Working capital management (WCM) refers to all management decisions and actions that ordinarily impacts on the size and effectiveness of the working capital. The concept of working capital management broadly addresses business’ managing of their short-term capital and the objective of the management of working capital is to promote a satisfying liquidity, profitability and shareholders’ value. Working capital management refers to the controlling of current assets properly and current liabilities in a manner that gives the firm with highest return on its assets and reduces payments for its liabilities. Which capital uses in farm’s daily operations these are refers to short-term capital and it consists of companies’ current assets and current liabilities. A good working capital provides a company’s wellbeing on the market in terms of liquidity, profitability, sustainability. WCM also works in favor for the highest growth of shareholders value as well. It focuses on sustaining good levels of current assets and current liabilities to ensure that a firm has enough cash flow in order to meet its short-term obligations.
We can say it is a managerial accounting system. Working Capital Management is a vital component of Corporate Financial Management. Actually it is the relationship between current assets and current liabilities. To carry the routine activities of a firm management of working capital is important. Working capital management objectives to ensure continuity in the operations of a firm or company and it have enough funds to fulfill the requirement of both maturing short-term debt and upcoming operational expenses. It mainly involves inventory management, accounts receivables, accounts payables and cash. The main concept of working capital management is to provide ample support for smooth and skilled functioning of day to day business operations by fascinating a trade between the three proportions of working capital. They are liquidity, profitability and risk.
WCM is an integral part of financial management. It contributes highly to a firm’s value creation as it directly impacts on organizational profitability and liquidity. Liquidity maintaining is the most crucial issue in WCM in the day to day operations. This is important because creditors and suppliers whose claims are due in the short term from posing unwarranted pressure on management and this ensure the plane running of the firm. This suggests that, the primary purpose of WCM is to ensure the protection of satisfactory level of working capital in a system that will prevent excessive or inadequate availability of working capital.
Inefficient WCM may not only reduce profitability but also push to financial crises and its associated effects. WCM is crucial for the financial strength of all businesses, neutral of type and size. In manufacturing firms they are investing large amount of cash in inventory and work-in-progress. So, adequate WCM management is essential for the financial succeed of the firms’. Among other things, sound WCM assures that organizations have the ability to meet their short-term liabilities adequately and on time and also many other current expenditures. This actually explains why it is often argued that efficient WCM is very crucial in achieving the principal goal of the firm, which is shareholders value maximization.
Working capital is the stock stored that has a conversion or resale value in order to gain profit. Especially the manufacturing firms’ working capital represents the largest cost of a firm. In normal circumstances, working capital consists of about 30% – 40% of a firm’s total investment. Investment in working capital to a large extent determines the returns earned by a firm. However, excessive levels of current assets can easily result in a firm realizing a substandard return on investment while firms with too few current assets may incur shortages and difficulties in maintaining smooth operations. As a result, working capital management is a very important component of corporate finance as it directly affects the liquidity and profitability of a firm. It centers on current assets and current liabilities of a firm.
In Bangladesh we have 29 listed pharmaceuticals firms and I’m interested to know the impact of working capital management on their profitability. So, here I collect integrated data of working capital of 21 firms for 10 years to analyze the study.
To determine whether there is a significant relationship between Average Collection Period (ACP) and Profitability of the firm (ROA, ROE, EPS).
To establish whether there is a significant relationship between Inventory Conversion Period (ICP) and Profitability of the firm (ROA, ROE, EPS).
To ascertain if there is a significant relationship between Average Payment Period (APP) and Profitability of the firm (ROA, ROE, EPS).
To examine if there is a significant relationship between Cash Conversion Cycle (CCC) and Profitability of the firm (ROA, ROE, EPS).
Rational of the study
There are several sectors in Bangladesh on which we can be proud of and undoubtedly the pharmaceutical sector is one of these sectors. It is one of Bangladesh’s success stories and one of the most technologically advanced sectors currently in existence. This industry is matter of substantial pride to the country. Skillful attitudes, knowledge and innovative ideas from the professionals are the key reasons why this industry grew in the way it did. The success story of Bangladesh pharmaceutical sector is very pleasant. It had to travel a long way to achieve the present prestigious position in domestic and international markets. In the post-independence period of Bangladesh, the pharmaceutical industry had a limited number of multinational companies. However, the industry has been expanded 65 times and has reached from an export volume of BDT 1730 million to BDT 113 billion.
