Management and Administrative Sciences Review ISSN: 2308-1368 Volume: 1, Issue: 1, Pages: 1-13 2013 Academy of Business &

; Scientific Research

Research Paper
Working Capital Management and Firm Performance in Karachi Stock Exchange (KSE)
Gulzar Ahmad Khan1*, Inaam Ullah Ghazi 2
1, 2. Air University Islamabad (44000), Pakistan

The objective of this paper is to determine the impact of working capital management on firms performance in emerging markets such as Karachi Stock Exchange. In this paper, we used different variables for the analysis of working capital management and t he firms performance. The sample consists of 22 firms from chemical sector, drawn from KSE-100 index, for the period of 6 years ranging from 2005-2010. The variables that were used in this study for the measurement of working capital management are: cash conversion cycle, number of days receivable, number of days inventory and number of days payables and the Size, Leverage, Growth rate, Fixed financial assets, Variability in net operating income and GDP are the control variables. Tobins Q and gross operat ing profit was used to measure firms performance. Results indicate that cash conversion cycle is positively influenced by the firm profitability. The firms with higher profits are not interested in managing working capital and firm performance. The findings also suggest that there is negative relationship between the working capital and firm performance. Keywords: Working Capital; Cash Conversion Cycle; Karachi Stock Exchange; Tobins Q
INTRODUCTION The present financial problems and decline that rapidity from 2008 have brought very much attention to savings that companies made in temporary assets, and capital utilized in the period of return into one year to signify the main pa rt of things on a companies financial position. It reddened the significance of temporary working capital management of companies in worldwide and urged researchers focus. Practitioners and researchers of some type supposed that perfect working capital management is necessary for companies among the successful financial period (Lo, 2008) and can be arranged well to develop the competition situation, profitability and others emphasize on progressing working capital management logically significant for the
*Corresponding author: Gulzar Ahmad Khan, Air University, Islamabad (44000), Pakistan. E-Mail: lashari646@gmail.co m

companies to survive from the impact of financial issues (Reason, 2008). Liquidity or profitability and the stability both are demanding options as to perform a firm every day process. The requirement of liquidity is to make sure that the firms are capable to meet their temporary responsibilities and constant stream can be definite to a gainful project. The significance of cash as a sign of ongoing economic wellbeing should not be amazing in the observation of its vital position in business. It is a requirement that the business should be run together perfectly or profitably. Specified that stress of lesser credit limits and due to increased interest rates a quick reduction in requirements that occurs earnings on firms goods and services. It is lead to a vertical

Working Capital Management

Research Paper

increase in stocks of capital and fixed up to these stocks. Therefore, the average period, a lot of firms change their attention from increment in internal success and managing cash. The difference in asset liability might be happen in which firms can enlarge the profitability in the short period but in a danger of its liquidation. Further, it offers more attention of liquidity that will be the cost of profitability. Therefore, the managers of units are in a impasse to achieve preferred exchange in order to increased the value of firms liquidity and profitability (Padachi, 2006). Wilner (2000) analyzed that the majority of firms briefly utilizes trade credit in spite of its clear larger cost and trade debt interest rates normally go beyond 16 percent. In 1993 Pakistani firms comprehensive their debts towards clients by investment. Deloof (2003) originate to analyze information from the National Bank of Pakistan that in 1997 no. of days accounts payable are 16 percent to total assets such as no. of days accounts receivables and no. of days inventory are accounted for 21 percent and 24 percent correspondingly. Summers and Wilson (1998) give arguments on KSE in chemical industry that is more than 80 percent of everyday business dealings based on credit. The firms volume extent to their functions in developing and progressing countries that is significant to the firms working in budding markets. In growing markets the firms are typically low size with incomplete contact to longer period capital markets. Those firms are likely to depend on extra serious proprietor financing, trade on debt and short time debt funding to their desirable savings cash, receivables and inventories (Chittenden et al, 1998; Saccurato, 1994).The breakdown rates between insignificant business to the very elevated compare with the big business. Preceding learnings have revealed that working capital management feeble to manage finance especially weak and insufficient long term finance is the main reason of breakdown between small firms (Berryman, 1983; Dunn and Cheatham, 1993 ; Lazaridis and Tryfondis, 2006). Investment specified the importance of working capital result Strategies of firms threats in number of firms, working management strategy options and practices implications can be significant for market progress but not for accounting profitability. The possession of Successful

