Working Capital

SECTION NAME SYLLABUS KAPLAN (CHAPTERS) BPP (CHAPTERS)

A FINANCIAL MANAGEMENT FUNCTION

1.  The nature and purpose of financial management
2. Financial objectives and therelationship with corporate strategy
3. Stakeholders and impact oncorporate objectives
4. Financial and other objectives in not-for-profit organisation
5. The financial management function
6. Financial management and financial objectives

B FINANCIAL MANAGEMENT ENVIROMENT

1. The economic environment forbusiness
2. The nature and role of financial markets and institutions
3. The nature and role of moneyMarkets
4. The economic environment for business
5. Financial markets and the treasury function
6. The economic environment for business
7. Financial markets, money markets and institutions

C WORKING CAPITAL MANAGEMENT

1. The nature, elements andimportance of working capital
2. Management of inventories, accounts receivable, accounts payable and cash
3. Determining working capital needs and funding strategies
4. Working capital management8. WCM (Inventory control)
5. WCM (Accounts receivable and payable)10.WCM (Cash and funding strategies)
6. Working capital
7. Managing working capital
8. Working capital finance

D INVESTMENT APPRAISAL

1. Investment appraisal techniques
2. Allowing for inflation and taxation in DCF
3. Adjusting for risk and uncertainty in investment appraisal
4. Specific investment decisions (Lease or buy; asset replacement; capital rationing)
5. Basic investment appraisal techniques
6. Discounted cash flow techniques
7. Further aspects of discounted cash flows
8. Investment appraisal under uncertainty
9. Asset investment decisions and capital rationing
10. Investment decisions
11. Investment appraisal using DCF methods
12. Allowing for inflation and taxation10. Project appraisal and risk
13. Specific investment decisions

E BUSINESS FINANCE

1. Sources of and raising business finance
2. Estimating the cost of capital
3. Sources of finance and their relative costs
4. Capital structure theories and practical considerations
5. Finance for small and medium sized entities (SMEs)
6. Sources of finance16. Dividend policy
7. Financial ratios
8. The cost of capital
9. Capital structure
10. Sources of finance
11. Dividend policy
12. Gearing and capital structure
13. The cost of capital
14. Capital structure

The application of proper accounting ratios revealed that the profitability of Dollar Tree Store slightly deteriorated from 2005 to 2006. Managers were less efficient in the generation of profits from the firm’s resources as shown by the 1. 09% decrease in the return on capital employed ratio, which is considered as the primary profitability ratio. A high percentage in the return on capital employed means that the company’s profits are substantially safe from unexpected changes in the business environment, such as new competitive measures, adverse economic changes and more.

In this respect, the return on capital employed of Dollar Tree Store exceeds 25%, which is a good profit level. The gross profit margin and operating income margin of the enterprise also faintly diminished complimenting the return on capital employed ratio. This implies that the net profit derived from every $100 of sales revenue is lower, revealing inferior control on the firm’s operating costs. By examining the shifts in the main variables in the profit and loss account, one can see that they are in line with the profitability ratios analyzed above, which reveal a minimal decrease in the overall financial performance for the organization.

The changes in such basic variables are shown below: The changes in the key variables reveal show an increase in sales revenue and gross profit. The decrease in the gross profit margin stems from the fact that the rise in sales revenue was in a less proportion than the increase in gross profit leading to a lower gross profit margin. Indeed in their report, the directors of the firm highlighted the point that the company operates in a highly competitive market and thus lower profits have to be made in order to sustain control on the firm’s market share.

The selling, general and administrative costs increased too. One can also see a drastic boom in the interest expense. These rises led to a lower profit before interest and taxation and net profit. This adheres to the point mentioned above that weaker control was exercised on costs. As regards interest charges, these arise from higher debts, which the company has obtained. Such issues will be examined later on in the investors section. Liquidity of Dollar Tree Store The current ratio of Dollar Tree Store Limited minimally deteriorated during the years examined.

This shows particular concern on working capital management of the firm, because such ratio reveals the ability of the organization to pay its current liabilities out of the current assets. However the acid test ratio, which represents the capability of the firm to cover the current liabilities out of the most liquid assets improved during the years. Therefore we can contend that the decrease in working capital probably arose primarily from a decrease in inventory.

Thus the corporation’s ability to meet current liabilities improved from 2005 to 2006. Even though the inventory level decreased by the organization, the stock turn ratio indicates that management was more effective in the management of stock. Indeed the stock turn ratio increased from 3. 53 times to 3. 7 times. This portrays that managers were more able to dispose of the stock held faster. This is very positive for the liquidity of Dollar Tree Store because the higher the ratio, the less the money tied up in stock.

Several organizations encounter cash flow problems due to the high amount of stock they hold which diminishes the availability of money and increases the holding costs of stock. This does not apply to the company examined. The organization selected operates as a discount variety store offering merchandise at fixed prices. The majority of the sales are made by cash, cheque or MasterCard/Visa credit cards. The materiality of trade receivables from debtors is thus low as indicated in the Balance Sheet itself. Therefore we did not determine the ratios on debtors collection period due to its insignificance.

Executive Summary This report is presenting the overall working capital management of BeximcoTextiles Limited. In this report all of the information is collected from secondary data. As, Primary data was too much confidential, the company didn’t disclose it to us. In this report the terms and conditions that we have learned in FIN 406 has implemented. In this report financial analysis and recommendations are given. Introduction part Company overview The Beximco Textiles Ltd. was incorporated in Bangladesh as a Public Ltd.

Company with limited liability on 1994 & commenced commercial operation in 1995. The project was set up as a state of the art fabric weaving, dyeing & finishing facilities for production of high quality shirting fabric, unique wrinkle free fabric (Cortex-2000, cotra DP 3. 5 +) & other fabrics. BTL has an installed capacity of 288 high-speed air-jet looms in its weaving section & a high-tech dyeing & finishing section with a capacity of 100,000 yards of finished fabric per day.

It is a member enterprise of the Beximco conglomerate. During the year the company produced and sold high quality shirting and other fabric and bringing forth all the latest in hard and soft technologies in weaving and finishing of fabric. It is the most modern composite mill in the region. They have leveraged Bangladesh’s labor cost advantage ; export competitiveness to the maximum. Beximco Textiles Limited engages in manufacturing and marketing yarn, woven, knit, and denim fabrics in Bangladesh.

The company offers yarn products, such as count, fiber, CVC, and TC yarn products; fabric products comprising solid dyed, yarn dyed, finishing, dobby designs, and yarn count products; and denim products. It also provides special yarn products consisting of plied yarn, fancy yarn, slub yarn, core spun, multi count, and multi twist products, as well as wrinkle-free products. The company was formerly known as Padma Textile Mills Limited and changed its name to Beximco Textiles Limited in 2006. Mission Each of our activities must benefit and add value to the common wealth of our society.

We firmly believe that, in the final analysis we are accountable to each of the constituents with whom we interact; namely: our employees, our customers, our business associates, our fellow citizens and our shareholders. Purpose of this Study: This study has been designed in such a way that students are going to learn the in-depth knowledge about a company’s financial condition. The main purpose of this report is to reinforce the concept of financial policy of Beximco Textiles ltd. along with its all working capital ratios, short-term financing and long-term financing. etc.

Overall, this study will help a finance student to familiar with the practical scenario. Limitation: The report is limited to the data that are available in the annual reports and in the website related to Beximco textiles. Primary data was not available as they didn’t disclose. Finally, we have used our own judgments in many ways from our Business Finance courses in order to simplify the research, evaluate, calculation and advising. Financial Analysis Working Capital of Beximco Textiles ltd. : Working capital is defined as current (expected to be consumed or converted into cash within one year) assets minus current liabilities.