Nowadays, people have become increasingly aware of the health issues that have increased the demand of the pharmaceutical products made in Bangladesh. By now, 97% of country’s demand of medicines is produced locally mainly by national pharmaceutical companies. The pharmaceutical sector of Bangladesh is expanding rapidly and some companies have already certified by different international regulatory authorities like UK-MHRA, Australia-TGA, EU, etc. for quality management and quality products manufacturing. Moreover, few companies are on the road to achieve US-FDA approval. According to the information of the Director General of Drug Administration of Bangladesh (DGDA), there are 263 Allopathic drug manufacturing companies in Bangladesh; 209 of which are functional, 29 companies are nonfunctional and 25 companies are suspended in status. Pharmaceutical export is contributing to the GDP of the country and every year this contribution is positively growing. In the meantime, Pharma sector has become the 2nd largest potential sector in Bangladesh to earn foreign currency. At present, about 30 pharmaceutical companies have started their export activities. Many smaller companies are on the verge of entering highly regulated overseas markets. Bearing in mind its successful past endeavors, the industry has the ability to establish itself in mass exportation. This industry has put significant contribution in reducing unemployment problem in Bangladesh by employing 1,65,000 workers during 2016-17 with a growth rate of around 15.37%. IMS Health Report has estimated a local market of BDT 180 billion by 2018. However, the industry is still importing raw materials from other countries.
In these circumstances, efficient management of working capital can promote this industry’s profitability. Because working capital management is very much important for their good profitability. Therefore, this paper aims to find out the association between working capital management and profitability of the listed pharmaceutical companies in Dhaka Stock Exchange (DSE).
Scope of the study
The study provides me the scope to learn about the operating performance of all pharmaceutical companies in Bangladesh over the last ten years. It also gives the opportunity to know about most important working management system. In the process of report making and analysis, I have come through the lessons of correlation matrix, multicollinearity, descriptive statistics and most importantly regression analysis and techniques to analyses the operating performance of pharmaceutical companies in Bangladesh. It also covers some knowledge about the literature review of pharmaceutical companies in this area. On the whole, it was a great opportunity for me to lean about pharmaceutical industry in the way of knowing the impact of working capital management on the overall operating performance analysis especially on their profitability.
Limitations of the study
There are some limitations in the process always that work against the making of a perfect analysis of working capital management impact on operating performance of pharmaceutical companies. These are –
Lack of experience, expertise and skill to prepare this type of paper
Less information gathers in some sector due to confidentiality factors of these pharmaceuticals companies
Lack of available technological expertise to analyze the performance in more detailed process
Lack of proper knowledge
Lack of available up to date data
Some areas that are out of covers of Course studies, are difficult to attain, use and gather by my prior experience and expertise
This chapter presents the review of literature to identify and understand the implications of different issues related to impact of working capital management on profitability of pharmaceuticals companies in Bangladesh. A comprehensive review of related past studies helps the researcher to adopt, modify and improve the conceptualization of framework and provide a link with past approaches. The findings and recommendation of the past literature relating to impact of working capital management on profitability of pharmaceuticals companies in Bangladesh are not many. Only few comprehensive studies exclusively towards financial performance are carried out in Bangladesh. The available studies are collected from research articles, committee reports, projects and surveys conducted.
Number of studies has been conducted on the exploration of working capital management and profitability relationship.
Deloof (1980) led a study on Belgian of non-financial firms for identifying the relationship between working capital management (WCM) and firms profitability. He used correlation and regression analysis and he found a negative relationship between gross operating incomes with average collection period, inventories and accounts payables and he said that if the number of days of accounts receivable and inventories. Is reduced then the profitability of non-financial firms of Belgium can be improved.
Padachi (2008) conducted 58 small manufacturing firms for 1998- 2003 about the working capital and its effect on performance in Mauritian firms. He used return on total asset (ROTA) as profitability measure and concluded that there is a negative correlation associated with the working capital management (inventories days and accounts receivables.)
Raheman and Nasr (2007) conducted a study on Karachi Stock Exchange (KSE) for 1999-2004. There are 94 listed firms. They used working capital management measure as average collection period (ACP), inventory turnover (ITO) in days, average payment period (APP), cash conversion cycle (CCC) and current ratio (CR) as variables and net operating profitability measure as profitability variable and concluded that there is strong negative relationship between working capital management and profitability in Pakistani firms.
