Table of Contents

Chapter -1 ......................................................................................................................................................................2
1.1 Introduction .............................................................................................................................................................2
1.2 Working Capital .......................................................................................................................................................2
1.3 Why Working Capital Management ........................................................................................................................3
1.4 Objectives ................................................................................................................................................................3
1.4.1 Specific objectives.................................................................................................................................................3
1.5 Methodology ...........................................................................................................................................................4
1.5.1Data Sources ..........................................................................................................................................................4
1.5.2 Data Analysis.........................................................................................................................................................4
1.6 Literature Review.....................................................................................................................................................5
Chapter -2 ....................................................................................................................................................................7
2.1 Company Overview:.................................................................................................................................................7
2.2 Type of Company .....................................................................................................................................................7
2.3 Capital Structure of the Organization ......................................................................................................................8
2.5 Product and Services ...............................................................................................................................................9
2.5.1 Market of the products: .....................................................................................................................................10
2.6 Mission and Values ................................................................................................................................................10
2.6.1 Mission................................................................................................................................................................10
2.6.2 Values .................................................................................................................................................................10
2.7 Business Performance ...........................................................................................................................................10
2.7.1 Reason of fluctuation..........................................................................................................................................11
Chapter -3 ............................................................................................................................................................ 13
3.1 Working Capital Policy ...........................................................................................................................................13
3.1 Working Capital Policy in Basundhara Papers .......................................................................................................14
3.1.1 Inventory Management ......................................................................................................................................15
3.1.2 Accounts Receivables in Days .............................................................................................................................16
3.1.3 Account Payable Period ......................................................................................................................................17
3.1.4 Cash Conversion Cycle ........................................................................................................................................18
3.1.5 Cash Management ..............................................................................................................................................19
3.1.6 Profitability .........................................................................................................................................................20
Chapter-4 ............................................................................................................................................................. 22
4.1 Empirical Analysis of Time Series ...........................................................................................................................22
4.2 Findings ..................................................................................................................................................................22
Chapter -5 ............................................................................................................................................................ 25
5.1 Conclusion .............................................................................................................................................................25
References ........................................................................................................................................................... 26
 Chapter -1

1.1 Introduction
Proper management of working capital is essential to a company’s fundamental financial
health and operational success as a business. A hallmark of good business management is the
ability to utilize working capital management to maintain a solid balance between growth,
profitability and liquidity. Working capital serves as a metric for how efficiently a company is
operating and how financially stables it is in the short term. Working Capital Management has
its effect on liquidity as well on profitability of the firm. In this research, we have selected
Bashundhara Paper Mills limited (BPML) to be listed in Dhaka Stock Exchange for a period of 5
years from 2011-2015, we have studied the effect of different variables of working capital
management including the Average collection period, Inventory turnover in days, Average
payment period, Cash conversion cycle and Current ratio on the Net operating profitability of
BPML. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and
financial assets to total assets ratio have been used as control variables.

1.2 Working Capital

Working capital is a daily necessity for businesses, as they require a regular amount of
cash to make routine payments, cover unexpected costs and purchase basic materials used in
production of goods. Working capital is an easily understandable concept, as it is linked to an
individual’s cost of living and, thus, can be understood in a more personal way. Individuals need
to collect money they are owed and maintain a certain amount on a daily basis to cover day-to-
day expenses, bills and other regular expenditures.
Working capital is a prevalent metric for the efficiency, liquidity and overall health of a
company. It is a reflection of the results of various company activities, including revenue
collection, debt management, inventory management and payments to suppliers. This is because
it includes inventory, accounts payable and receivable, cash, portions of debt due within the
period of a year and other short-term accounts.
1.3 Why Working Capital Management
When a company does not have enough working capital to cover its obligations,
financial insolvency can result and lead to legal troubles, liquidation of assets and
potential bankruptcy. Thus, it is vital to all businesses to have adequate management of working
capital.
Working capital management is essentially an accounting strategy with a focus on the
maintenance of a sufficient balance between a company’s current assets and liabilities. An
effective working capital management system allows businesses to not only cover their financial
obligations, but it is also a way to help companies boost their earnings. Managing working
capital means managing inventories, cash, accounts payable and accounts receivable. An
efficient working capital management system often uses key performance ratios, such as the
working capital ratio, the inventory turnover ratio and the collection ratio, to help identify areas
that require focus in order to maintain liquidity and profitability.

1.4 Objectives
This research is focusing on working capital management and its effects on profitability
for a sample of Bangladeshi firms.

