Thesis On Effect of Working Capitl Management On Profiability of Business

Effect of Working Capital management on the profitability of pharma firms
DISSERTATION
EFFECTS
OF WORKING CAPITAL MANAGEMENT
ON THE PROFITABILITY OF PHARM FIRMS listed in KSE
SUBMITTED BY
QURAT-UL-AIN KHALIL
(MBA/M/1173/11) MBA- IV (Finance)
A Report is submitted to Department of Business Administration, Federal Urdu University, Karachi In partial fulfillment of the requirements for the degree Of Master in Business Administration
SUBMITTED TO
SIR ABDUL AZIZ MEMON

DEPARTMENT OF BUSINESS ADMINTRATION FEDERAL URDU UNIVERSITY ART, SCIENCE & TECHNOLOGY
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Abstract
Working Capital management is the focus of study .Working Capital Management has its effect on liquidity as well on profitability of the firm. In this research, I have selected a sample of 5 Pakistani Pharma firms listed on Karachi Stock Exchange for a period of 12 years from 2000 to 2011, I have studied the effect of different variables of working capital management including the Debt ratio, size of the firm (measured in terms of natural logarithm of sales), Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Pakistani firms. Descriptive and Regression are used for analysis. The results show that there is a strong negative relationship between variables of the working capital management and profitability of the firm except the sales (Size of the company). We also find that there is a positive relationship between size of the firm and its profitability. There is also a relationship between debt used by the firm and its profitability.
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Acknowledgement
In the name of Allah, the Most Gracious and the Most Merciful All praise and glory goes to Almighty Allah (Subhanahu Wa Taala) who gave me the courage and patience to carry out this work. Peace and blessings of Allah be upon His last Prophet Muhammad (Sallulaho-Alaihe-Wassalam) and all his Sahaba (RaziAllaho-Anhum) who devoted their lives towards the prosperity and spread of Islam. Firstly, I would like to thanks to my Parents, who brought me up , where I am standing today, looking forward for the most promising and the most glowing future ahead for which they sacrificed most of their past Then I am heartily thankful to my teacher SIR ABDUL SAMAD, he has been the ideal thesis supervisor. His sage advice, insightful criticisms, and patient encouragement aided the writing of this thesis in innumerable ways. Family support plays a vital role in the success of an individual. I would like to thanks my siblings, cousin from the core of my heart. Their prayers and encouragement always help me take the right steps in life. I pray, May Allah help us in following Islam according to Quran and Sunna! ( Aameen)
QURATULAIN KHALIL
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DEDICATION
THIS REPORT IS DEDICATED TO MY PARENTS

This Research Paper is lovingly dedicated to MY RESPECTED PARENTS who have been my constant source of inspiration. They have given me the drive and discipline to tackle any task with enthusiasm and determination. Without their love and support this thesis would not have been made possible .
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Acronyms
CCC DR DTID DPO DSO ROA ROE WCM LOS CR QR Cash Conversion Cycle Debt Ratio Inventory turnover in Days Days Payables Outstanding Days Sales Outstanding Return on Assets Return on Equity Working Capital Management Logaritham of sales Current ratio Quick ratio
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CHAPTER#1
INTRODUCTION
1.1)Overview of Pharma Sector:
Pakistan has a developing and a vibrant Pharma Industry. At the time of independence, in 1947, there was hardly any pharmacy industry in Pakistan and the country was suffering in this regard to a greater extent. Today Pakistan has about 400 pharmaceutical manufacturing units, which also include those operated by 25 multinationals that are present in the country. Around 70% of the country's demand of Finished Medicine is met by The Pakistan Pharmaceutical Industry. In terms of share market, the domestic pharmacy market is almost evenly divided between the Nationals and the Multinationals. The National pharmacy industry has shown a growing progress over the years, mostly in the last decade. The industry has invested significantly to improve itself in the last few years and in the recent times the majority of the industry is following Good Manufacturing Practices (GMP), compliant with the domestic as well as international Guidance. At present the industry has the capacity to produce a variety of product that range from simple pills to sophisticated Biotech, Oncology and Value Added Generic compounds. Total capital investment in this sector is approximately Rs 21.12billion. The whole global Pharmaceutical market is valued at 650 billion US$ (2008-09), with an annual growth rate of 8% and continuing with the rate it will crossthe value of 1.1 trillion US$ by 2014.On the basis of value the global market is governed by USA, EU and Japan with a share of 48%, 28% and 12%, respectively. The rest of the world has only 20% of the total world Pharmaceutical market. According to the researches, although Pakistans pharmaceutical and healthcare sectors are expanding and evolving speedily, about half of the population has no access to the modern medicines. Clearly this presents an opportunity, but the government and industry's stakeholders are required to put more efforts. The value of pharmaceuticals that was sold in 2007 exceeded US$1.4bn, which equates to per capita consumption of less than US$ 10 per year and value of medicines sold is now expected to exceed US$2.3 Billion by the year 2012.The Pharmaceutical market of Pakistan is estimated at over $1.5 Billion in value and bulk imports of raw materials are close to $450 million. The utility rates and other aspects of production have been experiencing a stable enhancement over the last couple of years. Prices of drugs have not increased over the last 7 years, most recently with China revoking its export
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subsidy by 8%; prices of raw materials are expected to shoot up further. Machinery and equipment is imported from China, Taiwan, Korea, India, Germany, UK, USA and Japan most of the time. According to an expert, the regulation of price has given rise to the false belief that pharmaceutical companies are overpricing with reference to their products. Besides that, surging inflation and the deteriorating economic condition of the country has considerably affected company margins. There is the need of a properly defined policy in this regard, as price fixing remains is in the control of the ministry. It is necessary for the pricing policy to work in automatic ways, keeping in view the interests of both patients and pharmacists. In addition, price control can help increase investment. It was being informed that the production of drugs takes place under strict CGMP (Current Good Manufacturing Practice) principles, while a variety of dosage forms including liquids, tablets, capsules, dry syrups, creams and ointments, sterile ampoules, vials, metered dose inhalers can be produced. However, some companies products production for multinational companies is found to be worth Rs 1.0 billion. The reputable companies are not involved in the smuggling of drugs while multinational companies refrain from such a thing as well. The doctors are responsible to support the interests of the patient, but unfortunately unethical and immoral practices seem to prevail in the community. Companies should identify their responsibility and, hence, should focus at maintaining excellence on reasonable prices, while marketing should also be patient-intensive. It was being found that a meager seven percent claim of manufacturing is being satisfied on local basis as resources are not available in Pakistan. This is because of a lack found in petrochemical industry, which makes preliminary steps essential for our local industry. Certain companies have started such a thing, but it is disappointing that no basic research for making new drugs (molecular) is processed in the country. The quality standards of the ministry are not same for all, adding that role of the doctor could be limited through this access if it satisfies the patient to buy the same product on lower rates. The ministry should keep an eye on Chinese drugs which are coming in Pakistan and should allow only those Chinese firms that are genuine. The pharmaceutical industry hires well qualified people; therefore, grey channel input is in the loss of the patient. As for the budgetary changes, sustained increase in exports has been seen; therefore, duties should be revised on importing machines. In order to de-register the products, the Ministry of Health should play its dynamic role. Pakistan is a developing pharmaceutical market, holds a large population and economic progress evident.However, and per capita drug spending was observed to be rather low at around US$9.30 in the year 2007.
Classified spending accounts for 65% of total healthcare expenditure sourced through out-of pocket payments, international aid and religious or charitable
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institutions. Pharmaceutical spending accounts for less than 1% of the country's GDP, equivalent to levels in some neighboring countries but above that in some of the South Asian countries. The forecast period is probable to witness the marginal strengthening of the generics sector, albeit more in terms of volumes than values. The share of generics is also seems to increase further as major drugs come offpatent in the near term, to the likely benefit of the generics-dominated local industry. With an export turnover of over US$ 100 Million as of 2007, the Pakistan pharmacy industry is relatively young in the international markets. Pakistan Pharma business boasts of quality producers and many units are approved by regulatory authorities around the world. Like domestic market where in the last five years, the sales in international market have gone almost double. The pharmacy industry is making efforts to an Export Vision of USD 500 Million by 2013. In the meantime, exports are also expected to be boosted by new regional and global opportunities. Above all, the Pakistan Pharmaceutical Industry holds a successful developing business, providing high quality essential drugs at affordable prices to Millions. Technologically, well-built and self reliant National Pharmaceutical Industry is not only playing a specific role in promoting and sustaining growth in the vital field of medicine within the country, but is also set in a good manner to take on the international markets.. As of 2012, the total export value of Pakistani-manufactured medicines around the world stood at $400 million. Many different companies sell a diverse range of drugs and pharmaceutical products. Top 10 pharmaceutical brands in Pakistan include: Ferozsons Laboratories Getz Pharma Horizon Pharmaceuticals/Wilshire Labs. Herbion Remington Pharmaceuticals Barrett Hodgson Pakistan Nucleus Pharmaceuticals (Pvt) Limited Sami Pharma Macter International Limited AGP Pharmaceuticals Today, the pharmaceutical sector is one of the most developed hi-tech sectors within the country's economy. New pharmacy schools have been set up nationwide in the past few years which provide and cater to quality pharmacy education to students of pharmacy. Within the province of Punjab, the Punjab Pharmacy Council (based in Lahore) is a government department responsible for conducting examination and tests. The Pakistan Pharmacists Society is the national professional organisation of pharmacists country-wide and also acts as a regulatory authority controlling pharmacy practice in Pakistan.[6] Pharmaceutical authorities in Pakistan are part of the International Pharmaceutical Federation.
In recent years, the Government of Pakistan has substantially simplified the regulatory environment for the setting up of a business operation. The Patent
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Ordinance 2002 has been made TRIPS compliant to include granting of patents to pharmaceutical products, which will encourage new investments in the sector. There are about 906 hospitals, 4554 Dispensaries, 5290 Basic Health Units and 552 Rural Health Centers. The availability of hospital beds in all medical facilities has been estimated at 98,684, which comes to a population bed ratio of 1,536 persons per bed. The figures available about the medical facilities clearly indicate the need for a further expansion in health facilities.
Today, the total volume of the Pakistan Pharmaceutical market is 1.64 billionUS$, with an annual growth of 11%, which is more than the global growth of the Pharmaceutical industry. The economy of Pakistan is growing faster than ever. Exports are increasing at over 20% per annum and have surpassed the budgeted 12.2 billion mark. Remittances from expatriate Pakistanis have increased over 60% reaching the present level of over US $ 4.2 billion annually. The foreign exchange reserves of the Country are at an all-time high of over US $ 12 billion at present. The industrial growth has been over 8% and the overall growth in GDP has been over 6.4%. The Karachi Stock Exchange has performed better than all the stock exchanges of the world where it has gone from 1300 points to over 4200 points in one year and crossed the 5600 points limit. The PSDP outlay for the forthcoming year has been estimated at PKR 202 billion as compared to last years estimation of PKR 160 billion. The Government has also allocated PKR 3,254 million for Health Affairs & Services in the next years budget. These steps demonstrate the seriousness of the present Government concerning health infrastructure development in the Country and for this reason we have identified numerous potential investment opportunities in the Countrys health sector that will be promoted at health asia.
1.2)STATEMENT OF THE PROBLEM:

Effects of Working Capital Management on the Profitability of Pharma firms in Pakistan.
1.3)OBJECTIVES OF THIS STUDY:

1. The goal of working capital management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained, to meet the short-term obligations as and when they arise.
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2. A significant objective of working capital management is to ensure short-term liquidity and to see that profitability is not affected by the way current assets and current liabilities are managed. 3. The main theme of working capital management is the interaction between the current assets and the current liabilities and arrives at the optimum level of both. The optimum level thus arrived must have provision for contingencies. 4. Trade-off between Profitability and Risk: The level of a firms Net working capital has a bearing on its profitability as well as risk. The term profitability used in this context is measured by profits after expenses. The term risk is defined as the probability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. The risk of becoming technically insolvent is measured using Net Working Capital. The greater the net working capital, the more liquid the firm is and therefore the less likelihood of it becoming technically insolvent. The relationship between liquidity, net working capital and risk is such that if either net working capital or liquidity increases, the firm's risk decreases. 5. Trade-off: If a firm wants to increase its profits, it must also increase its risk. Inversely, if it decreases risk, its profitability too tends to decrease. The tradeoff between these variables is that regardless of how the firm increases its profitability through the manipulation of working capital, the consequence is a corresponding increase in risk as measured by the level of Net working capital. 6. Apart from the profitability risk trade-off, another important ingredient of the theory of working capital management is determining the financing mix. Financing mix refers to the proportion of current assets that would be financed by current liabilities and by long-term resources.
1.4)SIGNIFICANCE OF THE STUDY:

This study is significant because it will produce data on the workingcapital management on firms profitability useful to : 1.managers and top executives in organized private sector 2.students carry a research work in this same issue. 3.Bankers that deals with such firms 4.Auditors 5.Accountants
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6.Financial analyst t7.Stock exchange dealers 8.The staff of the organization 9.Prospective customers of the firm 10.Creditors of such organization 11.Legal practitioners 12.The stakeholders and management staff
1.5)LIMITATIONS OF THE STUDY:

The limitation of this research is to primary data,here it is difficult to get the primary data .The secondary data necessarily required to perform the research was gathered from the official sites of the PHARMA firms. Additionally, some of the required data was abstracted from the library of State Bank and Karachi stock exchange. Rest of the data is collected from annual reports, SBP analysis reports and economical surveys.he researcher would have obtained more information than what is obtainable here but due to lack of money because students have limited amount of money to spend on this type of study.this study covers only period of 2000-2011 of 5 pharma firms listed in Karachi Stock Kxchange because there is a time limitation to cover this research.
1.6)HYPOTHESES TESTING:
1.6.1 NULL HYPOTHESIS (HO);

1)There is no relationship between working capital management and profitability of Pharma firms in Pakistan. 2) There is no relationship between debt ratio and profitability of Pharma firms in Pakistan. 3)There is no relationship between LOS and profitability of Pharma firms in Pakistan. 4) There is no relationship between DSO and profitability of Pharma firms in Pakistan. 5)There is no relationship between DPO and profitability of Pharma firms in Pakistan.
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6)There is no relationship between ITID and profitability of Pharma firms in Pakistan.
1.6.2 ALTERNATIVE HYPOTHESIS( H1);

1)There is a relationship between working capital management and profitability of Pharma firms in Pakistan. 2) There is a relationship between debt ratio and profitability of Pharma firms in Pakistan. 3)There is a relationship between LOS and profitability of Pharma firms in Pakistan. 4) There is a relationship between DSO and profitability of Pharma firms in Pakistan. 5)There is a relationship between DPO and profitability of Pharma firms in Pakistan. 6)There is a relationship between ITID and profitability of Pharma firms in Pakistan.
1.7 )STRUCTURE OF WORK:

This research work is to be organized in five chapters as follows: 1. Introduction 2. Literature review 3. Methodology 4. Data analysis and Results 5. Conclusion 6.
1.8) WORKING CAPITAL:

There are two definitions of working capital (1) Gross working capital (2) Net working capital
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1) Gross working capital :

Gross working capital refers to working capital as the total of current assets .Gross working capital is sum of current assets of a company and does not account for current liabilities. Accordingly, Gross working capital = Total current assets 1.1)Constitutes of Current Assets: A current asset is an assets which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory and the portion of prepaid liabilities which will be paid within a year. 1.Cash in hand and cash at bank. 2.Bills Receivables /Sundry debtors. 3.Short term loans and advances. 4.Inventories in stock as : Raw material Work in process Stores and spares Finished goods 5.Prepaid Expenses 6.Accrued incomes 7.Marketable Securities 8.Temporary investment of surplus funds. The concept of Gross Working Capital focuses attention on two aspects of Current Assets' management. They are: a) Way of optimizing investment in Current Assets b) Way of financing current assets.
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a. Optimizing investment in Current Assets: Investment in Current Assets should be just adequate i.e., neither in excess nor deficit because excess investment increases liquidity but reduces profitability as idle investment earns nothing and inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet its obligation. It is taken into consideration that the Working Capital needs of the firm may be fluctuating with changing business activities which may cause excess or shortage of Working Capital frequently and prompt management can control the imbalances.
b. Way of financing Current Assets: This aspect points to the need of arranging funds to finance Company Assets. It says whenever a need for working Capital arises; financing arrangement should be made quickly.The financial manager should have the knowledge of sources of theworking Capital funds as wheel as investment avenues where idle funds can be temporarily invested.
2) Net working capital:

Net working capital is difference of Current assets and current liabilities .It is excess of current assets over current liabilities. In other words net working capital refers to current assets financed by long term funds. The net working capital position of the firm is an important consideration, as this will determine the firms profitability and risk. Here the profitability refers to profits after expenses and risk refers to the probability that a firm will become technically insolvent where it will be unable to meet obligations when they become due for payment. Accordingly, Net working capital = Current assets Current liabilities.
2.1)Constitutes of current Liabilites:
A current liability is a company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. 1.Accrued or outstanding expenses. 2.Short terms loans,advances and deposites. 3.Dividends payable.
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4.Bank overdraft. 5.Provision for taxation, if it does not amount to appropriation of profit. 6.Bills payable. 7.Sundry creditors.
1.9)Characteristics of working capital :

1.Short term Needs: Working capital is used to acquire current assets which get converted into cash in a short period. In this respect it differs from fixed capital which represent the funds locked in long term assets. The duration of the working capital depends on the length of production process, the time that elapses in the sale and the waiting period of the cash receipt. 2.Circular Movement: Working capital is constantly converted into cash which again turns into working capital. This process of conversion goes on continuously. The cash is used to purchase current assets and when the goods are produced and sold out; those current assets are transformed into cash. Thus it moves in a circular away. That is why working capital is also described as circulating capital. 3.An Element of Permanency: Though working capital is a short term capital, it is required always and forever. As stated before, working capital is necessary to continue the productive activity of the enterprise. Hence so long as production continues, the enterprise will constantly remain in need of working capital. The working capital that is required permanently is called permanent or regular working capital. 4. An Element of Fluctuation: Though the requirement of working capital is felt permanently, its requirement fluctuates more widely than that of fixed capital. The requirement of working capital varies directly with the level of production. It varies with the variation of the purchase and sale policy; price level and the level of demand also. The portion of working capital that changes with production, sale, price etc. is called variable working capital. 5.Liquidity: Working capital is more liquid than fixed capital. If need arises, working capital can be converted into cash within a short period and without much loss. A company in need of cash can get it through the conversion of its working capital by insisting on quick recovery of its bills receivable and by expediting sales of its product. It is due to this trait of working capital that the companies with a larger amount of working capital feel more secure. 6.Less Risky:
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Funds invested in fixed assets get locked up for a long period of time and can not be recovered easily. There is also a danger of fixed assets like machinery getting obsolete due to technological innovations. Hence investment in fixed capital is comparatively more risky. As against this, investment in current assets is less risky as it is a short term investment. Working capital involves more of physical risk only, and that too is limited. Working capital involves financial or economic risk to a much less extent because the variations of product prices are less severe generally. Moreover, working capital gets converted into cash again and again; therefore, it is free from the risk arising out of technological changes. 7.Special Accounting System not needed: Since fixed capital is invested in long term assets, it becomes necessary to adopt various systems of estimating depreciation. On the other hand working capital is invested in short term assets which last for one year only. Hence it is not necessary to adopt special accounting system for them.
1.10)Advantages of working capital:

It helps the business concern in maintaining the goodwill. It can arrange loans from banks and others on easy and favorable terms. It enables a concern to face business crisis in emergencies such as depression. It creates an environment of security, confidence, and over all efficiency in a business. It helps in maintaining solvency of the business.
1.11)Disadvantages of working capital:

Rate of return on investments also fall with the shortage of working capital. Excess working capital may result into over all inefficiency in organization. Excess working capital means idle funds which earn no profits. Inadequate working capital can not pay its short term liabilities in time.
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Implications of Working Capital

Figure#1:
1.11) Factors Or Determinants of Working Capital:

Requirements Of working capital depend upon various factors such as nature of business, size of business, the flow of business activities. However, small organization relatively needs lesser working capital than the big business organization. Following are the factors which affect the working capital of a firm: 1. Size Of Business
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Working capital requirement of a firm is directly influenced by the size of its business operation. Big business organizations require more working capital than the small business organization. Therefore, the size of organization is one of the major determinants of working capital. 2. Nature Of Business Working capital requirement depends upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations. A service sector does not require any amount of stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount. So, they need more working capital. 3. Storage Time Or Processing Period Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high, a firm should keep more quantity of goods in store and hence requires more working capital. Similarly, if the processing time is more, then more stock of goods must be held in store as work-in-progress. 4. Credit Period Credit period allowed to customers is also one of the major factors which influence the requirement of working capital. Longer credit period requires more investment in debtors and hence more working capital is needed.But, the firm which allows less credit period to customers needs less working capital. 5. Seasonal Requirement In certain business, raw material is not available throughout the year. Such business organizations have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the form of raw material inventories which gives rise to more working capital requirements. 6. Potential Growth Or Expansion Of Business If the business is to be extended in future, more working capital is required. More amount of working capital is required to meet the expansion need of business. 7. Changes In Price Level Change in price level also affects the working capital requirements. Generally, the rise in price will require the firm to maintain large amount of working capital as more funds will be required to maintain the sale level of current assets. 8. Dividend Policy The dividend policy of the firm is an important determinant of working capital. The
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need for working capital can be met with the retained earning. If a firm retains more profit and distributes lower amount of dividend, it needs less working capital. 9. Access To Money Market If a firm has good access to capital market, it can raise loan from bank and financial institutions. It results in minimization of need of working capital. 10. Working Capital Cycle When the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital. 11. Operating Efficiency The operating efficiency of a firm also affects the firm's need of working capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets in turn results in more fund release for working capital.
WORKING CAPITAL CYCLE : Figure#2:
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CHAPTER#2
LITERATURE REVIEW
Working capital is so important for business day-to-day operations. A decision made on one of the Working Capital components has an impact on the other components. In order to maximise the performance of a business, the Working Capital Management should be integrated into the short-term financial decision making process (Crum, Klingman, & Tavis, 1983) Working capital is an important tool for growth and profitability for corporations. If the levels of working capital are not enough, it could lead to shortages and problems with the day-to-day operations (Horne and Wachowicz, 2000). Working capital is also called net working capital and is defined as current assets less current liabilities (Hillier et al., 2010). Net working capital = Current assets current liabilities Both components of the working capital formula above can be found on the balance sheet. Current assets can be found on the left side of the balance sheet and are those assets that generate cash within one year. Current assets are normally divided in cash and cash equivalents, short-term investments, trade and other receivables, prepaid expenses, inventories and work-in-progress. Current liabilities can be found on the right side of the balance sheet and are obligations which have to be met within one year. Current liabilities are divided in trade payables, short-term debt and accrued liabilities. In the 1980s and prior to that period, working capital management was compartmentalized (Sartoris and Hill, 1983). WCM was divided in cash, account payables and account receivables. In most firms, these compartments were managed by different managers on various different organizational layers (Sartoris and Hill, 1983). But Sartoris and Hill (1983) argued that there was a need for an integrated approach, where all the three compartments are combined. This led to the integration of the management of inventories, account payables and account receivables, called Working Capital Management (WCM), these parts will now be discussed individually. The effects of working capital management upon corporate performance have been
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thefocus of a substantial amount of theoretical and empirical research for many years and in different environments. Traditional approach to the interaction between cash conversion cycle and profitability posits that relatively long cash conversion periods tend to decrease profitability (Samiloglu and Demirgunes, 2008). It means that reducing working capital investment would positively influence the companies profitability by reducing the proportion of current assets in total assets. Most studies in this area show that companies can improve their profitability by shortening the cash conversion cycle because they found a strong negative relationship between these two variables. Various results were obtained when it comes to the relationship between different components of the Cash Conversion Cycle and corporate profitability. According to Gitman (2009) the objective of WorkingCapital Management (WCM) is to minimisethe Cash Conversion Cycle (CCC) the amount of capital tied up in the firms current assets. It focuses on controlling account receivables and their collection process, and managing the investment in inventory. WCM is vital for all business survival, sustainability and its direct impact on performance. WCM is an important area of financial management inevery business function. WCM deals with the administration of the liquidity components of firms short -term current assets and current liabilities (Baker & Powell, 2005; Brigham & Ehrhardt, 2005; Gitman, 2009). The most important current assets are cash, debtors or account receivables, stock or inventory and current liabilities consisting of creditors or account payables, accrued expenses, taxation liabilities, short-term debt such as commercial bills, and provisions for current liabilities such as dividends declared but not yet paid (Birt et al., 2011; Gitman, 2009; D. Sharma, 2009). According to Oliver & English (2007) business performance analysis is dealing with the return on investment (ROI) and return on equity (ROE). Business Performance Analysis (BPA) gives the owners-managers of SMEs the means to look at every possible strategy for improving the return on assets. The SMEs owners would firstly consider the increasing of Net Profit Margin in various ways such as increasing the selling price on the same unit sales volume and decreasing cost of sales. The decreasing of cost of sales can be processed by earning more efficient purchasing, efficient management of quality, eliminating waste and reworks, identifying short delivery by suppliers, maximising security of inventory and cash, eliminating undercharging errors and omissions.The alternative ways of improving return on assets is by increasing the assets turnover. Under increasing the assets turnover, the SMEs owners would do this by increasing the unit selling price on the same unit sales volume with the same operating expenses, and reducing the assets. When the business assets are reduced, the liabilities and equity would have reduced by the same extent. In maintaining the Net Profit Margin while the assets are reducing then it helps to produce a higher return on assets. Birt et al., (2011) argues that business financial performance must be measured to verify achievement of business goals as expressed in a mission statement of the
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entities. In general all entities have to set their business goals, and evaluate their success by using performance measurement processes. The measure is normally compared with a benchmark such as previous achievement, expectation or competitor achievement,in order to decide whether the performance is good or bad. Performance measurement systems ina typical entity could include measures to evaluate the performance of the entity as a whole, divisions or segments, individual managers and employees, customers, products/services, suppliers or processes (Birt et al., 2011; Kimmel, 2010). All the components of the working capital formula above can be found from the balance sheet, although the way entries are labelled can vary. By definition, current assets are those assets that are expected to generate cash within one year and when looking at the balance sheet they are usually grouped under cash and cash equivalents, short-term investments, receivables, prepaid expenses and inventories, while current liabilities are obligations due to mature within one year. Different components of current liabilities on the balance sheet include trade payables, shortterm debt and accrued liabilities. Stephen H. Penman(2007) Working capital management is an important part of financial management and its primary task is concerned with the matching of asset and liability movements over time, which takes us to the two main purposes of WCM; liquidity and profitability (Pass & Pike, 1984). The situation of those dual targets of WCM is widely discussed in the literature and it is claimed that they are conflicting. Profitability refers to the shareholders wealth maximization and liquidity is concerned with fulfilling financial obligations. Conflicts between these two goals can arise when for instance a profitable long-run investment opportunity erodes companys liquidity in the short -run (Pass & Pike, 1984). WCM is very often about trade-offs between these two main goals, since focusing entirely either on profitability or liquidity most probably shakes the balance between these two important components of companys financial status (Shin & Soenen, 1998). Pass & Pike (1984) emphasize also the importance of clearly defined goals, since the responsibility of the WCM is often spread over many departments ina company and several managers may pursue for different goals. Sharma and Kumar (2011) argued that the positive relation .they found between accounts receivables and profitability is caused by the fact that Indian firms have to grant more trade credit to sustain their competitiveness with their foreign competitors, which have superior product and services. Raheman and Nasr (2007) in that research, the authors are selected a sample of 94Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999 2004. They used such variables Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio to find the relationship of the Net operating profitability of Pakistani firms. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio have been used as control variables . Pearson"s correlation and
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regression analysis are used for data analysis. The results show that there is a strong negative relationship between variables of the working capital management and profitability. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm. They find that there is a significant negative relationship between liquidity and profitability. They also find that there is a positive relationship between size of the firm and its profitability. There is also a significant negative relationship between debt used by the firm and its profitability .They have concluded that, Most of the Pakistani firms have large amounts of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. They have found a significant negative relationship between net operating profitability and the average collection period, inventory turnover in days, average payment period and cash conversion. These results suggest that managers can create value for their shareholders by reducing the number of days accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills. Joshua Abors (2005) research paper revealed significant relationship between financial leverage and profitability. His study demonstrated that the use of short-term debt improved the companies profitability. Results of the study showed a significantly positive relation between the ratio of short-term debt to total assets and return on equity (ROE), as well as a significantly positive association between the ratio of total debt to total assets and ROE. Shin and Soenen (1998) are an example of such studies. By using a COMPUSTAT sample of 58,985 US company years covering the period 19751994, they found a strong negative relationship between the length of the companys net-trade cycle, used to measure efficiency of working capital management, and its profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock returns. Based on their findings, they suggest that one possible way to create shareholder value is to reduce companys Net-Trade Cycle. Lazaridis and Tryfonidis (2009) this research is about the relationship of corporate profitability and working capital management. A sample of 131 companies listed in the Athens Stock Exchange (ASE) is used for the period of 2001-2004. The purpose of this research is to establish a relationship that is statistical significant between profitability, the cash conversion cycle and its components for listed firms in the ASE. The results of research showed that there is statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. According to this research managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables, inventory) to an optimum level. This research concludes that there is a negative relationship between profitability(measured through gross operating profit) and the cash conversion cycle
