Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Impact of Working Capital Policies on Financial Performances in Some
Selected Private Manufacturing Firms in Bangladesh
Jahirul Hoque
1. Introduction
The aim of this research paper was to investigate the impact of working capital policies on financial
performances in some selected private manufacturing firms in Bangladesh. The importance of efficient
working capital management cannot be denied in any type of business organizations. The extensive
literature indicates that it has impacts directly on corporate liquidity (Kim, Mauer and Sherman 1998; and
Opler, Pinkowitz, Stulz, and Williamson 1999) and profitability (e.g., Shin and Soenen 1998; Deloof 2003;
Lazaridis and Tryfonidis 2006).
According to Wikipedia, Working capital (abbreviated WC) is a financial metric which
represents operating liquidity available to a business, organization or other entity, including governmental
entity. Along with fixed assets such as plant and equipment, working capital is considered a part of
operating capital. A company can be endowed with assets and profitability but short of liquidity if its
assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is
able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital involves managing inventories,
accounts receivable and payable, and cash. Working capital management involves four major parts;
firstly the cash management which identifies the cash balance which allows for the business to meet day
to day expenses; secondly, inventory management which identifies the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials—and minimizes reordering costs—
and hence increases cash flow; thirdly, debtors management which identifies the appropriate credit
policy and finally the short term financing which identifies the appropriate source of financing.
The literature on working capital studies examines the impact of the business cycle on working capital.
An early study by Merville and Tavis (1973) examined the relationship between firm working capital
policies and business cycle. More recent studies have investigated the degree to which firms’ reliance on
bank borrowing to finance working capital is cyclical (Einarsson and Marquis 2001), the significance of
firms’ external dependence for financing needs on the link between industry growth and business the
cycle in the short term (Braun and Larrian 2005), and the influence of business indicators on the
determinants of working capital management (Chiou, Cheng, and Wu 2006). These studies have
independently linked working capital to corporate profitability and the business cycle. No study, to the
best of our knowledge, has examined the impact of working capital policies on financial performances of
the manufacturing firms of Bangladesh. There is, therefore, a substantial gap in the literature which this
paper seeks to fill. Firms may follow moderate working capital policies as well as an optimal level of
investment in working capital that maximizes their value. In such a context, examining the type of
working capital financing policies and that of working capital investment policies is of paramount
_____________________________________________________________________________
Prof. Jahirul Hoque, Faculty of Business Administration, Eastern University, Bangladesh. Email: hjahirul@yahoo.com,
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
importance in the private manufacturing firms in Bangladesh. Moreover, the question of measuring the
impact of these policies on the financial performances of the firms is also imperative in the context of the
sample firms.
Working capital policies are mainly of two types viz; working capital investment policy and working capital
financing policy. Working capital investment policy refers to the determination of the amount of working
capital to be invested in various current assets viz; inventory, cash, receivables, marketable securities,
prepaid expenses etc. That is, the allocation of total working capital into the major components of
working policy is known as working capital investment policy. But working capital financing policy refers
to the policy which is applied in financing the working capital. That is, in financing the working capital
whether the firm would use the hedging policy, conservative policy or moderate policy.
2. Objectives of the study
The study aimed at the following objectives which were the questions whose answers we were
investigating throughout the paper:
i.
To identify the existing short term financial objectives and policies of the sample firms
ii. To examine the factors influencing inventory, receivables and cash policies in the sample firms
iii. To analyze the actual positions of the working capital in the sample firms during the study period
2007 to 2011.
iv.
To evaluate the working capital financing and investment patterns in the sample firms in order to
measure the effectiveness of the working capital policies during the study period
v.
To measure the relationship as well as impact of working capital policies on financial
performances measured in terms of Return on Equity (ROE).
3. Literature Review
Many firms have invested significant amounts in working capital and a number of studies have examined
the determinants of this investment. For example Kim, Mauer and Sherman (1998) and Opler, Pinkowitz,
Stulz, Williamson (1999), Chiou et al. (2006) and D’Mello, Krishnaswami and Larkin (2008) find that the
availability of external financing is a determinant of liquidity. Thus restricted access to capital markets
requires firms to hold larger cash reserves. Other studies show that firms with weaker corporate
governance structures hold smaller cash reserves (Harford, Mansi, and Maxwell 2008). Furthermore
firms with excess cash holding as well as weak shareholder rights undertake more acquisitions.
