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1.0 ORGANIZATION OVERVIEW

1.1 Introduction:
Incepta Pharmaceuticals Ltd. is a leading pharmaceutical company in Bangladesh established
in the year 1999. The company has a very big manufacturing facility located at Savar, 35
kilometer away from the center of the capital city Dhaka. The company produces various
types of dosage forms which include tablets, capsules, oral liquids, ampoules, dry powder
vials; powder for suspension, nasal sprays etc. Since its inception, Incepta has been launching
new and innovative products in order to fulfill unmet demand of the medical community. The
focus was to bring more new technologically advanced molecules to this country. The
company specializes in value added high technology dosage form like sustained release
tablets, quick mouth dissolving tablets, barrier coated delayed release tablets etc. It has
established a modern research and development laboratory for the development of new
advanced dosage forms for various drugs and devices like poorly soluble drugs, dry powder
inhalers, coated pellets, modified release products, taste masked preparation etc.

Incepta quickly developed a very competent sales team, which promotes the specialties
throughout the country. The company virtually covers every single corner of the rural as well
as urban area of Bangladesh. It has its own large distribution network having 13 depots all
over the country. The company has a clear vision to become a leading research based dosage
form manufacturing company with global presence within a short period of time.

The Research and Development department for various dosage forms has been very well
developed. Incepta intends to bring newer products of advanced technology through research
hitherto unknown in this country.


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Figure 01: Growth Rate of Incepta Pharmaceuticals Compared to the industry

Beginning in 2000, Incepta Pharmaceuticals Ltd. has been launching new and innovative
products at a faster pace than its competitors. Up to June 2011 it has already launched more
than 317 generics with a total of 624 presentations. The company produces a wide variety of
dosage forms covering nearly all the major therapeutic classes.

During the last 11 years of operation it launched as many as 118 new generics for the first
time ever in Bangladesh. High focus on quality and timely introduction of much needed
essential medications previously unavailable in the country has enabled the organization to
become the second largest pharmaceutical company of the country.

1.2 Vision:

To become a research based global pharmaceutical company in addition to being a highly
efficient generic manufacturer. To discover and develop innovative, value-added products
that improves the quality of life of people around the world and significantly contributes
towards the growth of Bangladesh.



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1.3 Mission:
Provide people globally with high quality health care products at affordable prices in order to
improve access to medicine and to improve employees an enabling environment that facilities
realization of their full potential.

1.4 Ownership Pattern:
Incepta Pharmaceuticals Limited is the sister concern of the renowned Impress Group and the
business is running as fully private limited company. Directors of Incepta Pharmaceuticals
Limited own the majority shares. Incepta is not DSE listed in capital market yet, so it is
controlled by the internal board of directors .So any kind of significant decision is taken by
the management.

1.5 Market Position of IPL:













Table 01. Top ten pharmaceuticals companies in Bangladesh in 2012

According to IMS health survey which is a US-based and the world's number one market
research organization and has been providing pharmaceuticals market intelligence to more
than 100 countries over the past 50 years, the market position of the top ten pharmaceuticals
companies in Bangladesh in 2012.


Serial
No.
Companies Market Position Of the Companies
(Total 100%)
1. Square 17. 13
2. Incepta 9.78
3. Beximco 8.49
4. Opsonin Pharma 5.47
5. Reneta 5. 14
6. Eskayef 4.71
7. ACI 4.22
8. Acme Laboratories 4.07
9. Aristopharma 4.07
10. Drug International 3.97
Others 55.22%


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Director

General Manager
Deputy General
Manager

Assistant General
Manager
Senior Manager

Manager

Deputy Manager

Assistant
Manager
Executive Officer
Officer

Senior Officer

Managing Director

Assistant Officer





1.6 ORGANOGRAM OF IPL:


























Figure 02: Organogram


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1.7 Exporting Countries:
Afghanistan, Belize, Bhutan, Congo, Costa Rica, Cambodia, Dominican Republic, El
Salvador, Ethiopia, Guyana, Georgia, Hong Kong, Honduras, Kenya, Myanmar, Mongolia,
Mauritania, Sri Lanka, Somalia, Togo, Tajikistan, Turkey, Ukraine, Vietnam, Nigeria.

1.8 Abstract:
Companies can use working capital management as an approach to influence their
profitability. This paper studies the impact of working capital management and its
components upon the profitability of Bangladeshi pharmaceuticals companies. Cash
Conversion Cycle, Average days of collection period, Inventory turnover period, Deferred
payables Period are used as a comprehensive measure for working capital management and
Gross Operating Profitability used as a measure for profitability.

The purpose of this study is to analyze the impact of working capital management on
companies profitability from Bangladesh County. The relation between the components of
the working capital management and profitability is examined using Pearson correlation
analyses and using a sample of 14 annual financial statements of companies covering period
2009-2010. The conclusion to our study is that there are positive relationship between
deferred payables period and corporate profitability. There is also positive relationship
between inventory turnover period and profitability. On the other hand, there are negative
relationship between average days of collection periods and corporate profitability. The
results also show negative relationship between cash conversion cycle and corporate
profitability.










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2.0 PROBLEM STATEMENT

2.1 Prologue:

In Bangladesh the pharmaceutical sector is one of the most developed hi-tech sectors within
the country's economy. After the promulgation of Drug Control Ordinance - 1982, the
development of this sector was accelerated. The professional knowledge, thoughts and
innovative ideas of the pharmaceutical professionals are the key factors for these
developments. Due to recent development of this sector it is exporting medicines to global
market including European market. This sector is also providing 97% of the total medicine
requirement of the local market. Leading pharmaceutical companies are expanding their
business with the aim to expand export market. Recently few new industries have been
established with high tech-equipment and professionals which will enhance the strength of
this sector.

In every organization, corporate finance deals with three decisions: capital structure
decisions, capital budgeting decisions, and working capital management decisions. Among
these three decisions, working capital management is recognized as an important concern of
the financial manager due to many reasons. For one thing, a typical manufacturing firms
current assets account for over half of its total assets. Working capital is also an important
issue during financial decision making since its being a part of investment in asset that
requires appropriate financing investment. However, working capital always being disregard
in financial decision making since it involve investment and financing in short term period.

Working capital management is the functional area of finance that covers all the current
accounts of the firm. Working capital management involves the relationship between a firm's
short-term assets and its short-term liabilities. The goal of working capital management is to
ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy
both maturing short-term debt and upcoming operational expenses. The management of
working capital involves managing inventories, accounts receivable and accounts payable
and cash.



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In the present day context of rising capital cost and scarce funds, the importance of working
capital needs special emphasis. It has been widely accepted that the profitability of a business
concern likely depends upon the manner in which its working capital is managed. The
inefficient management of working capital not only reduces profitability but ultimately may
also lead a concern to financial crisis. On the other hand, proper management of working
capital leads to a material savings and ensures financial returns at the optimum level even on
the minimum level of capital employed.