management is to direct the profitability at commercial level. Specify the administrative achievements that could be calculated by market worth and suggestions in this learning the perfect working capital management must bring extra investors in market worth. The impact of working capital management that determines the strategies in growing markets together with the accounting and market progress of firms. Working capital is a finest declaration of cash changes we are struggled to set a relationship among accounting so the market progress and the management cash conversion cycle. It is a relationship that consists of all three significant aspects managing working capital. It is a sign to how much a firm can bring close to its functions or to describe the period break among the payments for commodities and group of sales. The best possible stage of inventories are projected to a direct cause on profitability while discharging working capital possessions in which the business cycle are to enlarge the inventory stages to take action to increase product demand. In the same way both of credit strategies from suppliers and credit time is recognized by clients that affects profitability. In order to recognize the working capital is organized the cash conversion cycle and its categories impact on firms market value and accounting progress is statistically studied, we examine the link among the firms working capital management and performance for the firms that are registered on the Karachi Stock Exchange for the phase 20052010. The impact of cash conversion cycle, No. of days receivables, No. of days in inventories and No. of days payable are to establish overall operations. Examine this difficult report, we have progressed objectives of our study which will confidently put in towards a very key feature of monetary administration known as working capital management. In Pakistan it is not touched or extremely small study that has been completed in this region. The focus of this study on working capital management and its effects on profitability for a model of Pakistani firms. The important aspects are: a connection among Working Capital Management and Profitability over a period of 5 years for 22 chemical Pakistani companies listed on Karachi Stock Exchange. Predicts the large number of components of managing working capital and performance. The relationship among

Manag. Adm. Sci. Rev. ISSN: 2308-1368 Volume: 1, Issue: 1, Pages: 1-13

the Pakistani firms are established the two aspects of performance and liquidity. The size and performance relationship developed among the Pakistani firms. The Pakistani firms of chemical sector established the relationship among the debt that has been utilized and its performance. The conclusion describes the relationship among the chemical Pakistani firms and working capital management. The exceptional in the paper can be managed such as: section 1 consist of introduction and chemical industry performance, in section 2 few words explain the imaginary structure pick some of the preceding studies, section 3 explain information the line of attack proceeds in that study, section 4 consist of analysis the outcome at the end with and section 5 concludes. LITERATURE REVIEW As commercial finance is the main part of decision as well as the structure of capital judgment and budgeting of capital judgment, managing of working capital is more significant element in commercial financing through perfect working capital management is to direct a firm respond speedily and properly for unexpected division in market components, so interest rates of rare items prices and gain aggressive rewards from opponents (Appuhami, 2008). Employees utilized a time prediction on every day capital decisions through current assets that are often transformed into other benefits types which are short term investments (Rao, 1989). Current liabilities in this case that a firm is responsible for doing duties stated in short term liabilities on rational basis. Liquidity is dependent for continuing firm on the working cash changes created from firms assets (Soenen, 1993). From consequence managing the working capital company is very difficult part in the area of monetary organization (Joshi, 1994). The hazards that incurred in Working capital management are related to organize the short term assets. The Short term liabilities are interconnection that present among them. It is impossible to attain considerable stage of capital. It is a possibility to become bankrupt and might obligatory in liquidation (Altman, 1968). Multivariate forecasting base on Pakistani corporations consist of working capital is a base mechanism. The information gather from the KSE organizations which is utilized, Taffler (1982)