1.4.1 Specific objectives

To establish a relationship between Working Capital Management and Profitability over a
period of 5 years for Bashundhara Paper Mills limited (BPML) to be listed in Dhaka Stock
Exchange.
i. To find out the effects of different components of working capital management on
profitability.
ii. To establish a relationship between the two objectives of liquidity and profitability of
the firm.
iii. To find out the relationship between profitability and size of the firm.
iv. To find out the relationship between debt used by the BPML and its profitability.
v. To draw conclusion about relationship of working capital management and profitability
of the Bangladeshi firms.
1.5 Methodology
The study is over Bashundhara Paper Mills Limited (BPML) which is to be listed in
Dhaka Stock exchange. We took the most recent five years from 2011-2015 under consideration
for our study. The purpose of our study is to analyze the impact of Working Capital Management
of Bashundhara Paper Mills Limited on its Profitability.

1.5.1Data Sources
The data used in this study was acquired from the annual report of the BPML for 2011-
2015, Internet and different firms. The data of BPML for the most recent SIX years formed the
basis of our calculations. The period covered by the study extends six years starting from 2011 to
2015. The reason for restricting to this period was that the leatest data for investigation was
available for this period.

1.5.2 Data Analysis

The model will be implemented to measure the impact of different variables related working
capital management on the positive performance of the firm. It is assumed that the firm
performance can be estimated by the progress of ROA, ROE, and EPS, which suggests a linear
relationship between the working capital managing variables and firm performance exist. The
model is developed using the most important issues in working capital management where the
independent variable would be the ROA of the firm, and dependent variables that should have
impact on the performance of the firm are collection period, payment period, days inventory,
cash conversion cycle. If we show this relation in equation then it would be,
𝑅𝑂𝐴 = 𝐶 + 𝑋1 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 + 𝑋2 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 + 𝑋3 𝐷𝑎𝑦𝑠 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑋4 𝐶𝐶𝐶
1.6 Literature Review
Many researchers have studied working capital from different views and in different
environments. The following ones were very interesting and useful for our research:

(Eljelly, 2004) elucidated that efficient liquidity management involves planning and
controlling current assets and current liabilities in such a manner that eliminates the risk of
inability to meet due short-term obligations and avoids excessive investment in these assets. The
relation between profitability and liquidity was examined, as measured by current ratio and cash
gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using
correlation and regression analysis. 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
companies. 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.

(Deloof, 2003) discussed that most firms had a large amount of cash invested in working
capital. It can therefore be expected that the way in which working capital is managed will have
a significant impact on profitability of those firms. Using correlation and regression tests he
found a significant negative relationship between gross operating income and the number of days
accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results
he suggested that managers could create value for their shareholders by reducing the number of
days’ accounts receivable and inventories to a reasonable minimum. The negative relationship
between accounts payable and profitability is consistent with the view that less profitable firms
wait longer to pay their bills.

(Ghosh and Maji, 2003) in this paper made an attempt to examine the efficiency of
working capital management of the Indian cement companies during 1992 – 1993 to 2001 –
2002. For measuring the efficiency of working capital management, performance, utilization,
and overall efficiency indices were calculated instead of using some common working capital
management ratios. Setting industry norms as target-efficiency levels of the individual firms, this
paper also tested the speed of achieving that target level of efficiency by an individual firm
during the period of study. Findings of the study indicated that the Indian Cement Industry as a
whole did not perform remarkably well during this period.

(Shin and Soenen, 1998) highlighted that efficient Working Capital Management (WCM)
was very important for creating value for the shareholders. The way working capital was
managed had a significant impact on both profitability and liquidity. The relationship between
the length of Net Trading Cycle, corporate profitability and risk adjusted stock return was
examined using correlation and regression analysis, by industry and capital intensity. They found
a strong negative relationship between lengths of the firm’s nettrading Cycle and its profitability.
In addition, shorter net trade cycles were associated with higher risk adjusted stock returns.

(Smith and Begemann 1997) emphasized that those who promoted working capital theory
shared that profitability and liquidity comprised the salient goals of working capital
management. The problem arose because the maximization of the firm's returns could seriously
threaten its liquidity, and the pursuit of liquidity had a tendency to dilute returns. This article
evaluated the association between traditional and alternative working capital measures and return
on investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange
(JSE). The problem under investigation was to establish whether the more recently developed
alternative working capital concepts showed improved association with return on investment to
that of traditional working capital ratios or not. Results indicated that there were no significant
differences amongst the years with respect to the independent variables. The results of their
stepwise regression corroborated that total current liabilities divided by funds flow accounted for
most of the variability in Return on Investment (ROI). The statistical test results showed that a
traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the
greatest associations with return on investment. Wellknown liquidity concepts such as the
current and quick ratios registered insignificant associations whilst only one of the newer
working capital concepts, the comprehensive liquidity index, indicated significant associations
with return on investment.