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which was used as a measure of working capital management efficacy. According to research lower gross operating profit is associated with an increase in the number days of accounts payables. The negative relationship between accounts receivables and firms profitability suggests that less profitable firms will pursue a decrease of their accounts receivables in an attempt to reduce their cash gap in the cash conversion cycle. Therefore managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables, inventory) to an optimum level. Deloof (2003) discussed that most companies had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact upon those companys profitability. Using a sample of 1,009 large Belgian non-financial companies during the period 19921996, with correlation and regression tests, he found a significant negative relationship between gross operating income and the number of days of accounts receivable, inventories and accounts payable of Belgian companies. On the basis of these results, he suggested that managers could create value for their shareholders by reducing the number of days of receivables and inventories accounts to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable companies wait longer to pay their bills. Nobanee (2010) this research shows the relationship between the Cash conversion cycle and the profitability of the firm. As the time period of the cash conversion cycle decrease the profitability of the company will be increase. On the other hand shortening the cash conversion cycle could harm the firms operations and reduces profitability. This could happen when taking actions to reduce the inventory conversion period, a firm could face inventory shortages. . When reducing the receivable collection period a firm could lose its good credit customers. The management should keep the optimal levels of inventory, receivables, and payables. In this regard, we suggest an optimal cash conversion cycle as more accurate and comprehensive measure of working capital management. However, achieving the optimal levels of inventory, receivable, and payable will minimizes the carrying cost and opportunity cost of holding. Nazir and Afza (2009) examines the relationship between working capital management policies and a firms profitability. For this research data is using for the period of 1998-2005. The study also finds that investors give weight to the stocks of those firms that adoptan aggressive approach to managing their short-term liabilities. Aggressive Investment Policy (AIP), ARamachandran and Janakiraman (2009) found negative relationship between EBIT and the cash conversion cycle (ccc). The study revealed that operational EBIT dictates how to manage the working capital of the firm. Further, it was found that lower gross EBIT was associated with an increase in the accounts payable days. Thus the study concluded that less profitable firms wait longer to pay their bills, taking advantage of credit period granted by their suppliers.
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While the positive relationship between average receivable days and firms EBIT suggested that less profitable firms will pursue a decrease of their accounts receivable days in an attempt to reduce their cash gap in the CCC. In the study of Ganesan (2007) he depicted that the working capital management efficiency was negatively associated to the profitability and liquidity. The study revealed that when the working capital management efficiency was improved by decreasing days of working capital, there was improvement in profitability of the firms in telecommunication firms in terms of profit margin. Padachi (2006) examined the trend in working capital needs and profitability of firms to identify the causes for any significant differences between the industries. The results showed that high investment in inventories and receivables was associated with lower profitability. The findings also revealed that an increasing trend in the short-term component of trend in the short-term component of working capital financing. Mathuva (2010) found contradicting evidence with the management of inventories in Kenya. He argued that companies increase their inventory levels to reduce the cost of possible production stoppages and the possibility of no access to raw materials and other products. He further stated the findings of Blinder and Maccini (1991), which indicate that higher inventory levels reduces the cost of supplying products and also protects against price fluctuations caused by changing macroeconomic factors. Also contradicting evidence is found by Mathuva (2010) with the management of account payables. He found a positive effect of the number days accounts payables on a firms profitability in Kenya. He explained this positive relation with two reasons, first he argued that more profitable firms wait longer to pay their bills. These firms use these accounts payables as a short-term source of funds. The second argument why firms increase their accounts payables is that these firms are able to increase their working capital levels and thus increasing their profitability. This is in line with theory of a negative effect of the Cash Conversion Cycle (CCC) on the profitability of a firm. This is caused by the fact that the number of days accounts payables needs to be add in the measurement of the CCC. Thus a higher amount of a number of days accounts payables leads to a higher profitability with a negative relation between the CCC and a firms profitability. Chiou and Cheng (2006) analyzed the determinants of working capital management and explored that how the working capital management of a firm was influenced by the different variables like business indicators, industry effect, operating cash flows, growth opportunity for a firm, firm performance and size of firm. The study has depicted consistent results of leverage and the operating cash flow for both net liquid balance and working capital requirements while variables like business indicator, industry effect, growth opportunities, performance of firm, and size of firm were unable to produce consistent conclusions for the net liquid balance and the working capital requirements of firms. Binti Mohamad and Binti Mohd Saad (2010) found that current ratio is negatively significant to financial performance of 172 listed Malaysian firms. Their study emphasized the importance of proper management of working capital as it affects firms market value and profitability. They also suggested that working capital management should be part of the companys strategic and operation al processes in order to be effective. Eljely, A. (2004) empirically examined the relationship of
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liquidity and profitability as measured by current ratio and cash gap on a sample of 29 joint stock companies in Saudi Arabia and found significant negative relation between the firms profitability and its liquidity level, as measured by current ratio using correlation and regression analysis. He presented evidence of negative relation between current ratio and profitability. His study pointed to reduction in profitability due to lost profits and unnecessary costs resulting from excessive liquidity. Based on these past studies, current ratio seemed to be a good proxy variable for working capital management. However, no data transformation technique can correct the current ratios normality distribution in this study. Farooq Khilji et al. (2011) studied the effects of working capital management on the profitability of Pakistani companies. The return on investment (ROI) has been defined as the index of profitability; cash conversion cycle, receivables conversion period, inventory conversion period, and payables conversion period have been defined as the indices of working capital management. According to this research, the directors are suggested firstly to generate value for the share holders by increasing the inventory of products and receivables, secondly
CASH CONVERSION CYCLE: Figure#3:
DAYS PAYABLES OUTSTANDING
DAYS SALES OUT STANDING
INVENTORY TURNOVER IN DAYS
increase productivity by developing effective and efficient of working capital, and thirdly pave the way for the company to have access to competitive advantages by effective and efficient use of resources. In his studies Uyar (2009) concluded the following points that are (1) to set industry benchmarks for cash conversion cycle (CCC) of merchandising and manufacturing companies, and to examine the relationship between (2) the length of the CCC and the size of the firms, and (3) the length of the CCC and profitability. The data were collected from the financial statements of the corporations listed on the Istanbul Stock Exchange (ISE) for the year 2007. ANOVA and Pearson correlation analyses
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are used for empirical investigation. The major findings of the study are as follows. The lowest mean value of the CCC is found in the retail/wholesale industry, with an average of 34.58 days, and the highest mean is found in the textile industry, with an average of 164.89 days. There is a significant negative correlation between the CCC and the variables; the firm size and the profitability . The paper showed that retail/wholesale industry has shorter CCC than manufacturing industries. The main reason for this is that retail/wholesale industry do not manufacture goods, rather it keeps ready-for-sale goods in its warehouse. Hence, it has shorter days in inventory. Secondly, the retail/wholesale industry makes cash sales or credit sales with short maturity. Moreover, the retail/wholesale industry is slower in paying its accounts payable to its suppliers. Another important finding of the study is that the textile industry has the longest CCC; therefore, the industry may have liquidity problems. Moreover, the finding indicated a significant negative correlation between the length of CCC and the firm size. Lastly, the significant negative correlation between the length of CCC and the profitability is another important finding of the study. The message to the firms is that the longer CCC, the less profitable you are. The probable reason are keeping inventory for a long time, being slow in collecting receivables, and paying debts quickly. Working capital management has been a concern for all firms but small firms should give more importance to this issue because they cannot afford to survive without cash (Peel, Wilson and Howorth, 2000). Many researchers have worked on the same issue but pioneer study of Shin and Soenen (1998) and Deloof (2003) have found that working capital management strongly affects the corporate profitability. Therefore sugar mills should address this issue seriously. Maccini and Blinder (1991) suggested that conventional approach that is to invest highly in working capital can also increase profitability. Maccini and Blinder (1991) suggested that if more investment is done on inventory than it will save supply time and money due to availability and fluctuations in prices and production process is also not disturbed. Hicks and Czyzewski(1992) analyzed that the firms which have greater cash balances have high return on assets. Jose, Lancaster and Stevens (1996) performed the research to find out the relationship between working capital management and firms profitability by taking net trading cycle as a measure of working capital management on specific industry, the result was not that significant. After observing the Industry nature and size of the industry Jose et al. (1996) suggested that aggressive liquidity management increases the profitability. Wang (2002) took a sample of Taiwanese and Japanese firms and Deloof(2003) took a sample of Belgium Firms. The results suggested that profitability depends on how the working capital management is handle by the management. Tryfonidis and Lazaridis(2006) carried out a research for the companies listed in Athens Stock Exchange. Tryfonidis and Lazaridis (2006) analyzed the relationship between working capital management and profitability of the firms. The variable for the measurement of profitably was gross operating profit in their research. Significant relationship between the cash conversion cycle and profitability was reported. Tryfonidis and Lazaridis (2006) stated that the profit can be maximize by taking care of every component of working capital at individual level.Padachi(2006) studied different behaviors in the working capital management for a sample of 58 small Mauritian firms for the year 1998 2003. Padachi (2006) stated that if the working capital is managed efficiently than it will add up to the firms value and increase
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profitability. The research showed that no of days inventories and no of days receivable are indirectly related to profitability. Alipour (2011) took a sample of 1063 top firms listed in Tehran stock exchange and found a negative significant relationship between no of days accounts receivable, Inventory Turnover and cash conversion cycle where as positive significant relation with no of days accounts payables with profitability and hence concluded that working capital management significantly affects the profitability of the firms. Enqvist, Graham, Nikkinen (2012) worked on the sample of Finland firms and studied the relationship of working capital management and profitability on different business cycles and concluded that there is a significant negative relationship between cash conversion cycle and profitability of firms. The results suggested that efficient management of inventory and accounts receivable days significantly affects the corporate profitability of the firms. In Pakistan there have been few researches on working capital management. Sana and Shah (2006) worked on oil and gas sector. They took a very small sample of consisting only 7 firms and they concluded that profitability and value of shareholders can be increased by managing the working capital efficiently. Nazir and Afza (2007)in their research analyze the relationship between aggressive and conventional way ofinvesting in working capital for 205 firms for 17 different sub sectors. Results showed that there is a negative relationship between aggressive approach in working capital investment and the profitability of the firms. Nasr and Rehman(2007) analyzed the relationship between the profitability and components of working capital management which includes no of days inventory, no of days accounts receivable, no of days accounts payable and cash conversion cycle. The result showed that there is negative relationship between them. In the year Nazir and Afza(2008) analyzed the working capital management for 204 firms. Though researchers have studied the relationship between the components of working capital management and the corporate profitability with reference to Pakistan but its not enough. There is still lack of evidence of relationship between the two variables. This reason has been a motivational force to do a research on the pharma sector of Pakistan. For this purpose sample of 5 pharma firms listed on Karachi stock exchange has been taken during 2000-2011.
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CHAPTER#3
METHODOLOGY
3.1) Method of Data Collection:

