Impact of Liquidity Management on Profitability of Pakistani Firms: A Case of KSE-100 Index

Abstract

The global financial crisis of 2007-08 has reverted the mounting importance of liquidity and profitability as a key concern in today's competitive business environment to generate funds internally. This study has examined the impact of the liquidity management on the performance of the 64 Pakistani non-financial companies constituting Karachi Stock Exchange (KSE) 100 Index for the period of 2006-2011. To derive the results of the study; descriptive statistical analysis, correlation analysis and multivariate regression tools of analysis were applied. According to the results of analyses, it is found that liquidity variables current ratio and the cash conversion cycle have significant positive impact on profitability (ROA). Further, results indicate that high current ratio and longer cash conversion cycle lead firms towards better performance. This study suggested firms to relax their credit sales policies, and devise inventory and collection turnover system in a wise manner to be more accessible to a large number of customers.