Falope and Ajilore (2008) conducted a study on 50 non-financials firms of Nigeria for 1996-2005. They found that there is a significant negative relationship between return on assets (ROA) measure of profitability and average collection period (ACP), inventory turnover (ITO), average payment period (APP) and cash conversion cycle (CCC) measures of working capital management. They also concluded that in larger and small firms there has no significant variability about their working capital management.
In another study in Malaysia, Zariyawati, Annuar, Taufiq, and Rahim (2010) found a strong negative relationship between cash conversion cycle and firm profitability by considering 148 firms for 1996-2006.
Ali and Hassan (2011) conducted a study on 37 Swedish listed companies for 2004-08. They used cash conversion cycle and Average payment period as the measures of working capital management and net income after tax as the measure of profitability and concluded that there has no significant relationship between working capital policy and profitability.
On the contrary, Gill, Biger, and Mathur (2010) considered New York Stock Exchange (NSE) listed 88 American firms for the period of 2005-07. They used cash conversion cycle (CCC) as a proxy of working capital and gross operating profit as a proxy of profitability and concluded a significant positive relationship between them. .
Singhania, Sharma and Rohit (2014) studying with 82 listed firms of Bombay Stock Exchange for 2005-12. And found a strong negative relationship between cash conversion cycle (CCC) as a measure of working capital management and return on assets (ROA), net operating profit (NOP), and gross operating profit (GOP) as a measure of profitability.
In another work, Hoang (2016) studied by 98 manufacturing firms listed with Ho Chi Minh City Stock Exchange for 2009-14. He used Pearson’s correlation and multiple regressions for his analysis after his analysis he concluded that there is a significant negative relationship between cash conversion cycle (CCC), inventory turnover (ITO), average collection period (ACP), average payment period (APP), and return on assets (ROA) as a measure of profitability in Vietnam.
In perspective of Bangladesh, Quayyum (2012) studied 28 listed firms of Dhaka Stock Exchange (DSE) of different manufacturing industry (food, pharmaceuticals, engineering, and cements) for 2005-09. After his Pearson correlation matrix test and multiple regressions test he concluded that except for food industry all other selected industries have not significant level of relationship between the profitability indicators i.e. return on asset, net profit margin and working capital measures i.e. average collection period, inventory turnover period, average payment period, cash conversion cycle and current ratio.
Amin and Islam (2013) studied considering 15 fuel and power companies listed with DSE for 2007-11. They used quick ratio (QR), cash conversion cycle (CCC), accounts collection period (ACP), accounts payment period (APP), inventory processing period (IPP), cash to sales (CTS) ratios and net working capital (NWC) turnover as measures of working capital management efficiency and return on assets (ROA) and net profit margin (NPM) as profitability measures. After their study they concluded that cash to sales (CTS) has significant positive relationship with ROA while QR has significant negative relationships but other measures have no significant relationship with ROA.
Hamid and Akhi (2015) conducted a study in recent years. They explored WCM relationship with profitability by considering 10 pharmaceuticals and chemicals companies listed with DSE for the period of 2005-14 and concluded that there is no significant relationship between working capital management measured by current ratio (CR), cash conversion cycle (CCC), accounts collection period (ACP), accounts payment period (APP), inventory turnover (ITO) and working capital ratio and return on assets (ROA), return on equity (ROE) measured as profitability.
Through the review of relevant and contemporary literatures, it can be understood that the relationship between working capital management and profitability measured by return on assets (ROA), return on equity (ROE) and earnings per share (EPS) is new and exclusive in the context of Bangladesh. In addition, a few researches are available on the relationship between working capital management and profitability in the pharmaceutical industry. For this, the focus of this study has been fixed in determining the relationship between working capital management and profitability which would help the financial managers to prioritize their efforts in managing working capital well.
In Bangladesh there are in total 29 listed pharmaceuticals companies in Dhaka Stock Exchange . But some of the firms data can’t find out for 10 years from the secondary sources so for this reason I have used only 21 listed pharmaceuticals companies in Bangladesh. Which companies are publily traded and listd in stock exchange I take those companies as my sample.
Here, I have collected my data mainly from the annual report of these pharmaceuticals companies of last ten years. For this, I have to visit different online web address, like DSE (Dhaka stock exchange), Lanka Bangla financial portal and pharmaceutical company’s web sites. These data sources are given below:
Annual Report of ACI from 2017-2008.
Annual Report of Active Fine from 2017-2008.
Annual Report of Ambee from 2017-2008.
Annual Report of Beacon from 2017-2008.
Annual Report of Beximco from 2017-2008.
