Skip to main content
SpringerLink
Log in

The determinants of working capital management and firms performance of textile sector in pakistan

  • Published:
Quality & Quantity Aims and scope Submit manuscript

Abstract

The aim of this study is to determine the relationship of working capital management and the firm’s profitability in the textile sector of Pakistan. A sample of 127 textile firms listed in the Karachi stock exchange for the period 2001–2012 are used in the study. The study uses the dynamic panel generalized method of moments to analyze the data. The findings revealed that average collection period in days, net working capital level, current assets to operating income, current assets to sales ratio, current liabilities to total assets has negative impact on return on assets, whereas the accounts payable period in days, inventory turnover in days, cash conversion cycle, net trade cycle, cash turnover ratio, current assets to total assets ratio, and current ratio has a positive association with profitability. In case of the control variables, sales growth and firm size have positive associations with profitability, while financial debt ratio, gross domestic product, inflation and interest depicted negative results. The findings highlight the significance of the working capital components with profitability in the textile sector of Pakistan and recommends that by designing and implementing effective policies on working capital, the firm’s profitability can be enhanced.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

References

  • ADB Report: In: A.D.B.A Report (ed.) Private Sector Assessment. Asian Development Bank Report, Pakistan (2008)

  • ADB Report: No. FLS 124471. (2012) Confronting Rising Inequality in Asia. Asian Development Bank, Phillipines (2012)

  • Ademola, O.J.: Working capital management and profitability of selected quoted food and beverages manufacturing firms in Nigeria. Eur. J. Acc. Audit. Financ. Res. 2(3), 10–21 (2014)

    Google Scholar 

  • Ajao, O.S., Alu, C.N.: Effective working capital management: a study of selected quoted manufacturing companies in Nigeria. Econ. Bus. Rev. 2(6), 55–67 (2012)

    Google Scholar 

  • Alavinasab, S.M., Davoudi, E.: Studying the relationship between working capital management and profitability of listed companies in Tehran stock exchange. Bus. Manag. Dyn. 2(7), 01–08 (2013)

    Google Scholar 

  • Alipour, M.: Working capital management and corporate profitability: evidence from Iran. World Appl. Sci. J. 12(7), 1093–1099 (2011)

    Google Scholar 

  • ALShubiri, F.N.: The effect of working capital practices on risk management: evidence from Jordan. Glob. J. Bus. Res. 5(1), 39–54 (2011)

    Google Scholar 

  • Aregbeyen, O.: The effects of working capital management on the profitability of Nigerian manufacturing firms. J. Bus. Econ. Manag. 14(3), 520–534 (2014)

    Article  Google Scholar 

  • Arellano, M., Bond, S.: Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev. Econ. Stud. 58, 277–297 (1991)

    Article  Google Scholar 

  • Asch, D., Kaye, G.R.: Financial Planning : Modeling, Methods, and Techniques. Kogan Page Limited, London (1989)

    Google Scholar 

  • Berryman, J.: Small business failure and bankruptcy: a survey of the literature. Eur. Small Bus. J. 1(4), 47–59 (1983)

    Article  Google Scholar 

  • Blundell, R.W., Bond, S.R.: Initial conditions and moment restrictions in dynamic panel data models. J. Econom. 87, 115–143 (1998)

  • Brigham, E.F., Gapenski, L., Ehrhardt, M.C.: Financial Management : Theory and Practice, 9th edn. The Dryden Press, Japan (1999)

    Google Scholar 

  • Charitou, M.S., Elfani, M.E., Petros, L.: The effects of working capital management on firms profitability : empirical evidence from an emeging market. J. Bus. Econ. Res. 8(12), 63 (2010)

    Google Scholar 

  • Charitou, M., Santoso, H.B., Petros, L.: The relationship between working capital management and firm’s profitability: an empirical investigation for an emerging Asian country. Int. Bus. Econ. Res. J. 11(8), 839–848 (2012)