All the above studies provide us a solid base and give us idea regarding working capital
management and its components. They also give us the results and conclusions of those
researches already conducted on the same area for different countries and environment from
different aspects. On basis of these researches done in different countries, we have developed our
own methodology for research.
 Chapter -2

2.1 Company Overview:

Bashundhara Paper Mills Limited (BPML) is one of the major concerns of Bashundhara Group.
The Company was incorporated in Bangladesh in 1993 as a private limited company under the
Companies Act, 1913 having its registered office at Dhaka. It was converted in to public limited
company in January 30, 1994. BPML started its commercial operation on March 01, 1997 as an
import-substitute local paper manufacturing company. After that two companies of the
Bashundhara Group of same nature namely “Bashundhara Newsprint & Duplex Board
Industries Limited” (Former Shahjalal News Print Industries Ltd.) and “Bashundhara Tissue
Industries Limited” (Former Freyschmidi Tissue Limited) amalgamated with BPML on
October 10, 2009. After the amalgamation of all three companies carring out its business as a
single legal entity and operated three separate units as “Unit 1”, “Unit-2” and “Unit-3” for
administrative purpose only. Presently the Authorized Capital of the Company is BDT 5000
Million and Paid-Up Capital stands at BDT 1477.49 Million. The factory of BPML is located at
Unit 1: Meghnaghat, Baranagar, P/O: Newtown, Sonargaon, Narayangonj; Unit 2: Meghnaghat,
P/O: Newtown, Sonargaon, Narayangonj; Unit 3:Anurpura, Gazaria, Munshigonj.The company
produces various kinds of papers, paper products, tissues, PP Woven bags and Sack bags in unit-
1 and unit-2 located at Narayangon and produces various kinds of tissues in unit-3 located at
Munshigonj. The total installed capacity for paper & tissue products is about 175,500 MT per
annum and the total cpacity for the bag section is about 120 Million pices per annum.

2.2 Type of Company

Bashundhara Paper Mills Limited manufactures different types of paper and allied products in
“Unit-1 & Unit-2” and tissue & allied products in “Unit-3” and marketing the same for domestic
consumption as well as for exports. In the paper sector of Bangladesh the Company feels no
competition for its divercified products line. In its three units produces different types of paper
products.
Bashundhara Paper Mills Limited (Unit-1):
produces very good Quality & International standard MG Paper, Offset Paper, White Writing &
Printing Paper, Brown Wrapper, Brown Liner, Newsprint paper, Coated/Uncoated paper board,
A4 paper, Glassine Paper, Stiffener, Ledger Paper, PP Woven Bag, Sack Paper also time to time
produce Plug wrap, Cigarette Tipping Paper on request of different Cigarette manufacturing
companies.

Bashundhara Paper Mills Limited (Unit-2):

Unit-2 of Bashundhara Paper Mills Limited was set up in 1994 & operates three modern plants in
producing newsprint, white writing/printing paper, duplex board, liner paper, Kraft paper, Art
card, art paper and allied products. The first unit produces duplex boards and other industrial
packing papers used in packaging industry. An off line coater produces coated duplex board &
Art card in this unit. It was formerly known as Bashundhara Newsprint & Duplex Board
Limited.
The second unit produces environment friendly newsprint from recycled pulp (DIP) for national
dailies, weeklies, fortnightlies. It also produces writing and printing paper for local consumption
and also for printing text book for NCTB. The third unit makes art paper for printing industries.

Bashundhara Paper Mills Limited (Unit-3):

Unit–3 of Bashundhara Paper Mills Limited, formerly known as Bashundhara Tissue Industries
Limited, was set up in 1995. It is the country’s first basic tissue manufacturing factory at the face
of growing popularity of tissue with fast changing urban lifestyle and elevation of living
standards as a whole. The company is manufacturing wide range of products including facial
tissue, pocket tissue, wet tissue, green tissue, sanitary napkin, baby diaper, toilet tissue, kitchen
towel, cigarette paper, glassine paper, and hard tissue, hand gloves and paper carton container.