However there is a higher likelihood of value-decreasing acquisitions (Harford 1999). Kieschnick and
LaPlante (2012) provide evidence linking working capital management to shareholder wealth. They find
that the incremental dollar invested in net operating capital is less valuable than the incremental dollar
held in cash for the average firm. The findings reported in the paper further suggest that the valuation of
the incremental dollar invested in net operating working is significantly influenced by a firm’s future sales
expectations, its debt load, its financial constraints, and its bankruptcy risk.
A number of researchers have investigated whether there was any significant relationship between
efficient working capital policy and profitability of firms. For example Kieschnick and LaPlante (2012)
provided evidence linking working capital management to shareholder wealth. They found that the
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
incremental dollar invested in net operating capital is less valuable than the incremental dollar held in
cash for the average firm. The findings reported in the paper further suggest that the valuation of the
incremental dollar invested in net operating working is significantly influenced by a firm’s future sales
expectations, its debt load, its financial constraints, and its bankruptcy risk. In a comprehensive study,
Shin and Soenen (1998) documented a strong inverse relationship between working capital efficiency
and profitability across U.S. industries. This inverse relationship is supported by Deloof (2003), Lazaridis
and Tryfonidis (2006), and Garcia-Teruel and Martinez-Solano (2007) for Belgian non-financial firms,
Greek listed firms, and Spanish small and medium size enterprises (SME), respectively. There are,
however, significant divergences in the results relating to the effect of the various components of working
capital on profitability. For example, whereas Deloof (2003) find a negative and statistically significant
relationship between account payable and profitability, Garcia-Teruel and Martinez- Solano (2007) find
no such measurable influences in a sample of Spanish SMEs.
Zubairi H. J. (2010), in his literature concluded that, a firm can enhance its profitability either by
increasing its currents assets or by reducing its current liabilities. He also mentioned that, the firm size is
found to have a significant and direct effect on profitability of automobile firms in Pakistan. The key factor
for improving industry profitability in the future appears to be increase in capacity utilization which can be
got further impetus if interest rates also decline. Lazaridis D. I. and Tryfonidis M. D. (2005) mentioned
that there is statistical significance between profitability, measured through gross operating profit, and the
cash conversion cycle. 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.
4. Research Methodology
4.1 Target population
The target population for fulfilling the research objectives was the private manufacturing firms operating
in Bangladesh which are enlisted in Dhaka Stock Exchange.
4.2 Sample Size
At present a total number of 110 private manufacturing firms are the members of Dhaka Stock
Exchange. These firms belong to various industries; i.e.; chemical, ceramic, cement, food, allied, jute,
paper, cotton textile, steel, pharmaceuticals, tannery and engineering. Out of these 110 firms, the
present study has covered 40 firms. The Financial Statements of these private manufacturing firms in
between the years 2007 and 2011 were analyzed. A total number of 40 respondents being the chief of
accountants were selected for collecting the primary data.
4.3 Collection of Data
Mainly secondary data were used in this research which were collected from the Financial Statements of
the selected private manufacturing firms. For literature review and other purposes, different books,
articles, manuals, World Wide Web and other secondary data were used. Some primary data were also
collected from the chief of accountants of each sample firms mainly using 5 point Likert scale.
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
4.4 Analysis of the Data
The collected data were analyzed using the SPSS 15. We have resorted to Tabular Analysis, Graphical
Analysis, correlation analysis, Regression Analysis, t-test and F-test to arrive at the results and
conclusion. Only 36.4% firms under all the sectors excepting jute and paper have been taken into study.
We have taken 5 firms under each sector. The jute and paper sector were excluded from the study
because there are less than 5 firms in these sectors.
4.5 Model Estimation & Specification
In this study, Return on Equity (ROE) has been selected as dependent variable; whereas percentage of
inventory in working capital, percentage of receivables in working capital, percentage of cash in working
capital, Working Capital Turnover, Inventory Turnover, Receivables Turnover, current ratio, quick ratio,
percentage of equity, bank credit and trade credit in working capital have been taken as independent
variables. The variables such as inventory, receivables, cash, bank credit, creditors for expenses and
others as a percentage of working capital, Working Capital Turnover, Inventory Turnover, Receivables
Turnover, Current Ratio and Quick Ratio relate to Working capital investment policy; whereas, the
variables like Equity and long term debt, bank credit and trade credit relate to working capital financing
policy. All these independent variables have impact as positive or negative on Return on Equity (ROE) of
the sample firms which were examined in the study.
