IMPACT OF WORKING CAPITAL MANAGEMENT ON

PROFITABILITY: CASE OF THE AGRICULTURAL SECTOR

OF PAKISTAN

SUPERVIOR:
Ms. IRUM BUTT

SUBMITTED BY:
ALINA SAJID

SESSION: (2011-2015)

KINNAIRD COLLEGE FOR WOMEN

Introduction:
The major function of any financial department is to manage the short and long term liability
and assets of the organization. As we are conducting the research on Pakistans agriculture
industry, we have selected six fertilizer manufacturing companies of Pakistan. According to
Muhammad Mursheed ur Rehman. (2011) there is the positive correlation between the working
capital and profitability, and same with the liquidity. For the purpose of research we will be
taking CCC, ROI, ROA and other working capital ratio for measuring the effectiveness of the
organization. Working capital management is the most important factor for improving
profitability and efficiency Suchdev singh, (2013). By reducing the cash conversion cycle
organization can improve their profitability Parul mehra, (2013).
According to Krishna Moorthy, Mr. Ng Chee Yew and Mr Mahendra Kumar. (2011) there is the
positive relation between the inventory management and profitability of the organization. There
research shows clear evidence that hold cost of goods in store or at the shelf of retailer is the cost
to the firm which ultimately reduce the profitability of the organization. Dr Ashok Kumar
Panigrahi. (2013) states that the inventory management is the most ulterior task in achieving the
efficient working capital they have conducted the study on Indian top10 cement industries they
took ten year data from 2001 to 2010. The results show that the inventory management had
positive relation with the organization working capital.
The profitability is the major element for any profit making organization, keeping in mind the
other goals of the firm like providing the high quality products, lowering cost of manufacturing
and etc. the analysis that we are about to conduct is mainly focuses on the financial department
of the selected organization. This study that we are conduct is previously conducted in
Bangladeshs cement industry to find out the relation between the working capital management
and the profitability. We are trying to apply that study on to the agricultural organization to find
out whether there is any relation between the two elements in Pakistan agric industry or not, for
that we will apply profitability analysis on the selected organizations and other statistic
techniques to find out the relation between the variables. This study will help to improve the
financial position of the organizations in Pakistan. As agriculture is the backbone of Pakistan
economy and yet there is no major steps been taken to improve the financial position of the

organization with in the agriculture industry. Its our little try to find out the path to improve the
organizations position working the agriculture industry.

Rationale of the study:

The purpose of this research is to analyze the impact of working capital on the profitability of the
organization. This will help the organizations to develop and implement the policies that will
help to improve the performance of the organization in terms of profitability.

Scope of the study:

The study is going to add help the future researchers as the assistance, as their was no research
being done on this industries regarding the management of working capital to attain maximum
profits. The study will also help the fertilizers manufacturers to improve their profitability by
adapting the recommendation. It will not only serve the fertilizer sector rather it will also help
the private sector along with the general public and private sector to improve their policies
regarding the working capital management.

Problem Identification:
After having the in depth analysis of the fertilizer industry of Pakistan the problem identified is,
the organizations which are not maintaining their working capital management system well
enough are facing the problem of low profitability. In this time of high competition the
organization who have failed to maintain the proper working capital variables are facing the low
profits.

Problem Statement:
Impact of working capital management on organizations profitability.

Research objectives:

To examine the effect of inventory turnover on the profitability.

To examine the effect of cash conversion cycle on the profitability.

To examine the effect of payable turnover on the profitability.

To examine the effect of account receivable on the profitability.

Hypothesis:
1) H1: there is relationship between inventory turnover and profitability.
H0: there is no relationship between inventory turnover and profitability.
2) H1: there is relationship between payable turnover and profitability.
H0: there is no relationship between payable turnover and profitability.
3) H1: there is relationship between cash conversion cycle and profitability.
H0: there is no relationship between cash conversion cycle and profitability.
4) H1: there is relationship between accounts payable and profitability.
H0: there is no relationship between account payable and profitability.