Working capital turnover indicates how efficiently the company generates revenue with its working capital. Year| Current Assets| Current Liabilities| Working Capital of particular year| 2006| 7572906611| 5961381357| 1605525254| 2007| 7881489387| 8058498925| -177009538| 2008| 7230982538| 7906937639| -675955101| 2009| 8677166758| 4834823994| 3842342764| 2010| 9031547621| 6944110703| 2087436918| Inventory: Inventories are carried at the lower of cost and net realizable value as prescribed by IAS 2:Inventories, cost is determined on weighted average cost basis.

The cost of inventories comprises of expenditure incurred in the normal course of business in bringing the inventories to their present location and condition. Net realizable value is based on estimated selling price less any further costs expected to be incurred to make the sale. Beximco textile ltd. Holds 5 types of inventory: * Raw material inventory (Fibre, yarn, gray fabric, dyes ; chemicals) * Work in process inventory * Finished goods inventory * Packing materials * Stores and Spares Amount of inventory in five years: Year| Amount of inventory| 006| 3414768025| 2007| 3688016341| 2008| 2733063864| 2009| 2742675600| 2010| 2994596746| Accounts Receivable: Their accounts receivable are recognized at cost which is fair value of the consideration given for them. 5 years accounts receivable of Beximco Textile: Year| Amount of Accounts receivable| 2006| 3407687731| 2007| 3451582241| 2008| 3765912622| 2009| 4986086053| 2010| 5040220480| Current ratio: Year| Ratio| 2006| 1. 27| 2007| . 97| 2008| . 91| 2009| 1. 79| 2010| 1. 3| Illustration: Quick Ratio: Year| Ratio| 2006| . 69| 2007| . 52| 2008| . 56| 009| 1. 22| 2010| . 86| Illustration: Activity ratios: Working capital turnover: Year| ratio| 2006| 3. 23| 2007| -24. 11| 2008| -7. 04| 2009| 2. 04| 2010| 6. 98| Illustration: Working Capital Turnover Inventory Turnover: year| ratio| 2006| . 92| 2007| . 81| 2008| 1. 13| 2009| 1. 79| 2010| 3. 15| Illustration: Days of inventory on hand (DOH): Assuming that, Beximco Textile’s number of days in period is 360. Then the DOH would be: Year| DOH| 2006| 391. 30| 2007| 444. 44| 2008| 318. 58| 2009| 201. 11| 2010| 114. 29| | | | | Illustration: Receivable turnover:

Year| ratio| 2006| 1. 52| 2007| 1. 23| 2008| 1. 26| 2009| 1. 57| 2010| 2. 89| Illustration: Days sales outstanding(DSO): Year| Ratio| 2006| 235. 85| 2007| 291. 20| 2008| 284. 80| 2009| 228. 19| 2010| 124. 51| | | Illustration: Cash conversion cycle: (Inventory conversion period+ Receivables conversion period)-Payables conversion period Year| CCC| 2006| 523. 12| 2007| 594. 16| 2008| 417. 5| 2009| 387. 17| 2010| 143. 36| | | Collection ; Disbursement Cash Inflow and Cash Outflow by Operating Activities (in tk. ): | 2010| 2009| 2008| 2007| 2006|

Cash received from customers ; others| 145187023| 664608431| 3190602600| 4223133089| 4887688455| Cash paid to suppliers ; Employees| 898661193| 535932698| 3043303205| 3788738872| 3703613507| Cash Generated from Operations| 5532091050| 1286757473| 147299395| 434394217| 1184074948| Interest Paid| 1445098454| 2006166127| 1261679027| 766830156| 906788267| Income Tax Paid| 43025787| 56338512| 20396366| 74934103| 8084912| Net Cash Generated from Operating Activitie| 4043966809| 775747166| 1134775998| 407370042| 269201769| Daily Cash Generated from Operating Activities| 11233241. 4| 2154853. 24| 3152155. 55| 1131583. 45| 747782. 6917| Cash Flows from Investing Activities (in tk. ): | 2010| 2009| 2008| 2007| 2006| Acquisition of Property, Plant ; Equipment| 3231593528| 2381789851| 986841760| 39250045| 205811905| Long-term security deposit| -| -| -| -| 46064| Net Cash Used in Investing Activities| 3231593528| 2381789851| 986841760| 39250045| 205857969| Daily Cash Used in Investing Activities| 8976648. 69| 6616082. 92| 2741227. 1| 1090279028| 571827. 917| Cash Flows from Financing Activities (in tk. ): 2010| 2009| 2008| 2007| 2006| Allotment of shares| -| 6351789302| -| -| 1050000000| (Decrease)/Increase in Long Term Borrowings| 594878760| 1605294361| 1945272911| 74392816| 1273417109| (Decrease)/Increase in Short Term Borrowings| 201830690| 1578840462| 181255969| 511187488| 118194147| Dividend Paid| -| -| -| -| 30405375| Net cash Generated from Financing Activities| 796709450| 3167654479| 2126528880| 436794672| 135628337| Daily Net cash Generated from Financing Activities| 2213081. 81| 8799040. 22| 5907024. 67| 1213318. 3| 376745. 3806| Increase or decrease in cash and cash equivalents| 15663831| 10117462| 4911122| 9825415| 72284537| Cash and Cash Equivalents at Beginning of Year| 27249672| 1713221o| 12221088| 22046503| 94331040| Cash and Cash Equivalents at End of Year| 42913503| 27249672| 17132210| 12221088| 22046503| Interpretations: 1. Working capital: In 2007 and 2008 working capital of Bextex ltd. was negative. That means; current assets have been lower than the current liabilities. So, the company was in a risky position in terms of liquidity.

But from 2009, it started to be positive and the company is in a stable position. 2. Current ratio: This ratio expresses current assets in relation to current liabilities. Current Ratio of bextex ltd. is highest in 2009 which indicates that the company has higher level of liquidity and it can meet short term obligations. But during 2007 and 2008 the ratio had a smaller value than one, indicating that Bextex ltd. had lower liquidity to meet its short term obligations. However, over the following years; Beximco Textiles managed to solve this issue. 3.

Quick ratio: The quick ratio is more conservative than current ratio, because it only includes the more liquid current assets in relation to current liabilities. Beximco Textiles Ltd. reached its peak in 2009 in terms of quick ratio but yet again it dropped in 2010. Apart from that, there has been a steady improvement in this aspect. 4. Activity Ratios: a. Working capital Turnover: working capital turnover indicates how efficiently the company generates revenue with its working capital. Bextex ltd. was in the worst situation in 2007, that the ratio was -24. 11; this ratio was negative in 2008 as well.

The main reason behind it was that the current asset remained lower than the current liabilities. The negativity in this aspect simply depicts that the company took a very high amount of loans during those years. Yet, the operations were efficient enough to improve that risky position over the years. b. Inventory Turnover Ratio: Inventory turnover ratio shows the times a company’s inventory is sold and replaced over a financial period. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

During 2006 and 2007; the annual inventory on hand was way higher than the following years. Consequently, the turnover was high as well. During the following years; the management took new measures and managed to reduce the excess the inventory. However, the total amount of inventory in 2010 was higher than that of 2009. Yet, the inventory turnover almost doubled during 2010; which is a strong indication that the sales is increasing in number. c. Days Sales Outstanding Ratio: It indicates the elapsed time between a sale and cash collection. Bextex ltd. ad the lowest DSO in 2010, which indicates a better situation than that of the previous years. In 2007, the ratio was the highest indicating the efficiency lapse in cash collection during that period. 5. Cash Conversion cycle: This metric indicates the amount of time that elapses from the point when a company invests in working capital until the point at which the company collects cash. Bextex ltd. had 523. 12 CCC in 2006 which indicates poor position and in 2010; they have decreased it from 523. 12 to 143. 36. So, it is a good indication for the company.

