Working Capital Management
EFFECT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF FIRMS IN MALAYSIA
( M. A., Zariyawati a, M. N., Annuar b and A.S., Abdul Rahim c a ,b & c Univeristi Putra Malaysia, Malaysia.
ABSTRACT Working capital management is important part in firm financial management decision. An optimal working capital management is expected to contribute positively to the creation of firm value. To reach optimal working capital management firm manager should control the trade off between profitability and liquidity accurately. 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 study is used panel data of 1628 firm-year for the period of 1996-2006 that consist of six different economic sectors which are listed in Bursa Malaysia. The coefficient results of Pooled OLS regression analysis provide a strong negative significant relationship between cash conversion cycle and firm profitability. This reveals that reducing cash conversion period results to profitability increase. Thus, in purpose to create shareholder value, firm manager should concern on shorten of cash conversion cycle till accomplish optimal level.
Keywords: Working Capital Management, Cash Conversion Cycle, Profitability and Liquidity
INTRODUCTION
Working capital is 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. Further, also act as a restrain in financial performance, since it does not contribute to return on equity (Sanger, 2001). Though, it should be critical for to a firm to sustain their short term investment since it will ensure the ability of firm in longer period.
The crucial part in managing working capital is
( M. A., Zariyawati a, M. N., Annuar b and A.S., Abdul Rahim c a ,b & c Univeristi Putra Malaysia, Malaysia.
ABSTRACT Working capital management is important part in firm financial management decision. An optimal working capital management is expected to contribute positively to the creation of firm value. To reach optimal working capital management firm manager should control the trade off between profitability and liquidity accurately. 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 study is used panel data of 1628 firm-year for the period of 1996-2006 that consist of six different economic sectors which are listed in Bursa Malaysia. The coefficient results of Pooled OLS regression analysis provide a strong negative significant relationship between cash conversion cycle and firm profitability. This reveals that reducing cash conversion period results to profitability increase. Thus, in purpose to create shareholder value, firm manager should concern on shorten of cash conversion cycle till accomplish optimal level.
Keywords: Working Capital Management, Cash Conversion Cycle, Profitability and Liquidity
INTRODUCTION
Working capital is 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. Further, also act as a restrain in financial performance, since it does not contribute to return on equity (Sanger, 2001). Though, it should be critical for to a firm to sustain their short term investment since it will ensure the ability of firm in longer period.
The crucial part in managing working capital is
References: Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in An Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Howorth, C., & Westhead, P. (2003). The focus of working capital management in UK small firms. Management Accounting Research 14, 94-111. Lamberson, M. (1995). Changes in working capital of small firms in relation to changes in conomic activity Lazaridis, I., & Tryfonidis, D. (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. Lyroudi, K., & Lazaridis, Y. (2000). The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens, from http://ssrn.com/paper=236175 Moyer, R Shin, H. H., & Soenen, L. (1998). Efficiency of working capital management and corporate profitability. Financial Practice and Education, 8(2), 37-45. Raheman, A. & Nasr, M. (2007) Working capital management and profitability – case of Pakistani firms. International Review of Business Research Papers, 3 (1), 279-300. Sanger, J. S. (2001). Working capital: a modern approach. Financial Executive, 69. Smith, K. V. (1980). Profitability and liquidity trade off in working capital management. In Reading on the Management of Working capital (pp. 549-562). St. Paul: West Publihing Co. Solawu, R. O. (2006). Industry Practice and Aggressive Conservative Working Capital Policies in Nigeria. European Journal of Scientific Research, 13(3). Weinraub, H. J. & Visscher, S. (1998). Industry practice relating to aggressive conservative working capital policies Padachi, K. (2006). Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Peel, M. L. & Wilson, N.(1996). Working capital and financial management practises in small firm sector. International Small and Business Journal, 14(2), 52-68.