Interrnship Report #Jobair Bin Habib #110084

Working Capital Management
on Firm’s Performance
A Study on BASF BANGLADESH LIMITED

A Report on
Working Capital Management on Firm’s Performance
A Study on BASF BANGLADESH LIMITED
Prepared for
The Chairman
Department of Finance & Banking
Prepared by
MD. Jobair Bin Habib
Student ID: 602
Reg. ID: 30748, Exam Roll: 110084
BBA Program, Department of Finance & Banking
Jahangirnagar University
Savar, Dhaka
March 29, 2015

Letter of Transmittal
29 March 2015
The Chairman
Savar, Dhaka
Through: Mr. Md. Yousuf Harun
Subject: Submission of the internship report.
Dear Sir:
I am pleased to present you with the paper ‘Working Capital Management on Firm’s Performance: A
Study on BASF BANGLADESH LIMITED’ as the final paper based on the internship program at
BASF Bangladesh Ltd.
Working capital management involves the relationship between a firm's short-term assets and its short-
term liabilities. The goal of working capital management is to ensure that a firm is able to continue its
operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing inventories, accounts
receivable and payable, and cash.
This paper shows all related work, analysis and possible application of academic theories in possible
scenarios.
I hope the paper will satisfy your inquisitive mind.
Yours sincerely,
Md. Jobair Bin Habib
Exam ID- 110084
BBA program, Batch- 02

Foreward
At the very beginning I would like to admit that, I retrieved all the information and data from BASF
SE, Germany with a view to understanding and analyzing them in the perspective of working capital
management. Question may arise on the localized firm about not showing the information related to
our country. Well, this could have been done but with little extent. The local is restricted by the parent
company to provide any financial information to third party, without any proper consent both from the
proper legislation of the country and BASF SE, Germany. This is the sole reason I chose BASF SE’s
data over the local one. So that, the paper can contains a bouquet of quality interpretations. Still I added
a portion naming credit management where I utilized the only data set that I was permitted to develop
from. My objective of the paper, in a few words, is simply find the correlation of different working
capital ratios with farm’s performance indicators i.e. net income, return on assets or return on equity.
I could manage to achieve this objective only working on the data from the financial statements from
BASF SE, Germany, which is the parent company of BASF Bangladesh limited.
I would like to express my gratitude to my supervisor Mr. Md. Yousuf Harun for his great support
during my internship research. He is the man behind this work, who simply shaped this paper with
resourcefulness, skill and of course with 24/7 support.
I would also like to thank to all of those people, without the help of those people it was not possible to
compile all the information and to give a structure, which this paper contains, in a structured and
flawless manner. Mr. Ikramul Hoque, CMA, the Senior Manager of Finance and Accounts, BASF
Bangladesh Limited, a heartfelt thanks to him for giving me the opportunity to work under him in a
great corporation with a beautiful, friendly and aesthetic corporate culture. He taught me several things
that I think can usher my path to future success. He taught me what punctuality and hard-working is.
I was used to be a little bit of procrastinating character, but the teaching and motivation from him lift
me up to a better level where I can now focus on finishing my responsibilities with care and preemptive
manner. Mr. Md. Kamruzzaman Ansary, Assistant Manager, Accounts & Finance, BASF Bangladesh
Limited, who was the great helping hand, showed me the way BBL goes in. He helped me to
thoroughly understand the functions of MS Excel, which I used in this paper to construct the analysis
part with many easy shortcuts and of course professionally. I wish every class should have a great
teacher like him, who can explain the Theory of General Relativity as simply as pie. I would also like
to thank Mr. Naimul Islam, Executive, BBL, for his continuous support in the firm. He actually showed
the corporate culture to me. He was friendly and I could express my thinking to him easily. From
photocopying to advanced accounting and auditing, every single job that a person have to do in an
organization was his instruction.
At last- I would say that I am grateful to them for what they gave me.

iii
Table of Contents
Table of Tables.................................................................................................................................................iv
Table of Figures ................................................................................................................................................v
Synopsis of the Study..........................................................................................................................................vi
1. Background.................................................................................................................................................. 1
1.1. Introduction......................................................................................................................................... 1
1.2. Objective of the Study......................................................................................................................... 1
1.3. Research Questions............................................................................................................................. 2
1.4. Significance of the Study ..................................................................................................................... 2
1.5. Organization of the Research.............................................................................................................. 2
2. Literature Review ........................................................................................................................................ 3
To summarize: ............................................................................................................................................. 6
3. Data and Research Methodology................................................................................................................ 8
3.1. Research Hypothesis ........................................................................................................................... 8
3.2. Sample Period...................................................................................................................................... 8
3.3. Sources and Collection of Data: .......................................................................................................... 9
3.4. Definition of Variables......................................................................................................................... 9
3.5. Methodology ..................................................................................................................................... 10
3.5.1. Research Design ........................................................................................................................ 10
3.5.2. Analysis...................................................................................................................................... 10
3.5.3. Limitations................................................................................................................................. 11
3.6. Company Overview ........................................................................................................................... 11
4. Working Capital Management................................................................................................................... 13
5. Analysis...................................................................................................................................................... 19
5.1. Current Assets ................................................................................................................................... 19
5.1.1. Cash Management..................................................................................................................... 19
5.1.2. Managing cash Inflows and Outflows........................................................................................ 20
5.1.3. Forecasting ................................................................................................................................ 20
5.1.4. Management of Marketable Securities..................................................................................... 23
5.1.5. Management of Receivables ..................................................................................................... 25
5.1.6. Inventory Management............................................................................................................. 26
Objectives of Inventory Management....................................................................................................... 27
Factors Determining Optimum Level of Inventory.................................................................................... 28
Tools of Inventory Management............................................................................................................... 28
5.2. Current Liabilities............................................................................................................................... 30

iv
5.3. Working Capital Ratio........................................................................................................................ 30
5.4. Current Ratio, Quick Ratio, Current Assets/Total Assets & Current Liabilities/Total Assets ............ 32
5.5. Cash Ratio.......................................................................................................................................... 33
5.6. Dividend and Investment .................................................................................................................. 34
5.7. Capital Structure................................................................................................................................ 36
6. Regression Analysis ................................................................................................................................... 38
6.1. Net Income and Working Capital ...................................................................................................... 38
6.2. Net Income and Current Assets & Liabilities..................................................................................... 38
7. Correlation, working capital performance and industry performance..................................................... 41
8. Conclusion ................................................................................................................................................. 44
9. Recommendation...................................................................................................................................... 47
References .........................................................................................................................................................i
Books..................................................................................................................................................................iii
Appendix 1...........................................................................................................................................................iv
Appendix 2.........................................................................................................................................................viii
Appendix 3...........................................................................................................................................................xi
Appendix 4..........................................................................................................................................................xii
Appendix 5.........................................................................................................................................................xiv
Data of different variables.........................................................................................................................xiv
Pearson’s Correlation Matrix.....................................................................................................................xiv
Table of Tables
Table 1: Working capital Performance and Firm Performance........................................................................... 7
Table 2: Financial Statement 201...................................................................................................................... 12
Table 3: Detailed relationship among the Components of Current Assets & Liabilities and Net Income ........ 40
Table 4: Correlation, working capital performance and industry performance ............................................... 41
Table 5: CCC Pearson’s Correlations.................................................................................................................. 42
Table 6: Hypothesis Results............................................................................................................................... 43

v
Table of Figures
Figure 1: Level of WC, Current Assets & Current Liabilities .............................................................................. 18
Figure 2: Cash or Cash Equivalent ..................................................................................................................... 20
Figure 3: Some Possible Cash Receipts.............................................................................................................. 21
Figure 4: Some Cash Disbursements ................................................................................................................. 23
Figure 5: Marketable Securities......................................................................................................................... 24
Figure 6: ACR Turnover...................................................................................................................................... 25
Figure 7: ACR Turnover in Days......................................................................................................................... 26
Figure 8: Inventory Turnover............................................................................................................................. 29
Figure 9: Inventory Turnover in Days ................................................................................................................ 29
Figure 10: Working Capital of BASF SE .............................................................................................................. 31
Figure 11: Current, Quick Ratio, CA/TA & CL/TA............................................................................................... 32
Figure 12: EPS vs. DPS........................................................................................................................................ 35
Figure 13: Net Income vs. Dividends.................................................................................................................. 35
Figure 14: Debt-Equity Difference..................................................................................................................... 36
Figure 15: Debt Equity Ratio.............................................................................................................................. 37
Figure 16: Value Creation.................................................................................................................................. 44

vi
Synopsis of the Study
Working capital management is the life blood of a company’s day to day activities. It always has a
positive relationship with value addition to firms. If the management of working capital can do
comparatively better, the net profit margin or simply the profitability of the firm will increase.
Working capital management has lately become a better known concept as more and more managers
are starting to realize the benefits that a well-managed working capital can bring. In literature, authors
generally refer to the concept of working capital as- working capital or net working capital.
The objective of a WC manager is to increase the revenue and reduce the costs of related subject
materials. Because the firm’s value depends on it. Firm value increases when the price of existing share
price increases. Higher net income leads to increase in the share price. We know, net income means
more dividends and more dividends means higher EPS. And the value of firm is simply calculated by
market price of per share multiplied by total number of shares outstanding.
The report is designed to achieve the objective- the level of working capital ratio and the correlation
among those ratios with net income, ROE, ROA and other performance indicators.
From the analysis, it is found that- Net income has a very steep tangent with year change. This is
because BASF SE is performing well in the selling area. They have reduced cost and generated more
revenues. The forecasted data shows that the NI will continuously increase. In some years they offered
dividends in a rising manner, suddenly the payment fall of but it was followed by a tremendous
payment in the latest years. This can be related to the NI, because NI increased dramatically in the
recent years. The company is getting back all the receivables.
Although NI is increasing, Gross profit will decline in the next years. This means- Their operating
income will increase, Non-operating income will also increase, Operating and non-operating expense
will decrease or simply all of those particulars indicate that the management is performing well to
reduced cost.
The intense upward trend of working capital means, BASF SE has more cash to pay their short term
liabilities, cash inflow is well functioning. It is forecasted that they have to pay a little to creditors.
Because their accounts payable forecasts a quick downward sloping which obviously is good sign.
The inventory turnover ratio is almost parallel to base, indicating a good performance as we observed
the sales revenue is upward through all the year. Their Inventory Turnover in Days is also increasing
a little bit, which almost seems parallel too. This means their retention ratio of inventories is almost