2.3 Capital Structure of the Organization

Particulars Type of Numbers of Amount in Taka
Securities Securities
Authorized Capital Ordinary 500,000,000 5,000,000,000
Issued, Subscribed and Paid up capital Ordinary 147,749,775 1,477,497,750
Total Paid-up Capital Before IPO [A] Ordinary 147,749,775 1,477,497,750
Proposed Initial Public Offering (IPO) through Ordinary 26,041,667 260,416,670
book building method [B]
Total Paid-up Capital after IPO [A+b] Ordinary 173,791,442 1,737,914,420
2.4 Existing Ownership of the Securities
Name of Position Address Amount of Pre IPO
Shareholder Securities Percentage of
securities (%)
Mr. Ahmed Akbar Chairman Plot # 125/A, Road-2, 4,000,000 2.70
Sobhan Block # A, Bashundhara
R/A, Dhaka-1229
Mrs. Afroza Begum Sponsor Do 5,885,200 3.99
Shareholder
Mr. Sadat Sobhan Shareholder Do 8,203,000 5.55
Mr. Shafiat Sobhan Shareholder Do 8,203,000 5.55
Mr.Sayem Sobhan Shareholder Do 8,203,000 5.55
Mr.Safwan Sobhan Managing Do 8,203,000 5.55
Director
Md. Nazmul Alam Director Bashundhara City, 101,050,575 68.40
Bhuiyan 13/Ka/1, Panthapath,
Nominated by: Dhaka
East West Property
Development (Pvt.)
Ltd.
Md. Imrul Hassan Director Flat- G/5, Tenement-2, 4,002,000 2.71
Road-6, Block-E
Bashundhara R/A,
DhakaDhaka-1229
Total: 147,749,775 100.00

2.5 Product and Services

The Principle Products of BPML are as follows:
 White Writing &  MG Paper  PP Woven Bag  Green Tissue
Printing Paper
 A4 Paper  Offset Paper  Paper Sack Bag  Sanitary Napkin
 Excercise Book  Glassine Paper  Sticker Paper  Baby Diaper
 Bidi Paper  Glassine/Ledger  Facial Tissue  Toilet Tissue
/Colour Paper
 NCR Paper  Duplex Board  Wet Tissue  Kitchen Towel
 Newsprint  Sludge Board  Pocket Tissue  Hand Gloves
2.5.1 Market of the products:
The markets for such products are local and abroad countries like India, Sri-Lanka, Nepal,
Bhutan, UAE, Canada, UK etc.

2.6 Mission and Values

2.6.1 Mission
"We Are Passionate About Helping The World Excel In Education, Communication, Business
And Salutariness By Offering Eco-Sustainable Paper-Based Solutions"

""পপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপ
পপপপপপপপপপপপপপপপপপপ,
পপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপপ""

2.6.2 Values
Our Values form the acronym SPIRIT and it is the SPIRIT in which we operate. The word
SPIRIT stands for SOUL, ESSENCE, LIFE, and ATTITUDE. This is the Spirit that nourishes
the SOUL of the people of ‘Bashundhara Paper’; it is the ATTITUDE and the ESSENCE that
gives LIFE to our winning culture.

2.7 Business Performance

Particular 31.12.2015 31.12.2014 31.12.2013
Revenue/Sales 10,435,756,308 10,335,094,709 10,501,929,489
% Change on Revenue 0.97 (1.59) 2.64
Other Income 1,745,937 9,380,554 5,328,902
% Change on other Income (81) 76.03 (25)
Total Income 10,437,502,245 10,344,475,263 10,507,258,392
% Change on total Income 1 (2) 3
Cost of Material 8,633,126,096 8,545,083,396 8,789,943,753
% Change on cost of material 1 (3) 2
Finance Cost (998,266,502) (1,077,238,571) (1,040,934,961)
% Change on financial Cost (7) 3 6
Depreciation & Amortization 592,336,906 526,052,934 475,272,334
% Change on Depreciation and 13 11 13
Amortization
Other Expenses - - -
% Change on other Income - - -
Inventories 4,934,688,578 5,065,768,840 5,080,644,406
% Change on Inventories (3) (0) 48
Net Profit before Tax 364,953,078 273,279,778 239,371,246
% Change on Net Profit before Tax 34 14 29
Net Profit after Tax 264,672,844 218,122,716 97,070,736
% Change on Net Profit after Tax 21 125 49
Earnings Per Share ( EPS) 3.63 4.40 5.10
% Change on EPS (18) (14) 49
Earnings per Share (EPS)Basic- - 2.99 -
restated

2.7.1 Reason of fluctuation:

Revenue:
The Company did not achieve its target sales for many reason including political unrest,
industrial accidents, limited production capacity for tissue, decrease in production of newsprint
products; price increases in fuel or raw materials; changes in laws, regulations and government
policies.
In the year 2013 the management of the Company made strategic decision to decreases its
newsprint production due to lower margin and bonded warehouse for duty free importation of
paper.
In the year 2014 sales reduce for political unrest at the end of 2013 and beginning of 2014.
In the year 2015 the company faced fire accident that resulted shut down PM-5 resulting losing
production of tissue paper by 3000MT. As a result we deprive from production of tissue that has
a sale value of Tk. 51 crore.

