Does Working Capital Management Affect the Profitability? A Case of Pakistani Manufacturing Firms

Abstract

This study investigates the effect of working capital management on profitability of 148 diverse manufacturing firms listed on Karachi Stock Exchange, Pakistan for the period January 2006 to December 2011. The fixed effect and random effect models results revealed that firms’ aggressive strategy of financing negatively affect the profitability. Moreover, tight credit policy, efficiency of stock-in-trade management, early payment policy and conservative strategy of investment in current assets are found to have significant positive effect on profitability of firms. Findings of the study suggested that profitability of firms can be improved by devising optimal working capital management policies and also emphasized the investigation of factors that must be considered by management while formulating appropriate working capital management policies.