Basic reason behind this positive trend is that; Beximco Textiles has improved the Inventory conversion and receivables Collection operations dramatically. Both the Inventory conversion period and the Receivable conversion period has been halved from the year 2006 to 2010. 6. Cash-Flow: Cash flow activities show that both the income from operational activities and the return from investments have been increasing over the years. The Payables are being paid out and the retained earnings are being reinvested heavily to increase the efficiency to a higher level.

This can be a reason why Beximco Textiles have refrained from giving out dividends since 2007. References 1. BEXIMCO TEXTILES Ltd. (2007). Auditors’ Report 2. BEXIMCO TEXTILES Ltd. (2009). Auditors’ Report 3. BEXIMCO TEXTILES Ltd. (2010). Auditors’ Report 4. Fredric C. Scherr, Modern Working Capital Management, Prentice Hall International Editions. 5. Ross, S. A, Westerfield, R. W & Jaffe, J. (2005). Corporate Finance 7th Edition. New Delhi: McGraw Hill Publishing Company Limited. 6. Financial Reporting and Analysis CFA (level-1) 2011

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

Working Capital Management

Overview In manufacturing sector of Pakistan 70% of goods are produced by the large scale industries which include mainly cement, automobiles, sugar, textile, oil and gas and etc. As the manufacturing sector includes so many sub sectors therefore in depth analysis is required for the industry as a whole and also of every firm at micro level. Though agriculture contributes to the major chunk in the economy of Pakistan but Sugar sector also plays a vital role.

Sugar sector is the second biggest sector in the manufacturing sector which contributed 2% to the overall GDP of Pakistan and 13% to manufacturing sector. Sugarcane production has increased by 12 percent to 55. 3 million tons in 2010-11 from 49. 4 million tons last year whereas sugar production increased by 3. 8 million ton showing an increase of 26. 5 % (Economic Survey of Pakistan, 2011). One of the main sectors in manufacturing sector is sugar sector. More than 100,000 labor works in sugar sector and more than 9 million people earn their living through the production of sugarcane.

Mills producing sugar in Pakistan are capable enough to produce country’s requirement for next 3 years. Government should not entertain any application of opening a new sugar mill rather they should concentrate on financing the working capital for the 69 firms working in Pakistan which desperately in need of that financing. Commercial bank will be approximately be needing Rs. 2. 7 billion to finance the working capital of these working sugar firms (Rizvi, 2009). Most of the sugar firms are owned by the persons who have political influence and were built by those development finance institutions which were themselves facing

Working Capital Management 3 working capital issues out of few have already been closed and few are near to be closed. Further shutdown of sugar mills will result in loss of national assets, less sales tax and unemployment will increase. There has been a crisis in the sugar industry of Pakistan especially the sugar mills in Sindh from last 3 years. This crisis has affect owners of the sugar mills, employees of the sugar mills and raw material suppliers. As the profit of these sugar mills are not improving which result in low value to shareholders and affects the owners of sugar mills.

Suppliers of raw material complain of not getting good prices of raw material and very late payments from the sugar mills and in last the employees of sugar mills are not getting paid because profits has converted in to negative. Sugar mills are facing severe liquidity problems they don’t have enough cash to pay a good price to suppliers and above all pay their suppliers on time. This problem has gone so worst that they are not able to pay their legal liabilities. Considering the situation of the sugar mills banks are not willing to advance any further loans.

Solution to all the problems mention above lies in the efficient management of working capital. Components of working capital which includes inventory management, receivable management, payables management and cash conversion cycle if controlled efficiently than all of the problems will be solved and the sugar industry of Pakistan will once again progress and contribute to the GDP of Pakistan in a better way than past. Many researchers have worked on the importance of working capital management. The work of Shin and Soenen(1998), Deloof(2003) and Padachi(2006) are most important.

The results concluded that working capital management is essential to increase the profitability of the firm. There have been very few researches with the Working Capital Management 4 respect to sugar industry in Pakistan which is a motivating force to work on this issue with reference to the sugar industry of Pakistan. Considering the importance of working capital management objective of this research is to find that which factors of working capital management plays important role and affect the profitability of sugar mills in Pakistan.

Variables taken for conducting this research are sales, sales growth, current ratio measure of liquidity, gearing ratio measure of debt and working capital componentsno of days accounts receivables, no of days accounts payable and no of days inventory. For the research data sample of 19 firms which are currently enlisted at Karachi Stock Exchange for the years 1999 – 2009 is taken. 1. 2 Problem Statement The objective of this study is to examine does working capital management affect the firm profitability in the sugar industry of Pakistan? 1. 3 Outline of the Study

The first chapter of the research focuses on giving basic view of the research and provides information on the overview, issues, purpose and basic theories on the working capital management. In the second chapter existing work by various researchers and past empirical studies is discus. The third chapter provided details regarding practically carrying out of the research and described data collection and analysis procedures. The fourth chapter gives details regarding the results of the research. Finally the fifth chapter includes the conclusion of the research.

Working Capital Management

Working capital management has been a concern for all firms but small firms should give more importance to this issue because they cannot afford to survive without cash (Peel, Wilson and Howorth, 2000). Many researchers have worked on the same issue but pioneer study of Shin and Soenen (1998) and Deloof (2003) have found that working capital management stronglyaffects the corporate profitability. Therefore sugar mills should address this issue seriously. Maccini and Blinder (1991) suggested that conventional approach that is to invest highly in working capital can also increase profitability.

Maccini and Blinder (1991) suggested that if more investment is done on inventory than it will save supply time and money due to availability and fluctuations in prices and production process is also not disturbed. Hicks and Czyzewski(1992) analyzed that the firms which have greater cash balances have high return on assets. Jose, Lancaster and Stevens (1996) performed the research to find out the relationship between working capital management and firm’s profitability by taking net trading cycle as a measure of working capital management on specific industry, the result was not that significant.

After observing the Industry nature and size of the industry Jose et al. (1996) suggested that aggressive liquidity management increases the profitability. Shin and Soenen (1998) took a sample of United States firms. To analyze the relationship between profitability and working capital Shin and Soenen (1998) use Net Trading Cycle as a measure of working capital management. The result suggested that Net Trading Cycle is indirectly related to profitability while in previous research on specific industry, the result was not that significant (Shin and Soenen, 1993).

The general thought which prevails is that profitability can be increase by decreasing the working capital investment. It can be done by decreasing the portion of current Working Capital Management 6 assets. Wang (2002) took a sample of Taiwanese and Japanese firms and Deloof (2003) took a sample of Belgium Firms. The results suggested that profitability depends on how the working capital management is handle by the management. Deloof(2003) stated that no of days inventory and no of days accounts receivable is indirectly related to profitability.

Deloof (2003) also stated that if the cash conversion cycle is shorter than the profitability will be increased. Thus efficient working capital management is very important to increases the value of the shareholders (Wang, 2002; Deloof, 2003). Tryfonidis and Lazaridis(2006) carried out a research for the companies listed in Athens Stock Exchange. Tryfonidis and Lazaridis (2006) analyzed the relationship between working capital management and profitability of the firms. The variable for the measurement of profitably was gross operating profit in their research.

Significant relationship between the cash conversion cycle and profitability was reported. Tryfonidis and Lazaridis (2006) stated that the profit can be maximize by taking care of every component of working capital at individual level. Padachi(2006) studied different behaviors in the working capital management for a sample of 58 small Mauritian firms for the year 1998 – 2003. Padachi (2006) stated that if the working capital is managed efficiently than it will add up to the firms value and increase profitability.