made a four components model that is not a successful forecast. Working capital consists of all four alternative components. The current are sufficient to meet its current liabilities to guarantee a logical edge of safety. Every current asset has to be organized perfectively to sustain liquidity whereas firms unable to high a stage of each of them. Every temporary source of finance continuously organized to make sure that are attained and used the finest feasible means. Main component that alert the working capital management substitution among productivity and threats which is connected to the stages of short term assets and liabilities. Afterward actions of working capital management are not long term actions. Managers utilized different methods to take action: cash changes or liquidity and profitability or capital Returns are key thoughts (from which cash flow is maybe significant). Smith (1980) gives the significance of tradeoffs among the both objectives management of working capital, mainly among profitability and liquidity. He describes the actions that are able to increase the probability but not sufficient liquidity. On the other hand, decrease in possible profitability of the company focus on all liquidity. Whereas the most predictable actions of financial changes in current ratio and liquidity ratio (see for example Emery, 1984; Kamath, 1989) give arguments that continuing Liquidity of firm not dependent on the insolvency worth of assets but quietly working cash changes created by those assets. Gitman (1974) introduced the idea of cash conversion cycle is a critical management component of working capital. Cash conversion cycle is to describe the collection period that firm give for buying of main figure of stock period in which organization attain its sales of completed goods. Richards and Laughlin (1980) operational zed the thought by reflecting the cash cycle that net time gap among cash expenses on buyings and the final recovery revenue from the sale of goods. The positive method of cash conversion cycle is the number of days means stock in hand and collections negatively the number of days costs to the suppliers. The combination of old learning is the parts among the cash conversion cycle. There are three forms. Combination among gains and stock

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Research Paper

(Sartoris et al., 1983), combine stock due (see Hadley, 1964; and Haley and Higgins, 1973), or combine parts of working capital (see Damon and Schramm, 1972; Crum et al., 1983). The parts link of working capital means to take action that one part affect another part of the organization (Sartoris et al., 1983). For example, stock managers are to take action at the stage of goods production. The large quantity of stock in other parts working capital (collections and payments) is to contribute as a threat that must be responding a decrease in quantity of final products to draw out an earnings edge. As an outcome, fruitless stock administration will have a cause on companys prosperity, by scheming payments and danger of not utilizing goods. Unluckily the relationship of researchers among the working capital management latter does not give positive results, McInnes (2000). For example the samples of 22 firms from chemical sector the working capital mechanism are not included by the known assumption. In case the working capital management is affected by the researchers conclusion affect the management of working capital. Two factors are discussed. The factors that affects the all companies are universal factors in which a few exact industries are exaggerated by these factors. A few universal factors which firms are political affairs (Carey, 1949), trade, financial conditions (Ben-Horim and Levy, 1983) and causes between industries (Hawaii, et al.,, 1986) and legislation (Peel et al., 2000). However, unique reasons are studied primary writing are administration structure (Garca- Teruel et al., 2007), management act (Krishna et al., 1993), savings rule (Seidner, 1990) and administration financial ability (Rahman and Ali, 2006). By the diverse methods of study shows that influence alarming the working capital administration minimum number openly examined the influence on company act. The pragmatic inquiry whether a petite cash change sequence is having better effect for the corporation helpfulness is questioned from the preceding writing. Shin and Soenen (1998) argue that the company has bigger sale through charitable credit strategy which extend the series of cash. In that case, larger cash conversion cycle might outcome of larger earning. Though, usual outlook connection among the cash conversion cycle and company earning is

that, a larger cash conversion cycle disturb earnings of company. There are limited resources in Pakistan and many economical crises. Because there is political instability in Pakistan. In different other countries the stock exchange is very strong but in Pakistan the stock exchange is weak due to economical and political crisis. The most of the chemicals we import from the different countries that are developed. But Pakistan is developing country. Pakistan went through under number of reforms in KSE. In 2000 the Pakistan enters into a rising market. When Pakistan chemical industries enter into foreign trade there is a progress in chemical sector such as FFC is the most famous company in Pakistan who takes larger portion of KSE. In Pakistan there are two type of finance. First is debt and second is equity. But the ideal situation of debt to equity is 40% equity and 60% debt. Because the condition in Pakistan is different debt to equity is 73% debt and 27% equity utilized in Pakistan. Karachi Stock Exchange is trading in Pakistan like that progressing Markets. The chemical sector produced a basis of capital in business to play vital role. Because the financial crisis in Pakistan are short in time. In Pakistan the KSE as well as central bank issued annual Reports of the Manufacturing companies progress which is concerned by the audit committee with some limited resources and financing in Pakistan. The availability of financing of short term financing and larger period of working capital is more efficiently and effectively for requirements. For the importance of company performance how much company made investment in management for contribution. METHODOLOGY We choose KSE for the collection data in this study we select the chemical sector in KSE & the 22 firms which are listed in KSE. In KSE the firms which are listed they must show these profits wherever they exit then investors are attracted. The listed firms are more incentives as compared to unlisted firms because the listed firms present their financial working and operations. Here we take the data of manufacturing firms and do work on chemical sectors. In this paper we take the sample of 22 firms 6 years data in chemical sector from KSE.