vii
the same for the years, which also clearly identify their proficiency in successfully selling the products
and also they are producing at a continuous rate but these being stored (this happens because, BASF
SE is a multination company running its business in almost all of the countries in the world- possibly
leading to stick in low sales in many different countries due to unprecedented events and issues),
though other sale ratios shows that sale is increasing. This can also show that- the demand is high in
the market, BASF Bangladesh are producing at a very high rate, their sale is comparatively high in
volumes, but not in the context of inventory turnover ratio. Many of their raw materials, finished goods
etc. are in stock for future sales. This can also be concluded that- for meeting the ongoing demand,
they are producing more and plan to produce more. That is why they are stocking lots of raw materials,
working process and finished goods.
It is not obvious why they are not maintaining any short term investments models like Baumol, Miller-
Orr or Beranek model. They could have used these model to best use of their idle cash by investing
and earn some extra value. Rather they use- contingency approach for short term investments.
Although, BASF is performing well in the context of net income, which has a very positive and steep
trend, it could have been much better if the proper, effective and efficient management of working
capital had occurred in the previous years. They could have introduced lockbox to reduce floatation
cost, Baumol, Beranek or Miller-Orr model to earn extra cash, better forecasting to know the market
demand and respond in accordance with that, JIT or EOQ models to reduce inventory holding cost and
better inventory management.
At last- the correlation grid summarizes the performance of working capital of BASF and industry
indicators. Except for few criteria, all of them match the results found by various academicians in their
research papers.

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1. Background
Working capital management has lately become a better known concept as more and more managers
are starting to realize the benefits that a well-managed working capital can bring. In literature, authors
generally refer to the concept of working capital as, working capital or net working capital.
Total background is discussed in the subsections below. Background is divided into different parts, so
that it becomes easier to understand and specific topics regarding to this background can be found very
easily with a matter of single glance.
1.1. Introduction
In this paper, almost all of the elements of working capital management is going to be discussed. At
first a little description of working capital management is required.
Several scholars defined working capital management with great extent. Arnold defines working
capital as, “the difference between current assets and current liabilities”. After reviewing different
sources about working capital, it has become clear that the definitions taken from Arnold is a very
general definition that is frequent used to define both working capital and net working capital.
Continuing with the concept of working capital management, Jeng-Ren, et al., describes this as
‘companies’ management of their short-term capital”. The short-term capital is here referred to as the
current assets and current liabilities.
This also to be noted that this paper also shows the relevancy of learning from books and corporate
practice of WCM. In this paper, almost all of the elements of working capital management is going to
be discussed and analyzed.
1.2. Objective of the Study
Working capital management concern companies’ management of their short-term capital. The short-
term capital refers to the capital that companies use in their daily operations and it consists of
companies’ current assets and current liabilities. Problem is--- Is the WC portfolio given at any point
enough to run the firm smoothly? This paper has been substantiated in numerous empirical studies.
Since the positive impact of WCM on firm profitability has been substantiated in various empirical
studies, several researchers have recently investigated potential positive correlations of Working
Capital performance that potentially boost firm’s performance.
This paper is designed to accomplish the answer to the former question with an objective, which is-

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To find out the correlation among different indicators of working capital with net income,
profit growth of the company, return on assets, and return on equity, sales and other variables.
1.3. Research Questions
Finding out the level of Working Capital or Net Working Capital along with different indicating ratios
from the financial statements of BASF is the prerequisite of achieving the objective. While achieving
the objective, many other crucial question come that are really needed to be answered with a view to
showing the clarity of the objective. The questions are-
1. What are the indicators of Working Capital that actually will reflect the firm’s short term
performance?
2. Why the so-called-indicators will act as the ‘Indicators’ of working capital?
3. What are the endogenous and exogenous variables in the set of those indicating ratios?
4. What is the intensity and nature of the relation between net income and working capital of
BASF;
 The relationship between Net Income and Working Capital
 The relationship between Current Assets, Current Liabilities and Net Income
 The relationship between Cash Level and Net Income
 The relationship between Inventories and Net Income
 The relationship between Net Income, Accounts payable, Accounts receivable and
Marketable securities
1.4. Significance of the Study
This study can be taken as a guide to the industry managers who are trying to find the relations among
the components of working capital, keeping this in mind that the indicators of working capital can vary
at any point. This paper will help them to summarize all the key components of working capital about
what intensity and what degree of them are affecting the output of a firm in accordance to the change
of the components.
This paper deals with a numerous mathematical calculations, theory and models. Students will find
them very much helpful in their academic work. Teachers can also use this paper to show different
methods to the students, so that the students can understand their text easily.
1.5. Organization of the Research
This paper is assigned by the Chairman, Department of Finance of Banking, Jahangirnagar University,
as an academic requirement which is to be finalized after three months of internship in a reputed

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organization. As I completed my internship in BASF Bangladesh Limited, which is the largest
chemical manufacturing company in Bangladesh, I concentrated unambiguously on the working
capital management of BASF Bangladesh LTD. so that I can best tie the scenario/environment to my
previous academic knowledge. This paper is to be submitted to the Chairman, through the supervisor
on March 29, 2015.
2. Literature Review
The purpose of this literature review is to describe working capital concepts, to outline existing WCM
performance measurement concepts and to identify value drivers that have been identified, analyzed,
and tested. A focus on the operating cycle has always highlighted WCM as a key success factor for a
firm's profitability.
The first paper about the relation between working capital management and firm performance was
published in 1989 and written by Ravindra Kamath (1989).1
It is worth noting that the paper was based
on authors’ investigations on data available in the public domain. While the paper was designed to
examine correlations between working capital measures and firm performance KPIs. The objective of
Kamath's academic work was to compare and contrast traditional static liquidity ratios with dynamic
concepts such as the Cash Conversion Cycle. Moreover, he also investigated the relationship between
these liquidity measures and firm profitability.
However, dynamic ratios such as CCC and NTC did reveal the expected positive correlation in most
cases. For his investigation four years later, Luc A. Soenen (1993) used the net trade cycle as the
endogenous variable and the total return on assets, measured as
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑠𝑡
, as the
exogenous variable.2
For the purposes of his analysis, he classified 20 companies in the timeframe
from 1970 to 1989 into four quadrants, depending on whether the observed net trade cycle and total
return on assets was above or below the median value for that industry. In line with his hypothesis –
the shorter the cash cycle, the higher the profitability – he concluded that, although the cash cycle does
have some influence on the total return on assets, the correlation is not very strong. However, when
analyzing the postulated correlation by industry, he found significant evidence for the negative
correlation in 18 out of the 20 industries. In summary, Soenen concluded that a strong negative
relationship exists between the cash cycle and the total return on assets depending on the type of
industry.
1
Kamath (1989), p. 24-28.
2
Soenen (1993), p. 53-58.

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Following the same basic approach, Soenen (1993) published a further paper in collaboration with
Hyun-Han Shin five years later.3
Their database contained 58,985 firm years in the period from 1975
to 1994. The results confirmed the authors' previous conclusions: The statistics show a significant
negative relationship between NTC and firm performance, represented as
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑠𝑡
. Similarly,
the correlation between the current ratio and firm performance is significantly negative. For that
reason, the authors conclude that reducing the net trade cycle to a reasonable minimum increases
shareholder value.
Jerry L. Stevens (1996) continued the former theory by publishing their article "Corporate Returns and
Cash Conversion Cycles".4
Their main focus was to support the hypothesis that successful
management of a firm's operating cycle triggers superior firm performance. They argued that in the
past management focused mainly on investment and financing decisions, and then the authors wanted
to draw an attention to the day-to-day management of short-term assets and liabilities. In line with
other empirical research in the US, they used the Compustat database with a sample size of 2,718
companies. The exogenous variables used in the model were the return on assets and the return on
equity. For both relationships – between CCC and ROA and between CCC and ROE – the statistics
show a significant negative correlation for all industries except financial services. R² is .0808 for the
first regression and 0.1155 for the second. Introducing a control for size difference increased the
quality of the model: The negative relation is significant for all industries and the R² measure rises to
.3044 and .3145 respectively. (Footnote 4)
Yung-Jang Wang (2002), who, in line with the approach adopted by Jose et al. (1996), showed that
the statistical results again indicate a negative correlation between both ROA and ROE in the firm’s
performance in Japanese and Taiwanese industries.5
The first investigation in the European market was conducted by Marc Deloof (2003).6
He analyzed a
sample of 1,637 Belgian firms using almost the same variables. With regard to firm profitability, he
slightly modified the ROA and ROS ratios used previously, instead using the
KPI=
𝑆𝐴𝑙𝑒𝑠−𝐶𝑂𝐺𝑆
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑠𝑡−𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
. Similarly, he investigated a negative correlation with the CCC.
According to his calculations, the number of accounts receivable, inventory and accounts payable days
correlate negatively to firm performance too. According to Deloof (2003), it was remarkable that
3
Shin/Soenen (1998), p. 37-45.
4
Jose/Lancaster/Stevens (1996), p. 33-46.
5
Wang (2002), p.159-169.
6
Deloof (2003), p. 573-587.

