Literature Review

The current study contributes to the literature by examining impact of ratio analysis on the operating performance and growth of the company. The study also sheds light on the relationship of ratio analysis with debt level, firm risk, and industry. Using a sample of a manufacturing, the study finds a significant positive association between higher levels of accounts receivable and operating performance. The study further finds that maintaining control (i.e. lower amounts) over levels of cash and securities, inventory, fixed assets, and accounts payables appears to be associated with higher operating performance, as well. We find that the firms which are experiencing unusually high growth tend not to perform as well as those with low to moderate growth.

Further firms which are experiencing high growth tend to hold higher levels of cash and securities, inventory, fixed assets, and accounts payables. These findings tend to suggest that firms are willing to sacrifice performance (accept low or negative operating returns) to increase their growth levels. The higher level of growth is also associated with higher operating and financial risk. The findings of this study suggest that perhaps the firms should stay more focused on their operating performance than on maintaining high growth levels. The following section presents a brief literature review. Next, the research method is described, including some information about

the annual Working Capital Management Survey published by various reports and magazine. Findings are then presented and conclusions are drawn. Many researchers have studied working capital from different views and in different environments. The following are some useful research:

Rehman (2006) investigated the impact of working capital management on the profitability of 94 Pakistani firms listed at Islamabad Stock Exchange (ISE) for a period of 1999-2004. He studied the impact of the different variables of working capital management including Average Collection Period, Inventory Turnover in Days, Average Payment Period and Cash Conversion Cycle on the Net Operating Profitability of firms. He concluded that there is a strong negative relationship between above working capital ratios and profitability of firms. Furthermore, managers can create a positive value for the shareholders by reducing the cash conversion cycle up to an optimal level. Similar studies on working capital and profitability includes Smith and Begemann (1997), Howorth & Westhead (2003), Ghosh & Maji (2004), Eljelly (2004), and Lazaridis and Tryfonidis (2006).

Dr Ioannis Lazaridis, Msc Dimitrios Tryfonid( 2006) studied the relationship of corporate profitability and working capital management. The purpose of their paper was to establish a relationship that is statistical significant between profitability, the cash conversion cycle and its components for listed firms in the ASE. The results of their

research showed that there is statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. Moreover managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables, inventory) to an optimum level.

Weinraub And Visscher (1998) had discussed the issue of aggressive and conservative working capital management policies by using quarterly data for a period of 1984 to 1993 of US firms. Their study looked at ten diverse industry groups to examine the relative relationship between their aggressive / conservative working capital policies. The authors had 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 ten-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. Deloof( 2003) discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable, inventories and accounts payable of

Belgian firms. On basis of these results he suggested that managers could create value for their shareholders by reducing the number of days accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills. Filbeck and Krueger (2005) highlighted the importance of efficient working capital management by analyzing the working capital management policies of 32 non-financial industries in USA. According to their findings significant differences exist between industries in working capital practices over time. Moreover, these working capital practices, themselves, change significantly within industries over time. Similar studies are conducted by Gombola and Ketz (1983), Soenen (1993), Maxwell et al. (1998), and Long et al. (1993). Abdul Raheman* and Mohamed Nasr ** 2007 Working Capital Management has its effect on liquidity as well on profitability of the firm. In this research, they have selected a sample of 94 Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999 2004, they have studied the effect of different variables of working capital management including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Pakistani firms. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio have been used as control variables. Pearsons correlation, and

regression analysis (Pooled least square and general least square with cross section weight models) are used for analysis. The results show that there is a strong negative relationship between variables of the working capital management and profitability of the firm. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. They find that there is a significant negative relationship between liquidity and profitability. They also find that there is a positive relationship between size of the firm and its profitability. There is also a significant negative relationship between debt used by the firm and its profitability. Lamberson (1995) studied 50 small firms for a period of 19801991 and used economic indicators as independent variables and financial ratios as dependent variables to explore the relationship between changes in working capital position and changes in the level of economic activity. The findings show that liquidity increased slightly for the sampled firms during economic expansion with no notable change in liquidity during economic slowdowns.