Manag. Adm. Sci. Rev. ISSN: 2308-1368 Volume: 1, Issue: 1, Pages: 1-13

The annual report of the period 2005-2010 of the 22 firms which are listed in Karachi Stock Exchange. We study their annual reports deeply and apply different test for the analyses to apply a criteria for the filtration of data. In this paper we take the balance sheets and Income statements of the 22 chemical industries for the Tobin's Q which is equal to Market value divided by total asset and gross operating profits to find firms profitability we get GDP of the chemical firms from stock exchange to find that their contribution in overall GDP. Measures The relationship between the firm working capital Management and performance in Pakistan to find framework of the empirical analyses. Here the study which is done by us is wide which may affect the firm's performance and working capital management. In this paper we use a large number of variables such as to find the firm's performance in two types of Methods first one is the value of market and accounting profitability. For performance both methods are used to measure the working capital management that effect market value of the firm. We used accounting profitability to measure the gross operating profit such as sales minus cost of goods sold divided by fixed assets minus fixed financial assets. Here we take a sample of chemical industries of 22 firms which are used in this study to find the working capital management and firm's performance in Karachi stock exchange. We take different items of balance sheets and income statements to find the variables such as total asset financial assets and sales which are significant for this study. We cannot find profitability from the return on assets. We first examine the firms financial positions such as its total assets on firm's balance sheets that show the firms size and the income statements of the firm showing the firms operations such as profitability and variability in net operating profit/income. Tobin's Q is based on the firm's market value for the measurement of firm's performance. Here we compare the market value with total assets the Tobins Q is calculated as

value/Total Assets

Tobins Q=Market

In this study we used independent variables such as first No. of days account receivables is (No. of days in a year/Receivable turnover) and receivable turnover=sales/receivables. Second one is No of days inventory (No. of days in a year/Inventory Turnover) inventory turnover is calculated as CGS/Inventory. Third is No. days account payable (No. of days in a year/payable turnover) and payable turnover is calculated as Purchases/payables. At least we find the cash conversion cycle which is used to measure the working capital management. It is simply defined as (No of days receivables plus No. of days inventory minus No. of days payables). All these variables lie in the first group of the independent variables. The other independent variable lies in the second group such as Leverage Size variability in net operating income, Growth Rate, Fixed financial assets and GDP. These variables are called the control variables which are classified into two types of groups. We are used these two groups variables to examine the working capital management by changing the first group control variables for firm's profitability. To find the efficient working capital we used to Ho Null Hypothesis and H1 is the alternative hypothesis. In this hypothesis e is the error term and I show the firm for time t. We develop first group models 1: GOP = C0 +C1 CCC + C2 SIZE + C3 GR + C4 LEV + C5 FFA + C6 VNOI + C7 GDP + e 2: GOP = C0 +C1 NDR +C2 SIZE + C3 GR + C4 LEV + C5 FFA + C6 VNOI + C7 GDP + e 3: GOP = C0 + C1 NDI + C2 SIZE + C3 GR + C4 LEV + C5 FFA +C6 VNOI + C7 GDP + e 4 : GOP = C0 + C1 NDP + C2 SIZE + C3 GR + C4 LEV + C5 FFA + C6 VNOI + C7 GDP + e The second group in this study is the control variables that are used in the models with dependent variable Tobins Q. 1: TQ = C0 + C1 CCC + C2 SIZE + C3 GR + C4 LEV + C5 FFA + C6 VNOI +C7 GDP + e 2: TQ = C0 + C1 NDR + C2 SIZE + C3 GR + C4 LEV + C5 FFA + C6 VNOI + C7 GDP + e

