Role of Working Capital Management on Business Competitiveness of the Manufacturing Companies Listed in Dhaka Stock Exchange

Abstract

Although abundant research has focused on working capital management and its influence on organizational performance, almost all of these studies limited their focus to the measures of working capital efficiency, liquidity and strategy. Only a few pieces of existing literature consider the details of working capital management practices that involve policies, strategies, monitoring, control, technology use, and the adaptation of tools and techniques in managing the components of working capital. Moreover, most researchers measure business performance using profitability ratios only, e.g., return on assets, net profit margin, and gross profit margin or sales. They argue that profitability or sales are inadequate measures of a firm’s performance because they do not take into account how a firm is performing in relation to market competition over time. Literature on competitiveness suggests that consistent good performance and future prospects of good performance, supported by resources and competencies, makes a company or firm competitive. In this thesis, the researcher explores the details of working capital management practices in organizations and investigates whether and how these practices influence business competitiveness. Interindustry differences in this regard are also projected. In light of the diverse theories, models and measures of business competitiveness, the researcher also proposes a framework to measure business competitiveness in an objective manner. Drawing from the literature review, the researcher has devised five measures of business competitiveness: standardized return on assets (roa), net profit margin (npm), persistency parameters, α and β, and Tobin’s q. DataXIV were collected from annual reports and through a structured questionnaire that surveyed 164 manufacturing companies listed in Dhaka Stock Exchange. Statistical Package for Social Science (SPSS) software was used for data analysis, and both descriptive and inferential statistics were determined and are presented in this work. Common descriptive statistics like frequency distribution, bar chart, mean, mode, etc., are used to summarize and present the results of the questionnaire on working capital management practices. Standard multiple linear regression analysis was used to determine the role of working capital management on business competitiveness. Results were validated through in-depth interviews with practicing managers from the industry. Data reveal that the majority of the companies in Bangladesh’s manufacturing sector have formal working capital policies and that they have adopted a moderate strategy in managing and financing working capital. Most of the companies surveyed depict above-average levels of sophistication in all of their working capital management practices. However, in terms of cash, receivables and inventory management, most of the companies evidence an average level of sophistication. Payables management practices show an almost equal distribution of average and above-average levels of sophistication. When analyzed across industries within the manufacturing sector, some differences are found in terms of sophistication in managing working capital components. In aggregate cement sector demonstrates the best practices in the industry while ceramic, textile and pharmaceutical sectors lag behind in certain aspects of working capital practices. The researcher found a significant association between working capital practices and business competitiveness when the latter was measured by standardized profitability (roa and npm). In general, companies with formal working capital policies, aggressive working capital management strategies and conservative working capital financing strategies are found to beXV more competitive. Sophistication in payables and cash management shows a positive association whereas sophistication in receivables management and excellence in inventory and stock-out management reveals a negative association with business competitiveness. This suggests that sound practices in a particular area do not directly pay off rather successful performance requires a concerted effort across areas. Most efficiency and liquidity measures of working capital demonstrate a negative association with business competitiveness. An inter-industry analysis of the data collected for this research reveals that for industries characterized by a small number of companies represented in the survey sample (fuel & power, and the food & allied industry), there is no significant association between working capital practices and business competitiveness. However, the results for sectors with a larger number of companies show a significant association between the two. Still, they differ with respect to the measure of competitiveness and the significance of the dependent variables. Practitioners may use the methodology employed in this research to assess the level of sophistication in working capital management practices and the measures of competitiveness for evaluating the same in their organizations. Managers of manufacturing companies in Bangladesh may consider this study’s results when identifying existing best practices in working capital management. Based on the significant associations found among the variables used in the study, practicing managers may formulate working capital strategies and channel resources and efforts for adopting sound business practices to improve market/industry competitiveness. Future research projects can validate the measures of competitiveness suggested in this study. The exploration of any possible non-linear relationship between working capital practices and competitiveness may be the thesis of future research projects. Similar research can be conducted on service sector companies and/or on small and medium-sized businesses, nonXVI listed companies, and on other industry sectors. Future researchers may provide a holistic view of whether and how sound practices in financial management influence business competitiveness by focusing on other areas of financial management like capital budgeting, capital structure (financing decision) and dividend policy.