Mehmet SEN, Eda ORUC 2009 Their study aimed to determine the relationship between efficiency level of firms being traded in ISE (Istanbul Stock Exchange) in working capital management and their return on total assets. They tried to explain the relationship between different indicators relating to efficiency in working capital

management and their return on total assets through two models. According to the results in terms of both all the firms involved in the study and sectors there is a significance negative relationship between cash conversion cycle, net working capital level, current ratio, accounts receivable period, inventory period and return on total assets. In a regional study, Pandey and Parera (1997) provided an empirical evidence of working capital management policies and practices of the private sector manufacturing companies in Sri Lanka. The information and data for the study were gathered through questionnaires and interviews with chief financial officers of a sample of manufacturing companies listed on the Colombo Stock Exchange. They found that most companies in Sri Lanka have informal working capital policy and company size has an influence on the overall working capital policy (formal or informal) and approach (conservative, moderate or aggressive). Moreover, company profitability has an influence on the methods of working capital planning and control. Shin and Soene (1998) highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. The way working capital was managed had a significant impact on both profitability and liquidity. The relationship between the length of Net Trading Cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital intensity. They found a strong negative relationship between lengths of the firms net trading Cycle and its

profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock returns. All the above studies provide us a solid base and give us idea regarding working capital management and its components. They also give us the results and conclusions of those researches already conducted on the same area for different countries and environment from different aspects. On basis of these researches done in different countries, we have developed our own methodology for research.

BIBLIOGRAPHY Articles
1. Afza T and MS Nazir (2007). Working Capital Management Policies of
Firms: Empirical Evidence from Pakistan. Presented at 9th South Asian Management Forum (SAMF) on February 24-25, North South University, Dhaka, Bangladesh.

2. Deloof, M. 2003. Does Working Capital Management Affects Profitability of Belgian Firms?, Journal of Business Finance & Accounting, Vol 30 No 3 & 4 pp. 573 587

3. Eljelly AMA (2004). Liquidity-Profitability Tradeoff: An Empirical Investigation in an Emerging Market. International Journal of Commerce and Management 14(2): 48-61.

4. Filbeck G and T Krueger (2005). Industry Related Differences in Working Capital Management. Mid-American Journal of Business 20(2): 11-18.

5. Ghosh SK and SG Maji (2004). Working Capital Management Efficiency: A Study on the Indian Cement Industry. The Management Accountant 39(5): 363-372.

6. Gombola MJ and JE Ketz (1983). Financial Ratio Patterns in Retail and Manufacturing Organizations. Financial Management12 (2): 45-56.

7. Howorth C and P Westhead (2003). The Focus of Working Capital Management in UK Small Firms. Management Accounting Research 14(2): 94-111.

8. Lamberson M (1995). Changes in Working Capital of Small Firms in Relation to Changes in Economic Activity. Mid-American Journal of Business 10(2): 45-50.

9. Lazaridis I and D Tryfonidis (2006). Relationship between Working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Financial Management and Analysis 19 (1): 26-35.

10. Long MS, IB Malitz, and SA Ravid (1993). Trade Credit, Quality Guarantees, and Product Marketability. Financial Management 22: 117127.

11. Mehmet Sen, Eda Oruc 2009: Relationship between Efficiency Level of Working Capital Management and Return on Total Assets in Ise International Journal of Business and Management Vol 4, No. 10 Oct 2009

12. Pandey IM and KLW Parera (1997). Determinants of Effective Working Capital Management - A Discriminant Analysis Approach. IIMA Working Paper # 1349. Research and Publication Department Indian Institute of Management Ahmedabad India.

13. Rehman A (2006). Working Capital Management and Profitability: Case of Pakistani Firms (Unpublished Dissertation). Pakistan: COMSATS Institute of Information Technology Islamabad.

14. Smith MB and E Begemann (1997). Measuring Association between Working Capital and Return on Investment. South Africa Journal of Business Management 28(1): 1-5

15. Soenen LA (1993). Cash conversion cycle & corporate profitability. Journal of Cash Management 13(4): 53-58

16. Shin, H.H and Soenen, L. 1998. Efficiency of Working Capital Management and Corporate Profitability, Financial Practice and Education, Vol 8 No 2, pp 37-45

Books
Chandra, P. (2006). Financial Management. Chennai: Tata McGraw Hill. Jain, K. &. (2011). Financial Management. Noida: Tata McGraw Hill. Kapil. (2011). Financial Management. New Delhi: Pearson. Pandey. (2009). Financial Management. Delhi: Vikas. Periasamy, P. (2008). Financial Management. Noida: Tata McGraw Hill. Tulsian, C.A (2012). (ADVANCED MANAGEMENT ACCOUNTING). S. CHAND.

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