Effects of Working Capital Management on Profitability of Manufacturing Firms of Pakistan

The aim of this paper is to inspect the tendencies in working capital management and its impact on firms' performance of Pakistani firms listed on Karachi Stock Exchange. Return on Asset (measure of profitability) is used as a dependent variable to investigate the relationship between corporate profitability and working capital management for a sample of 120 manufacturing firms for a period of 7 years (2008-2014), using panel data analysis. Accounts Receivable Days (AR) Inventories Days, Account Payable Days (AP) and Cash Conversion Cycle (CCC) are used as key variables of the study. Results of the regression analysis display that high investment in account receivables and inventories is linked with lower profitability. We found significant negative relation between Profitability and Accounts receivables days, Inventories Days, Account Payable days and Cash conversion cycle. We found that the components of working capital have strong influence on the profitability of manufacturing firms of Pakistan. Our results shows that well-functioning working capital management plays an instrumental role in profitability and growth of firms and firms can enhance their profitability through efficient management of the components of working capital.