The secondary data necessarily required to perform the research was gathered from the official sites of the Pharma firms. Additionally, some of the required data was abstracted from the library of State Bank and Karachi stock exchange. Rest of the data is collected from annual reports, SBP analysis reports and economical surveys.
3.2) Sample Size:

There are 9 pharma firms listed at Karachi Stock Exchange out of which 5 are selected. Those firms are not included whose data was not available or observations were missing for few years. The data used for the purpose of research consisted of 12 years annual data of the variables used in research. Data of all the variables belonged to period starting from fiscal year 2000 to fiscal year 2011 because this is the period where many of new pharma firms were installed and many of them were shutdown. There are total 60 observations.
3.3) Research Model Developed:

Person Correlation is used to calculate the relationship between the different variables use in this research. Working capital components are inventory, receivables and payables. To find the effect of working capital management on profitability on pharma firms regression model is developed .
3.4) Variables: 3.4.1)Dependent Variables:

In this research the dependent variable is profitability and the ratios to measure profitability of the firm calculated by the following variables. 1)Return on Assets (ROA) 2)Return on Equity (ROE)
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1)Return on Assets (ROA):

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". The formula for return on assets is: =Net income/Total assets
2)Return on Equity (ROE):

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: The formula for return on Equity is: =Net income/share holders equity
3.4.2)Independent Variables:
In this research three comprehensive components of working capital management Trade credit policy, Inventory policy and Payment policy are use. so, following are the independent variable. 1) 2) 3) 4) 5) 6) Days Sales Outstandings (DSO) Inventory Turnover in Days (ITID) Days Payable (DPO) Cash Conversion Cycle (CCC) Logarithm of sales(LOS) Debt Ratio(DR)
1) Days Sales Outstanding ( DSO):

A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect
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money. Days sales outstanding is calculated as:
2)Inventory Turnover in Days (ITID):

A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."
3)Days Payable Outstanding (DPO):

DPO is an indicator of how long a company is taking to pay its trade creditors. DPO is typically looked at either quarterly or yearly (90 or 365 days).A company's average payable period. Calculated as:
4)Cash Conversion Cycle (CCC):

A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and
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sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. Calculated as:
Where: DIO represents days inventory outstanding DSO represents days sales outstanding DPO represents days payable outstanding
5)Debt Ratio(DR):
A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. Calculated as:
3.5) Hypothesis Testing: NULL HYPOTHESIS (HO):

1)There is no relationship between working capital management and profitability of Pharma firms in Pakistan. 2) There is no relationship between debt ratio and profitability of Pharma firms in Pakistan. 3)There is no relationship between LOS and profitability of Pharma firms in Pakistan. 4) There is no relationship between DSO and profitability of Pharma firms in Pakistan. 5)There is no relationship between DPO and profitability of Pharma firms in Pakistan. 6)There is no relationship between ITID and profitability of Pharma firms in Pakistan.
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ALTERNATIVE HYPOTHESIS :
H1)There is a relationship between working capital management and profitability of Pharma firms in Pakistan. H2) There is a relationship between debt ratio and profitability of Pharma firms in Pakistan. H3)There is a relationship between LOS and profitability of Pharma firms in Pakistan. H4) There is a relationship between DSO and profitability of Pharma firms in Pakistan. H5)There is a relationship between DPO and profitability of Pharma firms in Pakistan. H6)There is a relationship between ITID and profitability of Pharma firms in Pakistan.
3.6 Statistical Technique:

Pearson Correlation and Multiple Linear Regression are used in this research to study the relationship between variables.Pearson Correlation is use to understand the relationship of variables with each other whereas the general purpose of using multiple linear regression is to know more about the relationship between many independent variable or predictor variables and a dependent or criterion variable.
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CHAPTER#4
DATA ANALYSIS AND RESULTS

DESCRIPTIVE STATISTICS:
ROE% ROA% DSO ITID DPO CCC LOS DR% 18.3916 27.4866 29.1666 51.4833 92.05 -12.28 11.3863 38.4633 1.41621 1.37045 5.21434 4.49880 5.05452 6.50502 0.51749 2.38698 16.59 25.975 9 64 74 0 11.45 31.35 #N/A 20.1 7 0 72 20 7.56 #N/A 10.9699 10.6154 40.3901 34.847 39.1522 50.3876 4.00846 18.4894 120.339 112.688 -0.84937 -0.65922 0.444746 0.460953 43.1 41.3 3.7 10.9 46.8 52.2 1103.5 1649.2 60 60 1631.36 1214.3 0.55825 -1.26 1.51195 -0.4383 123 103 2 0 125 103 1750 3089 60 60 1532.89 -0.6024 0.78149 145 39 184 5523 60 2538.91 16.067 0.8903 1.8291 -0.9448 -0.0108 230 11.11 -165 5.78 65 16.89 -737 683.18 60 60 341.860 -0.5010 0.6997 65.93 15.45 81.38 2307.8 60
Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum Maximum Sum No of observations
EXPLAINATION:
Firms in the pharma sector of Pakistan on average have 18.3916 % ROE, 27.4866 % ROA 113863 Sales Growth, 29.166 days sales outstanding, 92.05 days ofpayables outstanding , 51.4833 inventory turnover in days and-12.28 cash conversion cycle,38.46 debt ratio of the pharma sector according to this study.
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PEARSON CORRELATION:
ROA% ROA% ROE% DSO ITID DPO CCC LOS DR(%) ROE% DSO ITID DPO CCC LOS DR(%) 1 0.910117 1 -0.45204 -0.23411 1 0.202062 0.091972 -0.2636 1 -0.75936 -0.60376 0.599842 -0.28092 1 0.348417 0.325459 0.164113 0.696409 -0.47282 1 0.025108 0.011675 0.071163 0.603556 -0.27525 0.707882 -0.7919 -0.57356 0.621063 -0.28837 0.889168 -0.37744
1 -0.1905
H1)There is no relationship between working capital management (CCC)and profitability of Pharma firms in Pakistan;
150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 -50 -100 -150 -200 CCC ROA%
SUMMARY OUTPUT:
Regression Statistics Multiple R 0.348417 R Square 0.121394 Adjusted R Square 0.106246 Standard Error 47.6358 Observations 60
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Effect of Working Capital management on the profitability of pharma firms ANOVA df Regression Residual Total 1 58 59 SS MS F 18184.38 18184.38 8.013675 131611.8 2269.169 149796.2 Standard Error t Stat P-value 12.07996 -3.45338 0.001041 0.565332 2.830843 0.00637 Significance F 0.00637
Intercept ROA%
Coefficients -41.7168 1.600368
Upper Lower Upper Lower 95% 95% 95.0% 95.0% -65.8974 -17.5361 -65.8974 -17.5361 0.468732 2.732003 0.468732 2.732003
H2) There is no relationship between debt ratio and profitability of Pharma firms in Pakistan;
100 90 80 70 60 50 40 30 20 10 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 DR(%) ROA%
SUMMARY OUTPUT Regression Statistics Multiple R 0.791897 R Square 0.627101 Adjusted R Square 0.620672 Standard Error 11.3876 Observations 60
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Effect of Working Capital management on the profitability of pharma firms ANOVA df Regression Residual Total 1 58 59 Significance SS MS F F 12648.5 12648.5 97.53823 4.92E-14 7521.285 129.6773 20169.78
Intercept ROA%
Coefficients 63.01104 -1.33472
Standard Error t Stat 2.887781 21.81988 0.135146 -9.87614
P-value 1.2E-29 4.92E-14
Upper Lower Upper Lower 95% 95% 95.0% 95.0% 57.23052 68.79157 57.23052 68.79157 -1.60524 -1.0642 -1.60524 -1.0642
H3)There is no relationship between LOS and profitability Pharma firms in Pakistan;