Theoretical framework:

Working Capital
Management

j
Independent variables

Dependent variable

Literature Review:
In Pakistan researchers have conducted several researches on working capital and liquidity
relationship will profitability for this purpose we have selected same to variable but for the
agriculture industry. As Pakistan is consider to be the as agricultural economy and this sector
accounts for 80% of the Pakistans employment rate.
The research of Muhammad Mursheed ur Rehman. (2011) have then the study on textile industry
of Bangladesh for that they have selected 9 textiles company and have conduct multiple test on
them. They have conductive ratio analysis regression model and correlation model on three year
financial data of the selected organization from year 2005-2008. The study has revealed that
there is the positive relationship between two variables with profitability. By managing the
working capital, inventory turnover debtor turnover, current assets and liability organization
could achieve high profitability.
According to the research of Harsh Kaur & Sukhdev Singh. (2012) there is the positive relation
between the working capital and profitability, they have taken 200 companies belonging to the
19 different industries of India. The reason to conduct this research is to find the benchmark of
each industry and to find the solutions for the other companies. They have conduct different test
on the organizations like Cash conversation cycle CCC, Days operating cycle DOC, Normalized
days working capital NDWC. The study period of the research is from 2000 to 2010. After
conducting the research they were able to improve the profitability of 145 companies from the
selected organizations.
Parul mahra. (2013),this study was conducted by the Indian researcher on the Indian
pharmaceutical industry, the reason to conduct this research was that, there was no research
being done at all. Other than that pharmaceutical industry is mostly dependent upon the
innovation and development of new median and the average cost of developing new drug is 1
billion US Dollars. For this kind of industry organization should be highly liquid to invest on
R&D. for this research they have used two different type of the analysis tools, SPSS & Grelt
Software. The conclusion that was found after the research was that Average payback period,
Debt and CCC have negative relation with the profitability, in order to maintain high profitability

they have to keep the Current assets higher than the current liabilities. So it was concluded that
pharmaceutical industry can achieve high profits if they dont use debts.
Dr Ashok Kumar Panigrahi. (2013),the study shows the positive impact of inventory
management on the working capital of the organizations the research was conducted on the top
10 cement industry of India. The tests were applied on 10 years data from 2001 to 2010 the data
was obtained from secondary resources.the dependent variable was gross operating profit (GOP)
and the independent variable was inventory management. The financial tests and regression test,
test were applied on the data to obtain the results.
Krishna Moorthy, Mr. Ng Chee Yew and Mr Mahendra Kumar. (2011) the study was conducted
on the secondary data collected from various sources online and from library. The time period of
the analysis was from 2008 to 2010. There is the positive relation between the inventory
management and profitability of the organization. There research shows clear evidence that hold
cost of goods in store or at the shelf of retailer is the cost to the firm which ultimately reduce the
profitability of the organizations.

Research Methods :
Population:
The fertilizer manufacturer importer and distributer will all lie in the population of research.

Target population:
The six major fertilizer manufacturer companies will be the target population of the study.

Research technique:
The Regression technique that has been used to gather the relevant data.

Sample size:

Researcher will be taking the 80% of the total population as the sample size for the survey. The
total number of registered fertilizer companies is eight out of which we will be taking six out of
them for the survey.

Sampling technique:
Researcher will be using the simple random sampling for this research.

Analysis technique:
Regression model will be used to analyze the gathered data, using graphs and frequency tables.
Inferential statistics is used for hypothesis testing. Profitability and liquidity ratios will be
applied on the organization last five year financial performance to get the right idea of the
relationship between the variables

Analysis tools:
SPSS 17.0 will be used to analyze the data.

References:
1) Mohammad Morshedur Rahman. (2011) Working Capital Management and Profitability:
A Study on Textiles Industry. ASA University Review, Vol. 5 No. 1
2) Harsh Vineet Kaur and Sukhdev Singh. (2013) Managing Efficiency and Profitability
Through Working Capital: an Empirical Analysis of BSE 200 Companies Asian Journal
of Business Management 5(2): 197-207
3) Parul Mahra.(2013) Effect of Working Capital Management on theProfitability of the
Indian Pharmaceutical Sector. VOL. 2, ISSUE 3, ISSN NO: 2319-7471
4) DR. ASHOK KUMAR PANIGRAHI. (2013) RELATIONSHIP BETWEEN
INVENTORY MANAGEMENT AND PROFITABILITY: AN EMPIRICAL ANALYSIS
OF INDIAN CEMENT COMPANIES. Asia Pacific Journal of Marketing &
Management Review ISSN 2319-2836
5) M. Krishna Moorthy Mr Ng Chee Yew Mr. Mahendra Kumar Chelliah. (2013) THE
IMPACT OF INVENTORY CONTROL ON COST AND PROFITABILITY.