Quazi

Afri bear Journal of Business Management Vol. 5(27), pp. 11005-11010, 9 November, 2011 Available online at http//www. academicjournals. org/AJBM DOI 10. 5897/AJBM11. 326 ISSN 1993-8233 2011 Academic Journals Full space Research Paper Impact of work expectant on souseds positivity Hassan Aftab Qazi1*, Syed Muhammad Amir Shah2, Zaheer Abbas3 and Tanzeela Nadeem4 1 University of Central Punjab, Lahore 1-Khayaban-e-Jinnah Road, M. A. Johar Town, Lahore, Pakistan. 2 Illama Iqbal Open University, Islamabad, Pakistan. 3 Islamic external University, Islamabad, Pakistan.Accepted 20 April, 2011 The correlativity surrounded by working cap and valueability of securelys is conk outd for the counseling of immediate payment cycle forethought. on the job(p) uppercase is made by the third important factors, debtor, opinionor and contrast. When we include notes conversion cycle (CCC) to working heavy(p) then it becomes working peachy management (WCM). dickens sectors ar select ed as a sample size automobile and oil and gas sector. The time period is from 2004 2009. Different variables affecting the favorableness of firms are selected.In this study, terminateworking dandy, inventory turnover in geezerhood, number beak receivable and monetary asset to total assets (FATA) are taken as independent variables. The result shows validatory movement of working capital letter (WC) on firms profitability. R shows the fitness of the specimen which is 49. 95%. The independent variables inform 49. 95% of the model. Key words running(a) capital management (WCM), cash conversion cycle (CCC), account receivable (AR). INTRODUCTION A good number of firms gull put sufficient cash in working capital. work capital management (WCM) is an important factor of financial management (FM).Debtor, creditor and inventory are the major comp unmatchednts of working capital (WC). Large stock and trade credit constitution grass increase the sales volume. Inventory is the m ain part of the working capital. Increase in the inventory will give decrease in the risk of stock come forward. Inventory is done for fulfilling the demand of the public. Inventory is the liability of the company to sell it. The other element of working capital (WC) is accounts account payable (AP). Firms deal check the quality of the products provided by the producer by giving them late payment, whether it is suitable for the firm or not.Late payments create very bad impression of the firm in the market. Accounts receivable is also the major part of the working capital. Delay in the days of receivable creates more than complication for the company. Working capital management is still taken lightly by some companies. It works as a key to free the cash from stock, accounts payable (AP) and accounts receivable (AR). To deal with the less(prenominal) important aspects of efficient and effective Working great(p) (WC), firms cigaret sharply reduce the out sourcing and they can save the money for future investment or opportunities.This can create more financial flexibility and increase the worth of the firm by reducing capital employed (Buchmann and Jung, 2008). This study basically focuses on the long run financial decisions, future investments and allocations of funds, dividends and valuation of the firm in the stock market. However, balance sheet components assets and liabilities are significant in mulct shape planning and they need to be carefully considerd by the firm. Short marge assets and liabilities are managed carefully by working capital management (WCM) for the process of the firms profitability (Smith, 1980).For creating good worth of the share in front of shareholders, firms have to manage working capital efficiently and effectively. Working capital management process starts from the purchase of raw material up to the sales of the goods. It creates significant jolt on the profitability and liquidity of the firms (Shin and Soenen, 1998). Net working capital (NWC) and gross working capital (GWC) are the two major concepts of working capital (WC). The total authoritative assets and *Corresponding author. E-mail emailprotected com. Tel +92-42-35880007 or +923334604314. 11006 Afr. J. Bus. Manage. orking capital (WC) can be replaced as a Gross working capital of the firm. By subtracting Current Liabi-lities from Current Assets it becomes Net Working Capital. Net working capital (NWC) can also be used to measure the liquidity but it is not useful when firms are compared with each other regarding performance, but useful in touchstone the internal control of the firm. The net working capital upholds to compare the liquidity of previous record of the firm performance. The main purpose of the working capital management (WCM) is to make the sustainable level of the working capital (WC) which is favorable for the firm.Net working capital (NWC) is the part of the currents assets which is main-tained finished funds having maturi ty life more than one year. Current assets represent the source of short terms funds. If the firm has less short term funds then it is supported by long term funds and sustains the firm value and market share price. This is very useful for the ana-lysis of trade between profitability and risk in the shares of the firm. Positive working capital (PWC) and Negative Working Capital (NWC) are the two possible signs. Positive working capital (PWC) is the sign of firm healthiness.Positive working capital (PWC) way that firm have the ability to pay the liabilities which maturity date are less than one year of the firm