    Google Scholar 

  • Chhapra, I.U., Naqvi, N.A.: Relationship between efficiency level of working capital management and profitability of firms in the textile sector of Pakistan. Indus J. Manag. Soc. Sci. 4(1), 30–42 (2010)

    Google Scholar 

  • Ching, H.Y., Novazzi, A., Gerab, F.: Relationship between working capital management and profitability in Brazilian listed companies. J. Glob. Bus. Econ. 3(1), 74–86 (2011)

    Google Scholar 

  • Christopher, SB., Kamalavalli, AL.: Sensitivity of profitability to working capital management in Indian corporate hospitals. Working Paper, NCrM College (2009)

  • Crum, R.L., Klingman, D.D., Tavis, L.A.: An operational approach to integrated working capital planning. J. Econ. Bus. 35, 343–378 (1983)

  • Deloof, M.: Does working capital management affect profitability of Belgian firms? J. Bus. Financ. Account. 30(3&4), 573–587 (2003)

    Article  Google Scholar 

  • Dinku, T.: Impact of working capital management on performance of micro and small enterprises in Ethiopia. Swiss J. Res. Bus. Soc. Sci. 1(2), 1–14 (2014)

    Google Scholar 

  • Dong, H.P., Su, J.: The relationship between working capital management and profitability: a Vietnam case. Int. Res. J. Financ. Econ. 49, 59–67 (2010)

    Google Scholar 

  • Ejelly, A.M.A.: Liquidity—profitability tradeoff: an empirical investigation in an emerging market. Int. J. Commer. Manag. 14(2), 48–61 (2004)

    Article  Google Scholar 

  • Emery, G.W.: A pure financial explanation for trade credit. J. Financ. Quant. Anal. 19(3), 22–38 (1984)

  • Farzinfar, A.A., Arani, Z.G.: The assessment of the effect of working capital management on the profitability of pharmaceutical companies of tehran stock exchange. Am. J. Sci. Res. 48, 121–129 (2012)

    Google Scholar 

  • Frank, M.Z., Goyal, V.K.: Testing the pecking order theory of capital structure. J. Financ. Econ 67(2), 217–248 (2003)

  • Glautier, M.W.E.: Towards a reformulation of the theory of working capital. J. Bus. Financ. Account. 3, 37–42 (1971)

    Google Scholar 

  • Grablowsky, B.J.: Financial management of inventory. J. Small Bus. Manag. 18(3), 59–65 (1984)

    Google Scholar 

  • IMF Country report No. 10/ 183: Pakistan: Poverty Reduction Strategy Paper (PRSP), International Monetory Fund (Country Report) , Washington D.C. (2010)

  • IMF Country Report No. 12/ 35: Consultation and proposal for post program monitoring, International Monetary Fund (IMF), Washington. D.C (2012)

  • Jayarathne, T.A.N.R.: Impact of working capital management on profitability: evidence from listed companies in SriLanka. In: Proceedings of the \(3^{\rm rd}\) International Conference on Management and Economics, pp. 269–274 (2014)

  • Jeng-Ren, C., Li, C., Han -Wen, W.: The determinants of working capital management. J. Am. Acad. Bus. 10(1), 149–155 (2006)

    Google Scholar 

  • Kaddumi, T.A., Ramadan, I.Z.: Profitability and working capital management; the Jordanian case. Int. J. Econ. Financ. 4(4), 217–226 (2012)

    Article  Google Scholar 

  • Knight, W.D.: Working capital management—satisficing versus optimization. Financ. Manag. 1, 33–40 (1972)

    Article  Google Scholar 

  • Kohler, M., Britton, E., Yates, A.: Trade credit and the monetary transmission mechanism. Bank of England Working Paper no. 115 (2000)

  • Korankye, T., Adarquah, R.S.: Empirical analysis of working capital management and its impact on profitability of listed manufacturing firms in Ghana. Res. J. Financ. Account. 4(1), 124–131 (2013)