The research showed that no of days inventories and no of days receivable are indirectly related to profitability. Uyar(2009) evaluate the relationship between the firm size, profitability and the cash conversion cycle by using correlation and annova techniques for the companies enlisted in Istanbul Stock Exchange. The outcome was that that the cash conversion cycle of manufacturing sector was greater as compared to the whole sale industry. In addition to that it was analyzed that the size of the firm and profitability has significant negative relation with cash conversion cycle. Gill, Biger and Mathur(2010) studied the relationship between working capital management and firm’s profitability for the sample of 88 firms listed at New York stock exchange for the period of 2005 to 2007 and found significant relationship between the two variables. Zuberi (2010) took a sample of Pakistan’s automobile sector and concluded that the growth and current ratio of the firms in automobile sector have direct relation with the profitability of the firms.

Ding, Guariglia and Knight (2010) took a sample of over 120,000 Chinese firms and concluded that working capital management significantly affects the profitability of firms. Alipour (2011) took a sample of 1063 top firms listed in Tehran stock exchange and found a negative significant relationship between no of days accounts receivable, Inventory Turnover and cash conversion cycle where as positive significant relation with no of days accounts payables with profitability and hence concluded that working capital management significantly affects the profitability of the firms.

Enqvist, Graham, Nikkinen (2012) worked on the sample of Finland firms and studied the relationship of working capital management and profitability on different business cycles and concluded that there is a significant negative relationship between cash conversion cycle and profitability of firms. The results suggested that efficient management of inventory and accounts receivable days significantly affects the corporate profitability of the firms. In Pakistan there have been few researches on working capital management. Sana and Shah (2006) worked on oil and gas sector.

They took a very small sample of consisting only 7 firms and they concluded that profitability and value of shareholders can be increased by managing the working capital efficiently. Nazir and Afza (2007) in their research analyze the relationship between aggressive and conventional way of Working Capital Management 8 investing in working capital for 205 firms for 17 different sub sectors. Results showed that there is a negative relationship between aggressive approach in working capital investment and the profitability of the firms.

Nasr and Rehman(2007) analyzed the relationship between the profitability and components of working capital management which includes no of days inventory, no of days accounts receivable, no of days accounts payable and cash conversion cycle. The result showed that there is negative relationship between them. In the year Nazir and Afza(2008) analyzed the working capital management for 204 firms. Though researchers have studied the relationship between the components of working capital management and the corporate profitability with reference to Pakistan but it’s not enough.

There is still lack of evidence of relationship between the two variables. This reason has been a motivational force to do a research on the sugar sector of Pakistan. For this purpose sample of 19 sugar firms listed on Karachi stock exchange has been taken during 1999-2009. Method of Data Collection The secondary data necessarily required to perform the research was gathered from the official sites of the sugar firms. Additionally, some of the required data was abstracted from the library of State Bank and Karachi stock exchange.

Rest of the data is collected from annual reports, SBP analysis reports and economical surveys. 3. 2 Sample Size There are 35 Sugar mills listed at Karachi Stock Exchange out of which 19 are selected. Those firms are not included whose data was not available or observations were missing for few years. The data used for the purpose of research consisted of 11 years annual data of the variables used in research. Data of all the variables belonged to period starting from fiscal year 1999 to fiscal year 2009 because this is the period where many of new sugar mills were installed and many of them were shutdown.

Many researchers which include Shin and Soenen(1998),Deloof(2003) and Padachi(2006) used same components for analyzing working capital management. S – Sales are expressed in millions of PKR. Natural log of Sales are included in the research to measure the size of the firms. It is assume that bigger the size more the profit. Shin and Soenen(1998), Deloof(2003) and Padachi(2006) also included sale as a measure of firm size and found positive and highly significant relation between sales and corporate profitability. Working Capital Management 11 SG – Sales growth is (current year’s sales – last year’s sales)/last year’s sales.

Sales growth is added in the research to measure the investment growth opportunity in the industry. Deloof(2003) included sales growth in his research and found positive and highly significant relation with profitability. CR – Current ratio is current asset/current liabilities. Current ratio is taken as the measure of liquidity in the firm. More the liquidity of the firm less will be investment in working capital and firm will easily pay its immediate liabilities and creditors but on other hand more liquidity means that less investment in inventory and less sales.

It is found that current ratio have direct and significant relationship with profitability (Rehman and Afza, 2010). GR – Gearing ratio is total fixed liability/total capital employed. Gearing ratio is used to measure the leverage of the firm. Rehman and Afza(2010) used gearing ratio in the research and find negative relationship with profitability it means higher the debt less the profit. NDAR – No of days accounts receivable is (A/R x 365)/sales. No of days accounts receivable is included as a component of working capital management.

Generous credit terms can increase sales as it allows more time for customers to check the goods from the supplier before paying the cost (Long, Malitz and Ravid, 1993; Deloof and Jegers, 1996). Customers enjoy advantage from longer credit terms as compare to taking a loan from financial institution (Petersen and Rajan, 1997). Therefore no of days accounts receivable significantly affect the profitability of the firm (Deloof 2003). Working Capital Management 12 NDI – No of days inventory is (inventory x 365)/cost of goods sold.

Firms have different optimal level of investing in working capital some invest more some invest less. On one hand keeping low inventory result in high liquidity but on other hand keeping high inventory saves firm from stock out and also result in more sales. Many researchers have included NDI as one of the component of working capital management as NDI has a negative relation with NOI and significantly affect the profitability. The negative relation shows that low profit means less sales and less sales result in more inventory (Deloof, 2003).

NDAP – No of days accounts payable is (A/P x 365)/purchases. No of days accounts payable is also an important component of working capital management. Firm enjoys more liquidity and gets the chance to examine the quality of goods before paying to their suppliers if they pay late but on other hand they miss the discount offered by the suppliers which they can avail by prompt payment. Padachi(2006) and Deloof(2003) in theirresearches found that no of days accounts payable significantly affect the profitability of the firm. 3. 5 Hypothesis

This research primarily focused on following hypothesis: H1: Sales has a significant impact on NOI. H2: Sales Growth has a significant impact on NOI. H3: Current Ratio has a significant impact on NOI. H4: Gearing Ratio has a significant impact on NOI. H5: No of Days Accounts Receivable has a significant impact on NOI. Working Capital Management 13 H6: No of Days Inventory has a significant impact on NOI. H7: No of Days Accounts Payable has a significant impact on NOI. 3. 6 Statistical Technique Pearson Correlation and Multiple Linear Regression are used in this research to study the relationship between variables.

Log of sales (lnS) hasproved statistically insignificant. Positive sign with its coefficient shows that bigger the size of the firm or more sales result in more profitability. Gearing Ratio (GR) is statistically insignificant in this research but it has a negative relationship with net operating income which shows that higher will be the leverage Working Capital Management 18 low will be the operating profitability of the firm. Same result was concluded by Deloof(2003), Shin and Soenen (1998), Rajan and Zingales (1995) and Myers and Majlof (1984) but in this case it is insignificant.

Current Ratio (CR) has proved statistically significant and has impact on NOI. It is according to the findings of Deloof (2003). It is the measure of liquidity so if the firms have ample cash available it will pay its creditors soon which will result in more profits. No of Days Accounts Receivable (NDAR) has proved statistically insignificant. Its negative relation shows that if number of days accounts receivable is increased by 1 day there will be a loss in net operating income (divided by total assets) by 0. 27 %. It is according to the findings of Raheman and Afza (2010).

