Working capital management
International Journal of Business and Social Science
Vol. 2 No. 22; December 2011
Analyzing the Impact of Working Capital Management on the Profitability of
SME’s in Pakistan
Mustafa Afeef
Lecturer
Iqra National University
Phase 2, Hayatabad, Peshawar
Pakistan
Abstract
Working Capital Management has an overriding impact on a firm’s profit performance. However, it is expected that an efficient management of working capital might have a more profound impact on profitability of small enterprises than on the performance of larger companies since a substantial proportion of the total assets of small and medium firms is constituted of the Current Assets and a sizeable fraction of their total liabilities is consisted of the Current Liabilities. This study, therefore, aims to determine the potential effect of working capital management on the profit performance of Small and Medium sized firms in Pakistan. To investigate, effect of working capital management was determined on profitability of a sample of 40 Pakistani small and medium enterprises (SME’s) listed in Karachi Stock Exchange for a period of six years from 2003 to 2008 which led to a total of 240 firm-year observations. Findings from the analyses suggested that indicators of working capital management had a perceptible impact on profitability of firms under study.
Keywords: Working Capital Management, Cash Conversion Cycle, Inventory Conversion Period, Receivable
Collection Period, Payable Deferral Period, Return on Assets, Operating Profit to Sales
1. Introduction
Working Capital Management is one of the most imperative and crucial aspects of short-term financial matters of an organization. Firms of all sizes demonstrate sensitivity of their profit performance to the efficient management of their working capital. However, which category of firms (small or large) exhibit relatively more responsiveness to proficient working capital management is obscure. Presumably small firms and
Vol. 2 No. 22; December 2011
Analyzing the Impact of Working Capital Management on the Profitability of
SME’s in Pakistan
Mustafa Afeef
Lecturer
Iqra National University
Phase 2, Hayatabad, Peshawar
Pakistan
Abstract
Working Capital Management has an overriding impact on a firm’s profit performance. However, it is expected that an efficient management of working capital might have a more profound impact on profitability of small enterprises than on the performance of larger companies since a substantial proportion of the total assets of small and medium firms is constituted of the Current Assets and a sizeable fraction of their total liabilities is consisted of the Current Liabilities. This study, therefore, aims to determine the potential effect of working capital management on the profit performance of Small and Medium sized firms in Pakistan. To investigate, effect of working capital management was determined on profitability of a sample of 40 Pakistani small and medium enterprises (SME’s) listed in Karachi Stock Exchange for a period of six years from 2003 to 2008 which led to a total of 240 firm-year observations. Findings from the analyses suggested that indicators of working capital management had a perceptible impact on profitability of firms under study.
Keywords: Working Capital Management, Cash Conversion Cycle, Inventory Conversion Period, Receivable
Collection Period, Payable Deferral Period, Return on Assets, Operating Profit to Sales
1. Introduction
Working Capital Management is one of the most imperative and crucial aspects of short-term financial matters of an organization. Firms of all sizes demonstrate sensitivity of their profit performance to the efficient management of their working capital. However, which category of firms (small or large) exhibit relatively more responsiveness to proficient working capital management is obscure. Presumably small firms and