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accounts payable correlate negatively instead of the fact that accounts payables are presumed to reduce
the cash gap. According to Deloof (2003), profitability affects accounts payable days, not vice versa.
In 2006, Lazaridis et al. (2006) investigated the postulated correlation for companies listed on the
Athens Stock Exchange.7
Here again, a negative correlation was established. Deloof and Lazaridis et
al. (2006) both observed a negative correlation between accounts payable and firm profitability,
arguing in the same direction. In conclusion, Lazaridis et al. (2006) advocate greater attention to
working capital management and the optimized handling of the various components of the CCC.
Contrary to the research conclusions presented above, Padachi et al. (2006) published a positive
correlation between CCC and ROA using a fixed asset model.8
First, a very small sample of only 58
companies served as basis for the statistics used. Second, a market with unique conditions was chosen:
Mauritius. Accordingly, Padachi et al. (2006) explain the contradictory results mainly due to the small
firm sizes. They assume that smaller firms maintain a lower fixed asset base and rely mostly on current
assets to increase profits.
Similar correlations between CCC and firm profitability have been analyzed for Pakistan and Turkey
as well. Raheman et al. (2007) and Uyar (2009) correspondingly based their statistical analysis on data
for companies listed on the Karachi and Istanbul Stock Exchanges.9
The results established the
negative correlation.
A diverse measure to analyze working capital performance was used by Eljelly (2004).10
He focused
on the links between both the current ratio and the cash gap and firm performance. Firm performance
is defined in his study as
𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒−𝐷𝑒𝑝𝑟𝑖𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑠
𝑁𝐸𝑡 𝑆𝑎𝑙𝑒𝑠
. Based on his analysis of 29 Saudi
Arabian companies, Eljelly was able to verify the negative correlation between the current ratio and
firm performance. However, the correlation between the cash gap and firm performance was not
significant.
A unique approach has taken by Filbeck et al. (2007).11
Their research focused on whether efficient
working capital management has a positive impact on annual stock market closing price returns and
dividends. A database covering approximately 1,000 companies served as the basis for their statistical
analysis. According to these authors' results, a positive correlation exists between efficient working
7
Lazaridis/Tryfonidis (2006), p. 26-35.
8
Padachi (2006), p. 45-58.
9
Raheman/Nasr (2007), p. 279-300; Uyar (2009), p. 186-193.
10
Eljelly (2004), p. 48-61.
11
Filbeck/Krueger/Preece (2007), p. 18.

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capital management and the return to shareholders in terms of annual stock market closing prices and
dividends.
The most recent paper to focus on the effect of working capital management on firm performance was
published in 2009.12
Nazir et al. (2009) investigated the effect of variables such as the asset structure
or size of a company on firm performance, measured as the ROA. In particular, the authors reviewed
a data set containing 204 companies listed on the Karachi Stock Exchange for six variables: current
assets as a share of total assets, current liabilities as a share of total assets, size of firms, sales growth,
the GDP growth rate and financial leverage. They conclude that the variables current assets as a share
of total assets, firm size and the GDP growth rate correlate positively with the ROA. All the other
variables correlate negatively. Nazir et al. (2009) see evidence that the degree of aggressiveness of an
investment is negatively correlated to firm performance. Profitability increases as the ratio of current
assets to total assets increases. The same applies for the liabilities ratio: The higher the ratio of current
liabilities to total assets, the more aggressive the financing policy. According to the results of the study,
then, an aggressive financing policy yields a negative return on assets.
To summarize:
Academic research confirms the initial hypothesis that successful working capital management leads
to increased profitability. Especially with regard to the correlations based on the dynamic measures
CCC and ROA, numerous papers statistically verify a negative correlation. This finding gains even
greater importance from the fact that the investigations cover a large variety of industries and
marketplaces. Given that the positive impact of successful working capital management on firm
performance thus appears to be validated, the question of what specific factors affect working capital
performance must now be addressed. If firm performance is to be boosted by improving working
capital management, it is imperative to identify the precise drivers of working capital. The section that
follows presents a comprehensive overview of existing literature on this topic.
12
Nazir/Afza (2009), p. 19-30.

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The following table shows the correlation.
# Year of research and
Author
Area Endogenous Variable Exogenous Variable Correlation
1 Kamath (1989), p. 24-
28.
USA CCC
NTC
Current Ratio
Quick Ratio
Operating profits/ total
assets
-
-
+
+
2 Soenen (1993), p. 53-
58.
USA NTC Net income+ interest
expenses/total assets
-
3 Jose/Lancaster/Stevens
(1996), p. 33-46.
USA CCC ROA
ROE
-
-
4 Shin/Soenen (1998), p.
37-45.
USA NTC
Current Ratio
Operating income/Total
assets
Operating income/Sales
Operating income/Total
assets
Operating income/Sales
-
?
-
-
5 Wang (2002), p.159-
169.
Japan,
Taiwan
CCC ROA
ROE
-
-
6 Deloof (2003), p. 573-
587.
Belgium CCC (Sales-COGS)/(total
assets-financial assets)
-
7 Eljelly (2004), p. 48-
61.
Saudi
Arabia
Current Ratio
Cash Gap
Net operating income -
depreciations/net sales
-
?
8 Lazaridis/Tryfonidis
(2006), p. 26-35.
Greece CCC (Sales-COGS)/(total
-
9 Padachi (2006), p. 45-
58.
Maturity CCC Profit before interest
and taxes/total assets
+
10 Raheman/Nasr (2007),
p. 279-300;
Pakistan CCC Net operating income +
depreciations/ (total
-
11 Filbeck/Krueger/Preece
(2007), p. 18.
USA Cash Conversion
Efficiency
Days Working Capital
Rank
Annual stock market
closing price returns and
dividends
+
?
12 Uyar (2009), p. 186-
193.
Turkey CCC ROA
ROE
Sales
-
?
-
13 Nazir/Afza (2009), p.
19-30.
Pakistan Current assets/TA
Current liabilities/TA
Size
Growth of Sales
GDP growth rate
Financial leverage
ROA +
-
+
+
+
-
Table 1: Working capital Performance and Firm Performance
It is also to be noted that the chart is followed to construct this paper.

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3. Data and Research Methodology
3.1. Research Hypothesis
The research objective was to find the correlation. So, for the purpose of the research, we can take the
hypothesis as-
H0: There is no correlation between the endogenous and exogenous variables.
Mentioning to theoretical review on working capital management, there are several factors which have
an impact on the management of working capital such as company characteristics and industry effect.
If hypothesis H0 can be established, this research will proceed to the next stage where company
characteristics will be tested with cash conversion cycle (CCC). The following part presents company
performance indicators or variables, their impact on working capital and development of hypotheses
which would be tested in this study- in order to determine the effect of these indicators on the cash
conversion cycle as a measure of working capital.
It is worthy of making a note that those hypothesis are established by prior authors. Here, just the
hypothesis are given without any description, as because those are previously postulated- both in this
paper which is described earlier in the literature and in different articles with highest credibility.
H1: Net Income is negatively related to CCC.
H2: Operating profit/Total assets is negatively related to CCC.
H3: ROA is negatively related to CCC.
H4: ROE is negatively related to CCC.
H5: Sales is negatively related to CCC.
H6: (Sales-COGS)/ (Total Assets-Financial Assets) is negatively related to CCC.
H7: Profit Before Interest and Taxes/Total Assets is positively related to CCC.
H8: Net Operating Income-Depreciations/ (TA-Financial Assets) is negatively related to
CCC.
3.2. Sample Period
As this is not a research heavily depending on primary data, it did not collaborate any extensive process
of data collection throughout a systematically designed sample from any population, rather it is done
with a secondary data set which was already established by the source of data. And this data set

P a g e | 9
stretches from 2005 to 2014, a combination of ten year movement of the components of working
capital.
3.3. Sources and Collection of Data:
In this research the main source of data is secondary. The collection of annual report of BASF SE,
Germany from their local office in Bangladesh and the collection of some information by taking
personal interview of the employee were the most important events. Some of the financial data was
also collected from the website of BASF SE, Germany. Also from the personnel in the firm,
information has been derived from. There was a restriction also, infringement law enforced by the firm
did not allow to pile up all the necessary data that were crucial for several analysis. Yet a theoretical
and metaphorical analysis is done here to support the paper’s hypothesis. Data from different published
sources i.e. research papers; literatures on working capital structure has been used in this paper, too.
To ensure the relevance, reliability and timeliness of data, necessary checking and cross checking were
executed in the process of data mining and scanning of information.
3.4. Definition of Variables
A lot of variables are related in a firm’s performance and working capital.
Variables Set 1 Description
CCC
(Cash Conversion Cycle)
The average number of day’s inventories represents the period that
inventories are held by the companies before they are sold. A lower
number of days are better.
Cash Conversion Cycle = Average Number Of Days Inventory +
Average Number Of Days Accounts Receivable - Average Number Of
Days Accounts Payable
Current Ratio A liquidity ratio that measures a company's ability to pay short-term
obligations.
Quick Ratio Quick Ratio = (Cash And Equivalents + Marketable Securities +
Accounts Receivable) / Current Liabilities
Current Assets/TA Current Assets to Total Assets = Current Assets/Total Assets. The
current assets to total assets ratio is a measurement of how liquid a
construction company's assets are.
C. Liabilities/TA Current Liabilities/Total Assets
Growth Of Sales Sale growth is calculated from current year’s sale minus previous year’s
sales and divided by previous year’s sales
Financial Leverage The amount of total debt of a firm