Both excessive and inadequate working capital is harmful for a firm. Excessive working
capital leads to un-remunerative use of scarce funds. On the other hand inadequate working
capital usually interrupts the normal operations of a business and impairs profitability. There
are many instances of business failure for inadequate working capital. Further, working
capital has to play a vital role to keep pace with the scientific and technological developments
that are taking place in the concerned area of pharmaceutical industry. If new ideas, methods
and techniques are not injected or brought into practice for want of working capital, the
concern will certainly not be able to face competition and survive. In this context, working
capital management has a special relevance and a thorough investigation regarding working
capital practice in the pharmaceutical industry is of utmost importance.

2.2 Problem of the Study:
Every organization irrespective of size and nature of business requires necessary amount of
working capital. Working capital is the most crucial factor for maintaining liquidity, survival,
solvency and profitability of business. The impact of working capital policies on profitability
is highly important because firms required a balance between risk and efficiency to achieve
an optimal level of working capital. Efficient working capital management involves planning
and controlling current assets and current liabilities in a manner that eliminates the risk of
inability to meet due short term obligations on one hand and avoids excessive investment in
these assets on the other hand.

Working capital management efficiency directly affects the profitability and liquidity of
firms. Therefore, efficient management of working capital is a fundamental part of the overall
corporate strategy to create shareholder value. In general, companies try to keep an optimal
level of working capital that maximizes their value. Some firms try to increase their profits at


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the cost of liquidity which can bring serious problems to the firm. Therefore, there must be a
trade-off between these two objectives of the firms. If we do not care about profit, we cannot
survive for a longer period. On the other hand, if we do not care about liquidity, we may face
the problem of insolvency or bankruptcy. For these reasons working capital management
should be given proper consideration and will ultimately affect the profitability of the firm.



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3.0 PURPOSE OF THE STUDY

The purpose of this research is to determine whether there is any relationship between the
working capital management and firms profitability or not in the pharmaceuticals industry in
Bangladesh.

A. Broad Objective
The broad objective of this research is to analyze The impact of working capital
management on firms profitability in Pharmaceuticals industry in Bangladesh.

B. Specific Objectives
The specific objectives are given below:
1. To find the current market situation of pharmaceuticals industry in Bangladesh
2. To have an overview on the organization Incepta Pharmaceuticals Ltd.
3. To find out the internal factors like strengths and weaknesses of Incepta
Pharmaceuticals Ltd.
4. To find out the external factors like opportunities and threats of Incepta
Pharmaceuticals Ltd.
5. To find the effect of inventory conversion period on the profitability of
pharmaceuticals industry in Bangladesh
6. To find the effect of receivables collection period on the profitability of
pharmaceuticals industry in Bangladesh
7. To find the effect of payable deferral period on the profitability of
pharmaceuticals industry in Bangladesh
8. To find the effect of cash conversion cycle on the profitability of pharmaceuticals
industry in Bangladesh
9. To find out the relationship of collection policy between Incepta Pharmaceuticals
Ltd. and the pharmaceuticals industry in Bangladesh.
10. To find out the relationship of receivables inventory policy between Incepta
Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.
11. To find out the relationship of payment policy between Incepta Pharmaceuticals
Ltd. and the pharmaceuticals industry in Bangladesh.
12. To find out the relationship of cash conversion cycle between Incepta
Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.


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4.0 LIMITATIONS OF THE REPORT

The duration is for making such report is not enough to learn about such a big sector
as well as organization like Incepta Pharmaceuticals Limited.
For non-availability of secondary data, it was not be possible to work on the basis of
board data.
It was be difficult to collect the information from various personnel for the job
constraint.
Lack of experiences acted as constraints in the way of meticulous exploration on the
topic.


5.0 LITERATURE REVIEW

While searching for previous research works, many research reports were found in the
internet and other publications. But no research has been made on the issue of impact of
working capital management on profitability in context of pharmaceuticals industry in
Bangladesh. Many researchers have studied working capital from different views and in
different environments. The following are very useful for this research:
Shin and Soenen researched the relationship between working capital management and value
creation for shareholders. The standard measure for working capital management is the cash
conversion cycle (CCC). Cash conversion period reflects the time span between disbursement
and collection of cash. It is measured by estimating the inventory conversion period and the
receivable conversion period, less the payables conversion period. In their study, Shin and
Soenen used net-trade cycle (NTC) as a measure of working capital management. NTC is
basically equal to the cash conversion cycle (CCC) where all three components are expressed
as a percentage of sales. NTC may be a proxy for additional working capital needs as a
function of the projected sales growth. They examined this relationship by using correlation
and regression analysis, by industry, and working capital intensity. Using a sample of 58,985
firm years covering the period 1975-1994, they found a strong negative relationship between
the length of the firm's net-trade cycle and its profitability. Based on the findings, they
suggest that one possible way to create shareholder value is to reduce firms NTC.



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Singh and Pandey (2008) had an attempt to study the working capital components and the
impact of working capital management on profitability of Hindalco Industries Limited for
period from 1990 to 2007. Results of the study showed that current ratio, liquid ratio,
receivables turnover ratio and working capital to total assets ratio had statistically significant
impact on the profitability of Hindalco Industries Limited.
In 1983 N. Hill, W. Sartoris and D. Ferguson conducted a survey of the accounts payable
managers of 1,479 firms of various sizes in various industries: 180 responses were received.
A major thrust of this survey was obtaining information on firms decision regarding two
methods of obtaining finance from accounts payable; skipping the discount and stretching
accounts payable. The survey revealed that the vast majority of firms generally take the
discount. In deciding whether to take the discount, the primary criterion of most firms is the
amount of the discount. This makes good financial sense, since the amount of discount (along
with the delay period from the discount date to the due date) determines the cost of skipping
as a source of financing.
Inventory plays an important role to determine the activities in producing, marketing, and
purchasing. Since inventory determines the level of activities in a company, managing it
strategically contributes to profitability (Hill & Sartoris, 1992). Supplier selection process
and inventory management are reciprocal to enable companies to deal with uncertainties of
consumer demand. Furthermore, a companys ability to respond to demand is largely
dependent on how efficient the company manages inventories and how committed its
suppliers are to support a companys production lines.
Accounts payable are one of the major sources of unsecured short-term financing (Gitman,
2009; Hill & Sartoris, 1992). Utilizing the value of relationship with payee is a sound
objective that should be highlighted as important as having the optimal level of inventories
(Hill & Sartoris, 1992). As a consequence, strong alliance between company and it suppliers
will strategically improve production lines and strengthen credit record for future
expansion.Profit may only be called real profit after the receivables are turn into cash. The
management of accounts receivable is largely influence by the credit policy and collection
procedure. A credit policy specifies requirements to value the worthiness of customers and a
collection procedure provides guidelines to collect unpaid invoices that will reduce delays in
outstanding receivables (Hill & Sartoris, 1992; Richards & Laughlin, 1980). Aligning the
receivable management between cash, inventory and payable management is relatively


