Scientific Study, 2011, 7 Pages
World Applied Sciences Journal 12 (11): 1967-1973, 2011 ISSN 1818-4952 © IDOSI Publications, 2011
Practices of Working Capital Policy and Performance Assessment Financial
Ratios and Their Relationship with Organization Performance
1 2 3 Ghulam Shabbir Khan Niazi, Ahmed Imran Hunjra, Majid Rashid, 4 5 Syed Waqar Akbar and Muhammad Naeem Akhtar
1 Quaid-I-Azam, School of Management Sciences, Quaid-I-Azam University Islamabad, Pakistan 2 Scholar Iqra University Islamabad, Pakistan 3 Allama Iqbal Open University, Islamabad, Pakistan 4 Quaid-e-Azam University Islamabad, Pakistan 5 Iqra University, Islamabad, Pakistan
assessment financial ratios and to determine their relationship with organization performance. The target respondents were the finance executives/financial analysts of the companies. 64 properly filled questionnaires were processed for analysis. This study concludes that the finance executives consider that the proper practices of working capital and financial ratios are very important for the growth and performance of the organization. This research study also finds that there is positive and significant relationship between these practices and organization performance.
• Significant Relationship
The corporate culture depends on attitudes, beliefs The financial performance assessment is viewed as an and company management's values, education and work important factor in evaluating company performance. experience and its impact on corporate decision making The results of efficient working capital and financial processes. When the executives were rewarded (or ratios can be useful in analyzing the efficiency of a punished) for their work, it’s not written in company company in different operations. If these practices such policy, but referred to be an important corporate culture's as working capital policy and performance assessment components. The IMF report provides strong evidence financial ratios are exercised an organization would regarding the crises that took place in 1997, was an out achieve a better resource utilization and profit margin. come of poor corporate sector . Working capital policy Pakistani corporate sector has grown over the period of relates to the management of short term assets and time through the courtesy of privatization and liabilities within the maturity period of one year. Working liberalization, yet practice of these functions should be capital management is really vital for the financial health implemented in Pakistani corporate sector. Working of business no matter what is the size of the business. For capital policy and financial performance assessment ratios the growth and survival of firms efficient working capital are very important for the organizational success and is indeed a requirement because it shows the level of growth and hence must be practiced in Pakistani inventory, production and sales . Probably, financial corporate sector at large. The proper exercise of working managers spare more time for working capital management capital policy and financial ratios are very important for than any other financial activity. The debate on working every organization and has a significant impact on capital policy is having different views in a way that company performance and growth. In Pakistan, many
Corresponding Author: Ahmad Imran Hunjra, Scholar Iqra University, C/o Hafiz Shoiab, Audit department, Iqra University, Islamabad, Plot#5, H-9 Sector, Islamabad (44000), Pakistan. Cell: +92-0345-7162527, E-mail: firstname.lastname@example.org.
World Appl. Sci. J., 12 (11): 1967-1973, 2011
out these practices, mainly due to obsolete business maintain the high growth for the economy. Pakistani processes and structure of the company. As a result, Service sector has a remarkable development and the there are huge deficiency problems in Pakistani corporate growth over the last decade. Since last quarter of 2007, as sector. Preliminary investigation and published data a whole the corporate sector performance is on the decline reveal that Textile, Banking, Insurance, Chemical, constantly. The investigation reveals that inappropriate Fertilizer, Cement, Oil and Gas and Automobile are the application of financial management practices is one of leading industries in terms of these practices. Therefore, the reasons of this downfall along with above mentioned firms related to these sectors are the target respondents issues faced by the economy. for measuring the perception and application of these The extent to which Pakistani corporate sector is practices. These industries are also the main contributors following these practices needs to be investigated, towards economy in terms of profitability, contribution to especially in the period where economic indicators are GDP, employment generation and growth. declining after steady growth in last decade. The purpose In comparison to the globe these practices in Pakistan this study is to highlights the application of working are still immature in the monetary management policies of capital policy and the performance assessment financial the corporate sector. If corporate sector in Pakistan ratios and their relationship with organization (public or private) adopts comprehensive working capital performance. To suggest measures to improve the level of policy and financial ratios, these would be directly application of these practices in Pakistani corporate affecting profits and value maximization of the sector. organizations. A growing stream of research shows that these changing monetary policies have a strong influence Literature Review: Organizational performance has many on the organization performance. In Pakistan the growth dimensions, such as long-term performance, short-term in different industries has been beneficial for the economy performance, financial performance, non-financial and the country. Simultaneously, it has changed the performance, relationship-building performance . attitudes of the businesses towards the monetary policies, Financial parameters like profitability, market share and which indeed has a positive affect on the significance and sales growth are generally used to measure organizational worth of an individual organization. The expectations of performance. Financial indicators can only measure past financial managers and executives have escalated due to performance, but they cannot provide current or future the financial management revolution but still there is lot to performance directions for a company . be done to achieve the anticipated profit and value for the Industry practices are, significantly, determined by a firm. The literature on Pakistani corporate sector suggests firm’s management of working capital . Working capital that financial management practices are not being that is required by the business is determined by a followed across the economy. There is less realization number of factors . Mismanagement and starvation of regarding application of these practices and contribution working capital is regarded as the important cause, if not towards organization success. For the last decade or so major, for the failure of business in many countries, Pakistan economy has been growing at a steady rate. The developed and underdeveloped .  discussed that the sectors like Oil and gas, cement, fertilizer and automobiles way the companies manage the working capital it has a are among the most growing industries. Whereas, Textile, significant impact on their profitability since a large Tobacco, Sugar, Pharmaceutical industries have shown amount of cash, is invested in the working capital. Often growth initially and then there is a decline in these working capital amounts are high in proportion as industries. There are so many reasons behind the decline compared to total assets employed and therefore it is in these industries such as political instability, failing law important that these amounts are managed and used in and order situation, increasing power shortage, monitory effective and efficient way .  concluded that reduction, food and energy crises and increasing financial management practices are very important for the operating costs of business? There is decline in the growth and performance of organization and found the performance of manufacturing sector in the last part significant relationship between organization performance of this decade as compared to initial years where the and financial management practices.  explained growth was satisfactory . Banking, insurance and working capital management as the administration of all telecommunication are the most growing industries in the aspects of current assets and current liabilities.