In this study, the regression model has been developed by using ordinary Least Square (OLS) method
which is specified as follows:
 0  1 I   2 R   3C   4 O   5WCT   6 IT   7 RT   8 CR   9 QR  10 Eq  11BC
ROE=
 12TC  13CFE
5. The Background of Manufacturing Industry in Bangladesh
It is widely acknowledged that accelerated economic growth and poverty alleviation, which are the vital
goals before the country, require ensuring radical structural shift in the economy favoring the
manufacturing sector (Different Plan Documents of Bangladesh)i. In the context of the limited resource
base of Bangladesh, low technology and productivity base, narrow product mix, the constraints of the
domestic market, the pressure for gainful employment of a growing labor force and increasing scope to
use the emerging global opportunities, the task of designing a strategy of manufacturing development
capable of addressing the emerging challenges, both domestic and global, has become important for
future development of Bangladesh. Manufacturing sector is unique in enjoying benefits of increasing
return to scale. The importance of manufacturing is also reinforced by the development of agriculture and
service sectors for their reliance on backward and forward linkages with the manufacturing.
Manufacturing produces most of the capital goods, all intermediate goods and most of the consumer
goods. Manufacturing sector is the most vibrant force of development, and as Weiss (1988)ii reported,
manufacturing ―retains the characteristics of an engine of growth-rapid productivity growth, dynamic
increasing returns to scale, rapid technological change, and various dynamic externalities‖. There is a
significant rise in the growth of manufacturing industry which can be presented by the following graph
representing the structural change in the economy of Bangladesh:
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Figure 1.1: Structural Change in the Economy of Bangladesh
Source: Adapted and calculated from the data of Bangladesh Bureau of Statistics
6. Results & Discussions
The main findings of the study have been analyzed in terms of the specific objectives of the study which
are discussed below.
6.1 Short term Financial Objectives & Policies
Every enterprise whether manufacturing or trading, service or others need to fix up the major financial
objectives and policies. Financial objectives represent the major financing goals and target; whereas, the
financial policies represent the strategies in order to achieve the desired financial targets of the firms.
Financial objectives and policies are mainly of two types when these are considered from the perspective
of time dimension. These are short term financial objectives and policies and long term financial
objectives and policies. Since the subject matter of our study is the working capital policy and it is under
the short term financing policies; therefore, in this study we only covered the short term financing
objectives as well as policies. The respondents were requested to rate the importance of the following
short term objectives as mentioned by the author Ramamoorthy (1978).. Their responses were tabulated
below:
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Table 1: Responses regarding the rating of importance of short term financial objectives
Sl
Specific
Highly
Important Neutral
Less
Not
WAS1
no.
objectives
Important
(4)
(3)
important important(1)
(5)
(2)
1 Fixing target
32
8
4.80
profits
2 Fixing sales
30
10
4.75
targets
3 Fixing
27
13
4.675
production
targets
4 Maximization
28
12
4.70
of profits
5 Growth in
25
15
4.625
sales
6 Growth in
24
16
4.60
production
7 Maintaining
36
4
4.90
reasonable
amount of
cash
8 Fixing
22
18
4.55
dividend
payout
9 Fixing profit
20
15
5
4.375
retention
10 Maintaining
26
12
2
4.60
liquidity
Source: Field Investigation
According to the respondents opinions regarding the importance of short term financial objectives,
maintaining reasonable amount of cash was the most important (WAS 4.90) followed by another point
i.e.; Fixing target profits (WAS 4.80). The selected respondents also ranked the following important
points as short term financial objectives such as Fixing sales targets (WAS 4.75), Maximization of profits
(WAS 4.70), Fixing production targets (WAS 4.675), Growth in sales (WAS 4.625), Growth in production
(WAS 4.60), Maintaining liquidity (WAS 4.60), Fixing dividend payout (WAS 4.55) and Fixing profit
retention (WAS 4.375).