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challenging and important and a stimulus to researchers studies to integrate the WCM
components.
Ghosh and Maji attempted to examine the efficiency of working capital management of
Indian cement companies during 1992 - 93 to 2001 - 2002. They calculated three index
values - performance index, utilization index, and overall efficiency index to measure the
efficiency of working capital management, instead of using some common working capital
management ratios. By using regression analysis and industry norms as a target efficiency
level of individual firms, Ghosh and Maji achieving that target level of efficiency by
individual firms during the period of study and found that some of the sample firms
successfully improved efficiency during these years.
Weinraub and Visscher (1998) discussed the issue of aggressive and conservative working
capital management policies by using quarterly data for the period 1984-93 of the US firms.
Their study considered 10 diverse industry groups to examine the relative relationship
between their aggressive/conservative working capital policies.
Their study concluded that the industries had distinctive and significantly different working
capital management policies. Moreover, the relative nature of the working capital
management policies exhibited remarkable stability over the 10-year study period. The study
also showed a high and significant negative correlation between industry asset and liability
policies and found that when relatively aggressive working capital asset policies are
followed, they are balanced by relatively conservative working capital financial policies.
Eljelly (2004) empirically examined the relationship between profitability and liquidity, as
measured by current ratio and cash gap (cash conversion cycle) on a sample of 929 joint
stock companies in Saudi Arabia. Using correlation and regression analysis, Eljelly found
significant negative relationship between the firm's profitability and its liquidity level, as
measured by current ratio.
This relationship is more pronounced for firms with high current ratios and long cash
conversion cycles. At the industry level, however, he found that the cash conversion cycle or
the cash gap is of more importance as a measure of liquidity than current ratio that affects
profitability. The firm size variable was also found to have significant effect on profitability
at the industry level.


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Garcia-Teruel and Martinez-Solano (2007) collected a panel of 8,872 small to medium-sized
enterprises (SMEs) from Spain covering the period 1996 - 2002. They tested the effects of
working capital management on SME profitability using the panel data methodology. The
results, which are robust to the presence of endogeneity, demonstrated that managers could
create value by reducing their inventories and the number of days for which their accounts
are outstanding. Moreover, shortening the cash conversion cycle also improves the firm's
profitability.
To test the relationship between working capital management and corporate profitability,
Deloof [5, p. 573] used a sample of 1,009 large Belgian non-financial firms for a period of
1992-1996. By using correlation and regression tests, he found significant negative
relationship between gross operating income and the number of days accounts receivable,
inventories, and accounts payable of Belgian firms. Based on the study results, he suggests
that managers can increase corporate profitability by reducing the number of days accounts
receivable and inventories.
In other study, (Lyroudi & Lazaridis, 2000) use food industry Greek to examined the cash
conversion cycle (CCC) as a liquidity indicator of the firms and tries to determine its
relationship with the current and the quick ratios, with its component variables, and
investigates the implications of the CCC in terms of profitability, indebtness and firm size.
The results of their study indicate that there is a significant positive relationship between the
cash conversion cycle and the traditional liquidity measures of current and quick ratios. The
cash conversion cycle also positively related to the return on assets and the net profit margin
but had no linear relationship with the leverage ratios. Conversely, the current and quick
ratios had negative relationship with the debt to equity ratio, and a positive one with the times
interest earned ratio. Finally, there is no difference between the liquidity ratios of large and
small firms.
In a study, Chowdhury and Amin (2007) attempted to evaluate working capital management
as practiced in the selected firms of the Pharmaceutical industry for the period from 2001 to
2005. From the analysis, they conclude that pharmaceutical firms operated in Bangladesh are
efficiently deal with their liquidity preferences and investment criteria and this is due to the
competitive nature of this industry.



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There are few studies with reference to working capital management in Pakistan like Afza
and Nazir (2008), who studied the factors determining the working capital requirements for a
large sample of 204 firms in sixteen manufacturing sub sectors during 1998-2006. Another
study by Afza and Nazir (2007) investigated the relationship between aggressive and
conservative working capital policies for a large sample of 205 firms in 17 sectors listed on
Karachi Stock Exchange during 1998-2005. They found a negative relationship between the
profitability measures of firms and degree of aggressiveness of working capital investment
and financing policies. Raheman and Nasr (2007) studied the relationship between working
capital management and corporate profitability for 94 firms listed on Karachi Stock Exchange
using static measure of liquidity and ongoing operating measure of working capital
management during 1999-2004. The findings of study suggested that there exist a negative
relationship between working capital management measures and profitability. Shah and Sana
(2006) used a very small sample of 7 oil and gas sector firms to investigate this relationship
for period 2001-2005. The results suggested that managers can generate positive return for
the shareholders by effectively managing working capital.
The relationship of cash conversion cycle with firm size and profitability for firms listed at
Istanbul Stock Exchange was studied by Uyar (2009) using ANOVA and correlation analysis.
The results showed retail/wholesale industry has shorter Cash Conversion Cycle (CCC) than
manufacturing industries.
Furthermore, study found significant negative correlation between CCC and profitability as
well as between CCC and firm size. Lazaridis and Tryfonidis (2006) investigated the
relationship of corporate profitability and working capital management for firms listed at
Athens Stock Exchange. They reported that there is statistically significant relationship
between profitability measured by gross operating profit and the Cash Conversion Cycle.
Furthermore, Managers can create profit by correctly handling the individual components of
working capital to an optimal level.
Padachi (2006) has examined the trends in working capital management and its impact on
firms performance for 58 Mauritian small manufacturing firms during 1998 to 2003. He
explained that a well designed and implemented working capital management is expected to
contribute positively to the creation of firms value. The results indicated that high
investment in inventories and receivables is associated with low profitability and also showed
an increasing trend in the short term component of working capital financing.


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In summary, the literature review indicates that working capital management impacts on the
profitability of the firm but there still is ambiguity regarding the appropriate variables that
might serve as proxies for working capital management. The present study investigates the
relationship between a set of such variables and the profitability of a sample of
pharmaceuticals companies in Bangladesh. Moreover, no research has been made on such
topic in context of pharmaceuticals industry in Bangladesh.


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6.0 CONCEPTUAL FRAMEWORK

6.1 Working capital
Working capital may be regarded as the life blood of business. Working capital is of major
importance to internal and external analysis because of its close relationship with the current
day-to-day operations of a business. Every business needs funds for two purposes.
Long term funds are required to create production facilities through purchase of fixed assets
such as plants, machineries, lands, buildings & etc
Short term funds are required for the purchase of raw materials, payment of wages, and other
day-to-day expenses. It is otherwise known as revolving or circulating capital.
Working Capital is nothing but the difference between current assets and current liabilities.
Working Capital =Current Asset Current Liability.
Businesses use capital for construction, renovation, furniture, software, equipment, or
machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is
also used often by businesses to put a down payment down on a piece of commercial real
estate. Working capital is essential for any business to succeed.
The term "working capital" is often referred to "circulating capital" which is frequently used
to denote those assets which are changed with relative speed from one form to another i.e.,
starting from cash, changing to raw materials, converting into work-in-progress and finished
products, sale of finished products and ending with realization of cash from debtors.
6.2 Nature of Working Capital
The working capital meets the short-term financial requirements of a business enterprise. It is
a trading capital, not retained in the business in a particular form for longer than a year. The
money invested in it changes form and substance during the normal course of business
operations. The need for maintaining an adequate working capital can hardly be questioned.
Just as circulation of blood is very necessary in the human body to maintain life, the flow of
funds is very necessary to maintain business. If it becomes weak, the business can hardly
prosper and survive. Working capital starvation is generally credited as a major cause if not
the major cause of small business failure in many developed and developing countries


