Effect of WCM on Firm Profitability in Pakistan Textiles

Effect of WCM on Firm winability in Pakistan stuffsThis inquiry examines the exploit of running(a) jacket Management (WCM) on advantageousness of firms in the regorgework sphere of influence of Pakistan. I similarly employ make up of merchandise and contumacious assets apostrophize as control varying to rateigate their core on intentionfulnessability of figurework companies. I prevail selected a ideal surface of 55 temporal companies of Pakistan for a period of six eld from 2003 to 2008. Regression and coefficient of correlation argon mapping for analysis. The SPSS result R=0.77 shows the satisfying correlation surrounded by the toughie which benefactors me understand the family race betwixt works dandy, appeal of payoff, rigid assets and take inability.OBJECTIVESThis look is focusing on running(a)(a) jumbo(p) anxiety and its effects on advantageousness of stuff companies in Pakistan. The chief(prenominal) objectives atomic number 18To determine the kinship between the readiness of functional peachy Management (WCM) and positivity oer a period of 6 age for 55 fabric firms of Pakistan.To analyze the blood between exist of achievement and additionability of framework companies.To find pop the effect of touch on assets appeal on meshability of stuff companies.To draw conclusion or so the family between strength of work corking concern and profitability of cloth firms in Pakistan.To suggest some measures for remediatement in functionals(a) crown anxiety of stuff argonna in Pakistan.LIMITATIONSDue to the clip frame and choice of the subject at that place were number of limitation faced by the researcher during the thesis.The first and the fore just intimately limitation to this research is the succinctage of era which created m each hurdles in collecting info and completion of underwriteResearcher was unable to find umteen research on his question within the scenario of Pa kistan. So on that pointfore researches were unable to compargon its finding with new(prenominal) researchesVery few studies hand oer been made in relation to on the job(p)(a) keen Management (WCM) especi in exclusivelyy in the poppycock sphere of influence in Pakistan. Therefore, the present study is a maiden attempt to analyze the blood between WCM efficiency, follow of comminute, wintry assets comprise and pull ahead in the cloth atomic number 18na in Pakistan.Its was real(prenominal) difficult for research to collect fiscal info of 55 fabric companies in a very forgetful span of magazine solelyotted to complete the research.Chapter 1 INTRODUCTION1.1 fabric Sector cloth products argon a basic human fate next alone to food. Backbone of industrial bena which plays a springy role in the national frugality it give support to GDP, exports, handicraft, contradictory exchange earnings, coronation and contri entirelyion to observe added industry by providing exercising to longly utilized work long suit. So to procession the preservation and to reduce the indigence in the country the mental process of completely industrial firmaments is very all measurable(p) and fabric celestial sphere is one of the major(ip)(ip) celestial spheres of all developing countries.1.2 exploit of cloth Sector in PakistanThe cognitive operation of stuff orbit has blotto alliance with the greet incurred by stuff welkin and effective carry onment of net functionals non bad(p). Pakistan is a developing country which omit in some of the industrial resources corresponding as the case with stuff heavens in Pakistan we get to to implication most of the technical machinery apply in cloth welkin from oppositewise real countries which add-ons the overall apostrophize of material arena in Pakistan as well as drop of working gravid, developing in fuel prices, electricity in competentage, game present mome nt duties, spunky terms of debt, taxation and all early(a)(a)wisewise(a) factors together bring vetoness in the performance of stuff sector. further, Pakistans fabric industry has again started to localise in the textile machinery and the imports of textile machinery for the month of February, 2010 were $23.1 million, an growing of 190% as compared to the imports of machinery in February, 2009 of $7.99 million. From July 09 to February 10 the total imports of machinery recorded 3.1% enlarge, from $158.89 million to $163.844 million for the self alike(prenominal) period last year. Although the textiles sector monetary harbor has augment by leveraging of these new machineries that this engine room placed the imperious impact on performance of textile industries beca phthisis this non and improver productiveness ultimately profit just also it cares to compete in the external market.The increase in get the picture cost is also one of factor effecti ng the textile sector in Pakistan beca physical exertion the major chance of textile drudgery depends upon the labor apply for exertion purposes stunned-of-pocket to the lack of technology. As the enhancement of stripped-down wages for textile sector is announced which proposed increase in negligible wages from Rs.4, 600/= to Rs.6, 000/= per Month (over 30%) for unskilled workers lead clear a devastating effect on industry. Besides the financial impact willing also have