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3: TQ = C0 + C1 NDI + C2 SIZE + C3 GR + C4 LEV + C5 FFA + C6 VNOI + C7 GDP + e 4: TQ = C0 + C1 NDP+ C2 SIZE + C3 GR + C4 LEV + C5 FFA + C6 VNOI + C7 GDP + e TABLE 1 HERE ANALYSIS AND RESULTS TABLE 2 HERE The cash conversion cycle is strongly to be positive as well as negative. The positive results indicate that the number of days firm must borrow or the capital which is not assessable into money that is in wait of customers payments. The negative result shows that the number of days of firms receivables from sales that it must made payments to its suppliers. Mean of gross operating profit is 38% of total fixed assets. It described that firms have average profit is 38 percent. Its standard deviation is .30 which shows that there is high deviation in profit margin among sampled firms in our analysis. The mean of CCC is 9.78 days in the sample of different chemical industries. The standard deviation of CCC is 84.47 which show that there is low position of CCC. The Maximum and minimum value of CCC is respectively 339.0 and 16 days. The company number of days receivables in chemical industries is 37.81 days which shows that the firm number of receivables is better. The standard deviation of number of days receivables is 44.94. The maximum and minimum value of NDR is respectively 248.0 and 0.00 days. The firms number of days in inventory is 63.46% which shows that the firm how much time take the stock in hand. The firms number of days payable in chemical firms in KSE is 91.72% shows that the firms payable take more periods as compared to their receivables. Its standard deviation is 46.43 and maximum and minimum values are respectively 253.0 and 16.0 days which show that the payments are made by the company within these limits from the time of purchases. The average/mean of sales growth/growth rate is just 16.0 percent that lies between -66.0 percent and 278 percent which shows that there is large variation in firms growth rate in this learning. The mean of size of the firms is 21.77 and standard deviation is

1.79. So the maximum and minimum values of size are respectively is 25.26 and 18.85 which shows that firm is in larger market. TABLE 3 HERE In this table we measure Different variables. Here the Tobins Q is the dependent variables but the CCC (cash conversion cycle), NDR (number of days receivables), NDP (number of days payables) and NDI (number of days inventories) are the independent variables. The relationship between TQ and other variables are positive or negative that shown in this table. When we compare the TQ with Cash conversion cycle there is negative relationship between cash conversion cycle and TQ. If the cash conversion cycle increases it means TQ is decreased and if cash conversion cycle decreased such as -.0004 then the TQ is increased means Firm performance is low. The cash conversion cycle is the time period that converts cash investment in the form of inventory back to the cash, in the form of collection period from the sales of those inventories. NDR (no. of days receivables) it is same as CCC inverse relationship between no. of days receivables if they increased the TQ decreased and if they decreased the TQ is respectively increased. So that its affect on working capital management and firms performance. There is a relationship between TQ and NDI (number of days inventories) if inventories increase than TQ increased and if NDI decreased then TQ is also decreased. There is positive relationship between TQ and NDP (number of days payables) if the firm NDP are increased then it means that the TQ is also increased and if NDP decreased then so as the TQ decreased. NDP shows that average no. of days payables are outstanding. It shows the firms ability that the firms how much time takes to meet their Payments. R square shows change in dependent variables due to the change in independent variables. Adjusted R square adjusts the variables of the model. F statistics shows the significance of the model variables that how much the model is significance or not. The negative relationship between the sizes of the firm a TQ. Because the increase in the firms total assets means that the increase in firm size is increased. If the short term assets or long term