Again, the respondents were requested to rate the importance of the following short term financial
policies as mentioned by the authors. Their opinions are summarized below:
1
Weighted Average Score
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Table 2: Opinions of the Respondents as To Rating of the Importance of Major Short Term
Financial Policies
Sl
Specific
Highly
Important Neutral
Less
Not
WAS
no.
short term
Important
(4)
(3)
important important(1)
financial
(5)
(2)
policy
1
Purchasing
25
15
4.625
policy
2
Production
30
10
4.75
policy
3
Marketing
32
8
4.80
policy
4
Cash policy
35
5
4.875
5
Receivables
28
12
4.70
policy
6
Inventory
27
13
4.675
policy
7
Credit
26
14
4.65
collection
policy
8
Accounts
24
16
4.60
Payable
collection
policy
9
Dividend
22
18
4.55
policy
10 Profit retention
20
20
4.50
policy
Source: Field Investigation
As per the field survey, the respondents have opined that cash policy (WAS 4.875) is the most important
short term financial policy followed by the marketing policy (WAS 4.80). The respondents also ranked the
production policy (WAS 4.75) and receivables policy (WAS 4.70) as the third and fourth most important
short term financial policy for the working capital. There were some other policies also mentioned by the
selected respondents, i.e.; inventory policy (WAS 4.675) ,credit collection policy (WAS 4.65), purchase
policy (WAS 4.625), purchase policy (WAS 4.625), accounts payable (WAS 4.60), dividend policy (WAS
4.55) and profit retention policy (WAS 4.50).
6.2 Factors influencing Inventory Receivables & cash policies
Fixation of proper and effective working capital policies is of utmost significance for the efficient working
capital management of a firm, especially, a manufacturing one. But such fixation of working capital
policies depends on a number of factors, which are also known as determinants of working capital
requirements. Since inventory, receivables, cash occupy the majority portion of working capital; the
factors influencing these policies need to be properly identified and rated in order of importance. Some
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
authors, as for example, -Ramamoorthy1978) has identified a number of factors influencing inventory,
receivables and cash policies especially of manufacturing enterprises. Some of these factors have been
placed before the respondents to rate their importance. Their responses are tabulated below:
Table 3: Responses Regarding Major Factors Influencing Short Term Financial Policies in Sample
Firms
Sl
no.
Specific
factors
1
Purchasing
policy
Production
policy
Sales policy
Production
cycle
Business cycle
Credit cycle
Growth &
Expansion
Availability of
raw materials
Profit level
Dividend policy
Level of taxes
Depreciation
policy
Price level
changes
Operating
efficiency
Receivables
turnover policy
Inventory
turnover policy
Accounts
Payable policy
Profit retention
policy
Working Capital
financing policy
Cash
conversion
cycle
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Highly
Important
(5)
25
Important
(4)
Neutral
(3)
Not
important(1)
WAS
3
Less
important
(2)
-
12
-
4.55
28
12
-
-
-
4.70
30
25
10
15
-
-
-
4.75
4.625
20
32
26
15
8
10
5
4
-
-
4.375
4.80
4.55
30
10
-
-
-
4.75
25
22
20
20
12
12
12
15
3
6
8
5
-
-
4.55
4.4.
4.30
4.375
22
10
8
-
-
4.35
24
10
6
-
-
4.45
30
10
-
-
-
4.75
32
8
-
-
-
4.80
22
15
3
-
-
4.475
20
15
5
-
-
4.375
30
6
4
-
-
4.65
32
8
-
-
-
4.80
Source: Field Investigation
From the field survey, we have found that our respondents are of the opinion that credit policy, inventory
turnover policy and cash conversion cycle are the most influential factors for the short term financial
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
policy of the sample firms having an WAS of 4.80 each. They have also opined that sales policy,
availability of raw materials and receivables turnover policy (each having WAS of 4.75) are also the
factor influential for the short term financial policy next to the first mentioned ones. The respondents have
also mentioned some other factors such as production policy (WAS 4.70), Working Capital financing
policy (WAS 4.65), production cycle (WAS 4.625). The respondents were of same opinion about
purchase policy, growth and expansion and profit level (each scoring WAS 4.55). Finally, they mentioned
some other factors influential for the short term financial policy i.e.; AP____ policy (WAS 4.475),
operating effieciency (WAS 4.45), dividend policy (WAS 4.40), depreciation policy (WAS 4.375),
business cycle (WAS 4.375), price level changes (WAS 4.35) and level of taxes (WAS 4.30) respectively.
6.3 Analysis of actual positions of Working Capital during the study period (2007-2011)
After identifying the short term financial objectives and policies and the factors influencing the major
components of working capital in the context of sample firms during the study period; at this stage, it is
essential to analyze the actual position of working capital in terms of their major components. In such a
context, table 4 represents the actual positions of working capital in the sample firms during the study
period.