P a g e | 10
Variable Set 2
Operating Profits/ Total Assets The ratio of Operating Profits to Total Assets
Net Income+ Interest
Expenses/Total Assets -Operating
Income/Sale
Adjusted amount of net income, where operating income is subtracted.
ROA Profitability is measured by the return on assets (ROA) which is the
ratio of earnings before tax and interest (EBIT) to total assets.
ROE Profitability is measured by the return on equity (ROE) which is the ratio
of income and equity. After-Tax Return on Equity = Net Profit after
Taxes / Equity and Pretax Return on Equity = Net Profit before Taxes /
Equity.
Sales The amount of sales revenue.
(Sales-COGS)/(Total Assets-
Financial Assets)
The total asset turnover measures the efficiency of all assets (fixed and
current) to general sales.
Profit Before Interest And
Taxes/Total Assets
The ratio of Profit Before Interest And Taxes to Total Assets.
Net Operating Income-
Depreciations/(TA-Financial
Assets)
A performance exogenous ratio indicated by Eljelly (2004)
Operating Income/Total Assets Operating income with proportion to Total Assets
Net Operating Income -
Depreciations/Net Sales
A performance exogenous ratio indicated by Eljelly (2004)
WC/WCM Working Capital/ Working Capital Management
NI Net Income
CCC Cash Conversion Cycle
CA,CL, TA, TL Current Assets, Current Liabilities, Total Assets, Total Liabilities
NTC Net Trade Cycle
ACP Accounts Payable
AR Accounts Receivable
3.5. Methodology
3.5.1. Research Design
This paper is mainly an analytical research. The main focus of this paper is to find out the correlation
and drivers of working capital management of BASF. Information that determine the correlation has
been adopted throughout 3 months of internship in BASF with intense care.
3.5.2. Analysis
For quantitative analysis of data, regression analysis is applied. Trend and ratio analysis is also done
in accordance with industry standards. The variables that were tested here are selected from the

P a g e | 11
reporter’s perspective and the comparison of correlations were done with the standard results found by
other authors. Here, Correlation is used to measure the direction of the linear relationship between two
variables as well as to measure the strength of association between variables. In this study, the
Pearson’s Correlation Coefficient is calculated to see the relationship between all variables. As for the
direction of the relationship, the positive correlation indicates that when one variable increase another
also increases while the negative correlation show inverse relationship.
3.5.3. Limitations
There were a few limitations faced while reaching the objectives of this paper. Some of these
limitations are notable:
 Scattered Information: Though the information was collected from the primary sources, but
seemed scattered while the data collection process was running as because WCM is a vast area
to work on which may easily confuse all what to search actually.
 Confidentiality: In order to the policy and infringement issues about revealing data to third
party, researcher are restricted to different sensitive information by BASF Bangladesh. They
didn’t breach their policy at all.
3.6. Company Overview
BASF Bangladesh Limited ("the Company") is a private limited Company, incorporated in Bangladesh
as a subsidiary of BASF SE, Germany with an authorized capital of Taka 20,000,000 divided into
2,000,000 ordinary shares of Taka 10 each, to carry on the business of manufacturing and
merchandising of industrial chemicals, pesticides etc. and also the indenting of such items. The address
of the registered office of the Company is SAM Tower (Level 7), House # 4, Road # 22, Gulshan 1,
Dhaka – 1212, Bangladesh.
The Company is currently engaged in the manufacturing and the trading activities of chemical products
used by the local textile, leather and construction industries. The Company used to sell some chemicals
after repacking for agricultural purpose which are exempted from VAT. Sales of agricultural products
were closed in July 2011. The Company is also engaged in the indenting of chemical products and
earns commission. The Company has started the production of construction chemicals i n July 2012 at
its production plant at 113/C Tejgaon Industrial Area, Dhaka.
The financial statements have been prepared and accordance with Bangladesh Financial Reporting
Standards (BFRSs) and as per the Companies Act 1994.

P a g e | 12
A simple glance at the latest financial statement will describe BASF Bangladesh Limited a little bit
professionally.
BASF Bangladesh Limited
Statement of financial position
In Taka 31 December
2013
31 December 2012
Assets
Intangible assets 3,216,306 4,068,590
Deferred tax assets 20,509,512 11,242,709
Non-current assets 126,829,057 126,283,251
Inventories 45,832,395 59,928,752Trade and other receivables 302,779,471 174,906,222
Advances, deposits and prepayments 19,651,213 15,597,329
Advance income tax 81,188,400 48,266,395
Advance VAT 3,910,072 13,406,194
Cash and cash equivalents 108,343,005 79,797,364
Current assets 561,704,556 39 I ,902,256
Total assets 688,533,613 5I 8,185,507
EquityShare capital 12,275,840 12,275,840
Non -distributable special reserve 491,485 49 1,485
Retained earnings 237,536,683 192,164,274
Total equity 250,304,008 204,931 ,599
LiabilitiesEmployee benefits - staff gratuity 44,890 ,224 35,927,550
Non-current liabilities 44,890,224 35,927,550
Trade and other payables 269,404, I 04 220,509,363
Provision for tax 117,929,164 53,422,052
Workers' Profit Participation Fund 6,006,113 3,394,943
Current liabilities 393,339,381 277,326,358
Total liabilities 438,229,605 313,253,908
Total equity and liabilities 688,533,613 518,185,507
Table 2: Financial Statement 201

P a g e | 13
4. Working Capital Management
Working capital management concern companies’ management of their short-term capital. The short-
term capital refers to the capital that companies use in their daily operations and it consists of
companies’ current assets and current liabilities. A well-managed working capital promotes a
company’s well-being on the market in terms of liquidity and it also acts in favor for the growth of
shareholders value.13
Current assets consist of capital tied up in cash, short-term financial investments, inventories, account
receivables and other current assets.14
Current assets can be defined as assets used in companies’ daily
operations with the expectation to provide companies cash in return within a period no longer than
approximately a year. The short-term investments can be seen as a safety net for companies due to the
fast cash conversion ability.15
The current liabilities include short-term loans, the debts to suppliers as account payables, accrued
income taxes, and interest payments on long-term debts, dividend and other current liabilities.16
Current liabilities provide external financing for companies and they are especially important for
smaller companies that can experience difficulties to get long-term loans.
When purchased material has undergone a manufacturing process and become finished goods, it is
time to get the products sold to earn money. The money derived from sales are used to pay debtors,
finance new investments and give money back to shareholders in dividends. From here the cycle starts
over again.17
Schonberger18
states that one fundamental objective of world class manufacturing performance is to
"cut flow time, flow distance, inventory, and space along the chain of customers". Regarding supply
chain risk, Jüttner19
notes that "[...] supply chain control mechanisms like decision rules and policies
regarding order quantities, batch sizes and safety stocks can either amplify or absorb risk effects".
Scherr20
(1989) adds that "one of the major features of this world is uncertainty (risk), and it is this
feature that gives rise to many of the strategies involving working capital accounts". These remarks
give clear indication that a genuine link of the research areas manufacturing performance, supply chain
13
Jeng-Ren, et al., (2006), p. 149-155.
14
Brealey, Myers & Allen, (2006), p. 813.
15
Raheman & Nasr, (2007), p. 279.
16
Pass & Pike, (2007)
17
Pass &Hike, (2007)
18
Schonberger (1990), p. 296.
19
Jüttner (2005), p. 123.
20
Scherr (1989), p. 3.

P a g e | 14
performance, supply chain risk and working capital management prevails – Providing strong support
to further investigate in their correlation.
The concept of working capital was originally to ensure that obligations could be met in case the firm
went into liquidation. Holding sufficient short-term assets guaranteed that the firm would be able to
satisfy short-term creditors in the event of liquidation. Thus, the main objective was to control business
in a way that short-term assets matched short-term liabilities.21
In the mid-20th century, the focus shifted towards a going-concern view of the firm. By consequence,
the immediate liquidation of the firm was no longer of concern. This strategic shift in the basic view
of the firm had sensible consequences for the concept of working capital. Since then, the new example
of working capital management has been to maintain the firm's operating cycle while seeking to
maximize its profitability. The operating cycle consists of the whole sequence of cash flows generated
by the physical activities of the firm’s operations.22
In a perfect world, operations would be accurately
predictable. Inflows and outflows of raw materials, goods or cash could thus be anticipated with such
precision that buffers in terms of inventory or cash holdings would be superfluous. However, in a
world of machine outages, late payments and order changes, inventories, cash holdings and receivables
are indispensable.23
Given these imponderables, a firm that is shy of sufficient liquid reserves may
need to delay payments, obtain temporary financing on potentially unfavorable terms or even sell
assets.24
To avoid such costly actions that, if the worst comes to the worst, can have serious effects,
reserves are maintained that can be liquidated at sight. As a consequence, the main reasons for
maintaining positive working capital are unexpected events that could affect inflows or outflows of
cash, raw materials, or goods.25
Maintaining a buffer of short-term assets to safeguard the operating cycle is only one side of the coin,
however. Since short-term assets are usually the firm's least profitable assets, the goal is to keep them
as low as possible. Low net working capital serves in this context to boost firm performance and,
ultimately, increases shareholder value.26
Osisioma (1997) defines proper working capital management as "the regulation, adjustment, and
control of the balance of current assets and current liabilities of a firm such that maturing obligations
21
Fess (1966), p. 266.
22
Hill/Sartoris (1988), p. 7.
23
Scherr (1989), p. 2-3.
24
Emery (1984), p. 25.
25
Gentry/Mehta/Bhattacharyya/Cobbaut/Scaringella (1979), p. 29.
26
Scherr (1989), p.