Manag. Adm. Sci. Rev. ISSN: 2308-1368 Volume: 1, Issue: 1, Pages: 1-13

assets decreased firm size is also decreased. Growth rate of the firm shows that the sales increased or not as compared to their previous years. Leverage shows the firm debt to assets ratio in this study which is applied on the sample firms of the chemical sector of KSE. Variability in net operating income has positive relationship because the increase in VNOI is also increase in TQ. TABLE 4 HERE The GOP is dependent variable and the other variables are independent variables. There are positive or negative relationship between these variables .There is inverse relationship between cash conversion cycle and GOP because when CCC increased GOP decreased on the other hand when CCC decreased then GOP is increased. There is also inverse relationship between number of days receivables and gross operating profit. And also negative relationship between the numbers of days inventory and gross operating profit. The number of days inventory effects the working capital management and firm performance. Working capital is defined as the difference between current assets and current liabilities. Working capital is calculated as sales/avg. working capital. There is a positive relationship between number of days payables and gross operating profit if number of days payables increased or decreased then obviously GOP increased or decreased. The number of days payables shows that the firms average numbers of days payables are outstanding and in which period they made payments to their suppliers. These things have larger effect on working capital management and firm performance. R square shows the change in dependent variable due to the independent variables. Adjusted R square also explains the variable of the model that adjusts the models. F statistics shows the significance of the model. How much the model is significant or not. All those variables that are lies in the first group of control variables that affect the significance of cash conversion cycle and its different components to the firm profitability this is because due to the investors transparency affects. The inefficiency of the investors affects the transfer of information in the market. The Larger increase in the sales of big firms and the larger investment in long term financial assets are to gain larger market with

larger changes in the value of operating profit, larger leverage that firms are realized the lower market performance and its profitability. So that for the better performance of the market the economic growth plays a vital role. CONCLUSION Due to the current US subprime financial crisis the firms were stimulated to use the resources in efficient manners there are huge literature that gives importance for the long time financing and longer period investment. The firm short term investment that is important in these financial problems. In this paper we measure the balance between firm profitability and market value. We ensure that the firms are able to meet their short period responsibilities and out flow gave us the surety for profitability. The liquidity importance in this paper shows by firm working capital management and performance relationship, also display the firm position in the current market. In spite of that cost to give importance on a variable cost in firm profitability. Managers of the firms want to attain the relationship to maximize the firm profitability and liquidity value. The old learning urged that the larger efficiency to manage liquidity and profitability. In this paper we attain data from many previous learning to determine the relation that give importance on the firms which are developed. All the firms sample from chemical sector that are listed in Karachi stock exchange. Some of them are large and some are small they must try to manage their working capital. In these firms the forecasting which related to finance is very difficult. In this study we determine the relationship among the working capital management that can be measured by the different variables. In this study we predict the relationship between the dependent and independent variables which have positive or negative relationship with the working capital and firm performance. In this paper we found the negative relationship of working capital management with receivables, inventory, payables and cash conversion cycle with the profitability [25]. We take here the sample of 22 chemical firms from Karachi stock exchange for 6 years from 20052010 and to utilized different variables to analyze them. In this paper we ended with the management of working capital that is to manage

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the current assets and current liabilities and to provide finance to current assets. . All the above results guide that how to motivate the managers and policy makers to attract investors, so that the managers pay attention to improve the working capital management and firms performance. REFERENCES

Financial and Quantitative Analysis, Vol. 9, pp. 27185. Gitman, L. (1974), Estimating corporate liquidity requirements: A simplified approach, The Financial Review, Vol. 9, pp. 79-88. Hawawini, G., Viallet, C., and Vora, A. (1986), Industry Influence on Corporate Working Capital Decisions, Sloan Management Review, Vol 27. PP. 15-25. Joshi, P. (1995), Working Capital Management under Inflation (1st Ed.), Anmol Publishers, pp. 20- 93. Kasseven, P (2006) Trends in Working Capital Management and its Impact on Firms Performance: An Analysis of Mauritian Small Manufacturing Firms International Review of Business Research Papers Vo.2 No. 2. Pp. 45 -58. Lazaridis, I. and Tryfonidis, D. (2006), Relationship between Working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange, Journal of Financial Management and Analysis, Vol.19, pp 26 35.Lo, N. (2005), McInnes, A. (2000). Working Capital Management: Theory and Evidence from New Zealand Listed Limited Liability Companies. Unpublished Thesis, Lincoln University, Lincoln, New Zealand. Peel, M., Wilson, N., and Howorth, C. (2000), Late Payment and Credit Management in the Small Firm Sector: Some Empirical Evidence. International Small Business Journal, Vol. 18, pp. 17-37. Raheman, A, and Nasr, M (2007) Working Capital Management and Profitability 8