Table 4: Average Positions of Working Capital In Terms Of the Major Components during 20072011
Industry sector
Inventory Receivables
Cash &
Others
Total
Bank
Chemical
50.4
25.6
8.8
15.2
100
Ceramics
47.4
31
8.7
14.7
100
Cement
40.4
29
10.2
20.4
100
Food & allied
33.8
29.8
15.2
20.2
100
Cotton Textile
38.2
35.6
11.8
14.4
100
Steel & engineering
30.4
33.4
12.6
23.6
100
Pharmaceuticals
31.8
35.8
12.8
19.6
100
Tannery
24.4
37
14.2
24.4
100
Source: Annual Reports of the sample firms during 2007-2011
From the above table, we can see that among the selected firms in the chemical industry of Bangladesh,
inventory absorbs 50.4% of the total working capital followed by 25.6% receivables, 15.2% others (i.e.;
prepaid expenses etc) and 8.8% cash and Bank. In case of the Ceramics industry, majority portion of
working capital (47.4%) is consumed by inventory, whereas, 31% is consumed by receivables, 14.7% is
consumed by others and only 8.7% constitutes their cash and bank balances. In the cement industry of
working capital, 40.4% is inventory followed by 29% receivables, 20.4% others and 10.2% cash and
bank. Again, food and allied industry constitutes of almost equal percentage of inventory and receivables
(33.8% and 29.8%), 20.2& were others and 15.2% was cash and bank. In case of the Cotton and textiles
industry, majority portion of working capital (38.2%) is consumed by inventory, whereas, 35.6% is
consumed by receivables, 14.4% is consumed by others and only 11.8% constitutes their cash and bank
balances. Steel & engineering sector represented a very different scenario where majority working
capital was constituted by receivables with a percentage of 33.4% followed by 30.4% inventory, 23.6%
others and 12.6% cash and bank balances. Pharmaceuticals and tannery industry showed similar results
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
where receivables contained majority portion of working capital after inventory, cash and bank and
others.
6.4 Analysis of Working Capital Financing and Investment Patterns During 2007-2011
In order to examine whether there has been over/under investment in the total working capital as well as
component wise working capital, it is imperative to evaluate working capital investment patterns of the
sample firms over the study period. To this end, Working Capital Turnover, Inventory Turnover,
Receivables Turnover, Current Ratio and Quick ratio have been presented as the variables in the
following table:
Table 5: Industry-Wise Average Positions Of the Relevant Working Capital Variables during The
Study Period (In Times)
Industry Sector
Working
Inventory Receivables Current
Quick
Capital
Turnover
Turnover
Ratio
ratio
Turnover
Chemical
3.41
6.82
13.3
1.98
0.88
Ceramics
4.07
8.6
14.16
2.14
0.86
Cement
4.42
11.54
14.34
2.22
0.98
Food & allied
5.16
16.24
16.26
2.34
1.06
Cotton Textile
4.94
12.92
13.9
2.12
0.9
Steel & engineering
4.26
14.24
12.78
2.5
1.02
Pharmaceuticals
5.96
18.88
16.64
2.84
1.24
Tannery
4.60
18.92
12.44
2.82
1.30
Source: Annual Reports of the sample firms during 2007-2011
It is revealed form table 5 that, the average working capital turnover had varied form 3.4 times to 5.96
times in the sample industries. Comparing with the standard of 3 times working capital turnover as
mentioned by some authors (As for example_,Weston and Brigham_(1969), it can be said that working
capital turnover was satisfactory in all the industries. It is further revealed that, the average inventory
turnover had varied from 6.82 times to 18.92 times in the selected industries whereas some authors (_As
for example_,Weston and Brigham_(1969) mentioned the standard norm to be 6 times. It is observed
that inventory turnover was highly satisfactory in the selected industries. Again, the table also indicates
that the average receivables turnover varied from 12.44 times to 16.64 times in the sample industries. If
these actual figures are compared with the standard norm of 12 times as opined by the same authors, it
can be said that receivables turnover was also satisfactory in all the sample industries. The average
Current ratio and quick ratio had varied from 1.98 times to 2.84 times and 0.88 times to 1.24 times.
Comparing with the standard level of 2 times CR and1 time QR as opined by the same authors ,iit can be
inferred that those two ratios were satisfactory in the sample industries. From the above analysis, it can
be mentioned that average working capital investment patterns in the sample firms were reasonable and
adequate. Such working capital investment patterns are the reflection of sound and effective working
capital investment policies in the sample industries.