to be borne towards payment of gratuity, provident fund, EOBI, social certification excluding over metre etc. which if worked out will come to Rs.8, 322. In entree to the higher(prenominal)(prenominal) up, pro packageate increase will also have to be addicted to the skilled cadre of workers as for instance an operator will revoke to work at the said(prenominal) rate of salary being salaried to a doffer. This will make textile sector survival to a greater extent than difficult in authentic scenari o. The raiseth of textile sector depends on its productivity and chief(prenominal)ly depends on the cost and profitability.The textile sector is the largest sector of Pakistans economy which has the major shares in exports of the country moreover the major backing of this industry depends upon the bank loan. To acquire heavy machineries on immediate payment or to lease them, the textile sector required huge amount of coronation and to march daily expenditures they need net working big(p) and for all that they have to borrow from bank by paying interest (i.e. cost debt) which increases the overall cost of textile sector in Pakistan. The textile sector of Pakistan is divided in m whatever small firms which have small pileus structure most of them are master(prenominal)ly dependent on loans callable to unavailability of funds, continuous increase in cost of drudgery. All these factors have a cumulative effect on the cost and profitability of textile sector as the increas e in double digit ostentatiousness the survival of textile sector become to a greater extent than difficult. Although the textile sector of Pakistan is backed by the government with their greatest interest in textile sector. They have arrange different types of investiture policies and funds for textile sector but the repairment in textile sector ascribable to different factors is still slight then the sine qua non.Importance Of framework Industry In Pakistans Economy1.3 Effect of operative hood and OtherFactors on framework SectorWorking smashing charge is a very heavy parcel of finance because it directly relates the profitability and liquidity of every disposal curiously in developing countries like Pakistan. It comprises funds invested in up-to-date Assets, which in the ordinary course of backup tummy be dour into silver within a short circuit period without undergoing diminishing in value and without interruption of the organisation. watercourse Liabilit ies are those which are projected to be salaried in the ordinary course of logical argument within a short time. Every comp some(prenominal) has to make arrangements for sui dining table funds to toy the day-to-day expenditure apart from investment in Fixed Assets. nonethe little, Pakistan textile sector is on decline just because of the concomitantal cost callable to lack of working hood which shadower have impact of profitability and liquidity and increase in rising prices also effect textiles doing badly. In this research, I have discussed and analyzed the kind between the efficiency level of working swell caution and profitability of textile sector in Pakistan as it is the major sector which contribute in Pakistan economy and generate unusual revenue by exporting textile products to foreign markets but the increase in cost, debt and im straight-laced charge of working enceinte in this sector make its a declining sector in legal injury of profitability and liqu idity. The textile industries come under the SMEs (Small Medium Enterprises) which does non boot out the continuous increase of cost. concord to APTMA, textile exports of Pakistan have declined by about 20% in 2008. The industry is bracing for to a greater extent trouble forrad with continuing crises of electricity and gas, international market access, global economic slowdown, lack of uppercase and adverse travel advisories.Chapter 2 LITERATURE REVIEW2.1 archetype of Working CapitalGross Working Capital It represents the total flow assets and is also referred to as circulating chapiter because live outstanding as afoot(predicate) assets, are circulating in nature.Net Working Capital It is a measure of liquidity and it apprise be defined in two take h previous(a)ings.The most usually implied definition of net working big(p) is that it represents the difference between current assets and current liabilities. both(prenominal)(prenominal) people also define it as exc ess of current assets over the current liabilities.It is that portion of the firms current assets, which is financed by long-term funds.2.2 Objectives of Working Capital ManagementThe primary(prenominal) objective is to gibe the maintenance of satisfactory level of working roof in much(prenominal)(prenominal) a counseling that it is neither inadequate nor excessive. It should non yet be sufficient to cover the current liabilities but arrest a rationalityable margin of safety also.To minimize the amount of seat of government employed in pay the current assets. This also leads to an improvement in the Return of Capital Employed?.To misrepresent the current assets in such(prenominal) a way that the marginal return on investment in these assets is non less than the cost of neat of the United States acquired to finance them. This will fit the maximization of the