Altman, E (1968) Financial Ratios discriminate analysis and the prediction of corporate bankruptcy, Journal of finance, Vol. 23, pp. 589-609. Appuhami, B (2008) The impact of firms capital expenditure on working capital management an empirical study across industries in Thailand, International Management review, Vol. 4, pp. 8-21. Arellano, M and Bond, S (1991) Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, The Review of Economic Studies, Vol. 58, pp. 277-297. Chittenden, F., Poutziouris, P., Michaelas, N. (1998), Financial Management and Working Capital Practices in UK SMEs, Manchester, Manchester Business School. Deloof, M. (2003), Does Working Capital Management Affects Profitability of Belgian Firms?, Journal of Business Finance & Accounting, Vol 30, pp . 573 587. Dunn, P. and Cheatham, L. (1993), Fundamentals of Small Business Financial Management for Startup, Survival, Growth, and Changing Economic Circumstances, Managerial Finance, Vol.19, pp.1-13. Emery, G. (1984), A Pure Financia l Explanation for Trade Credit, Journal of

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Case Of Pakistani Firms, International Review of Business Research Papers, Vol. 3, pp. 279 - 300. Rahman, A and Ali, M (2006) Board, audit committee, culture, and earnings management: Malaysian evidence, Managerial Auditing Journal, Vol. 21, pp. 783-804. Rao, R. (1989), Fundamentals of Financial Management. (3rd Ed). Macmillan publishers. Reason, T. (2008), Preparing y our company for recession, CFO Magazine at http://www.cfo.com/article.cfm/1060005 5 Richards, V. and Laughlin, E. (1980), A Cash Conversion Cycle Approach to Liquidity Analysis. Financial Management, 9 , pp. 32-38. Sartoris, W. Hill, N. and Kallberg, J. (1983), A Generalized Cash Flow Approach to ShortTerm Financial Decisions/Discussion The Journal of Finance, Vol. 38, pp.349-360. Shin, H. and Soenen, L. (1998), Efficiency of Working Capital and Corporate Profitability, Financial Practice and Education, Vol. 8, pp. 3745. Smith, K., (1980), Profitability versus Liquidity Tradeoffs in Working Capital Management, Readings on the Management of Working Capital. West Publishing Company, New York, St. Paul. Soenen, L. A. (1993). Cash conversion cycle and corporate profitability. Journal of Cash Management, Vol. 13, pp. 53-58.

Taffler R. (1982), Forecasting Company Failure in the UK Using Discriminant Analysis and Financial Ratio Data, Journal of Royal Statistical Society, Vol. 145, pp. 342-358. Wilner, B . (2000), The Exploitation of Relationships in Financial Distress: The Case of Trade Credit, Journal of Finance, Vol. 55, pp. 153-178.

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APPENDIX

Table No. 1 Variables and their expected signs

Variables Dependent Variables GOP Gross operating profit Sales-CGS/Fixed assetsFinancial Fixed asset Equity Market Value/Total Asset Name Formula Symbols

TQ

Tobin's Q

Independent Variables a-Main Variables

CCC

Cash conversion cycle No of days A/R+ No of days inventory-No of days payables

The relationship between high cash conversion cycle and firm's performance is negative if cash conversion cycle is shorter than the performance is better. The relationship between No. of days Receivables & firm's performance is negatively related if the receivables period is less then performance is better. There is a negative relationship among the No. of days inventory and firm's performance if No. of days are less performance may be better.

NDR

No. of days receivables

365/sales/A/R

NDI

No. of days Inventory

365/CGS/Inventory

b-Control Variables SIZE Size The natural logarithm of sales

The old learning has positive impact on firm's performance and profitability because a number of companies with larger debt and capital in the form of assets.

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GR

Growth rate

This year sales-previous year sales/previous year sales

The old learning tell us about the increase in sale as compared to previous year sales. This is due to increase in short term assets it increase the firm's performance.

LEV

Leverage

Total debt/Total assets

From different previous studies the raise in capital from different ways such from debt and equity if debt increased then risk increased and debt related to market value and total assets. So the debt may be negatively related to market value. So it might be increase earnings.
In this paper we take a portion of total assets as fixed financial assets. This is important part of the financial assets such as investments and long term deposits. It may be positive or negative effect on firms performance and working capital management. If these type of assets increased then obviously the value of total assets increased and the cash from these assets are in inflows.

