Effect of Working Capital Management on Textile Industry of Pakistan

This research proposal investigates the effect of working capital management on the profitability of Pakistan's textile industry. It begins with an executive summary highlighting the importance of working capital in enhancing an organization's financial strength by balancing current assets and liabilities. The introduction establishes the research's focus, objectives, and questions, followed by a literature review that explores the relationship between working capital and firm profitability, identifying a gap in existing research. The proposal outlines the research methodology, including the research design, philosophy, and approach, along with data collection and analysis methods. It also addresses ethical considerations, the significance of the research, deliverables, required resources, and a detailed timeline. The study aims to provide insights into how effective working capital management can improve the financial health and operational efficiency of textile companies in Pakistan, considering factors like accounts receivable, inventory management, and the cash conversion cycle. The proposal emphasizes the need for a balanced approach to working capital components to maximize profit and cash flow, offering valuable insights for the textile industry.

Running head: RESEARCH PROPOSAL
Effect of Working Capital management on textile Industry of Pakistan
Name of the Student
Name of the University
Author’s Note

1RESEARCH PROPOSAL
Executive Summary
Working capital management has the potential to increase the profit margin of any given
organization. It has influence over the risk and profitability of an organization. This in turn can
increase the financial strength of the organization. The ration between the current assets and
current liabilities represents the working capital of an organisation. Company’s current assets
have needs to exceed the current liability to stay in profit. Moreover, if the exceeds too much
will result into the resources remain unused, which is also not a healthy sign in business. Hence,
it needs to be properly managed. Working capital management helps in reducing the accounts
receivable by imposing strict collection policy and by limiting sales credits to its consumers. It
will further help in cash flow. However, stringent collection policy and limited sales credit will
result in lost of sales, which will again reduce the profit of the organisation. Having longer
credits from the suppliers on the other hand can also increase the account payables. It will again
increase the chances of receiving poor quality materials from the suppliers, which will again
reduce the profitability. Hence, it requires for the components of working capital to be balanced.
However, it never stays in an equilibrium state and constantly changes over time. However, the
working capital remains constant even though the components are changing according to the life
cycle operations. It can be considered as a cause for net capital being useful in summary measure
of current assets or liabilities. This study will further examine the existing literatures in order to
understand the importance of working capital in the organisation’s profitability and the various
components related to it. The existing literature reflects that the management of working capital
is significant in any organisation regardless of its industry. It can sufficiently provide financial
benefits to the organisation by balancing its current assets and liabilities in the market. It helps
the organisations in achieving short-time financial success. This study will further focus on the
Pakistan’s textile industry in terms of working capital management to identify the profitability of
the organisations exits. This is due to the lack of existing research work available in the database.
Hypothesis is hence formed accordingly to justify the outcome of the research. This research
proposal has recommended the research methodology necessary for carrying out the research
work on the Pakistan’s textile industry. The proposed methodologies will be used for carrying
out the data collection and data analysis process. It also sets ethical boundaries for the
researchers during the conduction of the research. Lastly, the research communicates the time
schedule set for the research.

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Contents
Executive Summary.........................................................................................................................1
Introduction......................................................................................................................................3
Literature Review............................................................................................................................3
Literature Gap..............................................................................................................................6
Hypothesis....................................................................................................................................6
Research Objectives.........................................................................................................................7
Research Question...........................................................................................................................7
Research Methodology....................................................................................................................7
Research Design...........................................................................................................................7
Research Philosophy....................................................................................................................8
Research Approach......................................................................................................................9
Data Collection and Analysis.....................................................................................................10
Sampling....................................................................................................................................11
Accessibility..................................................................................................................................12
Ethical Issues.................................................................................................................................12
Significance...................................................................................................................................12
Deliverables...................................................................................................................................13
Required Resources.......................................................................................................................13
Time Table.....................................................................................................................................14
Conclusion.....................................................................................................................................15
Reference.......................................................................................................................................16