on due date. Positive working capital (PWC) is calculated by comparing Current Assets (CA) by current liabilities (CL). Negative Working Capital is the sign of firm fragileness. Negative working capital means that company does not have the ability to pay the short term liabilities. When the Working Capital (WC) shows negative sign, it indicates long term funds support the sh ort term funds and firm can easily pay the obligations on due date and save the value or worth of firm in the market.But in the opposite case, firm declining means bankruptcy. If declining working capital ratio continues for longer period then it can affect the firm value. If the firm skill is more in the operation, the more increase in working capital (WC). It can be analyzed by comparing the operation of working capital (WC) periodically. Working capital is raised from profits or outsourcing. Outsourcing means when there are more sales in the season but the firm is not able to invest and produce more products.From outsourcing, more liabilities arise but on the other way from investing more, revenue will generate from more sales and it will increase the assets of the firm. Working Capital Management (WCM) has its impact on profitability as well as liquidity of the company and the primeval goal of a company is to increase the annual revenues. Keeping the company liquid is an ex tremely main task also. Increase in company profitabiliy by reducing the liquidity of the company can bring some serious problems for it. Goals cannot be ignored at any terms because each individual goal has its own importance. If goal of maximizing the profit is gnored, survival is not possible for a longer time. Similarly, if liquidity objective is ignored, insolvency or bankruptcy could be faced. Because of these bases, comme il faut attention should be given to Working Capital Management (WCM) which affects the companies profits and through this, it will show the effect of the Working Capital (WC) on profitability (PRT). The enquiry problem of this study is does working capital have significant impact on profitability of a company? The objective of this reseach is to find out the correlation between working capital and profitability (PRT) through statistical abridgment of a sample of listed companies.The purpose of this research is to analyze the impact of handed-down workin g capital policies (WCP) on the profitability (PRT) of the firms, to analyze whether Working Capital Policies (WCP) can become stable over a long run-up and to occupy a conclusion about the impact of working capital on the profitability of companies. LITERATURE REVIEW A significant portion of financial research is concerned with the Management of working capital (MWC). This issue has been investigated at both(prenominal) theoretical and empirical levels. Different researchers have worked on working capital from divergent perspectives and in different economic environment.The environments and perspectives are discussed in detail in this work. This paper is conducted for the association between working capital (WC) and value creation for shareholders. Working capital has three parts. First, account receivable second, account payable and third, inventory. Account receivable is a part of balance sheet, placed in the Asset spot (AS) and it is the inflows of firm. Account receivable i s maintained when a company makes sales on credit bases. Account payable is also the part of the balance sheet, placed on the liabilities side and also the outflows of the firm.Account payable is maintained when a company do sum expenditures on the credit bases and make a payment on different terms. Inventory is maintained for generating the revenues from sales. The standard measure for working capital management (WCM) is cash conversion cycle (CCC). Cash conversion period reflects the time duo between disbursement and collection of cash. Cash Conversion Cycle (CCC) is based on three components number of days of account receivable, number of day of accounts payable and number of day of inventory. It is measured by the sum of inventory conversion period less payable conversion period.Different researchers use the name like net trade cycle for calculating the Working Capital Management (WCM). In this, every component is calculated in percenttage of sales (Soenen, 1998). Qazi et al. 1 1007 In Marcs visual sense most firms invest cash in working capital (WC) and it shows that the management of Working Capital leaves good impression on the Profitability of firms. Similarly, firms Working Capital Management (WCM) is a major part of financial positions. It helps the firms in maximizing their wealth and value of the shares. Larger inventory and trade policy can make higher sales for the firm.Large inventory reduces the risk of stock out for fulfilling the demand of the public. By providing credit sales to the customers, suppliers have significant cost advantage over financial institution (Deloof, 2002). Different researchers have different views that they test on the working capital. There is a positive correlation between account receivable and operating income of firm. Because if the good provided on credit bases then the days of the accounts receivable will not be for long period. On the theme of the accounts receivable, firms running their operations can meet th e payment on due date.Efficient liquidity management (ELM) is a process which includes planning and controlling of current assets (CA) and current liabilities (CL). Liquidity and profitability of firm have