At this stage, evaluation of working capital financing pattern is of utmost importance in order to examine
whether the sample firms have used costly sources of financing or not in financing their working capital.
There are various sources of financing working capital namely bank credit, trade credit, equity and long
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
term sources, creditors for expenses etc. It is to be mentioned here that equity and long term sources are
used for financing permanent portion of working capital that is the net working capital which is indicated
by the difference between the current assets and the current liabilities. In such a context a tabular
representation is given below:
Table 6: Industry-Wise Financing Patters of the Sample Firms during the Study Period
Industry sector
Permanent
Trade
Bank
Creditors
Total
Sources
Credit
Credit
for
(ELTD)
Expenses
Chemical
20.4
46
25.2
8.4
100
Ceramics
21.4
48
21.2
9.4
100
Cement
18.2
50.6
22.2
9
100
Food & allied
19
49.2
23.2
8.6
100
Cotton Textile
20.6
48.4
23.4
7.6
100
Steel & engineering
23
44
23.6
9.4
100
Pharmaceuticals
20.4
49.8
21
8.8
100
Tannery
20
49.8
20.6
9.6
100
Source: Annual Reports of the sample firms during 2007-2011
From the above table, we can see that the permanent sources like equity, capital and long term debts
representing average net working capital have varied from 18.2% to 23% in the sample industries. This
signifies that all the industries have used roughly on fifth of financing working capital which appears to be
reasonable. Trade credits, the less costly source of financing working capital, were used roughly 50% of
working capital in all the industries. Comparatively, the costly source viz, bank credits were used ranging
from only 21% to 25% in the sample industries which also does not seem to be reasonable.
6.5 Measuring Relationship and Impact of Working Capital Policies On ROI
One of the main objectives of the study was to measure the impact of the independent variables like
inventory as a percentage of current assets (I), receivables as a percentage of current assets (R), cash
and bank as a percentage of current assets (C), other assets as a percentage of current assets (O),
working capital turnover, inventory turnover, receivables turnover, current ratio, quick ratio, bank credit,
trade credit and creditors for expenses on the dependent variable Return on Equity (ROE) of the
selected firms. Before measuring such impact, it is essential to examine the relationship between ROE
and each of the dependent variables. Appendix 1 shows the correlation matrix. It is seen that values of
and between Return on Equity (ROE) and inventory (I), Return on Equity (ROE) and receivables (R),
Return on Equity (ROE) and Cash and Bank (C), Return on Equity (ROE) and others (O), Return on
Equity (ROE) and Working Capital Turnover (WCT), Return on Equity (ROE) and Inventory Turnover
(IT), Return on Equity (ROE) and Receivables Turnover (RT), Return on Equity (ROE) and Current Ratio
(CR), Return on Equity (ROE) and Quick ratio (QR), Return on Equity (ROE) and Bank Credit (BC),
Return on Equity (ROE) and Trade Credit (TC) and finally Return on Equity (ROE) and Creditors for
expenses (CFE) have been -0.56, -0.60, -0.57, -0.91, -0.91, 0.03, -0.74, -0.69, 0.01, -0.18, 0.28, -0.22
and -0.78 respectively. All these figures imply that the relationships between Return on Equity (ROE) and
each of the independent variables excepting Inventory Turnover (IT) and Quick ratio (QR) have been
negative as well as significant at 5% level.
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Appendix 2 presents the results of regression model in terms of regression statistics, ANOVA and beta
coefficients. Considering the values of beta coefficient the regression model goes as follows:
ROE=
 3.48 0  0.0199 I  0.0005R  0.065C  0.0197O  0.535WCT  0.227 IT  0.046 RT 
2.162CR  0.492QR  0.0497 Eq  0.073BC  0.011TC  0.024CFE
The P-values in case of Inventory Turnover (IT), Current ratio (CR) and Trade credit (TC) have been
significant at 10% level. This implies that Inventory Turnover (IT), Current ratio (CR) and Trade credit
(TC) have been the dominant variables for influencing Return on Equity (ROE) of the sample industry
firms. Regression statistics reveal that the value of adjusted R square equals to 0.9076 which implies
that 90.76% of the variations in Return on Equity (ROE) have been explained by the selected
independent variables. This result is highly encouraging in the sense that all the 13 independent
variables considered together have influenced about 91% variations in Return on Equity (ROE) in case of
the selected samples. Moreover, F-value as shown in ANOVA reveals that result has been significant at
5% level.