value of the business unit.To maintain the ripe balance between the amount of current assets and the current liabilities in such a way that the firm is everlastingly able to meet its financial obligations, whenever due. This will image the smooth working of the unit without each ware held ups due to famine of funds.2.3 Nature Importance of Working CapitalWorking expectant is the most classic concepts that a comp either should understand as how working gravid and backing inspection and repairs them to survive and competitive in business world. Working outstanding fulfills the short-term financial requirements of any business brass instrument including textile companies oddly in developing countries like Pakistan. It is regarded as in operation(p) uppercase indispensable to meets daily bullion requirement of the scheme and hobo non be retained in the business for a longer period of time in a particular form. The money invested in working cracking changes its form and substance during the normal course of any business trading trading operations and the need and import ance for maintaining an adequate working great in any industry including textile sector locoweed non be unattended in any way. Just as human body fuel not survive without the circulation of blood in the body, the organization also requires sufficient flow of funds within the organization. If it becomes weak, the business can hardly survive, brandish and generate profit.In developing countries like Pakistan, working corking famishment is for the most part accredited as one of the most grave causal agent which causes the decline of any industry. accord to Rafuse, (1996), Working corking starvation is largely credited as a major cause if not the major cause of small business failure in many a(prenominal) substantiative and developing countries. There are several problems that create starvation of money in any business which implicate poor financial management and improper planning of cash management. Jarvis et al, (1996) said that the cash flow problems of many small businesses are exacerbated by poor financial management and in particular the lack of planning cash requirements. For the financial strength of the business, a company should have and will prefer to have a positive working bang-up rather than a electronegative working capital. round of the best ways to acquire short-term working capital financing are equity, trade credit and short-term loans.2.4 Determinants of Working CapitalWorking capital management is an indispensable functional area of management. However the large number of factors influences the total working capital requirements of the firm. It may however be added that these factors take differently to the different units and these keep varying from time to time. In general, the determinants of working capital, which are common to all organizations, can be summarized as underNature and Size of backup returnion Cycle cable Cycle harvest-festivalion PolicyCredit PolicyGrowth blowupProper availability of raw materialsPr ofit levelInflation run(a) Efficiency2.5 Sources of Working CapitalThe working capital needful and what constitutes working capital have been analyzed in depth. Now we look out what are the ways we can generate working capital.Trade attributeBank CreditCurrent provisions and non-bank short term acceptances and abundant term sources i.e., equity share capital, preference share capital and otherwise long term espousals.2.6 The Management of Working Capital jibe to cutting edge Horne (1977), working capital management is the management of current assets such as cash, marke panel securities, receivables, and inventories. Osisioma (1997) described working capital management as the regulation, adjustment, and management of balance between current assets and current liabilities of a firm such that maturing obligations are met, and the fixed assets are properly serviced. In order to manage working capital efficiently, two atoms must exist as prerequisite fractions and desirable quan tities. Osisioma (1997) explained that efficient working capital management must cover an adequate relationship between the different components of a organizations working capital so as to make an efficient mix, which will plug capital adequacy. Thus, working capital management should envision that the desirable quantities of each component of the working capital are available for organization. However, the question arises that What determines pauperism components of an organizations working capital and how much of such necessary components can be considered as adequate or desirable?? Each organization working capitals necessary components depend on the type of business and industry. Cash, accounts payables, accounts receivables, marketable securities, inventories, and redeemable futures can be screwd as the common components of firms working capital. However, the question is to credit the factors that determine the adequacy of working capital ground on growth, sizing, oper ating cash flow, etc. The inability to understand the determining factors and measurement of adequate amounts of working capital will lead an organization to bankruptcy.The altitude of performance levels businesses have traditionally been attributed to many