Impact of Working Capital Management on Profitability: A Case of Pakistan Textile Industry.

Abstract

To be successful in short run, management of working capital was significantly important
for firms. Improper management of working capital negatively affects the firm profitability.
Optimum level of working capital can maximize firm value and ultimately profits. The
current study was taken to examine the impact of working capital and its components on
return the assets of Pakistan Textile Industry. Return on assets was used as a proxy for firm
profitability. For this purpose annual data of 46 listed companies were taken from textile
industry as a sample for a period of (2003 -2009).
For the quantification relationship of return on assets was taken as a dependant variable
and number of day's account receivable, number of day's inventory, number of day's
account payable and cash conversion cycle were taken as independent variables. The data
was in panel form therefore, the ordinary least square method was used. The results revel
that all the independent variables, number of day's account receivable, number of day's
inventory, number of day's account payable and cash conversion cycle negatively affected
the dependant variable return on assets. Thus, it was concluded that shorten the period
from sales to cash receipt, high the firm's ability to generate profits.