P a g e | 15
are met, and the fixed assets are properly serviced".27
In line with this definition, desirable quantities
of each component of working capital must be maintained for management purposes. Identifying the
best possible capital structure is clearly a challenging task.28
An overview of different advanced
approaches in working capital management is presented by Smith.29
An empirical study by Saran is
demonstrates that a significant negative financial risk effect on borrowing and fixed investment has
been shown by modeling of inter-related demand equations in the UK demand sector.30
Contrary to
the theorem introduced by Modigliani and Miller (1958), this provides evidence that an optimal capital
structure does in fact exist.31
In all previous studies of investment behavior, the influence of financial
policy on the investment is ignored.32
It is perfectly reasonable to discuss strategies to optimize working capital. Excess working capital does
not earn the cost of capital. As a consequence, determining the optimal amount of WC maximizes
shareholder value.
For the ease of work, the total financial management can be divided into two parts- considering the
time limit. The first one is short-term financial management which is described as working capital
management, and the rest one is long term financial management which deals with assets and capital
and long term liabilities.
This can be shown in a tree chart-
27
cit. op. Appuhami (2008), p. 10.
28
Ball/Brown (1969), p. 300.
29
Smith (1973), p. 50-55.
30
Sarantis (1980), p. 393.
31
Modigliani/Miller (1958), p. 261-297; Myers (1984). p. 575.
32
Sarantis (1980), p. 393.
Financial management
Long term financial
management
Finance required to meet Capital
Expenditure,
Also, known as Fixed Capital Finance.
Short term
financial
management
Finance required to meet day-to-day
Business requirements,
Also, known as Working Capital
Finance.

P a g e | 16
In this paper WCM is described, analyzed and elaborated. WCM has basically 2 parts in the context
of Balance Sheet. The first one is current assets and the other one is current liabilities. All the analysis
consists of the elements of those two balance sheet items.
Working Capital is the amount of Capital that a Business has available to meet the day-to-day cash
requirements of its operations. It is the difference between resources in cash or readily convertible into
cash (Current Assets) and organizational commitments for which cash will soon be required (Current
Liabilities). In other words it can be referred to the amount of Current Assets that exceeds Current
Liabilities (i.e. CA - CL).
From the previous insights of different scholar articles, it can be concluded that Working Capital
Management is concerned with the problems that arise in attempting to manage the Current Assets,
Current Liabilities and the inter-relationship that exists between them. Working Capital Management
means the deployment of current assets and current liabilities efficiently so as to maximize short-term
liquidity. It also entails short term decisions - generally, relating to the next one year period - which
are "reversible". Working Capital refers to that part of the firm’s Capital, which is required for
Financing Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories.
Working Capital is also known as Revolving or Circulating Capital or Short-Term Capital.
Working Capital has two concepts. Gross Concept means Current Assets. This is knows as
Quantitative aspect of Working Capital that Focuses on Optimum Investment in Current Assets and
Financing of Current Assets. And the other one is Net Concept: It means difference between Currents
Assets & Current Liabilities. This is knows as Qualitative aspect of Working Capital which has a focus
on Liquidity Position of the Firm and WC Amount that can be financed by Permanent sources of
Funds.
There are several factors, found from the research papers described earlier, affect the management of
Working Capital. Factors affecting Working Capital/ Determinants of Working Capital: are given
below-
 Nature of Business/Industry; Size of Business/Scale of Operations; Growth prospects
 Business Cycle; Manufacturing Cycle; Operating Cycle & Rapidity of Turnover
 Operating Efficiency; Profit Margin; Profit Appropriation
 Depreciation Policy; Taxation Policy; Dividend Policy and Government Regulations.

P a g e | 17
There are basically four approaches or Methods of estimating Working Capital. First- Conventional
Method: where matching of Cash Inflows & Outflows is important. This method ignores Time Value
of Money. Second- Operating Cycle Method: Debtors + Stock - Creditors. This method takes into
Account length of Time which is required to convert cash into resources, resources to final product,
final product to Debtors and Debtors to Cash again. Third- Cash Cost Technique: Working Capital
forecast is done on Cost Basis (i.e. taking Profit & Loss items into account). Fourth- Balance Sheet
Method: Working Capital forecast is done on various Assets & Liabilities (i.e. taking B/S items into
account). There are two Steps involved in the Working Capital Management: Forecasting the Amount
of Working Capital and the second one is determining the Sources of Working Capital. Working capital
management includes four basic topics. In this paper these topics are well described. These elements
are-
 Management of Inventory
 Management of Receivables/Debtors
 Management of Cash and
 Management of Payables/Creditor
The following chart tree will describe the areas covered in the paper. The chart describes about the
Current Assets part that are to be analyzed.
And the following chart shows the areas of long term liabilities that are going to be covered.
Current Assets
Accounts
Receivable
Management
Inventory
Management
Uncertainty
Approach
Certainty
Approach
Cash &
Temporary
Investment
Forecasting Models
Cash Inflows
Outflows

P a g e | 18
And before going further into analysis, let’s check the WCM level of BASF SE. Notable that the green
marked line is the level of WC on the basis of current assets and current liabilities.
Figure 1: Level of WC, Current Assets & Current Liabilities
Current Liabilities
liquidity
Management
Short term
LIabilities
Management
Integer-
Programming
Approach to
Structuring Current
Debt
15,127
18,392 18,908
21,274
19,587
24,861
27,088 27,467
25,951
27,420
8,385
13,980
12,482
16,295
11,680
15,568
16,477 16,710
14,339
15,893
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CashinMillionEuro
Year
Level of WC, Current Assets & Current Liabilities
Current Assets Current Liabilities
Linear (Current Assets) 2 per. Mov. Avg. (Current Assets)
Linear (Current Liabilities) 2 per. Mov. Avg. (Current Liabilities)

P a g e | 19
5. Analysis
5.1. Current Assets
Current assets (1) are in the form of cash, (2) will be realized in cash, or (3) conserve the use of cash
within the operating cycle of a business or one year, whichever is longer.
The five categories of assets usually found in current assets, listed in their order of liquidity, include
cash, marketable securities, receivables, inventories, and prepayments. Other assets may also be
classified in current assets, such as assets held for sale.
The operating cycle for a company is defined in such a way that the time period between the acquisition
of goods and the final cash realization resulting from sales and subsequent collections of money. Only
a few businesses have an operating cycle longer than a year.
5.1.1. Cash Management
Cash is a medium of exchange that a bank will accept for deposit and a creditor will accept for payment.
To be classified as a current asset, cash must be free from any restrictions that would prevent its deposit
or use it to pay creditors classified as current. If restricted for specific short-term creditors, many firms
still classify this cash under current assets, but they disclose the restrictions. Cash should be available
to pay general short-term creditors to be considered as part of the firm’s short-term debt-paying ability.
The cash account on the balance sheet is usually entitled cash, cash and equivalents, or cash and
certificates of deposit. The cash classification typically includes cash in hands, cash to be realized
soon, marketable securities, FDR (in case of BASF Bangladesh Ltd.), inventories, accounts receivables
and short term investments.
There are two major problems encountered when analyzing a current asset: determining a fair valuation
for the asset and determining the liquidity of the asset. But this is not a problem of Working Capital
Management, as all the components are liquid as good as cash equivalents.
In the working capital management, cash comes up in different modes. But naturally cash management
includes forecasting and managing cash inflows and outflows.
Before looking forward to forecasting and managing cash inflows and outflows it is better to look at
the internal condition of cash or cash equivalent.

P a g e | 20
Figure 2: Cash or Cash Equivalent
In the year 2008 BASF SE hold a lot of cash compared to other years, it may refer to that-
1. Their sale increased
2. There might be no impact of global recession fall upon the cash level of BASF
3. They received accounts receivable
4. Business performance is going up
5. They are not following any Model like Beranek, Baumol or Miller-Orr.
5.1.2. Managing cash Inflows and Outflows
I personally spoke with an official of BASF Bangladesh, he told me that they do not follow any cash
inflow outflow model. They are not used to any floatation cost due to highly uncertainty in the political
condition of Bangladesh. That is why, anything regarding to managing cash outflow inflow is not well
discussed in the paper. Also collection of receivables does not occur in a timely manner as because the
creditors are often found in unfavorable cash positions. The company has a diverse business area, so
the market portfolio for them is quite varied with different return pattern. Cash inflow and cash
outflow, as a result, is not structured in a concrete methodology.
5.1.3. Forecasting
Forecasting is a vital element of cash management. Without forecasting, sometimes it is really a
headache for a manager to plan for the next. The following chart shows the items that can be forecasted.
908 834 767
2,776
1,835
1,493
2,048
1,647
1,827
1,718
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CashinMillionEuro
Year
Cash or Cash Equivalent
Cash Level Linear (Cash Level) 2 per. Mov. Avg. (Cash Level)

P a g e | 21
Items to be Forecasted
Some possible types of Cash Receipts Some possible types of Cash Disbursements
Accounts Receivables Taxes
Notes Receivables Salaries
Rental Income Mortgage
Interest Income Dividends
Dividends etc. Accounts Payables
Capital Expenditures etc.
Figure 3: Some Possible Cash Receipts
Receiving cash from different sources is essential for the firm. For any company to survive, cash flow
is the single most important financial factor. A company could have fantastic revenue, reasonable
expenses, and significant income, but if its financial operations are not designed efficiently, it could
still have negative cash flow. And without positive cash flow, any company, no matter how promising
the business model, will go bankrupt.
Of course, if a business has just been launched, it may be able to endure negative cash flow in the
short-term in hopes of achieving long-term success. But eventually, any company must focus on
7,020
8,223
8,561
7,752 7,738
10,167
10,886
9,506
10,233 10,385
5,430
6,672 6,578 6,763 6,776
8,688
10,059
9,581
10,160
11,266
1,586
2,607
2,337
3,948
3,223
3,883 3,781
3,455
3,714
4,032
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CashinMillionEuro
Year
Some Possible Cash Receipts
Accounts Receivable Inventories Other Receivales
Linear (Accounts Receivable) Linear (Inventories) Linear (Other Receivales)