60 50 40 30 20 10 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 LOS ROA%
of
SUMMARY OUTPUT Regression Statistics Multiple R 0.025108 R Square 0.00063 Adjusted R Square -0.0166 Standard Error 4.0416 Observations 60
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Effect of Working Capital management on the profitability of pharma firms ANOVA df Regression Residual Total 1 58 59 Significance SS MS F F 0.597609 0.597609 0.036586 0.848979 947.403 16.33453 948.0006 Standard Error t Stat P-value 1.02491 10.94496 9.83E-16 0.047965 0.191274 0.848979 Upper Lower Upper Lower 95% 95% 95.0% 95.0% 9.166021 13.26918 9.166021 13.26918 -0.08684 0.105187 -0.08684 0.105187
Intercept ROA%
Coefficients 11.2176 0.009174
H4) There is no relationship between DPO and profitability of Pharma firms in Pakistan;
200 180 160 140 120 100 80 60 40 20 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 DPO ROA%
SUMMARY OUTPUT Regression Statistics Multiple R 0.75936 R Square 0.576627 Adjusted R Square 0.569328 Standard Error 25.69389 Observations 60 38 | P a g e
ANOVA df Regression Residual Total 1 58 59 SS MS F 52150.64 52150.64 78.99506 38290.21 660.176 90440.85 Standard Error t Stat 6.515715 21.77735 0.30493 -8.88792 Significance F 2.03E-12
Intercept ROA%
P-value 1.33E-29 2.03E-12
H5)There is no relationship between DSO and profitability of pharma firms in Pakistan;

160 140 120 100 80 60 40 20 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 DSO ROA%
SUMMARY OUTPUT Regression Statistics Multiple R 0.452043 R Square 0.204343 Adjusted R Square 0.190624 Standard Error 36.33709 Observations 60 39 | P a g e
ANOVA df Regression Residual Total 1 58 59 SS MS F 19668.04 19668.04 14.89569 76582.29 1320.384 96250.33 Standard Error t Stat P-value 9.214725 6.487148 2.12E-08 0.431242 -3.85949 0.000288 Significance F 0.000288
Intercept ROA%
H6)There is no relationship between ITID and profitability of Pharma firms in Pakistan;
140 120 100 80 ITID 60 40 20 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 ROA%
SUMMARY OUTPUT Regression Statistics Multiple R 0.202062 R Square 0.040829 Adjusted R Square 0.024292 Standard Error 34.42175 Observations 60 ANOVA 40 | P a g e
Effect of Working Capital management on the profitability of pharma firms Significance SS MS F F 2925.283 2925.283 2.468892 0.12156 68721.7 1184.857 71646.98 Standard Error t Stat 8.729013 4.545539 0.408511 1.571271
df Regression Residual Total 1 58 59
Intercept ROA%
Coefficients 39.67807 0.641881
P-value 2.83E-05 0.12156
Upper Lower Lower 95% 95% 95.0% 22.20506 57.15109 22.20506 5 -0.17584 1.459604 -0.17584 1
EXPLAINATON:
The result of this study shows a negative relation between Cash Conversion Cycle (CCC) and Return on Assets (ROA) and between CCC-ROE, but both are sensitive to industry factors. The findings also imply that aggressive liquidity management, e.g. shortening the CCC, improves operating performance of the firm ROA is considered as a measure for profitability. The level of WCM is measured with the cash conversion cycle. The study the three parts of the CCC, which are account payables, account receivables and inventories. These findings imply that managers can create shareholder value by shortening the CCC. Results shows the negative relation between profitability and account payables with the view that less profitable firms wait longer to pay their bills.This research observed negative relation between profitability and working capital management, measured with the cash conversion cycle,also found that account payables are negatively related to profitability.The negative relation between profitability and the CCC, which is the measure for working capital management efficiency in this study. relation between liquidity and profitability and a positive relation between the size of the firm and profitability. There is also evidence for a significant negative relationship between debt used by the firm and its profitability .The results demonstrate that managers can create shareholders value by shortening their firms number of days accounts receivables and inventories. Also shortening the firms cash conversion cycle enhances profitability., because they can create value if they keep their CCC to a reasonable minimum.The empirical evidence shows that the number of days accounts receivables and inventory and leverage have a negative effect on firm profitability. They measure firm profitability through gross operating profit and found that there is a negative relation between the CCC and firm profitability. Compared to the other studies mentioned here, his study has a significant weakness, which is the shortness of the sample period.There found a positive relation between WCM and firm profitability, although the CCC-ROA relation is not statistically significant. They found that account receivables are also positively related with ROA and that account payables are negatively related to ROA. This means that when increase their cash conversion cycle, profitability will be higher.
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CHAPTER#5
Conclusion
5.1FINDINGS:
In this research no of days accounts receivable, no of days account payable and no of days inventory are taken as a comprehensive components of working capital management, by using these variables the efficiency of working capital management can easily be check. The results shows that longer these components lesser will be the net operating profit as these have a negative relationship with net operating income. Firms can easily increase value for the shareholders by keeping the days to optimal level. In this research no of days payable and no of days inventory is significant and are affecting the operating profitability. Deloof (2003) concluded the same result for the study of Belgian firms. Current Ratio (CR) has proved statistically significant and has impact on NOI whereas gearing ratio is statistically insignificant in this research but it has a negative relationship with net operating income which shows that higher will be the leverage low will be the operating profitability of the firm. Same result was concluded by Deloof (2003), Shin and Soenen (1998), Rajan and Zingales (1995) and Myers and Majlof (1984) but in this case gearing ratio is insignificant.Sales growth and natural log of sales have positive relationship with profitability but sales growth in significant whereas natural log of sales has proven to be insignificant.
5.2 DISCUSSIONS:
Pharma sector which is the second biggest sector in manufacturing sector of Pakistan contributes to the economy significantly. Keeping in mind the importance of pharma sector in the economy of Pakistan objective of this research is to analyze the affect of working capital management on firms profitability in the pharma sector of Pakistan. To carry out the research data from 5 pharma firms which are currently listed at Karachi Stock Exchange is analyzed. The results shows that profitability of pharma firms are significantly affected by the efficient management of working capital and working capital management play a vital role in creating a value for the shareholders.
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5.3 IMPLICATIONS:
Many recommendations can be drawn from the above research results. Every pharma firms should give due importance to working capital management. Pharma firms should make such collection and payment policies which are in favor of the firm and existing policies should be thoroughly reviewed. Pharma firms should decrease there payment and increase receivable cycle. This can only be done when there will be professional management. The results suggest that pharma firms should keep optimum level of inventory and cash conversion cycle. This could only be possible when pharma firms will give due importance to every component of cash conversion cycle. Pharma firms should hire professional human resource to take decisions related to finance. There are many sugar mills where only one person is looking after the whole department. In order to maximize the profit pharma firmsshould manage there working capital efficiently.
5.4 Future Research:

Every sector in manufacturing sector should be analyzed at micro level for efficient working capital management so it can be understand that which factors affects the working capital management more and how can working capital management can increase profitability in different sectors of our country.
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APPENDICES#1 THE PHARMA FIRMS IN THIS RESEARCH
1. ABBOTT LABORATORIES(PAKISTAN) LTD
2. GLAXO SMITH KLINE(PAKISTAN)LTD
3. FEROZSONS LABORATORIES LTD
4. HIGHNOON LABORATORIES LTD
5. SEARLE PAKISTAN LTD
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APPENDICES#2
DATA OF RESEARCH
ROA% ROE% DSO ITID DPO CCC 13.8 20.1 9 0 74 -65 26.8 39.2 6 0 70 -64 25.4 36.6 5 0 74 -69 46.8 39.1 5 70 75 0 33.7 48.9 4 57 90 -29 38.2 49.6 3 44 53 -6 29.33 36.4 5 57 62 0 23.93 30.08 11 48 72 -13 21.68 29.01 9 63 86 -14 15.4 21.35 18 86 83 21 14 19.1 18 93 86 25 22.33 28.88 26 98 68 56 24.2 30.6 10 0 62 -52 19 24.2 7 0 72 -65 17.4 23.1 5 0 62 -57 26.3 35.5 3 71 68 6 30.9 36.9 2 66 45 23 32.6 38.8 3 75 50 28 29.73 36.35 3 78 67 14 27.12 33.97 4 77 69 12 28.87 36.44 27 93 60 60 13.62 18.01 29 99 72 65 13.18 18.06 6 83 68 21 14.75 20.42 6 94 65 35 4.9 10.9 4 0 135 -131 4.7 11.4 3 0 168 -165 6.3 14.9 8 0 159 -151 8.8 20.3 9 90 139 -40 5.6 13.4 7 93 162 -62 6.2 13.4 2 74 138 -62 8.94 19.1 28 80 131 -23 7.78 16.41 33 74 104 3 8.54 17.71 22 70 105 -13 9.45 22.04 4 103 112 -5 6.19 15.45 6 89 89 6 8.72 19.46 7 64 55 16 52 | P a g e
Effect of Working Capital management on the profitability of pharma firms 5.8 3.7 3.8 5.2 8.6 6.8 8.97 5.75 10.43 13.36 19.45 15.78 18.1 18.2 26.5 27.7 32.1 33.1 31.43 36.41 11.24 17.55 32.38 35.99 25.3 20.1 20.5 27.2 20.2 14.4 20.07 13.99 23.33 26.21 36.53 30.46 27.1 26.4 35.4 36.1 37.9 39.3 37.31 44.61 15.01 25.74 48.7 52.2 94 101 106 112 117 97 102 125 111 122 121 79 9 8 7 8 7 10 12 7 7 10 9 12 0 0 0 24 37 32 27 45 25 45 48 64 0 0 0 62 70 83 75 73 84 72 69 65 129 184 170 161 169 136 106 137 108 118 117 140 72 76 56 56 39 44 47 53 71 69 58 57 -35 -83 -64 -25 -15 -7 23 33 28 49 52 3 -63 -68 -49 -48 38 49 40 27 20 13 20 20
LOS 5.78 5.95 6.08 6.27 6.3 6.69 13.74 13.84 13.86 13.99 14.24 14.61 8.22 8.18 8.89 9.01 9.1 9.16
DR(%) CR QR QR 31.58 1.64 1.64 1.64 31.77 1.65 1.65 1.65 30.56 1.71 1.71 1.71 31.56 1.74 0.82 0.82 31.14 1.59 0.96 0.96 22.98 2.55 1.73 1.73 17.29 2.89 1.59 1.59 22.88 3.35 2.03 2.03 27.22 3.54 1.86 1.86 28.39 1.76 0.39 0.39 25.2 1.89 0.42 0.42 20.74 2.66 0.82 0.82 20.81 3.37 1.79 1.79 21.57 3.19 1.53 1.53 24.64 2.94 1.45 1.45 26.04 2.89 1.33 1.33 16.37 4.83 1.09 1.09 15.94 5.13 1.1 1.1
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Effect of Working Capital management on the profitability of pharma firms 16.14 16.19 16.43 16.63 16.75 16.89 6.56 6.61 6.75 6.86 7.01 7.23 14.31 14.54 14.67 14.72 14.78 14.89 7.41 7.37 7.56 7.56 7.61 7.81 14.99 14.95 14.99 14.95 15.24 15.4 7.87 8.2 8.36 8.39 8.41 8.58 15.6 15.73 15.81 15.94 16.21 16.37 20.19 20.14 21.37 26.59 27.31 28.04 54.8 58.9 57.8 56.3 57.9 53.69 54.67 50.8 52.6 60.9 59 50.9 77.12 81.38 81.19 80.7 57.3 52.47 58.77 59.04 51.09 47.15 46.41 49.57 33.33 31.09 25.24 23.39 15.45 15.79 15.76 21.19 28.85 34.55 32.43 29.96 4.02 3.87 3.62 2.81 2.71 2.48 1.07 1.07 1.11 1.07 0.91 1 1.02 1.14 1.07 1.26 1.41 1.64 1.79 1.53 1.45 1.47 1.31 1.33 1.69 1.51 1.69 1.85 1.74 1.63 1.97 2.26 2.69 2.91 4.6 4.51 4.53 3.19 2.39 2.03 2.19 2.42 1.25 0.99 1.31 1.26 1.13 0.66 1.07 1.07 1.11 0.42 0.34 0.46 0.27 0.37 0.23 0.08 0.17 0.15 3.37 3.19 2.94 1.84 3.38 3.63 2.59 2.35 1.79 1.2 1.13 0.69 1.98 2.26 2.69 1.82 2.84 2.64 2.29 0.63 0.82 0.63 0.61 0.91 1.25 0.99 1.31 1.26 1.13 0.66 1.07 1.07 1.11 0.42 0.34 0.46 0.27 0.37 0.23 0.08 0.17 0.15 3.37 3.19 2.94 1.84 3.38 3.63 2.59 2.35 1.79 1.2 1.13 0.69 1.98 2.26 2.69 1.82 2.84 2.64 2.29 0.63 0.82 0.63 0.61 0.91
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APPENDIX#2 GRAPHS OF DATA
DAYS PAYABLES OUTSTANDING
DPO(days)
200 150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 DPO DPO
CASH CONVERSION CYCLE
CCC(days)
100 0 -100 -200 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 CCC CCC
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RETURN ON EQUITY
ROE%
60 40 20 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 ROE% 55 58 ROE%
QUICK RATIO
QR
4 3 2 1 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 QR QR
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CURRENT RATIO
CR
6 4 2 CR 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 CR
LOGARITHAM OF SALES
LOS
20 15 10 5 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 LOS LOS
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DAYS SALES OUTSTANDING
DSO(days)
150 100 50 0 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 DSO(day) DSO(day)
INVENTORY TURNOVER IN DAYS
ITID(days)
150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 ITID ITID
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DEBT RATIO
Debt Ratio(%)
100 50 DR(%) 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 DR(%) 55 58
RELATIONSHIP BETWEEN ROE,ROA,DPO
250
200
150
DPO(day) ROE%
100
ROA%
50
0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
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RELATIONSHIP BETWEEN ROE,ROA,CCC
150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 -50 -100 -150 -200 CCC ROE% ROA%
RELATIONSHIP BETWEEN ROE,ROA,ITID
180 160 140 120 100 80 60 40 20 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 ITID ROE% ROA%
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RELATIONSHIP BETWWEN DR,ROE,ROA
140 120 100 80 60 40 20 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 DR(%) ROE% ROA%
RELATION BETWEEN ROE,ROA,LOS
120 100 80 LOS 60 40 20 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 ROE% ROA%
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RELATIONSHIP BETWEEN ROE,ROA,CR
60 50 40 ROA% 30 20 10 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 ROE% CR
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Effect of Working Capital management on the profitability of pharma firms

OF WORKING CAPITAL MANAGEMENT

ON THE PROFITABILITY OF PHARM FIRMS listed in KSE

SIR ABDUL AZIZ MEMON

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

THIS REPORT IS DEDICATED TO MY PARENTS

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

1.2)STATEMENT OF THE PROBLEM:

1.3)OBJECTIVES OF THIS STUDY:

Effect of Working Capital management on the profitability of pharma firms

1.4)SIGNIFICANCE OF THE STUDY:

Effect of Working Capital management on the profitability of pharma firms

1.5)LIMITATIONS OF THE STUDY:

1.6.1 NULL HYPOTHESIS (HO);

Effect of Working Capital management on the profitability of pharma firms

6)There is no relationship between ITID and profitability of Pharma firms in Pakistan.

1.6.2 ALTERNATIVE HYPOTHESIS( H1);

1.7 )STRUCTURE OF WORK:

1.8) WORKING CAPITAL:

Effect of Working Capital management on the profitability of pharma firms

1) Gross working capital :

Effect of Working Capital management on the profitability of pharma firms

2) Net working capital:

2.1)Constitutes of current Liabilites:

Effect of Working Capital management on the profitability of pharma firms

1.9)Characteristics of working capital :

Effect of Working Capital management on the profitability of pharma firms

1.10)Advantages of working capital:

1.11)Disadvantages of working capital:

Effect of Working Capital management on the profitability of pharma firms

Implications of Working Capital

1.11) Factors Or Determinants of Working Capital:

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

WORKING CAPITAL CYCLE : Figure#2:

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

CASH CONVERSION CYCLE: Figure#3:

DAYS PAYABLES OUTSTANDING

DAYS SALES OUT STANDING

INVENTORY TURNOVER IN DAYS

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

Effect of Working Capital management on the profitability of pharma firms

3.1) Method of Data Collection:

3.2) Sample Size:

3.3) Research Model Developed:

3.4) Variables: 3.4.1)Dependent Variables:

Effect of Working Capital management on the profitability of pharma firms

1)Return on Assets (ROA):

2)Return on Equity (ROE):

1) Days Sales Outstanding ( DSO):