Working capital management practice and its impact on profitability of Bangladeshi companies

Abstract

Working capital is defined as investments in current assets such as accounts receivable, inventory. A significant portion of the total capital of a company is invested into current assets. So a question naturally arises in the mind of anyone who is related with business, whether s/he is a student of business or an academician in the arena of business or an investor who wants to invest in a company or even a member of the regulatory authority whose job is to ensure smooth operation of the business. The question is how important the efficient management of those current assets is. In other words, can management of working capital have a significant impact on performance of a company? To answer this question the current study set following objectives; to study the working capital management practice of Bangladeshi manufacturing companies, to measure impact of working capital management practice on profitability of Bangladeshi manufacturing companies and to identify the moderating impact of firm growth. To attain those objectives financial data from 53 nonfinancial companies which are listed on Dhaka Stock Exchange, was collected for a period of five years and was assembled to generate financial ratios such as Accounts Receivable Period, Inventory Conversion Period, Payable Payment Period, Cash Conversion Period. Those ratios are considered in the study to represent the efficiency of working capital management, in other word those are the independent variable of the study. To measure the impact of those variables on the performance of a company, Return on Assets and Tobin’s q are taken as dependent variables of the study. Then statistical output such as descriptive statistics, correlation matrix and multiple regression result were generated. Through analyzing those statistical results the researcher found that companies in Jute Industry allow their customers on an average the highest time to pay their payables, they need on an average 86.64 days to collect their receivables. On average Bangladeshi manufacturing companies require 52 days to collect their receivables. Correlation between Return on Asset and accounts receivable period (AR) is negative (-.292) and highly significant. From regression it is found that accounts receivable period has negative effect on profitability. The study also found that companies in the Jute industry are slowest in terms of converting raw materials into finished goods (189 days). The overall average of Inventory Conversion Period is 112.92 days. Negative correlation (-.211) is found between Return on Asset and inventory conversion period and the correlation is highly significant (p= -.000). From regression result it is found that inventory conversion period has negative effect on profitability of Bangladeshi manufacturing companies. The overall mean value of accounts payable period is 42.68 days, which means Bangladeshi manufacturing companies are able to defer payments of their suppliers on an average of 43 days. Another important finding of the study is firm’s growth has no significant moderating effect on the profitability of Bangladeshi manufacturing companies. So the study suggests that managers of Bangladeshi manufacturing companies should be concerned about managing the working capital of their company.