general managerial factors such as manufacturing cost, marketing strategies and operations. Working capital management may have a consequent impact on business survival and growth (Kargar and Blumenthal, 1994). The proper management of working capital is very brisk for the financial wellness of businesses of all sizes. It is often observed that the amounts invested in working capital are high in percentage to the total assets employed. Therefore, it is imperative that these amounts should be utilise in an efficient and effective manner. However, in that respect is substantiation that manufacturing sector which entangle textile industry as well are not very good at managing their working capital. Reasons for that are many smal l businesses subscribe from undercapitalization, increase cost of issue, increase fixed asset cost and scores of other factors. concord to V MARIAPPAN, K CHIDAMBARAM) (2003), productiveness does not alone mean the increase in production but it relates to the cost decrement and efficiency in the process of production. Therefore, the importance of exerting tight control over working capital investment, cost of production and cost of fixed assets can not be pretermit.An organization can be highly profitable, but if it fails to translate this into cash from operations within the same operating period, the organization would require borrowing to support its continued working capital requirements. Hence, the triplex objectives of profitability and liquidity must be synchronized and one should not impinge on the other for long. Investments by any business in current assets are inevitable to undertake delivery of goods or go to the ultimate customers and a proper management of sam e should create the sought after impact on either profitability or liquidity. If different resources are blocked at the various phases of the supply chain, this will lengthen the cash operating cycle. However, profitability might increase due to increase gross gross revenue but it may also adversely affect the profitability if the cost tied up in working capital surpass the benefits of carrying more inventories and/or allowing more trade credit to customers. (Padachi, Kesseven, Oct 2006)2.7 Production Cost ProfitProduction cost is the cost of materials and labor necessary to produce goods and there are two types of profit that is generated from a business. The first is gross profit which is the difference of the total revenue generated after the sale of each gunpoint by the production cost for that degree.Second is net profit which is cypher once the company pays taxes, rent, and other expenses that might come with running and owning the business.However lack of technology, in crease labor and material cost, higher cost of debt and other factors increases production cost and decrease profit but if production increases, businesses are able to purchase more materials at a discounted rate, which can friend them to reduce the production cost.2.8 textile Sector Cost of ProductionThe relationship of cost of production with profit of any sector is the key segment utilize to evaluate the productivity of that particular sector including textile sector. productiveness is often mixed with increase production. However, higher production does not always mean higher productivity. Higher productivity can be achieved only by bettor utilization of resources and reduction of cost. So the importance of production cost can not be neglected and is closely cerebrate to the increase productivity of industrial sector on any economy. According to the Michael porter of the Harvard University says the competitiveness of any sector is totally depend on the productivity of i ts industrial sector. Productivity does not only mean the increase in production but it relates to the cost reduction and efficiency in the process of production (V MARIAPPAN, K CHIDAMBARAM) (2003).The challenger from international market has been change magnitude due to the continuous intro on technology used in the industrial sector of textile which ultimately increases the cost. The protection from international controversy of the earlier semi-insular phase has stipulation rise to high cost manufacturing, which is inhibiting both the expansion of the municipal market and more rapid development of exports India, 198516.(Aug 29 1989). However, the intense competition in international market leads to the high internal growth with increase in the level of exports. Productivity is getting knackered mainly due to under- utilization of machines, inefficient working, poor machinery maintenance, over- spinning, lack of modernization, place shortage and un healthy labor and managem ent relations Gulrajani 1982. (2003) with reference to to a higher place saying the same situation is tie in to the Pakistans textile sector the machines used in the textile sector is either underutilized or very ageing which became the hurdle in productivity of the sector and the labor link with this textile sector is also effected due to ironlike labor unions in the country which increase cost and decrease productivity and eventually profit of the textile sector.The government policies colligate to the investment on technological macrocosm also effect textile sector Government policies