2011- 2016. Fixed Effects methodology is employed in the study after determining the best fit model through the Hausman test, and effectiveness of working capital management is gauged through the impacts on profitability of the firm.
Findings: The results show that inventory turnover, average collection period and cash conversion cycle have an insignificant relationship with profitability, indicating that working capital management (WCM) is not important in the manufacturing sector. It appears levels of current assets are maintained to support current ratio and solvency to sustain the high levels of debt financing.  However, average payment period has a significant negative association with profitability demonstrating that firms may be managing working capital through payables, where reduction in payables increase profitability through better trade and cash discounts and timely supplies.  Therefore, it is evidenced that management focuses on the liabilities side of the WCM equation and maintains current assets for other purposes.
Practical implication: The results provide insights into manufacturing sector practice of maintaining levels of current assets as cushion against financial and operational risks, and the managing of working capital requirements through payables. It provides banks and other financial institutions a perspective into the working capital behavior of the manufacturing sector.
Originality statement: The paper provides innovative insights into the manufacturing sector practice of focusing on the current liabilities to manage working capital and maintaining levels of current assets as cushion against risk and to support borrowings. It suggests that in this sector, the conventional working capital practices are not applied.
 


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