Working Capital Management and Its Impact on Profitability of Fuel & Power Industry in Bangladesh

Abstract

Working capital management plays a vital role in the financial decision-making process as it is a part of investment in assets and the liquidity position as well as the profitability of the corporation irrespective of its nature. The main objective of this research is to study the impact of working capital management on company profitability in the context of the fuel and power industry in Bangladesh. For this purpose, the researchers have tried to investigate the relationship among the components of working capital management and then analyzed the impact of these components on the profitability of a sample of eight fuel and power companies listed on the Dhaka Stock Exchange for a period of seven years ranging from 2005 to 2011.  The data were analyzed by using descriptive statistics followed by Pearson’s correlation analysis to see the association between Net Operating Profitability and all the components of Working Capital Management and the impact of working capital management on company performance of the firms is tested by panel data analysis. The result shows that the Average Collection Period and Cash Conversion Cycle have a negative impact on the profitability of the firms. On the other hand, Inventory Turnover in Days and Average Payment Periods have a positive impact on profitability. Moreover, the current asset to total asset ratio and firm size have a significant effect on the firm’s profitability. The study also concludes that the fuel and power companies in Bangladesh are following a conservative working capital management policy and the firms are needed to concentrate on and improve their collection and payment policy. Furthermore, efficient management and financing of working capital can increase the operating profitability of the fuel and power companies in Bangladesh.