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(Rafuse, 1996). The success of a firm depends ultimately, on its ability to generate cash
receipts in excess of disbursements. The cash flow problems of many small businesses are
exacerbated by poor financial management and in particular the lack of planning cash
requirements.
6.3 Classification of Working Capital
Working Capital may be classified in two ways:
Concept based working capital
Time based working capital

Figure 03: Working Capital Classification





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6.4 Need for Working Capital
Working capital is needed till a firm gets cash on sale of finished products. It depends on two
factors:
Manufacturing cycle i.e. time required for converting the raw material into finished
product; and
Credit policy i.e. credit period given to customers and credit period allowed by
creditors.
Thus, the sum total of these times is called an "Operating cycle" and it consists of the
following six steps:
Conversion of cash into raw materials.
Conversion of raw materials into work-in-process.
Conversion of work-in-process into finished products.
Time for sale of finished goodscash sales and credit sales.
Time for realization from debtors and Bills receivables into cash.
Credit period allowed by creditors for credit purchase of raw materials, inventory and
creditors for wages and overheads.
6.5 Measurement of Working Capital
There are 3 methods for assessing the working capital requirement as explained below:
1. Percent of Sales Method
Based on the past experience, some percentage of sales may be taken for determining the
quantum of working capital
2. Regression Analysis Method
The relationship between sales and working capital and its various components may be
plotted on Scatter diagram and the average percentage of past 3-5 years may be ascertained.
This average percentage of sales may be taken as working capital. Similar exercise may be
carried out at the beginning of the year for assessing the working capital requirement. This
method is suitable for simple as well as complex situations.



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3. Operating Cycle Method
As a first step, we have to compute the operating cycle as follows:
Number of days accounts receivable (AR) = Average of accounts receivable / Sales* 365
Number of days accounts payable (AP) = Average of accounts payable / Cost of goods sold
*365
Number of days inventory (INV) = Average of inventory / Cost of goods sold * 365
Cash conversion cycle (CCC) = AR+ INV- AP
6.6 Advantages of Adequate Working Capital
Working capital is the life blood and nerve centre of a business. Just as circulation of blood is
essential in the human body for maintaining life, working capital is very essential to maintain
the smooth running of a business. No business can run successfully without an adequate
amount of working capital. The main advantages of maintaining adequate amount of working
capital are as follows:
1. Solvency of the Business
Adequate working capital helps in maintaining solvency of the business by providing
uninterrupted flow of production.
2. Goodwill
Sufficient working capital enables a business concern to make prompt payments and hence
helps in creating and maintaining goodwill.
3. Easy loans
A concern having adequate working capital, high solvency and good credit standing can
arrange loans from banks and other on easy and favorable terms.
4. Cash Discounts
Adequate working capital also enables a concern to avail cash discounts on the purchases and
hence it reduces costs.



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5. Regular Supply of Raw Materials
Sufficient working capital ensures regular supply of raw materials and continuous production.
6. Regular Payment of Salaries, Wages and Other Day-To-Day Commitments
A company which has ample working capital can make regular payment of salaries, wages
and other day-to-day commitments which raises the morale of its employees, increases their
efficiency, reduces wastages and costs and enhances production and profits.
7. Exploitation of Favorable Market Conditions
Only concerns with adequate working capital can exploit favorable market conditions such as
purchasing its requirements in bulk when the prices are lower and by holding its inventories
for higher prices.
8. Ability to Face Crisis
Adequate working capital enables a concern to face business crisis in emergencies such as
depression because during such periods, generally, there is much pressure on working capital.
9. Quick and Regular Return on Investments
Every Investor wants a quick and regular return on his investments. Sufficiency of working
capital enables a concern to pay quick and regular dividends to its investors as there may not
be much pressure to plough back profits. This gains the confidence of its investors and
creates a favorable market to raise additional funds i.e., the future.
10. High Morale
Adequacy of working capital creates an environment of security, confidence and high morale
and creates overall efficiency in a business.
6.7 Disadvantages of Excessive Working Capital
Excessive Working Capital means ideal funds which earn no profits for the business and
hence the business cannot earn a proper rate of return on its investments. When there is a
redundant working capital, it may lead to unnecessary purchasing and accumulation of
inventories causing more chances of theft, waste and losses.


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Excessive working capital implies excessive debtors and defective credit policy which may
cause higher incidence of bad debts. It may result into overall inefficiency in the
organization. When there is excessive working capital, relations with banks and other
financial institutions may not be maintained.
Due to low rate of return on investments, the value of shares may also fall.
6.8 Disadvantages of Inadequate Working Capital
A concern which has inadequate working capital cannot pay its short-term liabilities in time.
Thus, it will lose its reputation and shall not be able to get good credit facilities.
It cannot buy its requirements in bulk and cannot avail of discounts, etc.
It becomes difficult for the firm to exploit favorable market conditions and undertake
profitable projects due to lack of working capital.
The firm cannot pay day-to-day expenses of its operations and its creates
inefficiencies, increases costs and reduces the profits of the business.
It becomes impossible to utilize efficiently the fixed assets due to non-availability of
liquid funds.
The rate of return on investments also falls with the shortage of working capital.
6.9 The Management of Working Capital
While the performance levels of small businesses have traditionally been attributed to general
managerial factors such as manufacturing, marketing and operations, working capital
management may have a consequent impact on small business survival and growth (Kargar
and Blumenthal, 1994). The management of working capital is important to the financial
health of businesses of all sizes. The amounts invested in working capital are often high in
proportion to the total assets employed and so it is vital that these amounts are used in an
efficient and effective way. However, there is evidence that small businesses are not very
good at managing their working capital. Given that many small businesses suffer from under
capitalization, the importance of exerting tight control over working capital investment is
difficult to overstate.
Working Capital Management refers to the management of all types of current assets of the
business enterprise in which adequacy of current assets as well as the level of noninsurable
risk posed by current liabilities are optimally identified. It is concerned with the problems
relating to the administration of all aspects of current assets, current liabilities and the inter-


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relationships that exist between them. It aims at reducing the locking up of funds in working
capital so as to improve the return on capital employed (i.e. profitability in the business). It
seeks to formulate proper policies for managing current assets and liabilities as well as the
techniques for maximizing the benefits derived from it. The policies for managing the
working capital of a firm should be such that the firm can accomplish its three important
goals simultaneously-
Adequate Liquidity
Maximizing Profitability
Minimization of non-insurable risk and uncertainty
6.10 Strategies in Working Capital Management
In connection with the tradeoff between liquidity, risk and profitability a company may adopt
three types of working capital strategies:
Conservative Strategy
Aggressive Strategy
Moderate Strategy
The firm following conservative working capital strategy combines a high level of current
assets in relation to sales with a low level of short term financing. Excess amount of current
assets enable the firm to absorb sudden fluctuations in sales, production plans and
procurement time without disturbing the continuity in production. The higher level of current
assets reduces the risk of insolvency. But at the same time lower risk translates into lower
profit.
The firm following aggressive working capital strategies, on the other hand, would combine
low level of current assets with a high level of short term financing. This firm will have high
profitability and greater risk of insolvency.
The moderate firm would like to combine moderate level of current assets in relation to sales
with moderate level of short term financing to maintain a well balance between the risk of
insolvency and profitability.