3RESEARCH PROPOSAL
Introduction
The following research focuses on the textile industry on Pakistan and recognises the
profitability of the firms in terms of working capital management. This helps in measuring short-
term financial condition on the company as well as their operation efficiency. This measurement
is calculated in terms of current assets the company is holding and current liabilities in the
market. Company’s current assets have to be greater than the current liability to stay in profit.
Moreover, if the exceeds too much will result into the resources remain unused, which is also not
a healthy sign in business. Hence, it needs to be properly managed. This proposal formulates
research objectives and questions to keep the research focused. A systematic literature review
will in identification of the literature gap. Hypothesis will be proposed based on the gap found in
the existing literature. It further proposes the methodologies, ethics, and time schedule needs to
be considered for carrying out the research.
Literature Review
Working capital and firm’s profitability are interrelated. Various scholars have tried to
explore this relationship for understanding the level of profitability through working capital.
However, there exist very few studies that have attempted understand the level of efficiency of
working capital management in terms of organisation’s workability. The existing studies reflect
the utility of using WCM for controlling business’s profitability.
Enqvist, Graham and Nikkinen (2014) have found it important for any business
organisation to manage its working capital in order to maintain its financial health. It helps in
reducing the accounts receivable by imposing strict collection policy and by limiting sales credits
to its consumers. It will further help in cash flow. Baños-Caballero, García-Teruel and
Martínez-Solano (2014) recognised it as flawed. Stringent collection policy and limited sales
credit will result in lost of sales which will again reduce the profit of the organisation. One of the
ways of increasing the account payables is to have longer time span for credits taken from the
suppliers. This will again elevate the likelihood of receiving low quality products from its
suppliers, which will again reduce the profitability. Inventory on the other hand may be reduced,
which again lead to stock out that will definitely result in losing the sales. Hence, it is important
for the organisation to have balance between these components to attain utmost profit and cash
flow. Management of working capital can potentially deliver the balance in these components.

4RESEARCH PROPOSAL
Bhunia and Brahma (2011) on the other hand identified the significance of working
capital in terms of short-term liquidity of the business organizations. Their study conducted on
the steel companies in India established the strength of relationship among the profitability and
liquidity. According to them, liquidity identifies the benefits in short-term assets that generates
low profit and involves low risk. It helps the organization to pay short term obligation for
maintaining the continuity in their operation.
Tauringana and Adjapong Afrifa (2013) concluded that components of the working
capital never stays in an equilibrium state and constantly changes over time. However, the
working capital remains constant even though the components are changing according to the life
cycle operations. It can be considered as a cause for net capital being useful in summary measure
of current assets or liabilities. Funds accessible to the organisation for their day-to-day activities
can be represented by working capital. The company can invest this current asset in the cash
conversation cycle for gaining short-term benefits. An organisation reflecting working capital in
negative figure means the organisation short with funds in their possession for carrying out day-
to-day activities, which is not possible in real life situation. It is because the company will then
be running in loss and will eventually shut down its operations.
The international market has shown increased interest in working capital management in
recent decades. It is due to the significant impact on liquidity possession of the company because
of the short-term debts, inventory and the level of accounts receivable. As suggested by
Yazdanfar and Öhman (2014), cash conversion cycle analysis needs to be aligned with the
traditional and static liquidity analysis as it will provide dynamic insights. This statement
establishes the positive relationship of cash conversion cycle and current rations.
Nobanee (2014) states that cash tied up in inventories are proportionate to the duration of
the production process. Likewise, value of accounts receivables increases with the time taken by
the customers in paying their bills. On contrary, the greater time consumed by the company in
paying for its material will reduce the amount of cash needed. It means that the account payable
reduces the net working capital.
Account receivable is the accounting transactions, which deals with billing of the
customers in exchange for goods and services. This billing is typically done through invoice
generation and delivers the bill it to the consumers by various means. The consumers are liable
to pay the same within the provided time referred. As defined by Michalski (2012) is the money

5RESEARCH PROPOSAL
yet to be received for the customers for the products or services bought by them form the
organisation. Vural, Sökmen and Çetenak (2012) on the other hand represented it as accounts
and notes receivable form the customers. The claims are established through various instruments
of credits. These are considered a evidences for the debt taken.
Many has defined inventory in many terms. However, Attari and Raza (2012) defined
characterised it as raw materials that are required in production, work in progreess and
completed products. A slight change in inventory affects both the income and balance sheets of
an organisation. It is a significant determinant of operations over a particular period. Balance
sheet is considered as the most significant current asset for the merchandising organisations.
Exporters and multinational companies face greater challenge in inventory management than the
domestic firms do. Manufacturing and producing economy might prove to be elusive if the
products are customized for the local markets, as it repeatedly takes place or during the genuine
production takes place in the plants in international market.
Account Payable is the significant foundation of non-secured short-term investment for
business organisations. According to Enqvist, Graham and Nikkinen (2014) these are the
accounting entry, which represents the buyer’s obligation to pay off a short-term debt to its
supplier. Napompech (2012) defines current liabilities as those notes that are due over less than a
year in the balance sheet.
Various scholars over time have studied working capital management in relation to
various organisations in different industries. They have addressed different aspects of working
capital management in the industries. However, only limited researches are available on
Pakistan’s textile industry regarding the matter. However, studies on other industries both in
Pakistan and abroad is present in the database.
Khan and Khan (2010) conducted an industrial study on the textile industry of Pakistan.
His study reflected diversified challenges that the company is facing despite of holding 60
percent of the country’s total export. Despite of the fact, there is considerable declination in the
growth rate of the company. The major attributable issues that they identified are global
recession, internal security, working capital management and the production cost. Shaheen and
Malik (2012) addressed the declined growth of the industry with debt financing. The authors
argued that the debt financing is controlled by the profitability, size and capital intensity of the
firm. Hence, the declined growth can be achieved by properly addressing these factors to readjust

