WORKING CAPITAL MANAGEMENT AND PROFITABILITY: EVIDENCE FROM PAKISTAN FIRMS

Abstract

Working capital management is important part in firm financial management decision. Improper management of Working capital, that is, too much or too low working capital may suffer firms, so an optimum level of working capital is the key to a smooth inflow of profit. In this paper we investigate the relationship between profitability and working capital management. We used a sample of 60 textile companies listed at Karachi Stock Exchange (KSE) for the period of 20012006 and the firms observations are 360. The purpose of this study is to establish a relationship that is of statistical significant between profitability, the cash conversion cycle and its components (Number of days Accounts receivables, Number of days Accounts payables and Number of days Inventory). The results of our research showed that there is statistically negative significance between profitability, measured through Return on Asset, and the cash conversion cycle. Moreover managers can create profits for their companies by handling correctly the cash conversion cycle and keeping Number of days Accounts receivables, Number of days Accounts payables and Number of days Inventory to an optimum level.