Other Income:
There was no significant fluctuation in the other income during the last five years except in the
year 2014. In that year other income increased due to interest receipts from investment of FDR.

Total Income:
Fluctuation in the total income is the result of changes in the revenue and other income as
narrated above.

Cost of Goods Sold (COGS):

There was no significant fluctuation in the COGS during the last five years however due to
decrease in sales, changes in exchange rate, decrease in interest rate, changes in utility rate
causes some favorable/unfavorable changes in production cost.
Finance Cost:
There was no significant fluctuation in the finance cost during the last five years. Finance cost
has, however, decreased over the years due to decrease in interest rates and gradual settlement of
term loan obligations.
Depreciation and Amortization:
There was no significant fluctuation in depreciation. Depreciation increased in every year due to
in every year it was charged on additional assets.

Other Expenses:
Other expense is consistent over the last five years. However it may change due to increase/
decrease in salary of manpower, some accidental losses, increase in promotional activities etc.

Changes of Inventory:
There is no significant change in inventory over the last five years. Some seasonal aspects
inventory need to maintain substantial amount. Political unrest in 2013 and 2014 is also hamper
the production as a result inventory at that time was higher at the end of the said years.

Net profit before & after Tax and Earning per Share (EPS):
The Company has consistent growth of net profit before tax but due to recalculation of deferred
tax expense net profit after tax fluctuate during the last five years. Earnings per share (EPS) have
been fluctuating due to increase in share capital in the year 2014 and 2015.
Chapter -3
3.1 Working Capital Policy
In simple terms working capital can be defined as current assets minus current liabilities.
The future existence of a company is threatened when it is unable to manage its current liabilities
through its current assets. It is proved to be important for a firm to ensure that excess cash are
invested in short term securities to enhance the wealth of the shareholders. Working
capital policy can be mainly classified in three categories- defensive policy, aggressive policy
and conservative policy.
If the firm canaccurately forecast its array of sales, inventory procuring time, inventory
usage rates, volume and pattern of production, production cycle, split between cash sales and
credit sales, collection period and other factors which impinge on working capital components,
the investment in current assets can be defined uniquely.

If the firm adopts a moderate policy, it would carry a moderate level of current assets in
relation to sales. Additionally, if the firm follows a highly aggressive policy, it would
carry a low level of current assets in relation to sales.

A conservative current asset policy tends to reduce risk. The surplus from current assets
under this policy enable the firm to cope rather easily with variations in sales,
production plans, and procurement time. Further, the higher liquidity associated with this
policy diminishes the chances of technical insolvency. The reduction of risk, however, is also
accompanied by lower expected profitability.

The aggressive working capital policy is company’s intention to fund its working capital
through short term debt. This policy is thought to be cheap because funds such as overdraft can
be called upon when needed and the interest will be paid only when an overdraft is taken unlike
long-term debt where interest has to be paid for the entire loaned amount for the year.
3.1 Working Capital Policy in Basundhara Papers
On the basis of previous discussion it can be referred that Basundhara follows an
aggressive working capital policy. The company finances majority of their working capital
through short term debts. In an aggressive working capital policy the majority amount of
current assets are financed by short-term debt. This policy will push the finance
department to be proactive in the management of working capital always, as they need
to sell inventory stocks fast and collect receivables on a timely manner to settle the short
term debts on time. As the company has a higher growth rate, anaggressive working
capital policy suits them. As mentioned, if a firm follows a highly aggressive policy, it
would maintain a lower level of current assets in relation to sales. Let’s have look
towards the current asset situation in terms of sales ofBasundhara Papers. From the below graph
it is clear that the amount of current asset is lower than the amount of sales of the company
except in 2016 where sales has significantly dropped below the current assets.