23 | P a g e
Thus, the considerations of assets and financial mixes are very much crucial to the working
capital management of a firm. The working capital strategy as stated above can be shown in
the following diagram:

Figure 04: Strategies of Working Capital
SOURCE: Fees, P.E. (1978). The Working Capital Concept, Accounting Theory: Text and
Readings L.D Mac cullers & R.G. Schroeder (Ed.), JohnWiley & Sons



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7.0 RESEARCH QUESTIONS AND HYPOTHESIS
7.1 Research Questions
For conducting the research, the following propositions are identified:
Proposition-1
Receivable collection period is believed to have a negative impact on the firms profitability
Proposition-2
Inventory conversion period is believed to have a negative impact on the firms profitability
Proposition-3
Payable deferral period is believed to have a positive impact on the firms profitability.
Proposition-4
Cash conversion cycle is believed to have a negative impact on the firms profitability to
reach the desired objective the following research questions have been set. The following
questions have been tried to satisfy with proper justification.
Research Question No. 1: What is the effect of inventory conversion period on profitability?
Justification: Every firm wants to convert its inventory on sales in short time. But due to
various reasons, they may not be able to do so. So, it is very important to know, if the
companies take too time in this conversion, what will be the impact of it on the profitability
of the company. Thus, this question helped to identify the impact of inventory conversion
period (in days) on the profitability.
Research Question No. 2: What is the effect of receivables collection period on profitability?
Justification: The collection time sold products need to short, because it has a strong effect on
the overall performance of the firm. There are many organizations that follow various
techniques to collect the due in short period of time. So, it is very important to know what
will be the effect of receivables collection period on the profitability.
Research Question No. 3: What is the effect of payable deferral period on profitability?


25 | P a g e
Justification: If the firm can able to defer the bill from the creditors, the firm can use it
money for few more days. So, this question helped to identify the impact of deferring the
payment on the profitability of the firm.
Research Question No. 4: What is the effect of cash conversion cycle on profitability?
Justification: The cash conversion cycle is the days between disbursing cash and collecting
cash in connection with undertaking a discrete unit of operations. The Cash Conversion Cycle
(CCC) measures how long a firm will be deprived of cash if it increases its investment in
resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed
by growth. So, this question helped to find out the impact of cash conversion cycle on the
profitability.
Research Question No. 5: What is the association of collection policy between Incepta
Pharmaceuticals Ltd and pharmaceuticals industry in Bangladesh?
Justification: This question helped to identify the collection policy that is followed by Incepta
Pharmaceuticals Ltd. and its association with the pharmaceuticals industry in Bangladesh.
Research Question No. 6: What is the association of payment policy between Incepta
Pharmaceuticals Ltd and pharmaceuticals industry in Bangladesh?
Justification: The association of payment policy between Incepta Pharmaceuticals Ltd. and
the pharmaceuticals industry in Bangladesh was known by developing this question.
Research Question No. 7: What is the association of inventory policy between Incepta
Pharmaceuticals Ltd and pharmaceuticals industry in Bangladesh?
Justification: This question helped to identify the association of inventory policy between
Incepta Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.
Research Question No. 8: What is the association of cash conversion cycle between Incepta
Pharmaceuticals Ltd and pharmaceuticals industry in Bangladesh?
Justification: This question helped to identify the association of cash conversion cycle
between Incepta Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.



26 | P a g e

7.2 Hypothesis
From the above propositions, research objectives and research questions the following
hypotheses can be formulated which are tested in this research.
Hypothesis 1
Null hypothesis: There is no impact of receivables collection period on profitability in the
pharmaceuticals industry in Bangladesh
Alternative hypothesis: There is a significant impact of receivables collection period on
profitability in the pharmaceuticals industry in Bangladesh
Hypothesis 2
Null hypothesis: There is no impact of payable deferral period on profitability in the
pharmaceuticals industry in Bangladesh
Alternative hypothesis: There is a significant impact of payable deferral period on
profitability in the pharmaceuticals industry in Bangladesh
Hypothesis 3
Null hypothesis: There is no impact of inventory conversion period on profitability in the
pharmaceuticals industry in Bangladesh
Alternative hypothesis: There is a significant impact of inventory conversion period on
profitability in the pharmaceuticals industry in Bangladesh
Hypothesis 4
Null hypothesis: There is no impact of cash conversion cycle on profitability in the
pharmaceuticals industry in Bangladesh
Alternative hypothesis: There is a significant impact of cash conversion cycle on profitability
in the pharmaceuticals industry in Bangladesh.




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Hypothesis 5
Null hypothesis: There is no association of collection policy between Incepta Pharmaceuticals
Ltd. and the pharmaceuticals industry in Bangladesh.
Alternative hypothesis: There is a significant association of collection policy between Incepta
Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh
Hypothesis 6
Null hypothesis: There is no association of payment policy between Incepta Pharmaceuticals
Ltd. and the pharmaceuticals industry in Bangladesh.
Alternative hypothesis: There is a significant association of payment policy between Incepta
Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.
Hypothesis 7
Null hypothesis: There is no association of inventory policy between Incepta Pharmaceuticals
Ltd. and the pharmaceuticals industry in Bangladesh.
Alternative hypothesis: There is significant association of inventory policy between Incepta
Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.
Hypothesis 8
Null hypothesis: There is no association of cash conversion cycle between Incepta
Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.
Alternative hypothesis: There is a significant association of cash conversion cycle between
Incepta Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.





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8.0 RESEARCH METHODOLOGY
8.1 TYPE OF RESEARCH
Since the researchs broad objective is to find out whether working capital management has
any significant impact on profitability or not in the perspective of pharmaceuticals industry in
Bangladesh, this is a causal research. The study applied co-relational research.
8.2 BASIC RESEARCH METHOD
An exploratory research was carried out to define the research objectives. Mainly secondary
data analysis technique was used in the research. Basing on the finding from different
previous reports, the hypotheses were formed.
8.3 SAMPLING PLAN
Sampling is almost to do a complete census of most population. A properly designed sample
is more efficiently managed, less costly and can provide the level of information necessary
for the desired objectives. In this research, the steps followed in the sampling design are
briefly discussed in the subsequent sections.
8.3.1 Target Population
Sampling design begins by specifying target population. The broad objective of this research
is to find out whether there is any relationship exists between working capital management
and firms profitability in the pharmaceuticals industry in Bangladesh. For this purpose, the
target population for this research is all the small, medium and large local and multinational
pharmaceuticals companies in Bangladesh which is about 250. According to Bangladesh
Association of Pharmaceutical Industries (BAPI), there are 149 pharmaceuticals companies
in Bangladesh.
8.3.2 Sampling Frame
A sampling frame is a representation of the elements of the target population. It consists of a
list or set of directions for identifying the target population. Though the population includes
all the pharmaceuticals companies in Bangladesh; but the sampling frame mainly in this
research includes the companies located in Dhaka city.