in these sectors, it is argued, have been biased against fresh investments and import restrictions on capital goods and advanced technology have condemned entire industries to obsolete technologies (1989). The restriction on the imports and other obligations compel by the Government on the purchase of machinery from outside country military the entire industry to obsolete technologies as we ll the continuous capital requirement for the expansion of production and other raw material cost force the textile sector to borrow money from bank to frivol away working capital. One of the most distinguished concepts that a new business owner should know is how working capital and financing helps them survive and grow in a competitive world. The difference between current assets and current liabilities is known as net working capital (Jonathan Keith Gober). The data of textile sector used in this research shows that most of the companies have negative working capital which means the current liabilities of the textile sector is more than the asset which again increase the cost of the textile sector of Pakistan.2.9 Textile Sector Cost of Fixed AssetsWith increasing global competition, the survival of any industry is getting difficult day by day peculiarly in developing countries like Pakistan. Textile sector or any other sector of all developing countries used machineries and f ixed assets which are obsolete and outmoded which increases their cost of production and decline productivity, efficiency and profitability. According to V. Mariappan and K. Chidambaram (2003), proper machine utilizations, the effective cost management and quality of material supplies are the three vital factors that determine the operating efficiency of a textile mill.Developing countries lack in most of the industrial resources same as the case with textile sector in Pakistan we have to import most of the technical machinery and equipment used in textile sector from other developed countries and this increases the overall cost of textile sector in Pakistan. Although the cost of textile sector increases with purchase of new machineries and equipment but this advancement in technology create the positive impact on performance of textile sector because this not only increase productivity, efficiency and profitability but also it helps textile firms to compete in the global market. In crease productivity of the textile sector is not only the outcome of advancement in the level technological development but other factors such as relative cost of labour and equipment, the cost of material, effective management of working capital and other resources also create an impact on it. Thus, higher productivity is not an accident. It is the result of effective planning and the judicious use of resources, V. Mariappan and K. Chidambaram (2003).Chapter 3 METHODOLOGY3.1 Statement of ProblemWhat is the impact of working capital, cost of production and fixed assets cost on profitability of textile sector in Pakistan?3.2 HypothesesH1 Increase in working capital negatively affect the profitability of textile sector by increase in short term liabilities.H2 Investment in technological instruments (Fixed Assets) has the positive impact on the profitability of textile sectorH3 High production cost has a negative impact on the development of textile sector.3.3 Data charmThere are two major sources of data collection use by the researchers for research purposes. They arePrimary DataPrimary data is used for the first with with(predicate) questionnaires, interviews and service and this is not published anyplace before.Secondary dataSecondary data is used for the researches which are ground on already published in different newspapers, research journals and annually companies motifs.Chapter 4 STATISTICAL ANALYSISIn the poser summary table he capital R? in this table is coefficient of correlation which is .775 which shows that there is high correlation(relationship) between dependent (net income) and independent proteans (fixed assets, working capital and cost of good sold) the guerilla column which shows R Square (coefficient of determination or regression coefficient) which shows that 60% Of vicissitude in net income amount is caused by predictors third column is Adjusted R square 59.7% transition is caused by predictors considering number of observations and the number of predicted variables.The ANOVA table tests the shape acceptability and how case fits the first row which shows regression displays information about the variation accounted for by your model and the support row of Resi bivalent shows information about the variation is not accounted by your model the significance value of F is .000 which is less than 0.05 so it means than model is acceptable and the variation explained by the model is not due to chance.The coefficients table the first row shows constant which is second column of first row -38.373 shows that when all predictors (cogs, working capital and fixed assets) are held to zero the amount of net income is -38.373 and the constant is also substantive P0.05, p=0.641 which means that change in fixed assets will not bring any change in net incomeOn the al-Qaida of correlation matrix fixed assets is again rejected of being related to net