FFA

Fixed Financial Assets Financial Asset/Fixed Assets

VNOI

Variability in net operating Income

Std.dev of operating In this theory we examine the risk profit/Total assets-Financial and return of the company. If assets. higher risk then larger failure so it

effect is hot positive.

GDP

Gross domestic Profit

Current year-previous year/previous year

In this economical cycle we give arguments that the working capital is at a level of investment. The best economic environment creates a good GDP means increased the profitability of the firm.

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Table No. 2 Descriptive statistics

CCC Mean Maximum Minimum Std. Dev. 9.78 339 -161 84.47 FFA 0.02 0.74 0 0.1 GDP 4.82 7.67 1.6 1.98 GOP 0.38 1.31 -0.3 0.3 GR 0.16 2.78 -0.66 0.37 LEV 26.68 3401 0.03 298.24 NDI 63.46 193 2 46.99 NDP 91.72 253 16 46.43 NDR 37.81 248 0 44.94 SIZE 21.77 25.26 18.85 1.79 TQ 0.91 4.43 0.02 0.86 VNOI 0.2 0.92 -0.32 0.21

Table No. 3 Working Capital Management and Firm Performance Measured by Tobins Q
Coefficient C CCC NDR NDI NDP SIZE GR LEV FFA VNOI GDP R2 Adjusted R2 DW Stat F-statistic -0.4676 -0.1484 0.0001 -0.5456 0.4643 0.0437 0.8918 0.8623 2.0655 30.3066 0.0000 0.0000 0.0000 0.0000 0.0000 0.0009 0.0000 -0.4773 -0.1009 0.0001 -0.4994 0.2984 0.0411 0.8972 0.8693 1.9831 32.1133 0.0000 0.0000 0.0018 0.0000 0.0000 0.0165 0.0000 10.8392 -0.0004 Prob. 0.0000 0.0000 Coefficient 11.1050 -0.0006 Prob. 0.0000 0.0498 0.0000 -0.4474 -0.0790 0.0001 -0.5329 0.4688 0.0448 0.8929 0.8635 2.0674 30.3657 0.0000 0.9158 0.0007 0.0000 0.0874 0.0001 0.0000 0.0021 0.0000 -0.4931 -0.1267 0.0001 -0.4517 0.4283 0.0323 0.8651 0.8281 2.0533 23.3618 0.0000 0.0463 0.0000 0.0043 0.0001 0.0000 0.0003 0.0000 Coefficient 10.3613 Prob. 0.0000 Coefficient 11.3817 Prob. 0.0000

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Manag. Adm. Sci. Rev. ISSN: 2308-1368 Volume: 1, Issue: 1, Pages: 1-13

Table No. 4 Working Capital Management and Firm Performance Measured by Gross Operating Profit
C CCC NDR NDI NDP SIZE GR LEV FFA VNOI GDP R2 Adjusted R2 DW Stat F-statistic Coefficient 2.0981 0.0000 Prob. 0.0000 0.7315 Coefficient 2.0296 0.0001 Prob. 0.0000 0.3103 0.0000 -0.0884 0.0334 0.0000 0.1112 1.0521 -0.0026 0.9871 0.9836 1.8369 282.3338 0.0000 0.0000 0.3132 0.0005 0.0000 0.0000 -0.0856 0.0297 0.0000 0.1017 1.0753 -0.0027 0.9839 0.9796 1.8369 225.1853 0.0000 0.0003 0.2945 0.0003 0.0000 0.0000 -0.0901 0.0323 0.0000 0.1047 1.0534 -0.0030 0.9867 0.9831 1.8176 271.2348 0.3068 0.0000 0.0000 0.3125 0.0015 0.0000 0.0000 -0.0001 -0.0924 0.0223 0.0000 0.0945 1.0648 -0.0042 0.9855 0.9815 1.8797 247.7653 0.2371 0.0000 0.0004 0.3677 0.0219 0.0000 0.0000 Coefficient 2.1388 Prob. 0.0000 Coefficient 2.2001 Prob. 0.0000

0.0000

0.0000

0.0000

0.0000

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