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8.3.3 Sampling Technique
To avoid misclassification of firms the research has concentrated only on the pharmaceutical
firms in Bangladesh. The research is based on probability and also non-probability sampling
method. Out of the probability sampling methods, random sampling has been used. Because
in case of knowing the impact of working capital management on profitability there is an
equal and known chance of being selected for each member of the populations. And after that
convenience sampling method has been followed from the random sampling.
8.3.4 Sample Size Determination
According to Bangladesh Association of Pharmaceutical Industries (BAPI), there are 149
pharmaceuticals companies in Bangladesh. The steps followed in determining sample size are
briefly discussed in the subsequent sections.
Total Number of Population (N): Total number of population is 149
Confidence Level: The confidence level 90% (for 90% Z =1.64)
Precision level (d): Precision level is 10%
Proportion (p): It is the ratio or percentage. It is 0.5 because it is maximum
Estimated Proportion of Failure (q): Estimated proportion of failure is 0.5 (1-p)
So the sample size is:
N Z
2
pq
n =
Nd
2
+ Z
2
pq
149X1.64
2
X 0.5 X 0.5
=
149 X 0.10
2
+ 1.64
2
X 0.5X 0.5
= 40.64807
As the limitations of time, it was not possible to collect all the information from the above
sample firms. Thus, 9 companies were chosen for conducting the research.



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8.4 SELECTED COMPANIES FROM SAMPLE
In this research, nine companies were sampled for conducting the research. In case selecting
the companies, the convenience method was followed. These nine companies are:
Serial No. Company Name
1. Square Pharmaceuticals Ltd
2. Beximco Pharmaceuticals Ltd.
3. Incepta Pharmaceuticals Ltd.
4. IBN Sina Pharmaceutical Industry Ltd.
5. Renata Limited
6. Nuvista Pharma Ltd.
7. Drug International Limited
8. Beacon Pharmaceuticals Limited
9. Ambee Pharmaceuticals Ltd.
Table 02: Selected Companies from Sample
8.5 SOURCES AND METHOD OF DATA COLLECTION
Data were mainly collected from secondary sources. The secondary data was collected from
company annual report, different publications, and websites. In conducting the research,
some private limited companies were chosen. In that case, a questionnaire was prepared for
collecting the secondary data from different organizations.
8.6 ANALYSIS PLAN
In this research I have provided two types of data analysis; descriptive and quantitative
8.6.1 Descriptive Analysis
Descriptive analysis is the first step in this research. It helped to describe relevant aspects of
phenomena of cash conversion cycle and provide detailed information about each relevant
variable. SPSS software has been used for analysis of the different variables in this study.
SPSS for Windows is probably the most widely used computer software for analysis of
quantitative data for social scientists. SPSS, which originally was short for Statistical Package
for the Social Sciences, has been in existence since the mid-1960.



31 | P a g e
8.6.2 Causal Analysis
In this analysis two methods were applied. Firstly correlation models, specifically Pearson
correlation to measure the degree of association between different variables under
consideration. Secondly, to account for the effects of other construct, multivariate linear
regression is applied for the hypotheses. This measure provided more information on the
correlation structure between constructs and therefore facilitates a further step in hypotheses
testing.



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9.0 ANALYSIS AND INTERPRETATIONS
9.1 EMPIRICAL DATA RELATED TO PHARMACEUTICALS INDUSTRY IN
BANGLADESH
9.1.1 Descriptive Statistics
Descriptive statistics shows the average, and standard deviation of the different variables of
interest in the study. It also presents the minimum and maximum values of the variables,
which help in getting a picture about the maximum and minimum values a variable.
Table 03 provides descriptive statistics of the collected variables. All variables were
calculated using balance sheet (book) values. The book value was used because the
companies did not provide any market value related to the variables that we used in this
study. The explanatory variables are all firm specific quantities and there is no way to
measure these variables in terms of their 'market value.' Furthermore, when market values are
considered in such studies, there is always a rather legitimate question of the date for which
the 'market values' refer. This is rather arbitrary. Hence, 'book values' as of the date of the
financial reports is considered.
Descriptive Statistics of Pharmaceuticals Industry in Bangladesh
Variables Minimum Maximum Mean Std. Deviation
AR .180 92.803 30.799 25.457
AP 5.182 411.223 49.078 80.992
INV 28.918 937.168 295.4008 266.367
CCC 20.177 917.046 277.1203 237.447
LnS 18.001 23.151 21.0461 1.381
DR .096 .805 .5252 .2148
FFATA .003 .378 .1278 .0992
GrossPr .050 .922 .4675 .2814

Table 03: Descriptive Statistics



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Here,
Number of days accounts receivable (AR)= Average of accounts receivable / Sales*
365
Number of days inventory (INV) = Average of inventory / Cost of goods sold * 365
Number of days accounts payable (AP)= Average of accounts payable / Cost of goods
sold *365
Cash conversion cycle (CCC) = AR+ INV- AP
Natural Logarithm of sales (LOS) = ln (sale)
Debt ratio (DR)= Total debt/ Total assets
Fixed financial assets to total assets (FFATA) = Fixed financial assets/ Total assets
Gross operating profitability (GrossPr) = ( Sales Cost of goods sold)/ (Total assets
Financial assets)
Table 03 gives descriptive statistics for nine Pharmaceuticals Companies in Bangladesh for a
period of three years from 2007 to 2009 and for a total 27 firms- year observations.
Looking at this table, it is seen that the average value of net gross operating profitability is
46.75% of total assets, and standard deviation is 28.14%. This figure means that the value of
profitability can deviate from mean to both sides by 28.14%. The maximum and minimum
values of gross operating profitability are 9.22% and 5% respectively.
Information from descriptive statistics also indicates that the mean of cash conversion cycle
that used as a proxy to check the efficiency in managing working capital is 277 days and
standard deviation is 237 days.
The average of number of days accounts receivable is 31 days with standard deviation 26
days. Minimum time taken by a company to collect cash from customers is 1 day while the
maximum time for this goal is 93 days.
The average time of paying to suppliers is 49 days and the standard deviation is 81 days.
Maximum time taken from firm to pay for their suppliers is 411 days while minimum time
taken for this purpose is 5 days.


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Moreover, it takes an average 295 days in order to sell inventory with standard deviation of
266 days. Maximum time taken by a firm is 937 days, while minimum time to convert
inventory into sales is 29 day.
Natural logarithm of sales that measure the size of the firm is used as a control variable. From
Table 03 it is seen that the mean of logarithm of sales is 21.0461 and standard deviation is
1.381. The maximum value of log of sales for a firm in a year is 23.151 while the minimum
value is 18.001.
Debt ratio is used to check the relationship between debt financing and the profitability. It is
also used as a control variable. The result of descriptive statistics indicates that the average of
debt ratio is 52.52% with standard deviation of 21.48%. The maximum debt ratio financing
used by a firm is 80.5% which is unusual because of debt lager asset. However, it is also
possible if the equity of the firm is negative. While the minimum of debt ratio is 9.6%, this
means that there is a company that uses a little debt in its operation.
Finally, the fixed financial assets to total assets ratio is used to check the ratio of fixed
financial assets to the total assets of pharmaceuticals industry in Bangladesh. It is also
utilized as a control variable. The mean value for this ratio is 12.78% with a standard
deviation of 9.92%. The maximum value of financial assets to total assets is 37.8% and the
minimum value for this purpose is 3%.
9.1.2 Correlation Analysis
The descriptive statistics show the working capital measures and its variations among the
firms in sample industry. The correlation analysis is done to analyze the association between
the working capital management and profitability. To examine the relationship among these
variables, Pearson correlation coefficients are calculated.
The Table 04 shows the correlation matrix with Pearson correlation coefficients.