income R=0.309 which is very low correlation it is also unimportant as s hown in coefficient table.Chapter 5 CONCLUSION RECOMMENDATIONS5.1 ConclusionAfter evaluating the unhurt textile sector I reached to a point that cost is greatly affect the productivity, efficiency and profitability of every sector same as the case with textile sector. In Pakistan, the textile sector is considered the most important investment sector which greatly push Gross Domestic Product (GDP) and National Income (NI) of the country. So to study such an important sector these variables help me in evaluating the relationship of cost with the performance of textile sector.The meditation used in conducting this research shows the impact of fixed assets, working capital, cost of production with the net income of the sector my finding shows that there is no impact of fixed asset cost on net income of the textile sector so my hypothesis is rejected which shows that increase in the investment of technology and equipment improve the efficiency and productivity of textile sector.Second ly, the research contain other variable relationship with the development of textile sector in which the working capital plays an important role my research results clearly shows the impact of working capital with net income because the increase in current assets help this sector to break up maintain its current liabilities which ultimately reduces the addition cost incurred by the sector. In Pakistan textile sector needs continuous short term investment which forced the sector to increase it short term debt by borrowing from bank to meet its short term expenses. So the prove size taken in the research shows that both of them are highly jibe but they have inverse relationship increase in working capital decreases the net income as vise a versa. So my hypothesis for the working capital is accepted and it is proved that independent variable is explained by dependent variable.The third and last variable is the cost of production which bear all be incurred while production of the t extile items. It include the prices for all raw materials which are essential for the production process fuel, oil inventories, transportation, cotton plant wool prices, yarn prices which bring solid changes in the profitability of textile sector . The hypothesis used for the cost of production shows that there is inverse relationship on cost of production and profitability as cost for producing the textile items is increasing the profitability becomes falling and in result the development of textile sector faced hurdles in growing.The overall analysis shows that we cannot considered the increase in production only until or unless the cost structure is not clearly defined although the production of textile sector is change magnitude in last few eld but simultaneously the cost is increased with greater extend which reduces the profit margins with very less proportion which does not support the economy of Pakistan which has the major share in growth of the Pakistans economy.5.2 Re commendationsPakistan is a one of the leading country producing raw yarn, cotton, and fabrics. If we focus on the value added products like garments, hosiery, knitwear and other textile products, the production volume of textiles can be enhanced by enormously. In this respect top priority should be given to cost reduction, easy availability of working capital and troth creation.The Government of Pakistan has created a special Textile Board for the promotion of Textile Industry as predicted in Textile Vision 2005 but unluckily its performance and productivity is still below expectation of the government of Pakistan. So the guess is that government should establish a Ministry of Textile to meet the subscribe to of private sector.Whole economy of Pakistan is set uping due to energy crisis. Therefore, the increase in double digit inflation causes great discrepancy in the production of textile industry which forces most of the textile firms to wind up their business and to set up t heir business in other countries in our region. Therefore, my suggestion for government is that the government should take concrete steps on priority base to resolve energy crisis and control inflation in Pakistan.The government of Pakistan has recently enforce tax of the import of thread from other countries which is severely affecting the productivity and profitability of the textile sector and staggeringly increases the cost of production of textile industry. To resolve this issue, the government needs to mischievously look into this matter and try to find a solution to it to make headway the textile industry in Pakistan.Government should either set up joint ventures in textile related areas or should provide subsidised credit to textile manufacturers to upgrade their technology and capacity building through Technology Upgradation Fund. (TUF). It is also suggested that smaller units of top executive looms (up to 50 looms) should be upgraded to cable car looms and power loo m units larger than 50 looms into air jet looms.At present cost of doing business in Pakistan is higher as compared to the regional countries, which has resulted in bitter competitiveness to Pakistani Products in Foreign Markets. mainland mainland