CURRENT ASSETS VS SALES

Current Assets (In Mil) Gross Trunover (In Mil)

12,000.00

10,000.00

8,000.00

6,000.00

4,000.00

2,000.00

0.00
2011 2012 2013 2014 2015 2016

Figure1: Current assets Vs. Sales

Afza and Nazr (2007) has explained a scientific way of determining the working capital policy of
a firm, according to them aggressive financing policy supports the utilization of high levels of
current liabilities versus long-term liabilities. They have used following formula in determining
the financing policy of a firm,
 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑃𝑜𝑙𝑖𝑐𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

The following graph is representing the financing policy of the Basundhara Paper, it suggests
that the firm has actively been managing to finance more than 50% of its total assets through
current liabilities only. It clearly explains the firm is following an aggressive working capital
management policy.

Financing Policy
0.7000

0.6000 0.5892
0.5771
0.5520 0.5479
0.5000 0.4977
0.4733
0.4000

0.3000

0.2000

0.1000

0.0000
2011 2012 2013 2014 2015 2016

Figure 2: Financing Policy

3.1.1 Inventory Management

Inventory Period is an efficiency ratio that shows how quickly a company uses up its
supply of goods over a given time frame. While inventory period is shortening in some
industries, such as grocery stores, than in others, such as department stores, comparatively
lengthening inventory period means that a company has poor sales or too much inventory.
It is computed by dividing inventories by the company's average daily cost of goods sold.
 DAYS SALES INVENTORY
500

400

300

200

100

0
2011 2012 2013 2014 2015 2016

Figure 3: Days sales inventory

From the chart it is clearly visible the firm has been managing an inventory for around 150 days
in 2011 which has gradually been increasing, it is suggesting that the company has been
adjusting supply risk by increasing the amount of inventory. But in 2016 the inventory plan has
become ineffective although the reason is a sharp drop in the sales which is an operational issue
of the firm.

3.1.2 Accounts Receivables in Days

Number of Days Accounts Receivable is the length of time required to collect cash
receipts (Hillier et al. 2010). It is also called "Days of Sales Outstanding". Lesser the time of
Accounts Receivable that means more efficient cash conversion cycle. AR is an important
element of WCM that fulfills its term to efficiency. Accounts Receivable is calculated by
dividing the receivables by the net sale per day.
 Receiveable days
120

100

80

60

40

20

0
2011 2012 2013 2014 2015 2016

Figure 4: Receivables days

The chart is implying that Basundhara papers collects its account receivables in 70 days
approximately. If the collection time is efficient then it would be less than the accounts payables
in days, also it is important that we compare the outcomes with the industry practice. Compared
to the inventory the ratio is one third of the stock selling period which is quite efficient. Figure 5
is clearly showing that the accounts payable period is lengthier than the account receivables
collection period.

3.1.3 Account Payable Period

Accounts Payable is another important component of WCM. It is the length of time for
which the firm is able to delay payment on the purchase of raw materials to its suppliers. The
longer the period of AP, company has better opportunity to finance on other things. It helps the
companyin reducing costs by not taking loans for other expenses. Accounts Payable Period is
calculated by dividing trade payables by the company's cost of goods sold per day.
 Payable Period
140

120

100

80

60

40

20

0
2011 2012 2013 2014 2015 2016

Figure 5: Accounts Payable Period

The chart is showing a similar trend like the accounts receivables, as the accounts
receivables increased so the accounts payable increased. We can see an average of 80 days is
required by Basundhara papers to pay its suppliers payment which is greater than the accounts
receivables period and should help the firm in managing its working capital.

3.1.4 Cash Conversion Cycle

Operating Cycle is the interval between the order of inventory stock and the date when
cash is collected from receivables. And CCC begins when the company pays cash to suppliers
for the materials purchased and ends when cash is collected from customers for credit sales. The
cash conversion cycle is calculated using the following formula-
𝐶𝐶𝐶 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 − 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑃𝑒𝑟𝑖𝑜𝑑

Or 𝐶𝐶𝐶 = (𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑎𝑏𝑙𝑒𝑠 𝑃𝑒𝑟𝑖𝑜𝑑) − 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑏𝑙𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

Cash conversion cycle mainly helps to figure out how cash is moving throughout the
company in terms of duration. When CCC cuts that means the company has more cash for other
usages such as investing on equipment or innovating manufacturing and selling process. On the
other hand, when CCC lengthens, cash tied up in firm's operation activities where there is little
chance for other investment.

CCC
450
400
350
300
250
200
150
100
50
0
2011 2012 2013 2014 2015 2016

Figure 6: Cash Conversion Cycle

The graph is showing that the firm has been managing its cash conversion cycle within
150 to 200 days which has drastically increased in the year 2016. It can be said that in 2016
something has happened that has affected all the operational performance of the firm. The cash
converting period of the firm could be managed more efficiently.

