African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4094

Full Length Research Paper

Searching for internal and external factors that determine working capital management for manufacturing firms in Pakistan

Shahid Ali1, 2* and Muhammad Ramzan Akhtar Khan2, 3
  1Institute of Management Sciences, Peshawar 1-A, Sector-E/5 Phase VII, Hayatabad, Peshawar, Pakistan. 2Muhammad Ali Jinnah University, Islamabad Express Highway, Off Kaakpul,Islamabad, Pakistan. 3Department of Economics, Boston University, USA.
Email: [email protected]

  •  Accepted: 22 December 2010
  •  Published: 04 April 2011

Abstract

 

This paper searches for important endogenous and exogenous factors that have an influence on working capital management of manufacturing firms in Pakistan. The topic has been examined by researchers around the world and needs to be inquired for firms in Pakistan. Following Shulman and Cox (1985), working capital management of a manufacturing business firm is measured by net liquidity balance and working capital requirements. Determinants for working capital are separated as endogenous or exogenous to a manufacturing firm, similarly they are viewed as firm-specific or macroeconomic depicting the general conditions of the economy. The determinants that may have an effect on working capital of manufacturing business firms derived from literature are business cycles, firm growth, leverage, cash flows, return on assets, size of the firm, real gross domestic product, and unemployment rate. Proxies for efficient working capital are developed and are called as working capital requirement and net liquid balance. These two proxies are used as dependent variables in the models. In Pakistan, data on many endogenous variables that may impact working capital practice is not easily available. The same is not true for heavily invested manufacturing firms. A subjective sampling procedure is exercised to select 20% of firms from each of the four sectors namely Engineering, Sugar, Chemicals, and Fuel and Energy. Top 20% capital intensive firms for the period of 2000 to 2008 are sampled from each of the four sectors for the analysis. Descriptive findings show that Chemical firms are managing their working capital requirements and liquidity balances more efficiently. Findings do indicate that poor economic conditions affect working capital requirements and put firms under significant pressure of more efficient management practice. This suggests that working capital requirements and liquidity needs increase for firms when the economy is in poor economic conditions or is in recession. The study also concludes that all sectors are not able to remain equally efficient with their working capital policies as they are differently affected by macroeconomic conditions. The study could not identify any uniform micro or macro determinants across all selected sectors.

 

Key words: Working capital management, macroeconomic variables, microeconomic variables.