35 | P a g e


Table 04: Correlation Matrix


Correlation Matrix
GrossPr AR AP INV CCC LnS DR FFATA
GrossPr

Pearson
Correlation
1.00 -.437(*) .163 -.359(*) -.505(*) .273 -.253 .553(**)
Sig. (2-tailed)
.033 .447 .0085 .012 .196 .234 .005
AR

Pearson
Correlation
1.00 -.052 .185 .332 -.399 .277 -.541(**)
Sig. (2-tailed)
.810 .388 .113 .053 .190 .006
AP

Pearson
Correlation
1.00 .568(**) .290 .101 -.012 .019
Sig. (2-tailed)
.004 .169 .640 .955 .931
INV

Pearson
Correlation
1.00 .948(**) -.382 .254 -.414(*)
Sig. (2-tailed)
.000 .065 .230 .044
CCC

Pearson
Correlation
1.00 -.506(*) .319 -.529(**)
Sig. (2-tailed)
.012 .128 .008
LnS

Pearson
Correlation
1.00 -.832(**) .142
Sig. (2-tailed)
.000 .509
DR

Pearson
Correlation
1.00 .085
Sig. (2-tailed)
.692
FFATA

Pearson
Correlation
1
Sig. (2-tailed)



36 | P a g e
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
The first, starting with the analysis of correlation results between the average collection
periods (AR) and operating profitability. The result of correlation analysis shows a negative
coefficient -.437, with p value of .033. It shows that there is a significant at = 5%. This
means that if number of days accounts receivable increase, it will make operating profitability
decrease. Correlation result between inventory turnover in days (INV) and the operating
profitability also indicate the same type of result. The correlation coefficient is -.359 and p-
value t is .0085. It has significant at significant at = 5%. It explains when the firm takes less
time in selling inventory will negatively affect its profitability of the firm.
On the other hand, correlation result between number of days accounts payable (AP) and the
gross operating profitability is a positive. The correlations coefficient is .163 and p value is
.447.
The cash conversion cycle that is used as a comprehensive measure of working capital
management also has a negative correlation with the gross operating profitability with
coefficient -.505 and p value is .012. It also shows a significant at = 5%. This demonstrates
that paying suppliers longer and collecting payments from customers earlier, and keeping
products in stock less time, are all associated with an increase in the firms profitability.
Result from analysis also shows a positive correlation between natural logarithm of sales that
is used to measure the size of firm and the operating profitability. Its coefficient correlation is
.273 with p value 196. This shows that as size of the firm increases, it will not significantly
affect its profitability.
From the analysis, it is found that there is a positive relationship between the fixed financial
assets to totals assets and gross operating profitability. Its coefficient correlation is .553with p
value 0.005. It shows highly significant at = 1%. It explains that as fixed financial assets to
totals assets increases, gross operating profitability also increases.
Result from the analysis also shows a negative correlation between debt ratio that is used to
measure the leverage of firm and the operating profitability. Its coefficient correlation is -.253
with p value .234. This shows that as the debt ratio increases, it will not significantly affect
the profitability.


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To sum, results from analyzing of correlations indicate that there is a negative between cash
conversion cycle, number of days accounts receivable, number of days inventories with the
profitability of firms are consistent with the research of Deloof (2003) and Raheman and Nasr
(2007). However, in their study, they indicated a negative relationship between number of
days accounts payable and profitability. Contrast, this research shows a positive relationship
between number of days accounts payable and profitability. This analysis suits with result of
Lazaridis and Tryfonidis (2006).
9.2 Empirical data related to Incepta Pharmaceuticals ltd.
9.2.1 Descriptive Statistics
Descriptive Statistics OF IPL
Variables Sector Mean
Std.
Deviation Minimum Maximum
Receivables
Collection Period
Incepta
6.9460 1.9855 5.5420 8.3500
Industry
30.5317 3.3399 26.7917 33.2170
Payable
Deferral Period
Incepta
248.2430 230.4885 85.2630 411.2230
Industry
50.6941 24.1713 34.0180 78.4147
Inventory
Conversion Period
Incepta
601.6960 474.4290 266.2240 937.1680
Industry
302.6730 97.4150 240.2553 414.9287
Cash
Conversion Cycle
Incepta
360.4000 245.9274 186.5030 534.2970
Industry
282.5155 70.4567 233.821 363.3057
Gross
Operating Profitability
Incepta
.6235 .4221 .3250 .9220
Industry
.4717 .0507 .4247 .5254
Table 05: Comparison between statistics of Company and Industry
Table 05 gives descriptive statistics for Incept Pharmaceuticals Ltd. as well as
pharmaceuticals industry in Bangladesh for a period of three years from 2007 to 2009.
From this table, it is seen that the average of number of days accounts receivable of IPL is
almost 7 days with standard deviation 2 days. Minimum time taken by IPL to collect cash
from customers is 5 days while the maximum time for this goal is 8 days. On the hand,
average the receivable collection period of the industry is 31 days with a standard deviation
of 4 days.


38 | P a g e
The average time of paying to suppliers is 248 days and the standard deviation is 230 days.
Maximum time taken from firm to pay for their suppliers is 411 days while minimum time
taken for this purpose is 85 days. The average payable deferral period for the industry is 51
days and the standard deviation is 24 days.
The average time to convert inventories into sales for the pharmaceuticals industry is 302
days and the standard deviation is 98 days. On the other hand, IPL takes an average 601 days
in order to sell inventory with standard deviation of 474 days. Maximum time taken by IPL is
937 days, while minimum time to convert inventory into sales is 266 days.
In case of Incepta Pharmaceuticals Ltd. the mean of cash conversion cycle that used as a
proxy to check the efficiency in managing working capital is 360 days and standard deviation
is 245 days. On the other hand, the mean of cash conversion cycle is 283 days and the
standard deviation is 71 days for the pharmaceuticals industry.
Information from descriptive statistics also indicates that IPLs average value of net gross
operating profitability is 62.35%, and standard deviation is 42.21%. This figure means that
the value of profitability can deviate from mean to both sides by 42.21%. The maximum and
minimum values of gross operating profitability are 92.20% and 32.50% respectively. The
industrys average gross profitability is 47.17% and the standard deviation is 5.07%.