A very strong significant indirect relation between net operating income and number of days accounts payable (NDAP) is shown by the regression analysis. The negative correlation between operating income and number of days accounts payable is confirmed by this negative relation in regression analysis. It is according to the findings of Deloof (2003). It also shows that if the firm pays to their creditors soon they will avail big discounts hence increasing the profitability. No of Days Inventory (NDI) has proved statistically significant and has impact on NOI.

This shows that by reducing the no of days inventory profitability can be improved or profitability can be increase by keeping the inventory for shorter period. Mostly researchers have found a significant negative impact of no of days inventory on the profitability of firms. It is according to the findings of Deloof(2003). Working Capital Management 19 For further analysis sugar firms were divided in to 5 groups according to the firm’s size. The firm’s size was decided on the basis of two variables annual sales and value of total assets.

Conclusion

In this research no ofdays accounts receivable, no of days account payable and no of days inventory are taken as a comprehensive components of working capital management, by using these variables the efficiency of working capital management can easily be check. The results shows that longer these components lesser will be the net operating profit as these have a negative relationship with net operating income. Firms can easily increase value for the shareholders by keeping the days to optimal level. In this research no of days payable and no of days inventory is significant and are affecting the operating profitability.

Deloof (2003) concluded the same result for the study of Belgian firms. Current Ratio (CR) has proved statistically significant and has impact on NOI whereas gearing ratio is statistically insignificant in this research but it has a negative relationship with net operating income which shows that higher will be the leverage low will be the operating profitability of the firm. Same result was concluded by Deloof (2003), Shin and Soenen (1998), Rajan and Zingales (1995) and Myers and Majlof (1984) but in this case gearing ratio is insignificant.

Sales growth and natural log of sales have positive relationship with profitability but sales growth in significant whereas natural log of sales has proven to be insignificant. 5. 2 Discussions Sugar sector which is the second biggest sector in manufacturing sector of Pakistan contributes to the economy significantly. Keeping in mind the importance of Working Capital Management 22 sugar sector in the economy of Pakistan objective of this research is to analyze the affect of working capital management on firm’s profitability in the sugar sector of Pakistan.

To carry out the research data from 19 sugar mills which are currently listed at Karachi Stock Exchange is analyzed. The results shows that profitability of sugar mills are significantly affected by the efficient management of working capital and working capital management play a vital role in creating a value for the shareholders. 5. 3 Implications Many recommendations can be drawn from the above research results. Every sugar mill should give due importance to working capital management. Sugar mills should make such collection and payment policies which are in favor of the firm and existing policies should be thoroughly reviewed.

Sugar mills should decrease there payment and receivable cycle. This can only be done when there will be professional management. The results suggest that sugar mills should keep optimum level of inventory and cash conversion cycle. This could only be possible when sugar mills will give due importance to every component of cash conversion cycle. Sugar mills should hire professional human resource to take decisions related to finance. There are many sugar mills where only one person is looking after the whole department. In order to maximize the profit sugar mills should manage there working capital efficiently. . 4 Future Research Every sector in manufacturing sector should be analyzed at micro level for efficient working capital management so it can be understand that which factors affects the working capital management more and how can working capital management can increase profitability in different sectors of our country. Working Capital Management 23 REFERENCES Alipour, Mohammad. (2011). Working Capital Management and Corporate Profitability: Evidence from Iran. World Applied Sciences Journal, 12 (7), 1093-1099. Blinder, A. S. & L. Macinni. (1991).

The Relationship of Cash Conversion Cycle with Firm Size and Profitability: An Empirical Investigation in Turkey. International Research Journal of Finance and Economics, 24. Wang, Y. J. (2002). Liquidity Management, Operating Performance, and Corporate Value: Evidence from Japan and Taiwan. Journal of Multinational Financial Management. 12, 159-169. Zubairi, H. Jamal (2011). Impact of Working Capital Management and Capital Structure on Profitability of Automobile Firms in Pakistan. Finance and Corporate Governance Conference. Working Capital Management 25 Appendix 7. 1 Firms Size (Sales) – Group wise analysis

CHAPTER-I INTRODUCTION 1. 1 Back ground of Study Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital. Therefore, working capital management is the same of liquidity management and its relate inversely with profitability.

It is significance for any industries due to the investment in Current Assets (CA) must be adequate because inadequate or excessive inadequate working capital can disturb production and can also threaten the solvency of firm, if it fails to meet its current obligation excessive investment in CA should be avoided, since it impairs firm’s profitability Secondly, need for working capital arises due to increasing level of business activity ; it is to provided quickly some time surplus fund may arises which should be invested in Short term securities , they should not be kept idle.

The importance of Working capital management compelled to the firms to try the optimal level of investment in each element such as inventories, cash, account receivables but the firm also consider to way of financing the current assets. This means, consideration of current liabilities which include account payables, notes payable, interest payable and other shot-term debt.

In addition, the firm can adopt an aggressive working capital management policy with a low level of current assets as a percentage of total assets, or it may also be used for the financing decisions of the firm in the form of high level of current liabilities as a percentage of total liabilities(Nazir and Afza,2009), and it is the opposite in conservative working capital management policy. On the other hand, it should be distinguished between three policies that related directly with the working capital efficiency.

First policy is collection policy, that measured by average receivables collection period (ARCP) which is meaning the average length of time required to convert the firm receivables into cash. Second policy is inventory policy, which expressed by average conversion inventory period (ACI). It means the average length of time required to convert raw materials into finished goods and then sell these goods.

Third policy of working capital efficiency is payment policy, which measured by average payment period (APP) that means the length time between the purchase of materials and the payment of cash (Weston and Brigham,1993). These policies require from company to accelerate the collections of receivables, accelerate its inventory, accelerate the payment cycle, and reduce the cost of the working capital needs.

Above mentioned policies can be merged them in one general policy, is called cash conversion cycle (CCC) developed by Richards and Laughlin(1980) which focuses on the length of time between when the firm makes payments and when it receives cash inflow. To fulfill the one of the most important goal of organization to maximization of share holder’s wealth of a firm is possible only when there is sufficient return from the operations and successful sales activity is necessary for earning profit sales without convert into cash immediately.

To generate the sales and revenue activities there will be the s invisible time lap between the sale of good and receipt of cash. Hence, the time taken to convert raw material into cash is known as operating cycle that includes following activities in different phase. At first phase: * Conversion of cash into raw material * Conversion of raw material into work in progress * Conversion of Work in progress into finished goods * Conversion of finished goods into Sales ( Debtors and cash) At second Phase: Cash received and at third phase is payment of credit.

A low cash conversion cycle allows the managers to minimize holdings of relative unproductive assets such as cash and marketable securities, preserves the firm’s debt capacity since less short-term borrowing is required to provide liquidity and corresponds to a higher present value of net cash flows from firms assets Moreover, the cash conversion cycle is an important technique of analysis for the financial mangers of firm to assess why and when the firm needs more cash to sustain its activities. I am going to comparative study of Surya Nepal Private Limited (SNPL) is an Indo-Nepal-UK joint enture, which started operations in Nepal in 1986. SNPL, a subsidiary of ITC Ltd, India, is the largest private sector enterprise in Nepal. The balance shares are held by dispersed Nepalese shareholders and British American Tobacco, UK. Surya Nepal’s businesses include manufacture and marketing of cigarettes and readymade garments in Nepal as well as exports of ready-made garments with a total turnover of over US $100 million. Secondly, The guiding force behind Dabur’s growth and success has been the wealth of nature and its limitless capacity to support life.