6RESEARCH PROPOSAL
the debt financing that will in turn reform the capital structure of the companies in the industry.
Similar study conducted by Ahmed (2010) conducted a similar study over four years from 2004
to 2010 that reflects a 24.57% decline in cotton Yarn in the year 2009-10; whereas, cotton cloth
reflects a decline of 25.27% in 2009-10. He attributed the increase in EFS, electricity and gas
crisis, yarn prices, minimum, working capital management and a multiple factors for the decline.
Raheman et al. (2010) studied the working capital of 204 manufacturing companies
including textile companies among many others in the Karachi Stock Exchange. The results
reflects the need of working capital and financing management in teh firms to increase the
profitability and overcome issues that effected the cash conversion cycle, net trade cycle an
inventory turnover. They further suggested the companies to hire experts in finance to advise
them on working capital management that will in turn raise the outstanding share in the market.
Ching, Novazzi and Gerab (2011) performed a twofold research for comparing two
companies that are different from each other. It was to identify how the relationship between the
profitability and working capital management varies in accordance with the industry. The results
conclude that the importance of working capital management is evenly distributed within the
industries; however, the implementation of cash conversion cycle is different in each.
Haq et al, (2011) conducted similar study in Pakistan comparing data collected from 14
different companies belonging from the same industry that is cement. The time schedule set for
the study was six years. They found the relation between the profitability and working capital
management to be moderate. They study further added that the profitability can be increased by
investing more assets in production. This will work due to the high demand of cement products
within the boundaries of the nation.
Literature Gap
Though there are plenty of researches on the working capital management and
profitability, there exist only a few on the textile industry of Pakistan. Hence, this study can
focus on the textile industry of Pakistan, as it is famous around the world. The study can provide
significant insight within the industry.
Hypothesis
H0 – The industry is unable to manage the working capital for increasing the profitability
H1 – Working Capital Management is coordinated with the profitability of the textile industry of
Pakistan

7RESEARCH PROPOSAL
Research Aims
Aim of the research is to identify the efficiency of working capital management in the
textile industry of Pakistan. This will be identified in terms of profitability. It further aims to
identify the advantages and disadvantages that might occur due to the implementation of
working capital management in the organisations of the textile industry of Pakistan.
Research Objectives
 To critically analyse the importance of working capital management in textile industry of
Pakistan
 To analyse how it facilitates in increasing profit margin
 To identify the advantages of managing working capital
 To identify the disadvantages of managing working capital
 To identify the impact of managing working capital on the profitability of the textile
firms in Pakistan
Research Question
 What are the impacts of working capital management on profitability of the textile
industry in Pakistan?
 Why it is necessary to manage working capital in the mentioned industry?
 How Pakistani textile industry can efficiently manage theri working capital?
 What are the advantages it can provide to the firms?
 Are there any possible disadvantages the textile firms of Pakistan can face in their
profitability by managing working capital?
Research Methodology
This portion of the proposal will identify the necessary research approach, philosophy,
data collection and analysis techniques, as this narrates the structure of the report (Baskerville
and Wood-Harper 2016).
Research Design
Research design is composed of six layers and each of the layers will be describing the
methods utilised in the research (Creswell 2013)

8RESEARCH PROPOSAL
Figure 1: Research onion Model
Source: (Sekaram and Bougie 2016)
Research Philosophy
This communicates the aspect and acquaintance of a particular research. There exist four
primary philosophies that are Realism, Interpretivism, Positivism and Post-positivism.
Figure 2: Research Philosophy

