25-06-2014, 12:30 PM
Effects of Working Capital Management and Liquidity: Evidence from the Cement Industry of Bangladesh
Effects of Working Capital Management.pdf (Size: 47.23 KB / Downloads: 172)
ABSTRACT
This paper is an attempt to investigate the effects of working capital
management efficiency as well as maintaining liquidity on the profitability of
corporations. For this purpose, corporations enlisted with the cement industry
of Dhaka Stock Exchange have been selected and the analysis covers a time
period from year 2005 to 2009. The purpose of this paper is to establish a
relationship which is statistically significant, the other purpose is to help explain
the necessity of firms optimizing their level of working capital management and
maintaining enough liquidity as it affects the profitability. The result of this
study clearly shows significant level of relationship between the profitability
indices and various liquidity indices as well as working capital components.
INTRODUCTION
Capital structure and working capital management are two very widely
revisited area by academicians (Lazaridis and Tryfonidis,2006). This area of
finance has been approached in various ways by many academicians in many
countries over the world. Some has focused mainly on optimizing accounts
receivable management so that the firms can maximize profit, as we see
In Besley, Scott and Meyer (1987),. The theoretical importance of the
working capital components over the profitability ratio is very clear, that the
lesser the time a firm needs to realize cash from its customers relative to the time
it requires to pay off its creditors the better it is for its liquidity position and thus
reduces the risk of dependency on external and more expensive sources of
capital. For the purpose to check the practical application of the theory, an
attempt to study the working capital practice in Bangladesh has been made. The
idea of this particular study is similarly based on the idea of the research
LITERATURE REVIEW
The attention of academicians and managers over optimizing working capital
components is not very new, rather, many have provided with a variety of
thoughts for the welfare of businesses over many years. For over 25 years ago,
Largay and Stickney (1980, p. 53) had reported the importance of cash position
for sustainability of the firm. Lazaridis and Tryfonidis (2006), had found a
relationship between working capital management efficiency and profitability
and so did Shin and Soenen (1998), Deloof (2003) and many others. Thus it was
obvious that the firms would have to suffer if it does not take steps to minimize
their dependency on external sources of funds.
According to Deloof
(2003) the way that working capital is managed has a
significant impact on profitability of firms. It has also been proved that by
minimizing the amount of funds tied up in current assets; firms can reduce
financing costs and/or increase the funds available for expansion. Summers and
Wilson (2000) report that in the UK corporate sector more than 80% of daily
business transactions are on credit terms. Cote and Latham (1999, p. 261) argued
the management of receivables, inventory and accounts payable have tremendous
impact on cash flows, which in turn affect the profitability of firms. As found by
Lazaridis and Tryfonidis (2006), companies enjoy better pricing when they hold
enough cash to purchase from own suppliers and thus they may enhance their
profit. So having enough liquidity also affects the profitability of the firm.
DATA COLLECTION, VARIABLES AND METHODOLOGY
Data Collection
For the purpose of this study, secondary data have been collected and the
data collected were from listed firms in the Dhaka Stock Exchange. The reason
for choosing this source is primarily due to the better reliability of the financial
statements. Due to time constraint, only cement industry has been selected for the
said research. The industry consists of five companies, due to unavailability of
one company all years secondary data, four companies were taken as sample; this
covers 80% of the population. The outliers had been adjusted to get better
reliable result. The duration covered in this study was from year 2005 to year
2009 for this analysis. Finally the financial statements were obtained from the
Dhaka Stock Exchange Library
Regression Analysis
As we have seen from the correlation table shown previously we get an idea
about the relationship nature between variables but to analyze the extent of
dependency of firms’ profitability on its working capital management, regression
analysis has been conducted. In this study the working capital components and
cash position indicators are the independent variables as said earlier.
This study has focused on simple regression and multiple regressions both. In
the first section, the single regression has been conducted over each individual
dependent variable, i.e., ROA, NPM and ICR. The Second section covers the
Multiple Regression model
CONCLUSIONS AND RECOMMENDATIONS
This study finds a negative relationship between cash conversion cycle and
profitability of the Firm. This complies with the finding of Shin and Soenen
(1998) and Lazaridis and Tryfonidis (2006) and many others. This study extends
the earlier said studies in the sense that this study shows a strong positive
relationship of profitability with the firms’ cash holding position along with other
indicators. And it also recommends that the firms should forecast their sales and
hold cash enough as according to their projected sales level, so that they be able
to take advantage of the bargaining position while making purchases and thus
reduce cost. It is very clear that the efficient management of working capital and
liquidity has a positive effect on the firms’ profitability. So this study clearly
asserts that, firms in the cement industry in Bangladesh have enough scope to
enhance their profitability by handling their working capital in more efficient
ways. Especially, the inventory turnover if handled efficiently can produce a
significant positive impact on profitability of the firm.
Thus this study finds enough evidences that a firm is likely to enjoy better
profitability if the firm manages its working capital with better efficiency and
focuses on cash position with more care.