This document summarizes a research study that examined the impact of working capital management on the profitability of firms in Pakistan under different business cycles. The study found that cash conversion cycle and accounts receivable showed a negative relationship with firm profitability in different cycles. Inventory had a positive impact on profitability in boom periods. Accounts payable positively impacted profitability in recessions. The study concluded that efficient working capital management can increase firm profitability.

1. IMPACT OF WORKING CAPITAL MANAGEMENT ON
FIRMS’ PROFITABILITY IN DIFFERENT BUSINESS
CYCLE: Evidence from Pakistan
Nida Shah

2. GROUP NUMBER 2
Nuzzar Naseem 12243
Noman Hashmi 11081
Mohammad Shiraz 13035
Syed Rizwan Ali 16222
Wajahat Hussain 12542
SUBJECT: FINANCIAL MANAGEMENT POLICIES
MBA
4/30/2017
TEACHER: SIR RAHEEL BHAGAR

3. CONTENTS
 Summary
 Presentation Slides
 Research Paper

4. INTRODUCTION
 To maximize the shareholder's value, profit and survival of
business, companies need to find out all the reasons that
could affect their business profitability.
 Working capital management ensure the availability of
sufficient cash to ensure uninterrupted functioning of
business in day to day operations.

5. INTRODUCTION
 Working capital management is depended on
management of cash conversion cycle.
 Growth of Pakistan's economy is dependent on the
firm's operating in different sectors. When Industrial
growth increases GDP also increases and vice versa.

6. •The purpose of this study was to find out the
impact of working capital management on the
profitability of firms under different business
cycles.
•No empirical study has been made before in
Pakistan addressing this topic.
RESEARCH PROBLEM

7. RESEARCH QUESTIONS
 How cash conversion cycle impacts on the profitability
of non financial firms under different business cycle?
 What is the impact of the business cycle on the
working capital management and the profitability
relationship?

8. RESEARCH OBJECTIVES
 To investigate the influence of the working capital
management on firm's profitability under different
business cycles in 65 non financial firms listed in
KSE-100 for period 2004-2013.
 To analyze the long run relationship among variables,
to analyze long run coefficients.
 To analyze the impact of business cycle on working
capital management and profitability relationship.

9. LIMITATION
 Limited to listed 65 non financial firms at KSE-100

10. LITERATURE REVIEW
1) Developed Countries:
 Shin and Soenen 1998
 Enqvist Graham and Nikkimen 2014
2) Developing Countries:
 Shah and Sana 2005
 Addae and Nyarko Baasi (2013)

11. Developed Countries:
Shin and Soenen 1998
Examined the relationship between working capital
management and firm's profitability using data set of American
firms for period 1975-1994
Result:
negative relationship between cash conversion cycle and firm
profitability.
Enqvist Graham and Nikki men 2014
18 years data of non financial Finish companies to analyze
working capital and profitability relationship.
Result:
Business cycle affect the working capital management and
profitability relationship and profitability increases in recession
period.

12. Developing Countries:
Shah and Sons 2005
Investigated the impact of working capital on the
firm's profitability by using the data set of listed
companies on oil and gas sector of Pakistan for the
period of 2001-2005
Results:
They reported the negative relationship exists between
inventory, account receivable, cash conversion cycle,
sales growth and gross profit where as positive
relationship between accounts payable and gross
profit.

13. Addae and Nyarko Baasi (2013)
Applied the regression and correlation analysis on the
data of non listed Ghanaian firms comprising of years
2004-2009
Results
They reported that inverse association exists between
profitability of firms and the cash conversion cycle.

14. RESEARCH METHODOLOGY
 10 years annual panel data 2004-2013 of 65 non-financial firm
listed in KSE-100 index of Pakistan.
 Hadri panel unit root test has been used to scrutinize the stationary
properties of variables.
 To analyze the long run relationship among variables,
Pedroni (1999) panel co integration technique has been used to
analyze the long run relationship between our considered variables.
The Pedroni's panel co-integration approach has several advantages
upon other co integration methods of panel data. This approach
controls the biasness from firms size and also solves the issue of
heterogeneity.

