Working Capital Management

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MP A R
Munich Personal RePEc Archive

Affect of Working Capital Management on Firms Profitability in Sugar Industry of Pakistan Zafar Ullah Malik and Athar Iqbal
Iqra University - Main Campus - Karachi - Pakistan

1. May 2012

Online at http://mpra.ub.uni-muenchen.de/41436/ MPRA Paper No. 41436, posted 19. September 2012 11:40 UTC

Affect of Working Capital Management on Firms Profitability in Sugar Industry of Pakistan (Zafar Ullah Malik and Athar Iqbal)

Abstract
Management of working capital performs a very vital part in the performance of firms in sugar industry. This thesis tests the impact of working capital management on firm’s profitability in sugar industry of Pakistan for years 1999 to 2009. To analyze this, data of 19 sugar mills which are listed at Karachi Stock Exchange is used. The result shows that the Sales Growth, Current Ratio, No of Days Inventory and No of Days Accounts Payables are significantly affecting the profitability of the firms while Sales, Gearing Ratioand No of Days Account Receivables are insignificant in the research. Pearson Correlation and Multiple Linear Regression are used in this research to study the relationship between variables.

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INTRODUCTION
1.1 Overview
In manufacturing sector of Pakistan 70% of goods are produced by the large scale industries which include mainly cement, automobiles, sugar, textile, oil and gas and etc. As the manufacturing sector includes so many sub sectors therefore in depth analysis is required for the industry as a whole and also of every firm at micro level. Though agriculture contributes to the major chunk in the economy of Pakistan but Sugar sector also plays a vital role. Sugar sector is the second biggest sector in the manufacturing sector which contributed 2% to the overall GDP of Pakistan and 13% to manufacturing sector. Sugarcane production has increased by 12 percent to 55.3 million tons in 2010-11 from 49.4 million tons last year whereas sugar production increased by 3.8 million ton showing an increase of 26.5 % (Economic Survey of Pakistan, 2011). One of the main sectors in manufacturing sector is sugar sector. More than 100,000 labor works in sugar sector and more than 9 million people earn their living through the production of sugarcane. Mills producing sugar in Pakistan are capable enough to produce country’s requirement for next 3 years. Government should not entertain any application of opening a new sugar mill rather they should concentrate on financing the working capital for the 69 firms working in Pakistan which desperately in need of that financing. Commercial bank will be approximately be needing Rs. 2.7 billion to finance the working capital of these working sugar firms (Rizvi, 2009). Most of the sugar firms are owned by the persons who have political influence and were built by those development finance institutions which were themselves facing

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working capital issues out of few have already been closed and few are near to be closed. Further shutdown of sugar mills will result in loss of national assets, less sales tax and unemployment will increase. There has been a crisis in the sugar industry of Pakistan especially the sugar mills in Sindh from last 3 years. This crisis has affect owners of the sugar mills, employees of the sugar mills and raw material suppliers. As the profit of these sugar mills are not improving which result in low value to shareholders and affects the owners of sugar mills. Suppliers of raw material complain of not getting good prices of raw material and very late payments from the sugar mills and in last the employees of sugar mills are not getting paid because profits has converted in to negative. Sugar mills are facing severe liquidity problems they don’t have enough cash to pay a good price to suppliers and above all pay their suppliers on time. This problem has gone so worst that they are not able to pay their legal...
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