7. Conclusions & policy Implications
The study critically has examined the impact of working capital policies on financial performances in
some selected private manufacturing firms in Bangladesh. To this end, the study aimed at identifying
short term financial objectives and policies, examining the factors influencing working capital policies
analyzing the actual positions of working capital and evaluating working capital investment and financing
patterns of the sample firms. The study depicts that the working capital positions both in total and
component wise have been reasonable and adequate as considered from the viewpoints of the WCT, IT,
RT, CR, QR, ELTD, TC, BC and CFE. Moreover, the study points out that there have been significant
relationships between the independent variables and ROE. As regards the impact of the independent
variables on ROE, the study indicates that all the independent variables together have explained about
91% variations in ROE in case of the sample firms. Considering the above findings, the following policy
implications of the study may be recommended:
i.
The relevant authority of the sample firms need to pay special attention on the financing pattern of
their enterprises. The financing of working capital by costly sources like bank credit and trade
credit needs to be reduced as far as practicable in order to avoid more costs regarding bank credit
and trade credit. Therefore, the existing working capital financing policy of the sample firms needs
to be revised.
ii. The existing liquidity position measured in terms of current ratio and quick ratio demands special
attention of the relevant authorities in order to increase liquidity position to a reasonable extent.
iii. The existing working capital investment pattern in terms of its various components like inventory,
receivables, cash and bank and others representing marketable securities and prepaid assets
need to be restructured in order to have a reasonable investment patterns of working capital.
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
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Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Appendix 1
Correlation Matrix
ROE
ROE
I
R
C
O
WCT
IT
RT
CR
QR
ELTD
BC
TC
CFE
1
I
-0.5605
1
R
-0.60206
0.260814
1
C
-0.74089
0.132605
0.247546
1
O
-0.56642
0.431971
0.461443
0.249997
1
WCT
-0.90957
0.54056
0.673242
0.630959
0.793258
1
IT
0.027668
-0.25627
0.237292
0.097857
0.623732
0.268918
1
RT
-0.74116
0.432072
0.518165
0.56212
0.54265
0.801735
0.1505
1
CR
-0.69375
0.351422
0.496702
0.576939
0.47135
0.758209
0.134815
0.900845
1
QR
0.00857
0.119149
-0.1878
0.014724
-0.1048
-0.07742
-0.1238
-0.01711
-0.1695
1
ELTD
-0.18353
0.197013
0.211147
-0.02301
0.356756
0.264446
0.180913
0.078146
0.201684
-0.49
BC
0.280577
0.043586
-0.21122
-0.15539
-0.18266
-0.24931
-0.104
-0.13873
-0.17382
-0.06244
TC
-0.21971
0.037433
-0.09302
0.29805
-0.09415
0.120883
-0.1461
0.169864
0.161307
0.306639
1
0.543553443
0.130339396
CFE
-0.78203
0.47359
0.516266
0.588497
0.60475
0.861198
0.168567
0.925827
0.878792
-0.02628
0.26537659
1
0.37165
0.28499
1
0.185059451
1
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Appendix 2
Results of Regression Model
SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.968715555
R Square
0.938409826
Adjusted R
Square
0.907614739
Standard Error
0.37626071
Observations
40
ANOVA
df
Regression
Residual
Total
Intercept
I
R
C
O
WCT
IT
RT
CR
QR
ELTD
BC
TC
CFE
13
26
39
SS
56.08312482
3.680875178
59.764
Coefficients
-3.47522558
0.019879308
-0.000467133
-0.065251401
-0.019761601
-0.534805108
0.226761038
0.046329057
2.161967138
0.492153506
0.049675394
0.073066482
-0.010629764
-0.024351498
Standard
Error
4.394184646
0.046357872
0.020616657
0.060646234
0.060512236
0.557337559
0.092540973
0.154052684
0.501711233
0.880294196
0.038750508
0.040665855
0.030396856
0.05962594
MS
4.314087
0.141572
F
30.47271212
t Stat
-0.79087
0.428823
-0.02266
-1.07593
-0.32657
-0.95957
2.450385
0.300735
4.309186
0.559078
1.281929
1.796753
-0.3497
-0.4084
P-value
0.436175519
0.671584411
0.982096039
0.291839433
0.746606023
0.346110164
0.02131179
0.76600822
0.00020796
0.580892395
0.211181307
0.084002779
0.729381043
0.686320916