15. RESEARCH METHODOLOGY
 Kao (1999) residual based panel co-integration test is used
to analyze the long run relationship between cash
conversion cycle and its components on the non-financial
firms profitability.
 Regression analysis was used to analyze the long run
coefficients. Different interaction terms of cash conversion
cycle, inventory, account receivable and account payable
used to more validate their impact on profitability of non
financial firm in different cycles.

16. FUNCTIONS
After reviewing the empirical studies, the model to analyze
the relationship between working capital management and
non-financial firms profitability in different business cycles is
determined by following functions:
 ROAi,t = β0 + β1CCCi,t + β2CRi,t + β3SALi,t + β4BY
Ci,t + i,t
 ROAi,t = β0 + β1INVi,t + β2CRi,t + β3SALi,t + β4BY Ci,t
+ i,t
 ROAi,t = β0 + β1AARi,t + β2CRi,t + β3SALi,t + β4BY
Ci,t + i,t
 ROAi,t = β0 + β1APi,t + β2CRi,t + β3SALi,t + β4BY Ci,t
+ i,t

17. Where,
 t is the error term, i represent the number of firms in the
panel and t represents the number of observations over
time.
 ROA is the return on assets and expressed in percentage
(%),
 CCC is the cash conversion cycle which is measured in
days,
 INV is the inventories in days,
 AAR is the accounts receivable in days,
 AP is the Account payable in days,
 CR is the current ratio and expressed in percentage (%),
 BYC is the business cycle which is used as a proxy for
recession period and boom period.

18. HYPOTHESIS OF STUDY
Pedroni panel co integration
Ho=No co integration between all considered variables
Ha=Co integration exist between all variables
Ho was rejected in favor of Ha ie. Co integration exist
between all variables
Long run relationship exists and all variables are co
integrated.

19. Kao residual based panel co integration
 To analyze long run relationship between cash
conversion cycle and its components on non financial
firms profitability.
 Ho=No co integration exist among series of variables
 Ha=Co integration exist between variables
Ho rejected accepting Ha, co integration and long run
relationship exist between variables.

20. Regression Analysis Findings
 Cash conversion cycle has a significant negative
impact on the profitability.
 Inventory and profitability (Negative relationship or
inverse relationship)
 Accounts payable and profitability (Negative
relationship or inverse relationship)

21. INTERACTIVE TERMS
 Interactive terms of cash conversion cycle, inventories,
account receivable, accounts payable in the full sample
of non financial firm.
 Analyzing influence of business cycle(recession and
boom) on the relationship of working capital
management and profitability.

22. RESULTS OF INTERACTION TERMS:
 Accounts receivable and profitability (negative
relationship both in boom and recession)
 Accounts payable and profitability(negative
relationship in boom)
 Accounts payable and profitability(positive
relationship in recession)
 Current ratio has less impact on profitability of non
financial firm.

23.  Sales has significant impact on non financial
profitability
 In all the models, current ratio(CA/CL) shows an
insignificant impact on non-financial firms'
profitability.
 Sales have a significant impact on non-financial firms'
profitability.

24. CONCLUSION
 Cash conversion cycle and account receivable show the same
negative relationship with firms profitability in different
business cycle, where as the integration term of inventory
shows a significant positive relationship with firms
profitability in the boom period.
 More over the interaction term of account payable shows a
significant positive relationship with firms' profitability in the
recession period.

25. CONCLUSION
 Thus for increasing profitability firms should minimize
cash conversion cycle.
 A firm should manage working capital for profitability
of firms.
 At recession firms should delay payments at the
recession but at boom, firms should pay their liabilities
as soon as possible

26.  In the recession era firms should keep significant amount of
cash available for day to day business activities whereas,
the boom period companies should use excessive cash to
reinvest in short run projects.
 In boom firm should keep inventory in stock to make it
available for expected sales, whereas at recession firm
should shift their policy to JIT concept to avoid the holding
costs.
 Account receivable and profitability are having a negative
relationship in both recession and boom.
 Hence it is concluded by this research that one of the
solution to increase profitability of firm is, proficient
management of the working capital.
CONCLUSION

27. SHORTCOMINGS
The study doesn't indicate to the specification of data
to a sector, which is taken as a sample of non financial
firms. Therefore for further study there is ambiguity
that in what sector we could further research.