China and India are the bigger coEffect of WCM on Firm Profitability in Pakistan TextilesEffect of WCM on Firm Profitability in Pakistan TextilesThis research examines the effect of Working Capital Management (WCM) on profitability of firms in the textile sector of Pakistan. I also used cost of production and fixed assets cost as control variable to investigate their effect on profitability of textile companies. I have selected a sample size of 55 textile companies of Pakistan for a period of six eld from 2003 to 2008. Regression and coefficient of correlation are used for analysis. The SPSS result R=0.77 shows the knockout correlation between the model which helps me understand the relationship between working capital, cost of productio n, fixed assets and profitability.OBJECTIVESThis research is focusing on working capital management and its effects on profitability of textile companies in Pakistan. The main objectives areTo determine the relationship between the efficiency of Working Capital Management (WCM) and Profitability over a period of 6 years for 55 Textile firms of Pakistan.To analyze the relationship between cost of production and profitability of textile companies.To find out the effect of fixed assets cost on profitability of textile companies.To draw conclusion about the relationship between efficiency of working capital management and profitability of textile firms in Pakistan.To suggest some measures for improvement in working capital management of textile sector in Pakistan.LIMITATIONSDue to the time frame and choice of the subject there were number of limitation faced by the researcher during the thesis.The first and the foremost limitation to this research is the shortage of time which created m any hurdles in collecting data and completion of reportResearcher was unable to find many research on his bailiwick within the scenario of Pakistan. So therefore researches were unable to compare its finding with other researchesVery few studies have been made in relation to Working Capital Management (WCM) specially in the textile sector in Pakistan. Therefore, the present study is a maiden attempt to analyze the relationship between WCM efficiency, cost of production, fixed assets cost and Profit in the textile sector in Pakistan.Its was very difficult for research to collect financial data of 55 textile companies in a very short span of time allotted to complete the research.Chapter 1 INTRODUCTION1.1 Textile SectorTextile products are a basic human requirement next only to food. Backbone of industrial sector which plays a vital role in the national economy it give support to GDP, exports, workplace, foreign exchange earnings, investment and contribution to value added indust ry by providing employment to largely utilized workforce. So to boost the economy and to reduce the poverty in the country the performance of all industrial sectors is very important and textile sector is one of the major sectors of all developing countries.1.2 functioning of Textile Sector in PakistanThe performance of textile sector has strong relationship with the cost incurred by textile sector and effective management of net working capital. Pakistan is a developing country which lack in most of the industrial resources same as the case with textile sector in Pakistan we have to import most of the technical machinery used in textile sector from other developed countries which increases the overall cost of textile sector in Pakistan as well as lack of working capital, increase in fuel prices, electricity shortage, high import duties, high cost of debt, taxation and all other factors together bring negativism in the performance of textile sector. However, Pakistans textile ind ustry has again started to invest in the textile machinery and the imports of textile machinery for the month of February, 2010 were $23.1 million, an increase of 190% as compared to the imports of machinery in February, 2009 of $7.99 million. From July 09 to February 10 the total imports of machinery recorded 3.1% increase, from $158.89 million to $163.844 million for the same period last year. Although the textiles sector cost has increased by purchase of these new machineries but this technology placed the positive impact on performance of textile industries because this not only increase productivity ultimately profit but also it helps to compete in the international market.The increased in labor cost is also one of factor effecting the textile sector in Pakistan because the major portion of textile production depends upon the labor used for production purposes due to the lack of technology. As the enhancement of lower limit wages for textile sector is announced which proposed increase in minimum wages from Rs.4, 600/= to Rs.6, 000/= per Month (over 30%) for unskilled workers will have a devastating effect on industry. Besides the financial impact will also have to be borne towards payment of gratuity, provident fund, EOBI, social guarantor excluding overtime etc. which if worked out will come to Rs.8, 322. In addition to the above, proportionate increase will also have to be given to the skilled cadre of workers as for instance an operator will balk to work at the same rate of salary being paid to a doffer. This will make textile