great relation with each other. This consanguinity can be analyzed by current ratio (CR) and cash gap (CG) (Abdual, 2007). Firms short terms liabilities are directly related to the former while the continuity of liabilities is concerned with the latter. Higher investment blocked in stock and accounts receivable creates problem for operation. Decrease in number of days of account receivable gives increase in early eserves (Padachi, 2006). Financial managers can gain profit by maintaining component of cash conversion cycle (CCC) at a higher level (Nazir and Afza, 2009). If the inventory gets to the minimum level and the number of days account receivable (NDAR) also becomes minimum, then firms can increase their profits and run their project efficiently and effectively (Abdul, 2007) . The policies of working capital management can help to measure the WC. If the policies which the firm is going to implement are very strict and helpful for the firm then the firm will not bear losses or stock out or less short term assets.The financing policies mean how to allocate the revenue to different departments and after how many days the firm is going to receive their payments and ability to pay his own payments. The share value can be created by the financial managers if they efficiently manage through conservative approach (Nazir and Afza, 2009). Different researchers use different analysis models. For empirical investigation, the anova and Pearson correlation analysis is applied. From these models, firm size and cash cycle can be measured easily.It is easy to measure the efficiency of working capital management (WCM), performance evaluation and the whole efficiency of the firm by compass up their targets. For calculating the overall efficiency of the firm, the target has to be achieved in limited time period. Researchers use pooled selective information for the analysis. In the pooled data, different independent variables much(prenominal) as regress combine with the dependent variable (Zariyawati, 2009). The financial leverage and growth in sales are the major factor of firm profitability. Firms have to select the best policy to improve their collection and payment period.Efficient management financing of working capital can increase their operational profitability (Abdul, 2010). afterward studying the above articles, it is seen that the results of all researchers are the same on working capital management (WCM) and profitability (PRT) regardless of different companies, environments and situations. METHODOLOGY This research is to analyze the impact of working capital (WC) on the profitability (PRT) of oil and gas and automobile industry with reference to Pakistan. Different statistical tools are applied to analyze the significance of the varia bles. So, the method of coefficient of correlation has been selected.Regression analysis is applied for testing the model reliability and significant relationship between variables. Data set and sample Two sectors are selected from Karachi Stock Exchange. The first is oil and gas and the second is automobile sector. A total of 20 companies are taken as sample for the data collection, which are collected from different sources. They are taken from 2004 2009 from the annual report. Some data are collected from the State coin bank of Pakistan (SBP). State Bank of Pakistan (SBP) provides an analysis report of different sectors and companies which were listed in Karachi Stock Exchange (KSE).In this study, different variables are taken to measure the working capital (WC). Working Capital is taken as independent variable (WC) while profitability is taken as dependent variable (PRT). In this case, profit after tax is taken as profitability of firms. Working Capital can be measured by diffe rent ways. First is net working capital (NWC), which is measured by current assets (CA), shared by current liabilities (CL). Second is inventory turnover in days (ITID), which is calculated by inventory divided by Cost of Goods Sold (CGS) and figure by 365.Third is number of day of accounts receivable (AAR), which is calculated by other current assets divided by sale and multiplied by 365. Forth is financial asset to total assets (FATA), which is calculated by adding cash and investment and the whole divided by total assets. In addition, current ratio (CR), debt to equity ratio (DER) and sales natural logarithm (LOS) are taken as control variable in this analysis. All the aforementioned variables are affecting the Working Capital, Working Capital Management (WCM) and it will have negative or positive impact on the profitability of the firms.Hypotheses testing The objective of this research is to examine the impact of Working Capital (WC) on the profitability of firms. Figure 1 sho ws the impact 11008 Afr. J. Bus. Manage. Figure 1. Impact of Working Capital on Profitability. of working capital on profitability H1 Working capital has positive effect on the profitability of firms. H0 Working capital has no positive effect on the profitability of firms. case specification In this study, panel data turnabout analysis and time series of data are taken. For the regression analysis, pooled data are used.In this pooled data, all variables are combined on the same level and selected variables are grouped as independent and dependent variables. After that, all variables are selected for regression and correlation analysis. feigning equation PRT it = ? 0 + ? 1 (AAR it) + ? 2 (ITID it) + ? 3 (CR it) + ? 4 (DER it) + ? 5 (LOS it) + ? 6 (FATA it) + ? 