And we have constantly taken care to preserve and protect this natural bounty. With this overall vision of and to eco-sustenance, expand Dabur’s resource and production base, Dabur Nepal Private Limited was set up as an independent Group company in 1992. This new company, set amidst the verdant greens and towering mountains of the Himalayan kingdom of Nepal, has established a unique bond of technology and preservation. 1. 2 Problem of Statement The management of a company’s working capital significantly influences its profitability. In the short term, companies risk being short on liquidity if the working capital level deteriorates.

In the long term, too much working capital lowers the return on investment and reduces the value of the company. In contrast, a reduction of the working capital can significantly improve cash flows and free up capital from a company’s balance sheet. This capital can then be used to reduce debts, pay dividends to investors or reinvest in company growth. In the context of Nepal there is not practically implementation of working capital management technique that can brings the liquidity problem in short term and solvency problem in long term due to loss on business.

This can be the one most important reason for the lower growth rate of manufacturing firm. I want to gain insight into this field and to identify potential areas for optimization of working capital management for the profitability on the Nepalese manufacturing firm. Performance of firm on the topic of working capital management is very essential to reach the optimum level of working capital then to enhance their profitability. But these elements can be affected by Nature of business, seasonality of operations, production policy, market condition, and political scenario.

Therefore, I have done this investigation to know the answer of following question. a. What are the factors of working capital for Nepalese manufacturing firm? b. How can working capital affects the performance to enhance profitability of firms? c. How is the performance of firm to achieve the optimal working capital in order to maximize the profitability? 1. 3 Objective of the Study The main objective of the research is to measure the impact of working capital management on the profitability for Nepalese manufacturing firm. The specific objectives of the study are summarizing as following. a.

To analyze the relationship between working capital management and profitability for manufacturing firm. b. To determine the relationship between size of firm and the profitability c. To Know the relationship between leverage and profitability. 1. 4 Limitation of the Study This study is intended to measure the impact of working capital management on profitability of Nepalese manufacturing firm but the study also influences from the following limitation. a. There isn’t financial sponsor for the depth study. b. Due to the time constraints it is not possible to analyze the each variable in details. c.

In depth analysis and the study of financial position is not feasible because of the policy and privacy of firm. d. The information is assuming true that is taken from different source. CHAPTER-II LITERATURE REVIEW 2. 1 Literature Review According to Wilner (2000) most firms extensively use trade credit despite its apparent greater cost, and trade credit interest rates commonly exceed 18 percent and Deloof (2003) also found that according to National Bank statistics during 1997, Belgian companies had accounts payable of only 13% of the total asset and accounts receivable and Inventory of 17% and 10% of the total asset respectively.

Singh and Pandey (2008) discussed the impact of working capital management in the profitability of Hindalco Industries Limited. Regression results showed that current ratio, liquid ratio, receivable turnover ratio and working capital to total assets had statically significant impact on profitability. Dong and Su (2010) examined the relationship between profitability, the cash onversion cycle and its component for listed firms in Vietnam stock market for period (2006-2008). They resulted that there is strong negative relationship between cash conversion cycle and the profitability.

Cote and Latham (1999, p. 261) argued that management of receivables, inventory and accounts payable have tremendous impact on cash flows, which in turn affect the profitability of firms. According to Long, Malitz and Ravid (1993) it is seen that liberal credit terms to the customers increase the sales level of the firm, though having a continuous troubleshooting with managing short term financing in the finance department. The decision lays with the firm which one to put more importance on. Scherr (1989, p. 6) claimed that companies can strengthen strong cash flow levels, improve profitability, budgeting and forecasting process, predictability and manageability of results, heighten risk if they implement the best practices in working capital. Amit, Sur and Rakshit (2005) studied the relationship between working capital and profitability in the context of Indian pharmaceutical industries and concluded that no definite relationship can be established between profitability and liquidity. Cote and Latham (1999, p. 61) argued that management of receivables, inventory and accounts payable have tremendous impact on cash flows, which in turn affect the profitability of firms. Scherr (1989, p. 16) claimed that companies can strengthen strong cash flow levels, improve profitability, budgeting and forecasting process, predictability and manageability of results, heighten risk if they implement the best practices in working capital. Eljelly(2004) identified the relation between profitability and liquidity who was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock firms in Saudi Arabia.

The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. The size variable was found to have significant effect on profitability at the industry level. The results were stable and had important implications for liquidity management in various Saudi firms. First, it was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that there was great variation among industries with respect to the significant measure of liquidity.

Sur Biswas and Ganguly (2001) revealed in their study of Indian aluminium producing industry, a very significant positive association between liquidity and profitability. All previous studies had reached to the same results approximately, which had proved there is the negative relationship between the working capital, debt ratio, current ratio and profitability, and the positive relationship between size of the firm with profitability. This study tries to depend on previous studies to provide new evidence on how working capital can effect on the profitability. . 2 Research Frame Work Model ROA Leverage Performance Working Capital Efficiency Profitability of the Firm Size of Firm Current Liabilities Current Assets Organization Planning Growth of business Ln of Sales Debt ratio Liquidity ratio: CR All the components such as Working Capital, Profitability and Size of the firms, Liquidity, and Leverage performance are interrelated to each other. The working capital affects the profitability of the firm. Similarly size, leverage, and liquidity affect the working capital requirement and profitability of the firm.

If there is low in current assets then it can’t pay the short term obligation and if firms keep in high ratio then investment opportunity will lose that decreases the value of profitability elements such as ROE and ROA. Secondly, if there is high concentration on sales by keeping low liquid assets then profit can increase and it helps to increase the growth rate of company and fulfill the objective of shareholder’s wealth maximization and ease for the competition but low liquid assets can creates the risk of liquidity. Therefore, all components of above mentioned are interrelated positively and negatively.

After analyzing the financial ratio BOD, manager can formulate the policy for sustainable business as well as investors will take best decision for the investment. This study has been guided according to the above variables and discussed the variables relation after studied of two firms in detail in the below. Hence, this study will benefit for the best decision of working capital requirement to manage the profitability, leverage in long term and to growth the firm in stable rate. CHAPTER-III DATA COLLECTION AND METHODOLOGY 3. 1 Research Data Collection

The data has taken from the secondary source regarding to the official site of Surya Nepal Pvt. Ltd and Dabur Nepal Pvt Ltd. Secondary data is assumed as an enough and reliable. Sample of this study has been focused on the joint venture Nepalese manufacturing firms. These two firms have chosen as a sample company due to big market in Nepal. To fulfill the objective of research, report is prepared by taking a financial data of two sample companies from 2006 to 2011. 3. 2 Definition of variable I have used of dependent and independent variables to complete the study are as below.

Dependent variables include profitability measure which will be computed by the following equation: Return on Assets (ROA)=Net Operating IncomeTotal Assets Secondly, independent variables have been divided in two parts. First part includes working capital management variables. • Average receivable collections period (ARCP) are used to express the credit policy. It is calculated by using following equation: Average receivable collections period (ARCP)=Account Receivables *365/Sales • Average conversion inventory period (ACIP), which is expressed the inventory policy.

It will be identified by following formula: Average conversion inventory period (ACIP)= Inventory *365/Cost of Sales • Average payment period (APP) is used to reflect the payment policy it is measured measured by following equation: Average payment period (APP) =Accounts Payables *365/Cost of Sales • Cash conversion cycle (CCC) is used to express the overall impact on working capital efficiency, and that is calculated by using following equation. Cash Conversion Cycle (CCC)=ARCP+ACIP-APP At the second phase of independent variables has been included as below. • Size of the company = Natural of logarithm of sales (LNS). Current ratio (CR) = Current assets/Current Liabilities. • Financial leverage ratio (FL) = Total Liabilities / Total Assets. 3. 3 Empirical Analysis This section contains the descriptive analysis by taking the help of mean, standard deviation, maximum and minimum value of all variables that is used in study. Similary, on the second phase of analysis here has been explained the relationship between the variables by using correlation coefficient. Moreover, regression model has been used to quantify the relation between variable and to measure the accuracy of this report.