  • KPMG: Working capital management survey: How European companies manage their working capital. KPMG International. Retrieved from http://www.ch/library/pdf/kpmgsurvey_WorkingCapitalManagement_e.pdf (2005)

  • Külter, B., Demirgüneş, K.: Determinants of profitability in retailing firms: an empirical study on ise listed retailing firms. J. Çukurova Univ. Inst. Soc. Sci. 16, 445–460 (2007)

    Google Scholar 

  • Lazaridis, I., Tryfonidis, D.: Relationship between working capital management and profitability of listed companies in the Athens stock exchange. J. Financ. Manage. Anal. 19(1), 26–35 (2006)

  • Lyroudi, K., Lazaridis, Y.: The cash conversion cycle and liquidity analysis of the food industry in Greece, working paper. http://ssrn.com/paper236175 (2000). Accessed 7 Sept 2010

  • Martin, J.D., Petty, J.N., Keown, A.J., Scott, D.F.: Basic Financial Management, 5th edn. Prentice Hall, Englewood Cliffs (1991)

    Google Scholar 

  • Mathuva, D.M.: The influence of working capital management components on corporate profitability: a survey on Kenyan listed firms. Res. J. Bus. Manag. 4(1), 1–11 (2010)

    Article  Google Scholar 

  • McMohan, R.G.P., Holmes, S.: Small business financial management practices in North America : a literature review. J. Small Bus. Manag. 29, 19–29 (1991)

    Google Scholar 

  • Myers, S.C.: Financing of Corporations. In: Constantinides, G.M., Harris, M., Stulz, R. (eds.) Handbook of the Economics and Finance, vol. 1, pp. 215–253. Elsevier Publications, London (2003)

    Google Scholar 

  • Myers, S.C., Majluf, N.: Corporate financing and investment decisions when firms have information that investors do not have. J. Financ. Econ. 13, 187–221 (1984)

  • Nadeem, I., Naveed, A., Komal, J.: The relationship between working capital management and profitability: Evidence from Pakistan. Lett. Soc. Humanist. Sci. 9, 60–73 (2014)

  • Nazir, M.S., Afza, T.: On the factors determining working capital requirements. Proc. ASBBS 15(1), 293–301 (2008)

    Google Scholar 

  • Nazir, M.S., Afza, T.: Working capital requirements and the determining factors in Pakistan. J. Appl. Financ. 15(4), 28–38 (2009)

    Google Scholar 

  • Nejad, D.A., Bandarian, A., Ghatebi, M.: A study on the effect of working capital management on the profitability of listed companies in Tehran stock exchange. Acad. J. Account. Econ. Res. 2(4), 121–130 (2013)

    Google Scholar 

  • Niresh, J.A.: Trade-off between liquidity & profitability: A study of selected manufacturing firms in Sri Lanka. J. Arts Sci. Commer. 3(4), 34–40 (2012)

  • Nwankwo, O., Osho, G.S.: An empirical analysis of corporate survival and growth: evidence from efficient working capital management. Int. J. Sch. Acad. Intellect. Divers. 12(1), 1–13 (2010)

    Google Scholar 

  • Onodje, M.A.: Working capital management and performance of selected Nigerian manufacturing companies. Global J. Manag. Bus. Res. Econ. Commer. 14(3), 40–49 (2014)

    Google Scholar 

  • Padachi, K., Narasimhan, M.S., Durbarry, R.: An analysis of working capital structure and financing pattern of mauritian small manufacturing firms. J. Appl. Financ. 14(7), 41–62 (2008)

    Google Scholar 

  • Pandey, I.M.: Working capital management. In: Pandey, I.M. (ed.) Financial Management, pp. 657–658. Vikas Publishinh House Pvt Ltd, New Dehli (2011)

    Google Scholar 

  • Raheman, A., Nasr, M.: Working capital management and profitability–case of Pakistani firms. Int. Rev. Bus. Res. Pap. 3(2), 275–296 (2007)

