Impact of Working Capital Management on Profitability: Evidence from Pakistan Textile Weaving Sector

Abstract

Working capital management plays a vital role in determining the financial performance and sustainability of firms, particularly in manufacturing sectors where efficient utilization of short-term assets and liabilities is critical. The textile weaving sector in Pakistan, being one of the largest contributors to exports, employment, and industrial output, operates in a highly competitive and capital-intensive environment. In this context, effective working capital management becomes essential for maintaining liquidity while enhancing profitability. This study investigates the impact of working capital management on the profitability of firms operating in the Pakistani textile weaving sector. The primary objective of this research is to examine the relationship between working capital components—namely cash conversion cycle (CCC), accounts receivable period, inventory turnover period, and accounts payable period—and firm profitability. Profitability is measured using Return on Assets (ROA). The study employs a quantitative research approach using secondary data extracted from the audited annual financial statements of selected textile weaving firms listed on the Pakistan Stock Exchange (PSX). The data covers a period of multiple years to ensure robustness and reliability of results. Descriptive statistics, correlation analysis, and panel regression techniques are applied to analyse the data and test the hypotheses. The empirical findings reveal a significant relationship between working capital management and profitability. Specifically, a shorter cash conversion cycle and efficient management of receivables and inventory are found to have a positive impact on firm profitability. Conversely, excessive investment in working capital components adversely affects financial performance by increasing financing costs and reducing operational efficiency. The results of this study provide valuable insights for financial managers, policymakers, and investors within the textile sector. Efficient working capital management can enhance profitability, improve liquidity, and strengthen the overall financial health of firms. The study recommends that textile weaving firms in Pakistan adopt optimal working capital policies by minimizing receivable days, improving inventory control, and strategically managing payables without harming supplier relationships. This research contributes to the existing literature by providing sector-specific empirical evidence from Pakistan’s textile weaving industry. It also highlights the importance of balancing liquidity and profitability to ensure long-term growth and competitiveness in emerging markets.