Page 1 of 28
Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 07
July 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 1
The impact of working capital management on
profitability of elite pharmaceuticals sector in
Bangladesh
Mahbubur Rahaman1
Israth Rabbi2
Morshedul Alam3
1
Adjunct Faculty, Department of Business administration, International Islamic University
Chittagong. Email: mahbubur.iiuc@gmail.com
2
Student, Masters of Business Administration, Email: mdisrathrabbi@gmail.com
3
Adjunct Faculty, Department of Business administration, International Islamic University
Chittagong. Email: morshedulalam_bappy@yahoo.com
Any financial institution they can use working capital management as an approach to influence their
profitability. This paper studies the impact of Working capital is considered as the life blood of
organization, which has significant contribution to internal and external analysis because of its close
relationship with the current day-to-day operations of a business. The most objective of this study is to
work out the Impact of assets Management on profitableness of five elite pharmaceutical corporations in
Asian nation over an amount of 5 years 2012 to 2016 out whether or not there's any relation between
assets and profitableness. The results show that, working capital management does affect firm value.
Effective management of working capital resulted in high profitability and poor or inefficient
management of working capital resulted in low profitability.
Key words: Impact, working capital management, profitability, elite pharmaceutical
companies, Bangladesh
Introduction of the Study
Without funds it's impracticable to open or operate any firm whether or not it's producing,
mercantilism or industry. The task of feat funds is that the initial stage of fixing a
replacement venture or organization. However it's simple to amass fund instead of to
keep up the fund. Here maintain the fund suggests that, the method of victimization the
fund. The success of the business depends on the effective and economical utilization of
the funds.
1
Adjunct Faculty, Department of Business administration, International Islamic University Chittagong.
Email: mahbubur.iiuc@gmail.com
2
Student, Masters of Business Administration, Email: mdisrathrabbi@gmail.com
3 Adjunct Faculty, Department of Business administration, International Islamic University Chittagong.
Email: morshedulalam_bappy@yahoo.com
Page 2 of 28
Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 07
July 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 2
In any typical organization, various manager have to be compelled to accomplish 3 basic
functions. Such as; taking funding choices, taking investment choices and finally not the
smallest amount, taking dividend choices. If we have a tendency to deeply concentrate
these 3 functions, we are able to simply accord in a very call and is that, among these,
funding choices is that the most tough call a manager have to be compelled to undertake.
Question is arisen, why it's tough decision? A company invests his funds once adequate
quantity of fund is obtainable when meeting his day to day expenses or operations to earn
further profit. On the opposite hand, dividend is asserted once profit gained. While not
profit there's no method of declaration any dividend. However managers have to be
compelled to undertake funding call whether or not there have been shortage or excess
funds were out there. It’s simple once there was adequate quantity of funds were out
there. However just in case of shortage funds, the manager falls in difficulties. However
in each case, he had to supply call. Supported his call, success or failure depends.
Manager will use his fund each for future and short-run purpose. Why manager have to
be compelled to take call for future purpose? The solution is that, to amass plus for the
organization. On the opposite hand, short term call have to be compelled to undertake to
accomplish day to day operation, smoothly. Basically, these short terms call is thought as
assets. In our study, we have a tendency to solely specialize in these short-run choices
Traditionally, working capital has been defined as the firm’s investment in current assets.
Working capital decisions are of tremendous important for any firm, as they affect the
business’s liquidity position.
There are two major concepts of working capital- net working capital and gross working
capital. When accountants use the term working capital, they generally refer to net
working capital, which is the difference between current assets and current liabilities.
This is one measure of the extent to which the firm is protected from liquidity problems
or crisis. A liquidity crisis exists when someone needs cash and cannot quickly sell assets
to generate cash.
Financial analysis, on the other hand, means current assets when they speak of working
capital. Therefore, their focus is on gross working capital. Because it does make sense for
the financial manager to be involved with providing the correct amount of current assets
for the firm at all times, we will adopt the concept of gross working capital.
There is another concept of working capital- net operating working capital (NOWC).
NOWC is defined as operating current assets minus operating current liabilities.
Generally, NOWC is equal to cash, Accounts receivable, and inventories less accounts
payables and accruals.
Page 3 of 28
Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 07
July 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 3
Simply, working capital management refers to the management of working capital
components. What are these components? Basically 4 components are available in
working capital. These are;
Management of cash, Receivables management, management of inventories and finally
management of account payable. Success or failure basically depends on these
components. The effective and efficient management of these components is mandatory
to be successful in this competitive world. Otherwise failure is compulsory.
A firm has to maintain an adequate level of working capital to run its operations
smoothly and effectively. It should be adequate in sense that it shall not be more than the
requirements nor it shall be less than the requirements. Both the excessive as well as
inadequate working capital positions are dangerous for the firm’s point of view.
We know that the current liabilities are met out of the current assets. So, the level of
current assets shall be sufficient enough to meet the current liabilities. Excessive working
capital refers to the position where the level of current assets is much higher to meet
current liabilities. The excessive capital has opportunity cost for the firm, as this
excessive capital remains idle in the firm, which earns no profit for the firm. If these
funds shall be invested in some profitable project it adds the profitability of the company.
On the other hand, inadequate working capital refers to the position where the current
assets are not sufficient enough to meet the current liabilities. Such type of position may
be harmful to the firm as it may interrupt the production and sales of the company, which
ultimately affects the profitability of the company. Moreover, if the liquidity position of
the firm is not adequate enough to meet its current liabilities, it may affect its credibility
in the market.
Therefore, an enlightened management should maintain the right amount of working
capital on a continuous basis. The amount of working capital shall be maintained at such
level, which is adequate for it to run its business operations, neither excessive nor
inadequate. This level of working capital is called “optimum working Capital”
Profitability is the ability of a company to use its resources to generate revenues in excess
of its expenses. In other words, this is a company’s capability of generating profits from
its operations. There is a strong relationship between profitability and effective
management of working capital. What is that relation? We know, profit is determined by
matching revenue against cost associated with it (Salauddin 2001). Working capital can
be recognized either as expenses or investment. If the firm minimizes it expenses behind
working capital, it will increase the amount of profit because profit is determined by
deducting expenses from the revenue incurred in generating that revenue. If a firm
minimizes its investment in current assets, the resulting funds can be invested in value