9RESEARCH PROPOSAL
Source: (Eriksson and Kovalainen 2015)
The philosophy required in this particular research is positivism as it seeks to identify the
relation between the capital management and profitability in the textile industry of Pakistan
(Eriksson and Kovalainen 2015).
Research Approach
Two distinctive approaches for identifying the relevance of research hypothesis are
deductive and inductive approach. The deductive approach will help in the process of justifying
the proposed hypothesis as this approach helps validating the existing theory (Collins 2010).
Figure 3: Research Approach
Source: (Collins 2010)
Data Collection and Analysis
This study will be using both the primary and secondary data for getting in depth
knowledge in the field. There are two primary methods incorporated in the process that are
qualitative and quantitative method (Waltman et al. 2012). Open ended questions and
interview schedules are used in the qualitative data collection. This method will be applied on the
managers of the textile businesses of Pakistan to understand the relation between the profitability
and capital management. This is because managers are closely related in the decision making on
resource allocation. Quantitative method on the other hand collects the numerical data through
the questionnaires and surveys. A secondary research on the Pakistan Stock Exchange will
provide valuable information about the outstanding share of the companies that will be selected
for study. A comparison between the company’s outstanding share and its float will help in
understanding the working capital cycle of the company as well as the industry. Moreover,

10RESEARCH PROPOSAL
regression and hypothesis testing are the primary tools used in this method for accessing the
statistical data.
This researcher requires mixed method for collecting a wide range of data to address
every aspect of the chosen topic as this method incorporates multiple techniques of both
qualitative and quantitative method of data collection.
Different approaches will be taken for analysing qualitative and quantitative data. The
former will require the researcher to identify the patter of the answers collected. The quantitative
data accumulated from the research will be plotted in graphs and charts for analysing. The
regression tool plays active part in this to relate the independent and dependent variables in hand
(Allison 2014). This is important to identify the positivity or negativity present in the
relationship between the variables. This can incorporate ration analysis, cash flow analysis,
comparative financial statements and trend analysis. This will later put in the hypothesis testing
tool to validate the significance of the data accumulated.
Sampling
Two primary type of sampling is possible to carryout that are probabilistic and non-
probabilistic sampling.
The sampling method selected for this study will be systematic random sampling as it
provides the researcher with maximum level of accuracy and non-biased sample from the overall
population. Data will be collected for the Pakistan Stock Exchange to understand the Working
capital cycle of the industry. The sectors that will be included in the sample are textile
composite, textile spinning and textile weaving. Five companies from each of the sectors will be
considered in the research.
Accessibility
The accessibility to data might become a concern for the researcher. Very few researches
have been conducted on the selected topic and the selected industry that limits the access to the
secondary data. However, the researcher can use the existing data that are available in the
university library database. The researcher can also access the Google Scholar database for
fulfilling the need of secondary data in the research. Various government websites and blogs
may also be used for acquiring the data on the related topic. The secondary sources are limited to
the above mentioned to maintain the authenticity of the report. Moreover, the tension present in
the country regarding the terrorism makes it risky for the researcher to enter the country for the

11RESEARCH PROPOSAL
data collection. Hence, the researcher can utilize the technology like skype for collecting the
primary data from the management of these organisations.
Ethical Issues
Maintaining ethics is essential for any researcher in conducting the research. They have
to consider various factors in the course. Firstly, the researcher has to consider the privacy and
confidentiality of the subjects of study as the discloser of the information may harm the subject.
Moreover, anonymity of the subject is kept secret to protect the interest of the respondents. In
addition to that, no data will be extracted from the respondents by using external forces it has to
be made sure that respondents acted on their own accord, which is necessary to accumulate the
authentic data (Bryman and Bell 2015). Furthermore, it will be ensured that the data presented in
the paper are authentic and do not exist in other scholars’ work. Even if the data is collected from
other literatures, they are properly cited to avoid the plagiarism issue. The copy right is taken
prior from the authors of the particular works before incorporating them in the study.
Significance
Working capital management is important for every organisation existing in every single
industry. The strategy of managerial accounting is designed for monitoring as well as utilising
the two core components of working capital, which are current liabilities and current assets. It
helps ensuring the financial efficiency of the company. This is for ensuring that the company
maintains the adequate cash flow for meeting its short-term operational cost and short-term debt
obligations. The process involves the ratio analysis of the key elements of operating expenses
that includes the working capital ratio, collection ratio and inventory turnover ratio. It is to make
sure the company does not exceed its liability over the assets, which will in turn put the business
in danger. On contrary, the business should not hold on to its assets and make sure to utilise it in
the process of development. Otherwise, the business will not be able to make the profit it could
have in the market. This research is significant in identifying the present situation of the textile
industry in Pakistan, and the process of managing working capital. This will reflect the efficiency
of the organisations. This will further help in locating the issue present in the organisations
regarding working capital management and propose some of the possible way to overcoming the
same.