Relationship between Efficiency Level of Working Capital Management and Profitability of Firms in the Textile Sector of Pakistan

The main aim of this study is to investigate the relationship between working capital management (WCM) and firm’s profitability in the textile sector of Pakistan. WCM plays an important role in firm’s financial management decisions. An optimal WCM is expected to contribute positively to the creation of firm’s value and enhancement of its profitability. Working capital, fixed assets’ cost, Cost of production, cost of debt (interest expense), and size (capital) of the firm as control variables are also used to investigate their effect on profitability (net income). A sample size of 55 textile companies in Pakistan has been selected for a period of six years, from 2003 to 2008. The relationship between WCM efficiency and profitability is examined using correlation, regression analyses and ANOVA (Analysis of Variance) test. The results show a strong positive significant relationship between WCM and firm’s profitability in Pakistan’s textile sector. In case of control variables, it is found that there is a significant relationship between working capital, fixed assets’ cost, cost of production, and size (capital) and profitability. However, results show a significant negative relationship between debt used by the firm and its profitability. The findings enhance the knowledge base of WCM and will help companies to manage working capital efficiently. Moreover, it will help the policy makers and decision making authorities to better orient themselves towards considering and adopting efficient ways of managing working capital.