Impact of Working Capital on Corporate Performance in Seasonal And Non Seasonal Industries
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Date
2014
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UMT.Lahore
Abstract
The primary purpose of every commercial activity is profit maximization and firms face internal and external challenges/limitations in achieving this objective. One such limitation in profitability is working capital. This study investigated its impact on profit in seasonal and non seasonal industries and demonstrated significant results. The relationship proved to be positive for seasonal and negative for non seasonal industries and in case of certain industries the relationship was not found significant. The results are important and significant as most of the literature leads us to a negative relationship between working capital and profitability. Study further investigated relationship of various components (receivables, payables and inventories) of working capital with working capital itself. The results indicated that components of working capital displayed a different behavior across industries.
In view of positive, negative and some time non significant relationship between working capital and profitability, it becomes a preliminary question that must be answered first of all before making any investment in working capital (to exactly forecast its impact on profitability), what is the basic relationship and its direction between working capital and profitability for any specific industry. Secondly, it needs to be understood that which component (receivables, payables and inventories) of working capital needs to be given priority for investment for yielding good profitability as different component have different relation with working capital across industries. Every industry search for optimal amount which needs to be invested in the working capital that can ensure maximization of profit, which is the foremost one single cause for which all business operates.