Multiple regression models have used to complete the regression analysis. All types of analysis and graphical representation will be expressed by using the MS office package 2007. For this study I have used 4 regression models to quantify the relation and model is as below. 1. ROA= a+b1ARCP+b2CR+b3FL+b4LNS (model -1) 2. ROA= a+b1ACIP+b2CR+b3FL+b4LNS (model-2) 3. ROA= a+b1APP+b2CR+b3FL+b4LNS (model-3) 4. ROA= a+b1CCC+b2CR+b3FL+b4LNS (model-3) CHAPTER-IV DATA ANALYSIS AND PRESENTATION 5. 1. Empirical Analysis and Findings 4. 1. 1Descriptive Analysis: Dabur Nepal Pvt. Ltd (Table 1) | ROA| ARCP| ACIP| APP| CCC| CR| FL| Lns|  |  |  |  |  |  |  |  | Mean| 0. 034| 35. 67| 75. 12| 42. 35| 68. 44| 2. 00| 0. 248| 21. 73| Standard Deviation| 0. 028| 19. 74| 31. 74| 35. 27| 39. 24| 0. 676| 0. 055| 0. 346| Minimum| 0. 001| 4. 13| 17. 37| 8. 33| 6. 30| 1. 52| 0. 207| 21. 39| Maximum| 0. 084| 55. 23| 111. 78| 93. 46| 120. 94| 3. 19| 0. 351| 22. 38| Count| 6| 6| 6| 6| 6| 6| 6| 6| According to the above table, ROA on average is 34% and ROA existed between 0. 1 % to 0. 84%. The average receivables collection period has 5 days (approximately) as minimum to collect its receivables from the purchasers but it takes 55. 23 days as maximum to collect its receivable.

The average days of generating its sales on account about 35. 67 days. In addition, the average conversion inventory period (ACIP) takes about 17. 37 days to sell all its inventory as minimum and takes 111. 78 days as maximum. The mean days to sell the inventories are 75. 12 days with standard deviation of 31. 74 days. About the APP, the firm has a minimum time 8. 33 days to pay its purchases on account and 93. 46 days as a maximum time. It takes an average 42. 35 days to pay its purchase with standard deviation of 35. 27. The cash conversion cycle (CCC) has 6. 30 days as a minimum time and maximum is 120. 94 days.

The minimum current ratio (CR ) of the firm is 1. 52 and maximum is 3. 19 with the standard deviation of 0. 55%. The Natural Logarithm of size (LNS) shows minimum sales is 21. 39 and maximum is 22. 38 with the average of 21. 73. About the financial leverage is 20% as minimum and maximum is 35% with the standard deviation of 0. 55%. Surya Nepal PVT. LTD (Table 2) | ROA| ARCP| ACIP| APP| CCC| CR| FL| LNS| |  |  |  |  |  |  |  |  | Mean| 0. 287| 5. 11| 191. 55| 63. 45| 133. 21| 1. 72| 0. 424| 22. 82| Standard Deviation| 0. 086| 2. 90| 21. 84| 5. 88| 19. 96| 0. 678| 0. 152| 0. 339| Minimum| 0. 178| 2. 54| 170. 51| 57. 0| 110. 72| 1. 06| 0. 255| 22. 42| Maximum| 0. 389| 9. 86| 232. 04| 73. 16| 167. 62| 2. 44| 0. 594| 23. 31| Count| 6| 6| 6| 6| 6| 6| 6| 6| an average return on assets(ROA) is just 28% which is lower than Dabur Nepal Ltd. But the minimum and maximum value of ROA exists between 17 % to 38 % and less variability comparison with Dabur Nepal Ltd. The Average receivable collection period (ARCP) is 5. 11 days approximately and lower than Dabur. Thus, collection capacity of dabur is very strong. similarly, ACIP of Surya Nepal exist between 170. 51 days to 232. 04 days. About the average CCC of Surya Nepal is 133. 1 days which is higher than Dabur Nepal. Therefore, we can say that, cash inflow days in the Dabur Company are quicker than Surya Nepal. Moreover, an average 42% portion is existed under the total assets of the Surya firm that is higher than Dabur Company. It means, Surya Nepal takes more loans for the business. About the average size of Surya Nepal is 22. 82 that is higher than Dabur. Graph: 1 source Table 1 and 2 Let summarize the above result: a. ROA of Surya Nepal is higher that tends to the meaning of; profitability volume is good rather than Dabur Nepal Pvt. Ltd. b. Credit collection capacity is stronger of Surya Nepal Pvt.

Ltd. c. Surya Nepal Ltd. takes more time to convert the goods in raw material. d. Surya Nepal pays to supplier at delay comparison with Dabur. e. CCC of Surya is higher due to higher in ACIP and APP. 4. 1. 2. Correlation Coefficient Analysis Dabur Nepal Ltd. (Table 3) | ROA| ARCP| ACIP| APP| CCC| CR| FL| Lns| ROA| 1|  |  |  |  |  |  |  | ARCP| -0. 903| 1|  |  |  |  |  |  | ACIP| -0. 666| 0. 537| 1|  |  |  |  |  | APP| -0. 074| 0. 141| 0. 705| 1|  |  |  |  | CCC| -0. 927| 0. 811| 0. 446| -0. 258| 1|  |  |  | CR| 0. 835| -0. 627| -0. 888| -0. 450| -0. 6291| 1|  |  | FL| -0. 095| 0. 285| -0. 007| -0. 152| 0. 2743| 0. 48| 1|  | Lns| 0. 144| -0. 172| 0. 348| 0. 609| -0. 352| -0. 203| -0. 572| 1| Surya Nepal Pvt. Ltd (Table 4) | ROA| ARCP| ACIP| APP| CCC| CR| FL| LNS| ROA| 1|  |  |  |  |  |  |  | ARCP| -0. 420| 1|  |  |  |  |  |  | ACIP| 0. 393| -0. 174| 1|  |  |  |  |  | APP| -0. 359| -0. 402| 0. 441| 1|  |  |  |  | CCC| -0. 263| 0. 073| 0. 939| 0. 130| 1|  |  |  | CR| -0. 892| 0. 493| -0. 443| -0. 736| -0. 196| 1|  |  | FL| -0. 869| -0. 457| 0. 541| 0. 769| 0. 299| -0. 992| 1|  | LNS| 0. 958| -0. 437| 0. 569| 0. 464| 0. 423| -0. 893| 0. 902| 1| According to the Table 3 and 4, Return on Assets (ROA) has negative relationship with ARCP.

It tends to the meaning of longer the time of collection days reduces the profitability of firm. Therefore, if a firm reduces the length between sales and collection, it will increase the profitability through reinvest collections in profitable investments. Correlation results related negatively between the average conversion conversion inventories (ACIP) and ROA significantly in the case of Dabur. It means when the firm reduces the length time required converting raw material in to finished goods and then to sell those goods that lead to enhance profit.

But in the case of Surya Nepal, there is positive relationship between ARCP and ROA. It means, it should take more stock for the high profit. The average Payment Period (APP) has negatively correlation with Profitability. It means, if the both firm shorten the length time between purchases goods and payment of the value of goods, it will lead to increase profitability. There are negative relationship between cash conversion cycle (CCC) and ROA. If the firms shorten its conversion cycle as much as possible without hurting its operation, it will reflect positively on profitability.