3.1.5 Cash Management

One of the techniques of assessing working capital management is measuring the
performance of cash management. The finance manager must maintain adequate liquidity so that
the firm can pay off its obligations. In order to test the liquidity of a firm one of the best
techniques that can be used is the liquidity ratios. The following chart is exhibiting all the
liquidity ratios of the Basundhara papers.
The chart is suggesting that the firm usually maintain a current ratio of 1, in other words,
the firm usually keep 1tk current asset for meeting 1tk current liability which is quite a good
practice. Although the firm will require active working capital management to avoid the risk of
bankruptcy. Additionally, quick ratios of the last five years are revealing that the company hold a
substantial amount of inventory in its current assets which almost 50% of the current assets of
the firm.
 Liquidity Ratios

1.7596
1.3914
1.2559 1.1820 1.2248 1.2495
2.0000

1.5000
0.9975 1.0149 1.0155 1.0004
0.8912
1.0000 0.5074 0.8556
0.4861 0.5264 0.4728 0.4313 0.4520
0.0170 0.0356 0.0155 0.0282 0.0178 0.0215 Interest Coverage
Cash Ratio
0.5000
Quick Ratio
Current Ratio
0.0000
1 2 3 4 5 6

Current Ratio Quick Ratio Cash Ratio Interest Coverage

Figure 7: Liquidity ratios

On top that, the chart is revealing that the company holds a cash balance of 2% average
which could be consider appropriate given the firm is selling papers in the national market. And
the interest coverage ratio is suggesting the firm has been actively managing its capital structure
and successfully reduced its debt ratio, as the firm has been improving its ability of paying
interest which is a positive sign for the firm.

Overall, Basundhara paper has been managing its liquidity by forecasting the current
assets requirement in the near future. The cash management policy of the firm has a positive
impact on its performance but the analysis is showing the firm is keeping a higher amount of
inventory which can be managed to make the operations more efficient.

3.1.6 Profitability
Every activities of a business organization are aimed to increase the profitability of the firm, if
the profitability increases the value of the firm increases, therefore the price of the shares
increase which is the ultimate goals of the managers. In short, profitability of the organization is
of utmost importance.

Year Gross Margin Net Margin Operating Margin EPS ROE ROA
2011 17.30% 1.15% 12.55% 5.47 3.84% 0.75%
2012 15.97% 0.64% 11.35% 3.41 2.68% 0.44%
2013 16.30% 0.92% 12.14% 5.10 3.85% 0.59%
2014 17.32% 2.11% 12.98% 4.40 7.95% 1.28%
2015 17.27% 2.54% 13.24% 1.79 6.28% 1.46%
2016 18.08% 5.56% 14.58% 2.14 7.03% 1.67%
The table is representing information of the profitability performance of Basundhara
group for the last 6 years. Overall, the firm has been performing better with the time as the firm
successfully increased its gross margin from 16% to 18%, the net margin rose from 1% to
5.56%, and the operating margin increased from 12% to 14%. The ratios are suggesting the firm
has been managing its administrative expenses, financing expenses which has increased the net
margin by 4% while gross margin and operating margin had increased by 2% only.

Unfortunately the return to the shareholders has been going down, the EPS record is
clearly exhibiting a decline in the earning per share which is not expected by the shareholders of
the firm. While the firm had a declining EPS its return on equity has been increasing for the last
six years from 3% to 7%. Similarly, the overall return on invested assets has been increasing
over the last six years. In short it can be said, the working capital management policy of the firm
should have a positive impact on the firm.

Basundhara papers mills limited implemented an aggressive working capital policy which can be
risky for the firm. Although the policy is risky but it has improved the profitability of the firm
gradually. Moreover, the firm is actively managing working capital to avoid the risks arise from
inefficient management of working capital. To avoid the bankruptcy threat the firm has been
keeping a healthy liquid balance. Overall, the working capital management policy of the firm
shows a positive impact on the performance of the firm.
Chapter-4
4.1 Empirical Analysis of Time Series
The model will be implemented to measure the impact of different variables related
working capital management on the positive performance of the firm. It is assumed that the firm
performance can be estimated by the progress of ROA, ROE, and EPS, which suggests a linear
relationship between the working capital managing variables and firm performance exist. The
model is developed using the most important issues in working capital management where the
independent variable would be the ROA of the firm, and dependent variables that should have
impact on the performance of the firm are collection period, payment period, days inventory,
cash conversion cycle. If we show this relation in equation then it would be,
𝑅𝑂𝐴 = 𝐶 + 𝑋1 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 + 𝑋2 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 + 𝑋3 𝐷𝑎𝑦𝑠 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑋4 𝐶𝐶𝐶

