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Measuring the Impact of Working Capital Management on Net Operating Profitability: A Comparative Analysis of Cement and Oil and Sector in Pakistan

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1. Introduction
Working capital in an important component of financial management and basically Working Capital Management (WCM) has been approached in numerous ways. It focuses attention to the managing of the current assets, current liability and their relationships that exist between them. In other words, working capital management may be defined as the management of a firm’s liquid assets, cash, marketable securities, accounts receivable and inventories. In the present day context of rising capital cost and scarce funds, the importance of working capital needs special emphasis. It has been widely accepted that the profitability of a business concern depends upon the manner in which its working capital is managed. The inefficient…show more content…
Sometimes referred to as operating capital, it is a valuation of the amount of liquidity a business or organization has for the running and building of the business. Generally speaking, companies with higher amounts of working capital are better positioned for success. They have the liquid assets needed to expand their business operations as desired. Changes in working capital will impact a business’ cash flow. When working capital increases, the effect on cash flow is negative. This is often caused by the liquidation of inventory or the drawing of money from accounts that are due to be paid by the business. On the other hand, a decrease in working capital translates into less money to settle short-term debts. Objective of Study:
The primary and main objective of the present study is to measure the impact of working capital management on net operating profitability of the cement and oil and gas companies listed at Karachi Stock Exchange (KSE) over a period of five years (2004-2008). In other words, the study undertakes a comparative analysis of these two sectors in terms of the impact of WCP on NOP. So for very little research has been done in this area in Pakistan.
i. Net Operating Profit (NOP) = (Operating Income + Depreciation)/Total Assets ii. Average Account Receivable (ACP) = Receivables/(Sales/365) iii. Inventory Turnover in Days (ITID) = Inventories/(CGS/365) iv. Average Payment Period (APP) = Payables/(Purchases/365)
v. Cash
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