7 (NWC it) + ? PRTi t = Net Profit t i = 1- 20 firms. ?0 Beta ? i Coefficients X it X it Independent variables i at time t t Time = 1-5 years. ? The phantasm term Whereas, AAR = middling Account Receivable ITID = Inventor y Turnover in Days CR = Current Ratio LOS = Sales logarithmFATA = Financial Assets to Total Assets NWC = Net Working Capital DER = Debt Equity Ratio Qualitative analyses In this paper, two analyses are applied. First, correlation and statistical tools are applied in these data. We select person correlation model for this study to find out the degree of correlation among dependent and independent variables. In the regression analysis, we gather the data from annual reports and turn it to the same level. This congregation of data is called pooled data. For this analysis, we select E-views software to analyze it correctly in the case of pooled data.DATA ANALYSIS AND REGRESSION RESULTS The correlation and determination coefficients are the measures of the regression model. First, correlation coefficient (49. 95%) and the determination coefficient (26. 12%) show the degree of correlation among working capital and profitability of selected firms from oil and gas and automobile sector ove r 2004 2009. The standard error value is 6. 5926 and F-statistics value is 5. 4213 which is significant at 1% and shows 100% fitness of the model (Table 1). Similarly, the Durbin-Watson statistics is 1. 9991 which clearly defines that there is no serial correlation in this regression model.Table 2 shows the estimation results of the six antecedents for the independent variable of working capital at Qazi et al. 11009 Table 1. Model summary. R R2 Adjusted R-squared Standard Error of image Durbin-Watson statistics F statistics 0. 499599 0. 261211 0. 213029 6. 592679 1. 991426 5. 421362 Table 2. Estimation results. Variable NWC NDAR ITID FATA DER CR Means 23. 58595 129. 4913 75. 80012 0. 217936 17. 96434 18. 85266 SD 8. 415465 351. 7532 143. 2339 0. 191679 3. 368055 0. 597391 T stats 4. 520358 0. 254527 0. 937944 -0. 477942 -0. 554939 0. 096545 Remarks Sig Not Sig Not Sig Not Sig Not Sig Not Sig Table 3.Correlation matrix. PROFIT NWC NDAR ITID FATA DER CR PROFIT 1. 000000 0. 474400 0. 109619 0. 112621 -0. 124623 -0. 201328 -0. 217375 NWC 1. 000000 -0. 086246 -0. 125120 -0. 054646 -0. 308676 -0. 397314 NDAR IITD FATA DER CR 1. 000000 0. 748882 -0. 190807 -0. 095937 -0. 040053 1. 000000 -0. 311687 0. 061122 -0. 118921 1. 000000 0. 078238 0. 396036 1. 000000 0. 008978 1. 000000 1% significance level. The results show that Net Working Capital (NWC) has positive and significant impact on the Profitability (PRT) of firms and the rest of the variables explain the behavior of profitability but have no significant impact on profitability.In the correlation results shown in Table 3, networking capital has soaked positive relationship with profitability of firms while number of days of account receivable (NDAR) and Inventory turnover in days (ITD) are positive but have weak correlation power with profitability of firms financial assets to total assets (FATA), debt equity ratio (DER) and current ratio (CR) are weak and negatively correlate with the Profitability (PRT) of t he firms.But the correlation results of independent variables somehow showed positive and strong correlation of inventory turnover in days (ITD) with number of days account receivable (NDAR) and a strong but negative correlation of current ratio with net working capital the remaining variables correlate but are weak in both the positive and negative sense, thus the concept of colinearity does not exist among the variables as evident by the analysis results. Conclusion This study is the relationship of working capital (WC) and profitability (PRT) of firms. orking capital (WC) is the major portion of the balance sheet. In this paper, data are collected form Annual Reports (AR) and analysis report which is provided from the State Bank of Pakistan (SBP). In this analysis report, the companies which are listed in stock exchange are analyzed and summarized. In this research, oil and gas and automobile sectors are taken 11010 Afr. J. Bus. Manage. as sample. Data are taken from 2004 2009. In this research, R shows the fitness of model which is 49. 95%. The independent variables explain 49. 95% of the model.In the regression results, only net working capital is positive and significant and Number of Days of Account Receivable (NDAR) and Inventory Turnover in Days (ITD) are positive but insignificant and all other independent variables are negative and insignificant. In the correlation results, networking capital is positively correlated with profitability of the firms. The other two variables are sapless correlated with the profitability of firms and the other three independent variables are negatively correlated with profitability of firms.Hence, the empirical results of the paper show the positive trend of working capital on profitability of the firms. The results are supported by previous studies of Rahman (2007) and Nazir and Afza (2009) and Deloof (2002) on the Working Capital (WC). REFERENCES Abdual RMN (2007). Working Capital Management And Profitability tr ip Of. Int. Rev. Bus. Res. Papers, pp. 279-300. Abdul RMN (2007). Working Capital Management And Profitability theme Of Pakistani Firms. Int. Rev. Bus. Res. Papers, pp. 79-300. Abdul RTA (2010). Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan. Int. Res. J. Finan. Econ. , 47 152. Buchmann P, Jung U (2008). 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