Working Capital Management & Profitability
A case of Pakistan textile sector
1. INTR!"CTIN
Working capital management is related with the current assets &
current liabilities of the corporation. The liquidity and company’s profit is
directly influenced by the working capital management due to which it is the
main constituent of the corporate finance. It is also essential in a sense that it
involves planning and controlling of current assets and liabilities in such a
way that enables the company to meet the short term obligations. It also
evades huge investments in these assets. It has been observed that the
managers are more concentrated to those day-to-day problems that involve
decisions related to working capital. In the field of financial management
working capital has a very sensitive status. The liquidity of an on-going
company is totally dependent upon the use of cash flow that is generated by its
assets during operation. The main ob!ective of a firm is to boost their profits
yet another important ob!ective of the firm is its liquidity. The problem arises
when the firm is earning profit at the cost of its liquidity which should not be
the case because both of them have their own importance for a firm.
It has been e"posed historically that generally businesses do
investment round about #$% of their total capital on the current assets. &n
average in an organi'ation the finance manager spend ($% of his total time on
daily bases by looking after the short term investments. )or a successful
enterprise or business efficient management of working capital is a pre-
requisite. It means that the working capital should be maintained in such a
way that the firm can run its operations smoothly to achieve its ob!ective of
liquidity and profitability. It is a difficult task for the management to have a
proper estimation of working capital required because of the variation in its
requirement over the period of time depending upon the nature of the
business production cycle credit policy availability of raw materials etc.
*ifferent approaches are used for the managing of working capital
depending on their inclination towards the term of financings in order to
finance current assets. These approaches are the conservative approach the
aggressive approach and the moderate approach. The use of these approaches
depends on the desire of the manager for the profit and the level of risk they
want to take. +hort term financing is used in aggressive approach to finance
the current assets of the firm. *ue to fluctuation of the interest rates the risk
increases but have the potential to earn more due to less cost of financing. The
firm that wants to adverts the risk will go for conservative approach. There are
firms who try to bring balance between risk and the return from current assets
will opt for moderate approaches.
In this research I will be studying the impact of the management of
working capital in the te"tile sector. ,s te"tile sector is the most important
sector in -akistan and plays a very vital role in the economic development of
the country. It has a ma!or contribution in the e"ports of -akistan. The
working capital management can have a greater role in boosting the
profitability of the company in this sector. The firms belonging to the te"tile
industry needs to have liquidity to a great e"tend. *ifferent components of
W./ need to be controlled and planned in such a way that it benefits the
organi'ation to a great e"tend.
+ince 01#2 a tremendous and impressive cotton production and
development in the te"tile sector has been observed. The whole te"tile
industry earns round about 34% foreign e"change of the total e"ports and it
provides employment to about 4$% of labor force of the industry. -akistan is
ranked at fourth position with respect to cotton production in all over the
world. +ince the industriali'ation has begun in the country in 014$’s the
te"tile industry from that time contributed a lot in the economic development
of -akistan. Till 012$ a rapid e"pansion has been seen in this sector which
was followed by a downfall for the sector in the 2$’s. It contributes about
(.4% of the total 5*-.
The industry of te"tile in -akistan is dominated by the province of
-un!ab. -akistan covers almost 6% of the 7+ imports of clothing & other
variety of te"tiles. In 0111 the e"ports from the te"tile sector were 84.9
billion and in 9$$2 it became almost double i.e 80$.4 billion. In 9$$( it was
80$.39 billion which was 44% of the total e"ports of -akistan.
The problem statement to be studied in this research is:
;*oes the working capital management
A case of Pakistan textile sector
1. INTR!"CTIN
Working capital management is related with the current assets &
current liabilities of the corporation. The liquidity and company’s profit is
directly influenced by the working capital management due to which it is the
main constituent of the corporate finance. It is also essential in a sense that it
involves planning and controlling of current assets and liabilities in such a
way that enables the company to meet the short term obligations. It also
evades huge investments in these assets. It has been observed that the
managers are more concentrated to those day-to-day problems that involve
decisions related to working capital. In the field of financial management
working capital has a very sensitive status. The liquidity of an on-going
company is totally dependent upon the use of cash flow that is generated by its
assets during operation. The main ob!ective of a firm is to boost their profits
yet another important ob!ective of the firm is its liquidity. The problem arises
when the firm is earning profit at the cost of its liquidity which should not be
the case because both of them have their own importance for a firm.
It has been e"posed historically that generally businesses do
investment round about #$% of their total capital on the current assets. &n
average in an organi'ation the finance manager spend ($% of his total time on
daily bases by looking after the short term investments. )or a successful
enterprise or business efficient management of working capital is a pre-
requisite. It means that the working capital should be maintained in such a
way that the firm can run its operations smoothly to achieve its ob!ective of
liquidity and profitability. It is a difficult task for the management to have a
proper estimation of working capital required because of the variation in its
requirement over the period of time depending upon the nature of the
business production cycle credit policy availability of raw materials etc.
*ifferent approaches are used for the managing of working capital
depending on their inclination towards the term of financings in order to
finance current assets. These approaches are the conservative approach the
aggressive approach and the moderate approach. The use of these approaches
depends on the desire of the manager for the profit and the level of risk they
want to take. +hort term financing is used in aggressive approach to finance
the current assets of the firm. *ue to fluctuation of the interest rates the risk
increases but have the potential to earn more due to less cost of financing. The
firm that wants to adverts the risk will go for conservative approach. There are
firms who try to bring balance between risk and the return from current assets
will opt for moderate approaches.
In this research I will be studying the impact of the management of
working capital in the te"tile sector. ,s te"tile sector is the most important
sector in -akistan and plays a very vital role in the economic development of
the country. It has a ma!or contribution in the e"ports of -akistan. The
working capital management can have a greater role in boosting the
profitability of the company in this sector. The firms belonging to the te"tile
industry needs to have liquidity to a great e"tend. *ifferent components of
W./ need to be controlled and planned in such a way that it benefits the
organi'ation to a great e"tend.
+ince 01#2 a tremendous and impressive cotton production and
development in the te"tile sector has been observed. The whole te"tile
industry earns round about 34% foreign e"change of the total e"ports and it
provides employment to about 4$% of labor force of the industry. -akistan is
ranked at fourth position with respect to cotton production in all over the
world. +ince the industriali'ation has begun in the country in 014$’s the
te"tile industry from that time contributed a lot in the economic development
of -akistan. Till 012$ a rapid e"pansion has been seen in this sector which
was followed by a downfall for the sector in the 2$’s. It contributes about
(.4% of the total 5*-.
The industry of te"tile in -akistan is dominated by the province of
-un!ab. -akistan covers almost 6% of the 7+ imports of clothing & other
variety of te"tiles. In 0111 the e"ports from the te"tile sector were 84.9
billion and in 9$$2 it became almost double i.e 80$.4 billion. In 9$$( it was
80$.39 billion which was 44% of the total e"ports of -akistan.
The problem statement to be studied in this research is:
;*oes the working capital management