4.2 Findings
Output of the regression analysis is presented in the following table
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.9664
R Square 0.9339
Adjusted R
Square 0.3347
Standard
Error 0.0021
Observations 6

ANOVA
Significan
df SS MS F ce F
Regression 4 0.0001 0.0000 9.4151 0.2392
Residual 2 0.0000 0.0000
Total 6 0.0001
 Coefficie Standar Lower Upper Lower Upper
nts d Error t Stat P-value 95% 95% 95.0% 95.0%
Intercept 0.0206 0.0073 2.8075 0.1069 -0.0109 0.0521 -0.0109 0.0521
Collection
Period -0.0026 0.0026 -1.0102 0.4188 -0.0138 0.0086 -0.0138 0.0086
Payment
Period 0.0019 0.0022 0.8373 0.4905 -0.0077 0.0114 -0.0077 0.0114
Days
Inventory 0.0001 0.0000 2.1667 0.1626 -0.0001 0.0003 -0.0001 0.0003
CCC 0.0000 0.0000 65535 #NUM! 0.0000 0.0000 0.0000 0.0000

From the output of regression analysis it can be found that the firm has an intercept on its ROA
at 2.06% in other words the working capital management do not have any impact on the first
2.06% return on assets of the firm. The collection period has a negative impact on the ROA of
the firm by .26% while the payment period is positively related with the ROA of the firm. The
impact of the payment period is .19% which is quite significant for the profitability on the firm.
As the model is saying the cash conversion cycle do not have any individual impact on the firm’s
performance as the CCC is calculated using other three variables of the regression equation. So
the profitability equation of Basudhara papers would be

𝑅𝑂𝐴 = .0206 − .0026𝑋1 + .0019𝑋2 + .0001𝑋3

The Model Summary table provides several measures of how well the model fits the data. R
(which can range from 0 to 1) is the correlation between the dependent measure and the
combination of the independent variable(s), so the closer R is to 1, the better the fit. In this
example, we have an R of 0.9664, which is a good score. This is the correlation between the
dependent variable and the combination of the four independent variables used in this study. R
can also be considered as the correlation between the dependent variable and the predicted
values.

Adjusted R Square symbolizes a mechanical development over R Square in that it explicitly

adjusts for the number of predictor variables relative to the sample size. If Adjusted R Square
and R Square differ dramatically, it’s a sign either that researcher have too many predictors or
the sample size is too small. In this situation, Adjusted R Square has a value of 0.3347, which is
very similar to the R Square value of .9339 which has happened due to the small sample size, the
study was conducted using a 6 years sample data, in other words the reliability on the regression
result is low.

In short, it is empirically proved that the working capital management of a firm has quantitative
impact on the profitability of the firm. For Basundhara Papers mills limited the impact of these
variables seems very low although it is not a reliable output. To have a reliable output an analysis
on a larger sample is required.
Chapter -5
5.1 Conclusion
One of the best ways to judge a company's cash flow health is to take a deep look on its working
capital management. The better a company can manage its working capital the lower company's
need of borrowing.

Working capital management policy of Basundhara papers seem to be effective. There is the
availability of internal source of funds due to satisfactory amount of collection period during the
period of payment. The firm faces no complications in management of inventory, debtors, cash
balances and current liabilities. The liquidity position of the company is also satisfactory due to
good turnover of current assets, inventory debtors and cash balances. The company enjoys good
facility of cash credit and other working capital loan though the borrowing amount of the
company is substantial. The firm should face no difficulties in repayment of its current liabilities
out of the operating profit.

Regardless a drop in the EPS the firm was able to generate a better ROA which is really very
promising for the firm. The firm has been using the amount to repay its debt to reduce the
reliability on debt which has negatively affected the EPS. Along with the debt reduction policy if
the firm choose to manage its inventory actively then the operational performance of the firm
will increase. Finally it can be concluded that the working capital management of Basundhara
papers is satisfactory but not efficient, if the firm make its working capital policy efficient it
would become more profitable as the WCM policy has substantial impact on the performance of
a firm.
References
Afza, T. and M.S. Nazir, 2007. Working capital management policies of firms: Empirical
evidence from Pakistan. Presented at 9th South Asian Management Forum (SAMF) on February
24-25, North South University, Dhaka, Bangladesh.