P a g e | 22
creating positive cash flow. Without it, a company will not even be able to accomplish the simplest of
tasks: paying its monthly expenses.
To grow, a company often will need to invest in factories, real estate assets, machinery, or technology.
These are typically one-time costs that require significant funds. Without cash on hand, a business may
not be able to make these necessary investments and, as a result, may never be able to experience
company growth. Sure, a business can take out a loan, but even a loan will generally require a
significant down payment, which will in turn require that the company have access to cash. Loans also
come with interest rates that can further consume into a company’s bottom line. Many small businesses
have had to learn the hard way that lenders are becoming thriftier with how they loan money. If a
business has cash available, it can better take advantage of opportunities to expand and make important
acquisitions – options that may otherwise not be available in the absence of loans.
The next page shows a graph of some cash disbursement. We can see different trend in different cash
disbursements. The most jig jagged trend is seen in the additions of property, plant and equipment and
intangible assets. This happened because BASF SE dispatched its several business units in many areas,
on the contrary they sold as well as acquired a portion of their fixed assets and office equipment in an
ongoing process.
Depreciation followed a straight line method, leaving the trail that the business’s assets are all okay
from misuse. In 2009, depreciation became less than previous year, it can conclude that- whether the
assets are sold (as because- in 2009, property addition will leave the accounting to add its depreciation
in the next year, clearly showing the result of occurrence of other things) or some other thing happened.
Tax liability is straight upward, showing a correlation of net income. Tax liability increased, as because
the net income increased.
Accounts payable gives an almost positive sine curve, meaning that the company pulls hard break at
the time when the need to- at the time of low payable, they borrow more and gradually they pay it and
let the curve be lowered at desired point.

P a g e | 23
Figure 4: Some Cash Disbursements
5.1.4. Management of Marketable Securities
An important element of WCM is marketable securities. The business entity has varying cash needs
throughout the year. Because an inferred cost arises from keeping money available, management does
not want to keep all of the entity’s cash needs in the form of cash throughout the year. The available
alternative turns some of the cash into productive use through short-term investments (marketable
securities), which can be converted into cash as the need arises.
To qualify as a marketable security, the investment must be readily marketable, and it must be the
intent of management to convert the investment to cash within the current operating cycle or one year,
whichever is longer.
887 858 881 860 1,003 1,140 1,038 870 968 1,0791015
1484
1831 1791 1561
2021
2296 2388 2480 25722523
10039
4425
3634
5972
5304
3646
5263
7726
7285
2403
2973 2909 3099
3711
3370 3407 3267 3272 3417
2,777
4,755
3,763
2,734 2,786
4,738
5,121
4,502
5,153
4,861
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
InMillionEuro
Axis Title
Some Cash Disbursements
Tax liabilities
Dividends
Additions to property, plant and equipment and intangible assets
Depreciation and amortization of property, plant and equipment and intangible assets
Accounts payable, trade
Linear (Tax liabilities)
Linear (Dividends)
Linear (Additions to property, plant and equipment and intangible assets)
Linear (Depreciation and amortization of property, plant and equipment and intangible
assets)

P a g e | 24
It is to management’s advantage to show investments under marketable securities, instead of long-term
investments, because this classification improves the liquidity appearance of the firm. When the same
securities are carried as marketable securities year after year, they are likely held for a business
purpose.
Investments classified as marketable securities should be temporary. Examples of marketable
securities include treasury bills, short-term notes of corporations, government bonds, corporate bonds,
preferred stock, and common stock. Investments in preferred stock and common stock are referred to
as marketable equity securities.
Sometimes marketable securities are used when there is excess cash. It helps to generate some profits.
There are some models that tells when to invest in securities, when to disburse them, when to use cash
generated from these securities. Some of those models are- Beranek model, Miller-Orr model, Baumol
model. Etc.
But in the context of BASF Bangladesh limited, no relevant was found. This limitation caused
nonperformance of analyzing optimal short term investments. Here the forecasted line indicates a fall
in marketable securities of BASF SE. Appendix 1 has a detailed chart about this.
Figure 5: Marketable Securities
183
56 51
35
15 16 19 14 17 19
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MillionEuros
Year
Marketable Securities
Marketable Securities Linear (Marketable Securities) 2 per. Mov. Avg. (Marketable Securities)

P a g e | 25
The graph clearly shows that at the point of time after 2005, a portion of marketable securities have
been liquidated, as per the need for cash for liquidity purpose in a dire situation, seemingly, indicating
that either the firm fall in a cash gap or simply a new policy for investment, or even this can be possible
that the directors simply liquidated them for other purposes.
5.1.5. Management of Receivables
An entity usually has a number of claims to future inflows of cash. These claims are usually classified
as accounts receivable and notes receivable on the financial statements. The primary claim that most
entities have comes from the selling of merchandise or services on account to customers, referred to
as trade receivables, with the customer promising to pay within a limited period of time, such as 30
days. Other claims may be from sources such as loans to employees or a federal tax refund.
Claims from customers, usually in the form of accounts receivable, neither bear interest nor involve
claims against specific resources of the customer. In some cases, however, the customer signs a note
instead of being granted the privilege of having an open account. Usually, the interest-bearing note
will be for a longer period of time than an account receivable. In some cases, a customer who does not
pay an account receivable when due signs a note receivable in place of the account receivable.
Now at this point, the management of receivables is being described. At first we will try to figure out
Accounts Receivable Turnover and Accounts Receivable Turnover in Days.
Figure 6: ACR Turnover
6.09
6.40
6.77
8.04
6.55
6.28
6.75
7.59
7.23 7.16
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Times
Year
ACR Turnover
ACR Turnover Linear (ACR Turnover) 2 per. Mov. Avg. (ACR Turnover)

P a g e | 26
Accounts Receivable Turnover Accounts Receivable Turnover in Days
The liquidity of receivable in 2008 was very high
which means good, but in the later years the
liquidity is low. This means they have a negative
trend in receiving payments.
The turnover in days is a leaping frog shape. This
means, their management is good. Because,
when they see any anomaly in the trend they
adopt different and new approach to stick to
policy and grab better controlling of the firm.
Figure 7: ACR Turnover in Days
From the above analysis. We can say, they are having proficiency in managing receivables as the part
of WCM. The common characteristic of receivables is that the company expects to receive cash
sometime in the future.
The forecasted line indicates a downward movement in the following years, meaning that the accounts
receivable turnover in days are decreasing, which obviously is a positive sign for the firm- it is running
well in the collection process of receivables.
5.1.6. Inventory Management
Inventory is often the most significant asset in determining the short-term debt-paying ability of an
entity. In the context of WCM, the better the management is, the more the profit is. It is also visible
59.94
57.05
53.92
45.41
55.72
58.10
54.06
48.10
50.49 51.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
AverageDays
Year Movement
ACR Turnover in Days
ACR Turnover in Days 2 per. Mov. Avg. (ACR Turnover in Days) Linear (ACR Turnover in Days)

P a g e | 27
that an efficient management of inventories leads a better cost reduction, time saving and resource
allocation. Often, the inventory account is more than half of the total current assets. Because of the
significance of inventories, a special effort should be made to analyze properly this important area to
max out the successful level off WCM.
To be classified as inventory, the asset should be for sale in the ordinary course of business, or used or
consumed in the production of goods. A trading concern purchases merchandise in a form to sell to
customers. Inventories of a trading concern, whether wholesale or retail, usually appear in one
inventory account (Merchandise Inventory).
A manufacturing concern produces goods to be sold. Inventories of a manufacturing concern are
normally classified in three distinct inventory accounts: inventory available to use in production (raw
materials inventory), inventory in production (work in process inventory), and inventory completed
(finished goods inventory).
Usually, the determination of the inventory figures is much more difficult in a manufacturing concern
than in a trading concern. The manufacturing concern deals with materials, labor, and overhead when
determining the inventory figures, while the trading concern only deals with purchased merchandise.
The overhead portion of the work in process inventory and the finished goods inventory is often a
problem when determining a manufacturer’s inventory. The overhead consists of all the costs of the
factory other than direct materials and direct labor. From an analysis viewpoint, however, many of the
problems of determining the proper inventory value are solved before the entity publishes financial
statements.
The inventory management system can be classified into 2 different classes. The first one is certainty
approaches and the second one is uncertainty approaches. Now some of the important of inventory
management is described below-
Objectives of Inventory Management
Operating Objectives Financial Objectives
Availability of Materials Economy in Purchasing
Promotion of Manufacturing Minimizing Cost
Efficiency Reasonable Price
Minimizing the Wastage Optimum Investment & Efficient use of Capital
Better Service to Customer
Control of Production Level
Optimum Level of Inventories

P a g e | 28
Factors Determining Optimum Level of Inventory
 Seasonal Nature of Raw Materials and Demand for Finished Goods
 Length & Technical Nature of the Production process
 Style factor in the End Product
 Terms of Purchase
 Supply conditions
 Time Factor
 Price Level Variation
 Loan Facility
 Management Policies
 Other Factors
Tools of Inventory Management
 Fixation of Levels of Inventory: Maximum; Minimum, Re-order and Danger Level
 ABC Analysis: Small; Medium & High Number/Usage
 Perpetual inventory System: Restoration of the Stock Issued
 VED Analysis: Vital, Essential and Desirable
 FSN Analysis: Fast Moving, Slow Moving & Non Moving
 Periodical Inventory Valuation: Annual Stock Taking
 Economic Order Quantity (EOQ) Analysis: Ordering Cost & Carrying Cost
 SDE Tool: Scarce, Difficult & Easy (Procurement Difficulty)
For better understanding the inventory, it is good to look at some historical data of inventory and some
ratio analysis. Please go to the Appendix 2 for detailed data.