Correlation coefficient of the size (LNS) firm is positive relationship with profitability that indicates if the firm increases its size of sales; it will lead to increase its profitability. Current ratio refers to liquidity of the firm which relates positively correlated with ROA in case of Dabur but negatively correlated with ROA in case of Surya Nepal. Generally, if the firm invests its liquidity very well, it will generate high return and as per situation there might be required or not for holding of stocks in long term. About the Financial leverage that is negatively correlated with profitability.

It means, if the firm depends on the financial leverage as much as need, ti carry itself financial obligation such as interest payment and principal payment and then it reflects negatively on its profitability. Dabur Nepal Pvt. Ltd. (Table 5) Year| 2006| 2007| 2008| 2009| 2010| 2011| ROA| 0. 031| 0. 030| 0. 022| 0. 001| 0. 084| 0. 038| CCC| 85. 74| 86. 30| 63. 87| 120. 93| 6. 29| 47. 46| Source Table 5. Graph 2 Conclusion: According to the above finding, the increasing in the value of CCC that decreases the value of ROA. And it is proved that there is negative relationship between ROA and CCC.

Surya Nepal Pvt. Ltd Graph 3. Conclusion: In the case of Surya Nepal Pvt. Ltd, there is positive relationship between ROA anc CCC. This means to increase the profit of Surya firm then they have to increase the value of working capital component. 4. 1. 3Regression Analysis: Dabur Nepal Pvt. Ltd Table 6 Independent Variables| Model-1| Model-2| Model-3| Model-4| ARCP| -0. 001|  |  |  | ACIP|  | -0. 020|  |  | APP|  |  | -0. 0003|  | CCC|  |  |  | -0. 0004| CR| 0. 020| 0. 115| 0. 045| 0. 017| FL| -0. 021| -0. 577| -0. 178| -0. 015| Lns| 0. 014| 0. 053| 0. 008| 0. 002| Adjusted R^2| 0. 780| 0. 7| 0. 517| 0. 815| F-test| 0. 010*| 0. 01*| 0. 0051*| 0. 077**| Surya Nepal Pvt. Ltd Table 7 Independent Variables| Model-1| Model-2| Model-3| Model-4| ARCP| -0. 003|  |  |  | ACIP|  | 0. 907|  |  | APP|  |  | -0. 008|  | CCC|  |  |  | 0. 953| CR| 0. 275| 0. 360| 0. 221| 0. 275| FL| -1. 188| -1. 599| -0. 055| -1. 188| Lns| 0. 245| 0. 224| 0. 069| 0. 245| Adjusted R^2| 0. 770| 0. 67| 0. 71| 0. 79| F-test| 0. 0876**| 0. 0035*| 0. 012*| 0. 0144*| In the above table, F-test has been done at 5%=* and 10% =**significance of level. Table 6 and 7 presents the regression result of two firms of 4 models.

According to the table 6 and 7, ARCP and ROA have negatively correlated. For the both Company if there is 1% increase in the days of collection period than less than 1% will decrease on the value of profitability. Similarly, for the both firm, liquidity ratio and size of firm is positively correlated. It means, increases in the sales that will increase the profit volume. Positive value of CR and LNS but negative value of financial leverage (FL) is accepted by all models. This means, if loan amount is increased by 1% then profit will decreased by 0. 21% in case of Dabur but more than 11% in case of Surya Nepal.

All the, result revealed that, to increase the profit, firm should decrease the loan amount. According to the Model 4 from table 6, there is negative relationship between ROA and cash conversion cycle. This means, to increase the profit, Dabur should reduce the CCC. It is also supported by the theory of higher the working capital leads to the lower of profitability. On the other hand, model 4 from table 7 reveals that there is positive relationship between ROA and CCC. This result is beyond the theory and if Surya Nepal wants to increase its profit then it should increase the Working capital.

It may the cause of poor situation of Nepalese economy, nature of business as well as less concentration on environment management that is leading to keep higher amount of stock. According to table 6, model 1 , 2 ,3 and 4 explained the dependent variable by independent in the portion of 78% , 77% , 51%, and 81 % respectively and remaining portion is due to other element. But in the table 7, dependent variable (ROA) is explained by independent in the form of 77%, 67%, 71%, and 79% and remaining part is covered by other elements. CHAPTER-V CONCLUSION AND RECOMMENDATION 5. Conclusion and Recommendation

Working capital management is the same of liquidity management and its related inversely with profitability but this theory always doesn’t work. Here, I have found the different relationship between the component of working capital and profitability by taking financial data of Dabur Nepal Ltd and Surya Nepal Pvt. Ltd manufacturing from 2006-2011. This study appears that there is a negative significance relationship between average receivables collection period (ARCP), average conversion inventory period (ACIP, only case for Dabur), average payment period (APP) and the profitability measures.

It is proved also a negative relationship between the cash conversion cycle (CCC) from the data of Dabur Company but it is not the result of universal fact because it is also proved that there can be a positive relationship between CCC and Profitability. The reason behind this can be the political risk, poor economy, lack of availability of raw materials and delivery of goods and services in time due to the labor union problem, increasing in supplier power, unavailability of credit facility, poor management of current assets and lack of efficient procedure and subsidy facility from government.

After this analysis, the study recommends for the firms to manage their working capital efficiently to achieve the optimal profitability. Thus, the firms can manage their working capital through reduce the length time between sell the goods and receive cash of sales, it can do that by accelerating its collections. And it also reduce the length time between convert the raw materials into finished goods to sell these goods through. On the other hand the firms should shorten the length time between purchase goods to pay their purchases.

All these will lead to shorten the cash conversion cycle and then lead to achieve the optimal profitability. Moreover, we can’t say that there will be lower profit due to higher CCC because due to the environmental factors the component of working capital can be influenced and result can go beyond the planning and objective. In the context of Nepal, where the practices of working capital management is poor and as a result firms are generating lower profit. Secondly, long procedure of raw material conversion and delay of payment also reduces the profit of firm.

It can be the one cause of Positive relationship between CCC and profitability in case of Surya Nepal Pvt. Ltd. Therefore, reduction of working capital is not only best solution because environment analysis is also important factor. References: Amit, K. Malik, Debashish Sur and Debdas Rakshit (2005). Working Capital and Profitability: A Study on their Relationship with Reference to Selected Companies in Indian Pharmaceutical Industry, GITAM Journal of Management. 3: 51-62. Deloof M (2003). “Does Working Capital Management Affect Profitability of Belgian Firms? J. Bus. Financ. Account. , 30(314): 573-587. Dr. S. , Ray “Evaluating the Impact of Working Capital Management Components on Corporate Profitability: Evidence from Indian Manufacturing Firms” 2012 Eljelly, A. M. (2004). Liquidity –Profitability Tradeoff: An Empirical Investigation In An Emerging Market, International Journal Commerce and Management. 14(2), 48-61. J. , Desai ; N. , A. Joshi, “Effect of Working Capital Management on Profitability of Firms in India” March 2, 2011 ; http://papers. ssrn. com/sol3/papers. cfm? bstract_id=1774686; Lazaradiz, I and Tryfonidis, D. (2006). Relationship Between Working Capital Management And Profitability Of Listed Firms In the Athens Stock Exchange, Journal of Financial Management and Analysis. 19(1), 26-35. Mukhopadhyay, D (2004), Working Capital Management in Heavy Engineering Firms- A Case Study, myicwai. com. knowledge/fm48. Raheman, A. , ; Nasr, M. (2007). Working Capital Management And Profitability – Case Of Pakistani Firms. International Review of Business Research papers, 3(1), 279 – 300.

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