World Appl. Sci. J., 12 (11): 1967-1973, 2011
is the decision of management determination of efficient working capital . Working capital management is
indeed a pre-requisite for the growth and survival of the firm . Fig. 1: Theoretical Framework The development of European financial system was analyzed by  and it unconcerned some complex Research Methodology: In this study non probability linkage of economic, political and some global factors. sampling technique was used. The target population of There was no evidence of a significant association the study was ten leading sectors companies of corporate between corporate sustainability performance (CSP) and sector (banking, telecommunication, oil and gas, cement, financial performance .  indicated that leading insurance, sugar, oil and ghee, automobiles, textile and corporate sustainability performance (CSP) firms are fertilizer). Companies from each sector were selected on significantly larger, have higher levels of growth and a the basis of listing at Karachi stock exchange. The target higher return on equity than conventional firms. The respondents were the finance executives/financial financial ratios are viewed as an important factor in analysts of the companies. 79 questionnaires were assessing performance of a company. The results of these distributed among the respondents of different companies ratios can be useful in evaluating the efficiency of a in Islamabad, Rawalpindi, Lahore, Faisalabad, Multan company in different operations. However, [17, 18] Gujarat, Gujranwala, Peshawar and Karachi of Pakistan but discussed some of the weaknesses in the usage of 67 filled questionnaires were received back and 64 common ratios such as proportionality, scaling and properly filled were used for analysis in this study. symmetric effects. The changes which are observed in the There were two parts of the questionnaire, general financial ratios and accounting are due to the adoption of information regarding the respondents and company was strict requirements, regarding accounting issues and rules collected through first part of the questionnaire and the about fair value accounting .  tested the second part contained the information related to three effectiveness of four different techniques used to predict dimensions working capital policy, financial ratios and financial distress. They found that multiple discriminate organizational performance. The response was measured analysis and recursive partitioning have the highest through 5 point Likert scale in section two of the prediction accuracy for predicting “failed” companies. questionnaire, where 1 is highest degree of agreement and The following theoretical framework has been 5 is the least degree of agreement and nominal scale was developed on the basis of evidence available in above used in section one. The statistical package social mentioned literature. The dependent variable is sciences program (SPSS) was used for analysis. It is an organization performance and five independent variables adapted questionnaire based on the financial practices are capital structure decision, dividend policy, investment followed by the local companies, from the study of  appraisal techniques, working capital policy and financial and to measure the organization performance scale was performance assessment. taken from . The reliability of instrument was checked. The organization performance having three items with Hypotheses Statements: To test the relationship between reliability of 0.776 and there are (five items) in working organization performance and working capital and capital policy dimension and the Cronbach Alpha is 0.731, financial performance assessment, following hypotheses the performance assessment using financial ratios (eight have been developed: items) and the reliability is 0.877. The reliability index for the instrument (16 items) was 0.807. H1: Working Capital Policy has significant impact on The questionnaire was personally distributed Organization Performance among 79 companies in Islamabad, Rawalpindi, Lahore, Multan, Karachi, Faisalabad, Gujarat, Gujranwala H2: Performance Assessment Financial Ratios has and Peshawar. The concern financial personnel were significant impact on Organization Performance identified in each company through company profile,
World Appl. Sci. J., 12 (11): 1967-1973, 2011
GRIN Publishing, located in Munich, Germany, has specialized since its foundation in 1998 in the publication of academic ebooks and books. The publishing website GRIN.com offer students, graduates and university professors the ideal platform for the presentation of scientific papers, such as research projects, theses, dissertations, and academic essays to a wide audience.
Free Publication of your term paper, essay, interpretation, bachelor's thesis, master's thesis, dissertation or textbook - upload now!