P a g e | 29
Figure 8: Inventory Turnover
Figure 9: Inventory Turnover in Days
We can conclude from the figures that-
1. The inventory turnover ratio is decreasing, while the inventory turnover in days is slightly
upward sloping; indicating a true relationship between those two of them
2. The liquidity of inventory is gradually decreasing, which means the company is not performing
well to manage the inventories. Because the indicator ratio shows the turnover is lower in the
recent years than that of previous years.
4.89
6.32
6.96
5.42
5.86 5.79 5.65 5.63
5.21
2006 2007 2008 2009 2010 2011 2012 2013 2014
Times
Year
Invetory Turnover
Invetory Turnover 2 per. Mov. Avg. (Invetory Turnover) Linear (Invetory Turnover)
74.70
57.71
52.41
67.36
62.29 63.05 64.60 64.83
70.03
2006 2007 2008 2009 2010 2011 2012 2013 2014
Invetory Turnover in Days
Invetory Turnover in Days Linear (Invetory Turnover in Days)
2 per. Mov. Avg. (Invetory Turnover in Days)

P a g e | 30
3. This also can be concluded that the- they are holding a lot of inventories, that’s is why their
inventory turnover is getting lower.
4. Their Inventory Turnover in Days is also increasing, this means their retention ratio of
inventories is getting higher, which also clearly identifies their lack of successful sale that they
are producing at a continuous rate but these being stored because of low sales rate, though other
sale ratios shows that sale is increasing. So we can logically say that- with a fair amount of
investment, the production process is elevated gradually.
This can also show that- the demand is high in the market, BASF SE (BASF Bangladesh too)
are producing at a very high rate, their sale is comparatively high in volumes, but not in the
context of inventory turnover ratio. Many of their raw materials, finished goods etc. can be in
stock.
5. This can also be concluded that- for meeting the ongoing demand, they are producing more
and plan to produce more. That is why they are stocking lots of raw materials, working process
and finished goods. Which leads a lower inventory liquidity ratio.
6. Comparing both of the ratio of WCM, we can conclude that inventory management is up to the
mark and highly satisfactory.
5.2. Current Liabilities
Current liabilities are ‘obligations whose liquidation is reasonably expected to require the use of
existing resources properly classifiable as current assets or the creation of other current liabilities.’
Thus, the definition of current liabilities correlates with the definition of current assets.
5.3. Working Capital Ratio
The working capital of a business is an indication of the short-run solvency of the business. Compute
working capital as follows:
Working Capital = Current Assets − Current Liabilities
The current working capital amount should be compared with past amounts to determine if working
capital is reasonable. Because the relative size of a firm may be expanding or contracting, comparing
working capital of one firm with that of another firm is usually meaningless because of their size
differences. If the working capital appears to be out of line, find the reasons by analyzing the individual
current asset and current liability accounts.
Companies with positive net working capital have more current assets than liabilities and can use the
surplus of current assets to fulfil their financial commitments and obligations to shareholders which is

P a g e | 31
a vital aspect for the continuing growth of any company.33
The advantages of having a positive net
working capital are clear, but there are also disadvantages to consider and they occur when companies
have to high level of capital tied up in their current assets. Tied up capital, is capital that do not generate
companies any additional value and would do more good in new investments that could bring the
company further return.34
If current liabilities exceed current assets, the net working capital is negative which means the company
does not have enough own capital for financing its short-term debts. Most companies suffer badly
when their net working capital is negative and this is a condition that also profitable companies can
end up in if they do not manage their working capital efficiently. Profitability is great but it is not
enough to become a successful company as a well-managed working capital is equally as important.
As a way to avoid bankruptcy in poor situations, companies can use credits or sell off short- term assets
to get capital for payments.35
The calculation of working capital of BASF SE was pretty easy. The detailed information is given in
the Appendix 2 for detailed and expanded view.
Figure 10: Working Capital of BASF SE
33
Lantz, (2008), p. 113
34
Lantz, (2008), p. 114.
35
Maness & Zietlow, (2005), p. 5-9.
6,742
4,412
6,426
4,979
7,907
9,293
10,611 10,757
11,612 11,527
15,127
18,392 18,908
21,274
19,587
24,861
27,088 27,467
25,951
27,420
8,385
13,980
12,482
16,295
11,680
15,568
16,477 16,710
14,339
15,893
0
5,000
10,000
15,000
20,000
25,000
30,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MillionEuro
Year
Working Capital of BASF SE
WCM Current assets Current liabilities Linear (WCM)

P a g e | 32
Working Capital of BASF SE
Criteria Performance Comment
Trend Upward Good position
Difference Very High Positive difference is good, the
better it is when the difference is
very high
Highest level Recent years Good performance
Lowest level Previous years Indicates the growth
Forecasting Possibility of better performance More production with low
liabilities
5.4. Current Ratio, Quick Ratio, Current Assets/Total Assets & Current Liabilities/Total
Assets
Another indicator, the current ratio, determines short-term debt-paying ability and is computed as
follows: Current Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
We have calculated the data for Current Ratio of BASF Bangladesh Limited. The detailed information
is given in the Appendix 2.
Figure 11: Current, Quick Ratio, CA/TA & CL/TA
1.80
1.32
1.51
1.31
1.68
1.60
1.64 1.64
1.81
1.73
1.16
0.84
0.94
0.89
1.10
1.00 1.02
0.88
1.10
1.02
0.42 0.41 0.40 0.42 0.38 0.42 0.44 0.44 0.40 0.38
0.24
0.31 0.27
0.32
0.23 0.26 0.27 0.27
0.22 0.22
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Ratio
Year
Current Ratio, Quick Ratio, Current Assets/Total
Assets & Current Liabilities/Total Assets
Current Ratio Quick Ratio CA/TA
CL/TA Linear (Current Ratio) Linear (Quick Ratio)
Linear (CA/TA) Linear (CL/TA)

P a g e | 33
Current Ratio of BASF
Trend Almost flat, upward After 2008, the trend is steep to upwards, meaning decline
in the level of liabilities. The short term liquidity is in good
situation. The firm is able to tackle uncertainty
Difference Good in recent years Should be sustained
Highest level Recent years Good performance of current assets management in the
recent years
Lowest level Previous years Indicates the decline in assets in earlier years of Global
crisis
Forecasting Possibility of increase
in assets
More assets to help in paying the liabilities in the future
Quick Ratio of BASF
Trend Jig Jagged at small
levels, Slightly
upward
Every year has a negative relations compared to last year’s
performance- an indicator of good control of liquidity.
Difference Average recent years Should be improved
Highest level Recent year Good performance of current assets management in the
recent year
Lowest level Previous years Indicates the decline in assets
Forecasting Possibility of increase
in assets
More assets to help in paying the liabilities in the future-
in line with the trend of current ratio
5.5. Cash Ratio
Sometimes an analyst needs to view the liquidity of a firm from an extremely conservative point of
view. For example, the company may have pledged its receivables and its inventory, or the analyst
suspects severe liquidity problems with inventory and receivables. The best indicator of the company’s
short-run liquidity may be the cash ratio. Compute the cash ratio as follows:
Cash Ratio =
𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
The analyst seldom gives the cash ratio much weight when evaluating the liquidity of a firm because
it is not realistic to expect a firm to have enough cash equivalents and marketable securities to cover
current liabilities. If the firm must depend on cash equivalents and marketable securities for its
liquidity, its solvency may be impaired.
Analysts should consider the cash ratio of companies that have naturally slow-moving inventories and
receivables and companies that are highly speculative. For example, a land development company in
Florida may sell lots paid for over a number of years on the installment basis, or the success of a new
company may be in doubt.

P a g e | 34
The cash ratio indicates the immediate liquidity of the firm. A high cash ratio indicates that the firm is
not using its cash to its best advantage; cash should be put to work in the operations of the company.
Detailed knowledge of the firm is required, however, before drawing a definite conclusion.
Management may have plans for the cash, such as a building expansion program. A cash ratio that is
too low could indicate an immediate problem with paying bills.
We have calculated the data for Cash Ratio of BASF SE. The detailed information is given in the
Appendix 2.
The analysis of Cash Ratio from Figure 11 is given below-
Cash Ratio of BASF Bangladesh Limited
Trend Upward The company is holding a lot of cash in 2013, compared to
other years. Where in the other years, the level of holding
cash is moderate and relevant to previous years
Difference Very high in recent
years
In 2013 they hold a lot of cash
Highest
level
Recent years 2013
Lowest level Previous years Relevant to previous years, no steep change, drastic fall or
rise
Forecasting Low cash in the future Although they are holding a lot of cash in 2013, obviously
they have an intention to pay in cash, which indicated that
the level of cash holding by now is going to be depleted in
the upcoming years
5.6. Dividend and Investment
The shareholders will get the highest dividends if the NI is higher. NI gets higher when WCM works
better. The following figure shows the Earning per Share and Dividend per Share.

