Working is Gross working capital and is indicates

Working
Capital is the basic requirement of the Businesses, as they require a regular
amount of cash to make routine payments, to cover unexpected costs and purchase
basic materials used in the production of goods. It is one of the most
important components of the corporate finance. Recently Haq et al. (2011) noted that the firm’s profitability is directly
affected by working capital management. There are two major concepts of working
capital. One of the working capital concept is Gross working capital and is
indicates the total current assets of the business. If current assets are
managed efficiently be the business it gives more growth and can increase the
value of the business in the market. The other concept of working capital is
the net working capital which indicates the difference between the current
assets and the current liabilities. One of the fundamental decisions which a finance
managers make is the management of working capital.

Working
capital is the common measure of liquidity efficiency and overall health of the
firm. As it includes cash, inventory, account receivable, accounts payable, a
portion of debt due within one year and other short term accounts, a company’s
working capital reflects company’s activities. Working Capital Management deals
with the management of short term financing and investment decisions of a firm
and a very important component of the corporate finance decisions.

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There
are two possibilities of working capital, it may be positive or negative as
well, Positive working capital indicates that the business is in a position to
pay off its short term liabilities almost immediately and negative working
capital indicates that a business is unable to do so.  This is why it should be managed very
carefully. An optimal level of working capital should be maintained by the
finance managers otherwise it may affect the profitability or the liquidity of
the firm. Objective of working capital management is to manage the current
assets and liabilities in such a way that satisfactory level of working capital
is maintained.

PANIGRAHI, (2017) Working capital
management (WCM) involves a risk return trade off: means not to take an
additional risk until and unless it is well accomplished with assure additional
returns. The existence of a firm depends largely on its ability to efficiently
and effectively management of working capital. Working capital management is
the heart of every firm’s day to day operations and also improve the
corporate’s profitability. Working capital is considered as the life blood of
the businesses. The interaction between the current assets and current
liabilities is, therefore the main theme of the theory of the working capital
management.  Working capital efficiency primarily
measured by the cash conversion cycle. Cash conversion cycle basically shows
how long an industry or firm takes to convert its cash outflows into cash
inflows. It consists of three parts, inventory turnover, payable deferral
period, receivable collection period. Working capital should be at optimal
level, if a management team does
not keep an organization’s working capital within certain levels, it can have
crushing consequences to the organization’s financial health. Working capital
management affects either profitability or the liquidity of the firm, as
working capital management is directly affects the profitability as well as the
liquidity of the firm. Therefore, working capital management should be managed
efficiently and effectively, as (BPP
learning media, 2010) stated that the efficient working capital means to
manage various components of working capital in such a way that an adequate
amount of working capital is maintained for the smooth running of the firm
operations and the fulfillment of the profitability objective.

There
are many factors which can influence the decision of financial managers about
the firm’s current assets and current liabilities, those factors may be
internal or external.  PANIGRAHI, (2017) states that generally, there
are two basic approaches from where working capital management is derived: one
of them is known as aggressive policy, which indicates low levels of current
assets, mainly low cash balances, a very limited credit grants to its customers
and very low level of inventories stock and large amounts of investments in
non-current assets, for the purpose of generating more profits. Though, this
approach pretends a higher level of risk with regard to the probability of
adequate funds for day to day operations and also to pay for current
liabilities (Van- Horne and Wachowicz, (Van-Horne, 2008) 2008). The second
approach for working capital management in known as conservative and is also a
flexible approach, this approach suggests to have large investments in current
assets, particularly more cash balances, higher inventory levels and customer
loans, and low amount of investments in the non-current assets, which may
create more value for the firm (Nazir and Afza, (Nazir, “Impact of aggressive working capital
management policy on firms’ profitability”,, (2009)) 2009). Most empirical studies relating to
working capital management and profitability support the fact that efficient
management of working capital enhance a firm’s profitability.

Undoubtedly, profitability of the firm and
the working capital management have some relationship with each other. Much
research on the relationship of working capital management and the firm
profitability is available but the selected sector i.e. Cement sector, is not
much considered, about the impact of working capital management. So, much
literature is not available in this sector in Pakistani context. Working
capital is very important component of business accomplishments of any firm. Hence,
for the Cement as well, working capital management is of great importance.
Therefore, the aim of this study is to find out “Does efficient working capital
management have any impact on the profitability of firms of Cement sector of
Pakistan?”