Abstract
This paper examines the impact of working capital management on firm’s profitability performance of manufacturing firms by using not only static models such as ordinary least square (OLS), fixed and random effects but also dynamic models difference generalized method of moments (GMM) and system generalized method of moments (SGMM) over the period from 2007 to 2018. The performance was measured in terms of profitability by return on the asset as a dependent variable and the working capital management was determined by inventory conversion cycle (ICP), receivable collection period (RCP), payable deferral period (PDP) and cash conversion cycle (CCC) as an explanatory variables. This study only presents the results of System GMM model, due to efficient system estimator and producing statistically significant outcome. The results show that inventory conversion period (ICP) and payable deferral period (PDP) have a positive relationship with return on asset while the cash conversion cycle (CCC) has a negative effect on return on assets, whereas receivable collection period (RCP) is positive but statistically insignificant. This paper results suggest that pay suppliers prolong and collecting payments from customers earlier, moreover cement firms could add value by improving their cash conversion cycles. Furthermore, managers can create value for shareholders by reducing inventory and receivable accounts. This paper adds new knowledge to current literatures by examining the effect of working capital management on profitability in the context of an emerging capital market of Pakistan.
Highlights
Working capital management is one of the most important issues and believed to have a profound impact on firm’s profitability performance
Working capital management is concerned to capabilities to control the current asset and current liability effectively and efficiently, as well as enhances the ability of the firms to maximize return on asset and minimize payments for liability
The purpose of this study is to examine the relationship between working capital management and firms profitability by employ the Static model such as pooled ordinary least square (OLS), Random effect, and fixed effect and dynamic models (GMM and System generalized method of moments (GMM)) explored by Arellano & Bover (1995) and Blundell & Bond (1998) models in order to see the impact of working capital management on firms
Summary
Working capital management is one of the most important issues and believed to have a profound impact on firm’s profitability performance. Working capital management is concerned to capabilities to control the current assets and current liabilities effectively and efficiently (Ali, 2011). The short term capital consists of current asset and current liability that companies use for their regular operation. The working capital management refers to the proper planning and controlling of current assets and current liabilities in a way through which the firms can eliminate their risk of inability to meet short term obligation on hand and avoid from the extreme investment in these assets on the other hand (Iqbal et al, 2014). The span of time which converts raw materials to final goods and goes to cash called cash conversions cycle (CCC) This is used as a scale for managements for flow of cash for companies.
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