Management of Receivables, Financial Distress, and Profitability in Bangladesh

Abstract

If a firm's profitability is affected by inefficient working capital practices, it is logical to assume that an adjustment of working capital will improve profitability. In particular, small and medium-sized businesses in the least developed countries (LDCs) and the new economies of Europe suffer from long delays relating to the payment of dues which threaten their survival. When the policies and practices are reasonably efficient, tweaking practices is not expected to be very beneficial. We should observe benefits from adjusting working capital practices for those companies that are clearly outside the norm in the industry. A major part of working capital management is receivables management and collection. In this study, we examine the data on receivables from Bangladesh from 2000 to 2017 to see if companies with inefficient working capital levels benefit from adjusting toward the norm, which is a new way of examining the benefits of adjustment. Specific actions and reactions will depend on the situation. Any adjustments that management make to fine-tune working capital management are unlikely to produce much value unless the underlying circumstances are taken into account. A new firm with a compelling case of quality and competitive strength may be more successful in managing a successful low average collection period (ACP) operating structure, and keeping the ACP low is strongly advised.