    Google Scholar 

  • Ray, S.: Evaluating the impact of working capital management components on corporate profitability: evidence from indian manufacturing firms. Int. J. Econ. Pract. Theor. 2, 119–126 (2012)

    Google Scholar 

  • Rehman, M.U., Anjum, N.: Determination of the impact of working capital management on profitability: an empirical study from the cement sector in Pakistan. Asian Econ. Financ. Rev. 3, 319–332 (2013)

    Google Scholar 

  • Ruichao, Lu: Impact of Working Capital Management on Profitability: The Case of Canadian Firms: Unpublished Master Thesis. Saint Mary’s University, Canada (2013)

  • Samiloglu, F., Dermigunes, K.: The effect of working capital management on firm profitability: evidence from Turkey. Int. J. Appl. Econ. Financ. 2(1), 44–50 (2008)

    Article  Google Scholar 

  • Schwartz, R.A.: An economic model of trade credit. J. Financ. Quant. Anal. 9(4), 643–657 (1974)

  • Sen, M., Eda, O.: Relationship between efficiency level of working capital management and return on total assets in Ise. Int. J. Bus. Manag. 4(10), 109–114 (2009)

    Google Scholar 

  • Sharma, A.K., Kumar, S.: Effect of working capital management on firm profitability: empirical evidence from India. Global Bus. Rev. 12(1), 159–173 (2011)

    Article  Google Scholar 

  • Shroff, S.J.: An empirical study of working capital policy, risk and leverage. Pak. Bus. Rev. 14(4), 712–731 (2013)

  • Siddique, R.D., Iffat, S.: Report-VI, s.l: Federal Board of Revenue (FBR) Pakistan, vol. 12, pp. 51–62 (2012)

  • Soku, B.: How and when do firms adjust their capital structure toward targets? J. Financ. 63(6), 3069–3096 (2008)

  • State Bank of Pakistan Report.: SBP Report. State Bank of Pakistan, Islamabad (2010, 2012)

  • Stewart, T.: Creating working capital and cash flow efficiencies. Alask. Bus. Mon. 25(10), 16–17 (2009)

    Google Scholar 

  • Textile sector report: Growth trends of Pakistan textile industry. Pakistan (2012)

  • Tufail, S., Sidra, B., Amjad.: Impact of working capital management on profitability of textile sector of Pakistan. Elixir Int. J. 12, 14387–14397 (2013)

  • ul Haq, I., Sohail, M., Zaman, K., Alam, Z.: The relationship between working capital management and profitability: a case study of cement industry in Pakistan. Mediterr. J. Soc. Sci. 2, 2039–2117 (2011)

    Google Scholar 

  • Van Horne, J.C.: Financial Management, 8th edn. The Dryden Press, New York (1980)

    Google Scholar 

  • Weinraub, H.J., Visscher, S.: Industry practice relating to aggressive conservative working capital policies. J. Financ. Strateg. Decis. 11(2), 1–11 (1998)

  • Weston, J.F., Brigham, E.F.: Financial Theory and Corporate Policy, 3rd edn. Addison-Wesley Publishing Company, Reading (1992)

    Google Scholar 

  • Zawaira, T., Mutenheri, E.: The association between working capital management and profitability of non financial companies listed on the Zimbabwe stock exchange. Int. J. Res. Soc. Sci. 3(8), 114–120 (2014)

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Faculty of Management (FM), Universiti Teknologi Malaysia (UTM), Skudai, 81310, Johor Bharu, Malaysia

    Mohammad Tahir & Melati Binti Ahmad Anuar

  2. Department of Management Sciences, COMSATS Institute of Information Technology, Islamabad, Pakistan

    Mohammad Tahir

Authors
  1. Mohammad Tahir
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Melati Binti Ahmad Anuar
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mohammad Tahir.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Tahir, M., Anuar, M.B.A. The determinants of working capital management and firms performance of textile sector in pakistan. Qual Quant 50, 605–618 (2016). https://doi.org/10.1007/s11135-015-0166-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11135-015-0166-4

Keywords

Search

Navigation