P a g e | 35
Figure 12: EPS vs. DPS
And the trend between net income and dividends payment to the stockholders is as below -
Figure 13: Net Income vs. Dividends
2.87
3.19
4.16
3.13
1.54
4.96
6.74
5.25 5.22
5.61
1.00
1.50
1.95 1.95
1.70
2.20
2.50 2.60 2.70 2.80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Euro
Year
EPS vs DPS
Earnings per share Dividend per share
Linear (Earnings per share) Linear (Dividend per share)
1273.00
1951.00
2267.00
2982.00
2176.00
3737.00
3506.00
2880.00 2826.00
5853.00
1015.00
1484.00
1831.00 1791.00
1561.00
2021.00
2296.00 2388.00 2480.00 2572.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MillionEuro
Year
NI vs. Div.
Net income of BASF SE Dividends Linear (Net income of BASF SE) Linear (Dividends)

P a g e | 36
From the EPS vs. DPS graph it is clearly visible that-
1. The booming period was in 2009-2011, after the global financial crisis.
2. The EPS falls in 2009 because of sudden fall in global market, yet the firm continued to
giveaway a strong level of desired dividends.
3. After 2011, EPS started to settle down and went into a steady upward move.
4. Dividends per share is always in an upward slope, which obviously a very good sign.
From the Figure 13, we can also conclude some insights about net income and dividends.
1. Net income followed a jig jagged slope, while dividends followed a steady upward slope.
2. In some areas of the graph, the difference between net income and dividends is higher, it
indicate that the level of investment is higher, while the dividends payout policy is parallel to
the company policy.
3. The slope of NI is steeper than that of dividends.
4. In the last year, BASF SE went for a massive investment, as the portion of retained earnings is
extraordinarily high.
5.7. Capital Structure
WCM plays a vital role in capital structure. The accounts payable and WCL are in the total debt or
liabilities section. The following chart shows capital structure of BASF Bangladesh Limited for 10
years.
Figure 14: Debt-Equity Difference
4,417
4,420
4,397
4,417
4,405 4,392
4,379 4,364
4,341 4,319
3,682 5,788 6,954 8,290 12,444 11,670 9,019 8,704 11,151 11,839
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total Equity Financial indebtedness

P a g e | 37
Figure 15: Debt Equity Ratio
From the graph above we can conclude that-
1. Debt has a higher ratio.
2. They are getting tax advantages.
3. Because of high leverage, the firm’s value, in accordance with the Modigliani & Miller
Model, in the recent years has increased.
4. Less equity in the capital structure.
Shareholder will get less dividends for some of the next years, the trend indicates. But BASF SE
policy always intends to pay dividends more to the shareholders.
4,417
4,420
4,397
4,417
4,405 4,392
4,379 4,364
4,341 4,319
3,682 5,788 6,954 8,290 12,444 11,670 9,019 8,704 11,151 11,839
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Debt Equity ratio
Total Equity Financial indebtedness

P a g e | 38
6. Regression Analysis
It is always better to know the correlation and regression of different entities. In this paper, 2 different
regression analysis were prepared.
1. Net Income and Working Capital
2. Net income and other components of current assets and current liabilities.
6.1. Net Income and Working Capital
In this part the relation between net income and working capital is determined. It should be noted here
that working capital is the difference between current assets and current liabilities.
The summary of the regression model is given below. For further information please go to Appendix
3.
Coefficients of NI and WC (Dependent= NI)
Model Unstandardized Coefficients t Sig. F
Coefficient Std. Error
WCR + 0.47 0.038 12.24 .000001
The chart above indicates that- for every unit of WCR increase will lead to 0.047x net income.
Relationship of NI and WC
Nature Positive More WC means more NI. WC leads to better
production. And the more the production is the
more the revenue is. Revenue generates NI
Degree Strong NI does change heavily with WC
6.2. Net Income and Current Assets & Liabilities
In this part we are going to show the relation among net income and other components of current assets
and current liabilities. The other components are-
 Current asset
 Current liabilities
 Accounts payable
 Inventories

P a g e | 39
 Accounts receivable, trade
 Marketable securities
 Cash and cash equivalents
All of the above components are the part of working capital. The following relationship grid is going
to show the nature, degree and responsiveness of net income regarding to each of the elements. It is
found that some of them have negative and some of them have positive relationship. It is also clear
that some of the relations have strong response with each other.
All the related information is in the Appendix 4. Here is only the findings.
Coefficients Std. Error t stat
Current assets 0.10 0.62 0.16
Current liabilities -0.02 0.45 -0.04
Accounts payable 0.49 1.42 0.35
Inventories 0.23 1.11 0.20
Accounts receivable -0.14 0.98 -0.15
Marketable securities 1.89 10.21 0.18
Cash and cash equivalents -0.36 1.40 -0.26
The following chart describes in detail about all of them.
Detailed relationship among the Components of Current Assets & Liabilities and Net Income
Current assets Nature Positive More cash holding leads a bit of increase in NI
Degree Low Intensity is low
Current liabilities Nature Negative The more the payable amounts goes up, the less
the NI would be
Degree Very low Intensity is very low
Accounts payable Nature Positive The more the company gives its money/cash
payable, the more the NI grows
Degree Good And the degree of relationship is good enough to
have a strong impact

P a g e | 40
Inventories Nature Positive More inventories leads more production, which
helps to gain higher NI through increased
revenue
Degree Moderate Moderate relationship means a fair amount of
positive impact of inventories in NI
Accounts receivable Nature Negative More receivable leads to lower NI
Degree Low Relationship is weak, yet can affect negatively
Marketable
securities
Nature Positive More marketable securities will lead more NI
Degree Very
High
And the relationship is highly positive-moving
Cash and cash
Equivalents
Nature Negative For this particular company, more cash leads to
decrease in NI
Degree Fair Degree of relationship is fair enough to make a
big impact
Table 3: Detailed relationship among the Components of Current Assets & Liabilities and Net Income

P a g e | 41
7. Correlation, working capital performance and industry performance
Endogenous
Variable Exogenous Variable Correlation
Industry
performa
nce
CCC Operating profits/ total assets -0.67 -
NTC -0.62 -
Current Ratio -0.33 +
Quick Ratio -0.51 +
NTC Net income+ interest expenses/total assets -0.53 -
Operating income/Sales -0.61 -
CCC ROA 0.27 -
ROE 0.34 -
Sales -0.01 -
(Sales-COGS)/(total assets-financial assets) 0.32 -
Profit before interest and taxes/total assets 0.34 +
Net operating income-depreciations/(TA-financial
assets) 0.21 -
Current assets/TA ROA 0.45 +
C. Liabilities/TA 0.44 -
Growth of Sales 0.916 +
Financial
leverage -0.77 -
Current Ratio Operating income/Total assets -0.33 -
Operating income/Sales -0.20 -
Net operating income -depreciations/net sales -0.14 -
Table 4: Correlation, working capital performance and industry performance
At the very beginning, Table 1 shows the 20 years of research summarization about the correlation
between several parts of working capital, conducted by thirteen different researchers/teams around the
globe. Compared to their research, there is a slight mismatch with this research. The relationship
between Current ratio and Quick ratio with Operating profits/Total Assets ratio was supposed to be
positively correlated, but in the case of available data from BASF SE, the correlations among them get
negative. Correlation among Cash Conversion Cycle, ROA and ROE is negative in industry
performance in accordance with the researchers, but here the result is opposite.
While the industry standard imposes a negative correlation between ROA and Current liabilities/Total
Assets ratio, in our case, we got a different result- a positive correlation between those two ratios.

P a g e | 42
But, we can easily conclude that- working capital correlation of BASF SE is in collaboration with
industry performance- depicting that their day to day basis activities are strong enough to bring out the
most desired outcome set by the shareholders.
So, the H0 is tested, this stated earlier that there is no correlation, but it’s proved that there is correlation.
We can reject the hypothesis and conclude that there are relationships among the drivers.
CCC OP/TA ROA ROE Sales R1 R2 R3
CCC 1.00
OPs/TA -0.67 1.00
ROA 0.28 0.04 1.00
ROE 0.34 0.36 0.73 1.00
Sales -0.02 0.56 -0.07 0.53 1.00
R1 0.33 -0.49 0.71 0.13 -0.55 1.00
R2 0.35 -0.50 0.71 0.13 -0.54 1.00 1.00
R3 0.07 0.05 0.93 0.51 -0.36 0.74 0.74 1.00
Table 5: CCC Pearson’s Correlations
Here,
CCC Cash Conversion Cycle
OPs/TA Operating profits/ total assets
ROA Return in Assets
ROE Return in Equity
Sales Sales revenue
R1 (Sales-COGS)/(total assets-financial assets)
R2 Profit before interest and taxes/total assets
R3 Net operating income + depreciations/ (total assets-financial assets)
Not only had this report aimed to find the evidence of correlation among the drivers and components of
working capital, but also it targeted to discover the degree and nature as well as the intensity of correlation
among those components.
The next table describes each hypothesis individually.
H2: Operating profit/Total assets is negatively related to CCC.
Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity
- -
(Hypothesis accepted)
(.67) Semi-strongly correlated,
indicating intense effect

P a g e | 43
H3: ROA is negatively related to CCC.
- +
(Hypothesis rejected in case of BASF)
(.28) Slightly positively
correlated, indicating moderate
effect
H4: ROE is negatively related to CCC.
- +
effect
H5: Sales is negatively related to CCC.
-
-
(Hypothesis accepted, though
insignificant relation)
(.02) Almost zero correlation,
indicating almost no effect
H6: (Sales-COGS)/ (Total Assets-Financial Assets) is negatively related to CCC.
- +
effect
H7: Profit Before Interest and Taxes/Total Assets is positively related to CCC.
+ +
(Hypothesis accepted)
effect
H8: Net Operating Income-Depreciations/ (TA-Financial Assets) is negatively related to CCC.
-
+
(Hypothesis can be rejected in case of
BASF as the relation is not significant)
(.07) Not significantly
correlated, indicating almost
null effect.
Table 6: Hypothesis Results

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