39 | P a g e
10.0 SUMMARY OF FINDINGS
10.1 Findings related to pharmaceuticals industry in Bangladesh
The findings that are related to sampled pharmaceuticals industry in Bangladesh are
described bellow according to the components of working capital management.
10.1.1 Receivable Collection Period
An interesting data is found in case of a firm while conducting this research which is the
minimum days to collect the payment from the customers is 0.180. It indicates that this firm
is so effective in collection the payments or the firm is not willing to provide products in
credits.
From Pearson Correlation Matrix it was found that there is a negative relationship between
average collection period and the profitability of the firm. If number of days accounts
receivable increase, it will make operating profitability decrease. The regression analysis also
sketched the same type result of Pearson Correlation. This concludes that there is a negative
impact of receivables collection period on profitability in the pharmaceuticals industry in
Bangladesh.
10.1.2 Payable Deferral Period
There is a vast difference between the minimum level and maximum level of Payable
Deferral Period in pharmaceuticals industry in Bangladesh. Maximum time taken from firm
to pay for their suppliers is 411 days while minimum time taken for this purpose is 5 days. It
indicates that there is a firm which takes too much time to pay the vendors and there is a firm
which pays the vendors in shorter period of time.
In conducting the regression analysis, it is found that the payable deferral period positively
affects the profitability of the firm.
10.1.3 Inventory Conversion Period
Like number of days accounts payable, there is a massive difference between the minimum
and maximum level of inventory conversion period in pharmaceuticals industry in
Bangladesh. It indicates that there is a firm which takes much time in stock out the
inventory.


40 | P a g e
The Pearson Correlation and regression analysis shows that when the firm takes more in
selling inventory will adversely affect its profitability of the firm.
10.1.4 Cash Conversion Cycle
Cash conversion cycle that used as a proxy to check the efficiency in managing working
capital is 277 days and standard deviation is 237 days which is too long for a industry. This
shows the lack of efficiency.
There is a negative effect of cash conversion cycle on profitability in the pharmaceuticals
industry in Bangladesh which is found both from the Pearson Correlation and regression
analysis.
10.2 Findings related to Incepta Pharmaceuticals ltd.
A comparison has been made between Incepta Pharmaceuticals Ltd. and the pharmaceuticals
industry in Bangladesh. The findings of these comparisons are given here.
10.2.1 Receivable Collection Period
The receivables collection period of Incepta Pharmaceuticals Ltd. is almost 7 days which less
than the average of the pharmaceuticals industry in Bangladesh. It means that the company is
so efficient in collecting their receivables. The result of ANOVA test indicates that there is a
significant association of collection policy between Incepta Pharmaceuticals Ltd. and the
pharmaceuticals industry in Bangladesh.
10.2.2 Payable Deferral Period
The payable deferral period of pharmaceuticals industry in Bangladesh is 51 days whereas
IPL has the average of 249 days. This indicates that IPL takes time to pay its customers.
There is no significant association payment policy between Incepta Pharmaceuticals Ltd. and
the pharmaceuticals industry in Bangladesh which is found from the result of SPSS.
10.2.3 Inventory Conversion Period
The average days to inventories into sales of IPL are 602 day. On the other hand, the industry
average is 302 days. This shows that IPL takes more time to stock out the inventory. The
result of SPSS explains that there is no association of inventory policy between Incepta
Pharmaceuticals Ltd. and the pharmaceuticals industry in Bangladesh.


41 | P a g e
10.2.4 Cash Conversion Cycle
The cash conversion cycle of IPL is higher than the pharmaceuticals industry in Bangladesh.
It implies that IPL takes much time to convert its resources into cash. The SPSS result
indicates that there is no significant association of cash conversion cycle of Incepta
Pharmaceuticals Ltd. with the pharmaceuticals industry in Bangladesh.



42 | P a g e
11.0 CONCLUSION AND RECOMMENDATIONS

11.1 Conclusions
Working capital management is important part in firm financial management decision. The
ability of the firm to operate continuously for longer period depends on how they deal with
working capital. The optimal of working capital management is could be achieve by firm that
manage the tradeoff between profitability and liquidity. The purpose of this study is to
investigate the relationship between working capital management and firm profitability. Cash
conversion cycle is used as measure of working capital management.
This paper support for existing literatures such as Shin and Soenen (1998), Deloof (2003),
Raheman and Nars (2007) and who found a strong negative relationship between the
measures of working capital management including the number of days accounts receivable,
number of days inventories and cash conversion cycle with corporate profitability. Moreover,
this paper also adds to finding of Lazaridis and Tryfonidis (2006) who claimed that there was
a positive relationship between number of days accounts payable and profitability.
The negative relationship between corporate profitability that measured by gross operating
profitability and cash conversion cycle that used as measuring efficiency of working capital
management shows that cash conversion cycle is longer, profitability is smaller. Result from
analysis of relationship between working capital management and profitability on
pharmaceuticals industry in Bangladesh also indicates that there is a negative between
number of days accounts receivable, number of days inventories and profitability. So it can
be concluded that if the firms properly manage their cash, accounts receivables and
inventories in a proper way, this will ultimately increase the profitability.
This would also assist policy-makers and educators to identify the requirements of, and
specific problems faced. However, the sample size and the period of time for this study is
compared to some of the previous studies made about the relationship between working
capital management and profitability (Deloof, 2003, Shin and Soenen, 1998). So, the sample
does not highly stand for population. Moreover, the study only refers to internal factors but
not consider external factors as industry dummy, level of economic activity. Future research
could further explore in order to overcome these limits.



43 | P a g e
11.2 Recommendations
From the research, it is found that all the components of working capital have a significant
effect on the profitability in the pharmaceuticals industry in Bangladesh. Again in case of
Incepta Pharmaceuticals Ltd. , only collection policy has a significant association with the
pharmaceuticals industry in Bangladesh. The payment policy, inventory policy, and cash
conversion cycle have no significant association with the pharmaceuticals industry in
Bangladesh.
The cash conversion cycle for both the pharmaceuticals industry in Bangladesh and Incepta
Pharmaceuticals Ltd. is too high. As the cash conversion cycle has the negative relationship
with the profitability, this cycle should be short as much as possible without hurting the
operations, This would improve profits, because the longer the cash conversion cycle, the
greater the need for external financing, and that financing has a cost.
The following ways can be followed to improve the cash conversion cycle.
Cash conversion cycle can be shortened by reducing the inventory conversion period
by processing and selling goods more quickly. The inventory conversion period for
IPL and the industry is too long. So, the managers can increase profitability by
stocking out inventories more quickly.
By lengthening the payables deferral period by slowing down the firms own
payments, cash conversion cycle will be shortened. IPLs payable deferral period is
already too high so it should not be revised. On the other hand, in case of industry,
some firms can take time to pay its vendors.







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REFERENCES


1. IMS Health Survey- http://pps.imshealth.com
2. Official Website- http://www.inceptapharma.com/
3. General Information- www.wikipedia.org
4. Financial Data from Sample firm Websites-
www.squarepharma.com.bd/, http://beximco-pharma.com,
www.ibnsinapharma.com/, www.renata-ltd.com/

BIBLIOGRAPHY

Afza, T., & Nazir, M. (2009). Impact of aggressive working capital management policy on
firms' profitability. The IUP Journal of Applied Finance, 15(8), 20-30.

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Abbreviation

API= Active Pharmaceutical Ingredient
QAD=Quality Assurance Department
IPL=Incepta Pharmaceuticals Ltd.
WC=Working Capital
WCM=Working Capital Management
CCC=Cash Conversion Cycle
AR= Number of Days Accounts Receivable
AP= Number of Days Accounts Payable
INV= Number of Days Inventory
DR=Debt Ratio
LnS=Logarithm of Sales
FFATA= Fixed Financial Assets to Total Assets