Annual Report of Beximco Synthesis from 2017-2008.
Annual Report of Central from 2017-2008.
Annual Report of Gkaxo Smith Kline from 2017-2008.
Annual Report of IBN Sina from 2017-2008.
Annual Report of Imam Button from 2017-2008.
Annual Report of Keya from 2017-2008.
Annual Report of Kohinoor from 2017-2008.
Annual Report of Orion Infusion from 2017-2008.
Annual Report of Orion Pharma from 2017-2008.
Annual Report of Pharma Aids from 2017-2008.
Annual Report of Libra from 2017-2008.
Annual Report of Reckitt from 2017-2008.
Annual Report of Merico from 2017-2008.
Annual Report of Reneta from 2017-2008.
Annual Report of Salvo from 2017-2008.
Annual Report of Square from 2017-2008.
Here, two kinds of variables are used to examine and analyze the impact of working capital management on profitability of pharmaceutical companies in Bangladesh. These are – dependent and independent variables. Dependent variables are the measure of profitability of pharmaceutical companies and independent variables are the measure of working capital management of pharmaceutical companies. I take some control variables too.
Dependent variables (Profitability)
Return on Assets (ROA)
Return on Equity (ROE)
Earnings Per Share (EPS)
Independent Variables (working capital management)
Inventory Turn Over (ITO)
Average Collection Period (ACP)
Average Payment Period (APP)
Cash Conversion Cycle (CCC)
Here, for panel data, ordinary least square method is not effective and appropriate rather we have to use random-effect generalized least-square (GLS) method. According to this model –
Model-I: ROA = ?0 + ?1 ITO + ?2 ACP + ?3 APP + ?4 CCC + ?5 LEV + ?6 SIZE +?7 AGE +?
Model-II: ROE = ?0 + ?1 ITO + ?2 ACP + ?3 APP + ?4 CCC + ?5 LEV + ?6 SIZE +?7AGE +?
Model-III: EPS = ?0 + ?1 ITO + ?2 ACP + ?3 APP + ?4 CCC + ?5 LEV + ?6 SIZE +?7AGE +?
Techniques of analysis
Here, regression analysis, a statistical tool to analyze and examine the relationship between working capital management and firms’ profitability of pharmaceuticals companies in Bangladesh over the last ten years is taken to find out the optimum result. Here some variables under the head of dependent and independent variables and some control variables are also taken to make the format clearer and easy to access.
In statistics, regression analysis is a statistical process for estimating the relationships among variables. It includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps one understand how the typical value of the dependent variable (or ‘criterion variable’) changes when any one of the independent ‘variables is varied, while the other independent variables are held fixed. Most commonly, regression analysis estimates the conditional expectation of the dependent variable given the independent variables – that is, the average value of the dependent variable when the independent variables are fixed. Less commonly, the focus is on a quintile, or other location parameter of the conditional distribution of the dependent variable given the independent variables. In all cases, the estimation target is a function of the independent variables called the regression function. In regression analysis, it is also of interest to characterize the variation of the dependent variable around the regression function which can be described by a probability distribution. Regression analysis is widely used for prediction and forecasting, where its use has substantial overlap with the field of machine learning. Regression analysis is also used to understand which among the independent variables are related to the dependent variable, and to explore the forms of these relationships. In restricted circumstances, regression analysis can be used to infer causal relationships between the independent and dependent variables. However this can lead to illusions or false relationships, so caution is advisable for example, correlation does not imply causation. The performance of regression analysis methods in practice depends on the form of the data generating process, and how it relates to the regression approach being used. Since the true form of the data-generating process is generally not known, regression analysis often depends to some extent on making assumptions about this process. Regression models are used to predict one variable from one or more other variables.
Here I use correlation matrix. Using correlation matrix we can easily find out the relationship between variables. When correlation coefficient is greater, then we understand that the relationship between those two variables is very significant. Relationship may be positive or negative both are possible. We understand by the positive correlation that if first variable is increasing then the second variable is also increasing. But if it is negative correlation then the situation is revised.
Here I also use multicollinearity test. With this test one can identify heavy significant relationship between two variables data set or more very easily. When there is heavy significant relationship within the data set then it is difficult to conduct a sound multiple regression.
In this study I also use unit root test. Unit root test is the test where we can check the stationarity of our data set. Because to run a good regression we need a stationary data, but if our data set is not stationary then our regressions model are not be very sound. So, it’s very important to test the unit root test for my data set.