Impact of Working Capital Management on Companies' Profitability in Food and Personal Care Product Sector of Pakistan

Abstract

The main objective for conducting this study is to empirically test how the working capital management influences the profitability of firms in Food and Personal Care Products’ Sector of Pakistan. For investigating the relationship between management of working capital and the company’s profitability, secondary data is collected from the Pakistan Stock Exchange for the time frame of 6 years starting from 2010 to 2015. For this purpose, in this study return on assets ratio is used to measure the profitability of company while independent variables include Current Liabilities to Total Assets Ratio (CLTAR), Current Assets to Total Assets Ratio (CATAR), Inventory Turnover in Days (ITID), Payables’ Payment Period (PPP) and Receivables’ Collection Period (RCP). The findings of the study show that significant but negative relation exists between the profitability and Current Liabilities to Total Assets Ratio, Current Assets to Total Assets Ratio (CATAR) and profitability are insignificantly related to each others, significant but negative relationship exists between profitability and Inventory Turnover in Days, significant but Positive relationship exists between the profitability and Payables’ Payment Period, and the insignificant relationship exists between the Profitability and Receivables’ Collection Period. Therefore, managers may enhance the profitability of their firms by efficiently dealing with the current liabilities, Inventories and company’s Payables. So, the results demonstrate that company can enhance its profitability by efficiently dealing in its working capital. As such study was not done in Food and personal care products sector so far so this study will benefit the companies in this sector in the management of their working capital in an effective manner so that they can enhance their profitability.