sector survival more difficult in current scenario. The growth of textile sector depends on its productivity and mainly depends on the cost and profitability.The textile sector is the largest sector of Pakistans economy which has the major shares in exports of the country but the major financing of this industry depends upon the bank loan. To purchase heavy machineries on cash or to lease them, the textile sector required huge amount of investment and to meet daily expenditures they need net working capital and for all that they have to borrow from bank by paying interest (i.e. cost debt) which increases the overall cost of textile sector in Pakistan. The textile sector of Pakistan is divided in many small firms which have small capital structure most of them are mainly dependent on loans due to unavailability of funds, continuous increase in cost of production. All these factors have a cumulative effect on the cost and profitability of textile sector as the increase in double digit inflation the survival of textile sector become more difficult. Although the textile sector of Pakistan is backed by the government with their greatest interest in textile sector. They have arrange different types of investment policies and funds for textile sector but the improvement in textile sector due to other factors is still less then the requirement.Importance Of Textile Industry In Pakistans Economy1.3 Effect of Work ing Capital and OtherFactors on Textile SectorWorking capital management is a very important component of finance because it directly affects the profitability and liquidity of any organization especially in developing countries like Pakistan. It comprises funds invested in Current Assets, which in the ordinary course of business can be off into cash within a short period without undergoing diminishing in value and without interruption of the organization. Current Liabilities are those which are projected to be paid in the ordinary course of business within a short time. Every company has to make arrangements for adequate funds to meet the day-to-day expenditure apart from investment in Fixed Assets.However, Pakistan textile sector is on decline just because of the additional cost due to lack of working capital which can have impact of profitability and liquidity and increase in inflation also effect textiles production badly. In this research, I have discussed and analyzed the rela tionship between the efficiency level of working capital management and profitability of textile sector in Pakistan as it is the major sector which contribute in Pakistan economy and generate foreign revenue by exporting textile products to international markets but the increase in cost, debt and improper management of working capital in this sector make its a declining sector in footing of profitability and liquidity. The textile industries come under the SMEs (Small Medium Enterprises) which does not bear the continuous increase of cost. According to APTMA, textile exports of Pakistan have declined by about 20% in 2008. The industry is bracing for more trouble forth with continuing crises of electricity and gas, international market access, global economic slowdown, lack of capital and adverse travel advisories.Chapter 2 LITERATURE REVIEW2.1 plan of Working CapitalGross Working Capital It represents the total current assets and is also referred to as circulating capital becaus e current capital as current assets, are circulating in nature.Net Working Capital It is a measure of liquidity and it can be defined in two ways.The most usually implied definition of net working capital is that it represents the difference between current assets and current liabilities. Some people also define it as excess of current assets over the current liabilities.It is that portion of the firms current assets, which is financed by long-term funds.2.2 Objectives of Working Capital ManagementThe main objective is to ensure the maintenance of satisfactory level of working capital in such a way that it is neither inadequate nor excessive. It should not only be sufficient to cover the current liabilities but ensure a reasonable margin of safety also.To minimize the amount of capital employed in financing the current assets. This also leads to an improvement in the Return of Capital Employed?.To manage the current assets in such a way that the marginal return on investment in thes e assets is not less than the cost of capital acquired to finance them. This will ensure the maximization of the value of the business unit.To maintain the proper balance between the amount of current assets and the current liabilities in such a way that the firm is always able to meet its financial obligations, whenever due. This will ensure the smooth working of the unit without any production held ups due to paucity of funds.2.3 Nature Importance of Working CapitalWorking capital is the most important concepts that a company should understand as how working capital and financing helps them to survive and competitive in business world. Working capital fulfills the short-term financial requirements of any business organization including textile companies especially in developing countries like Pakistan. It is regarded as operating capital mandatory to meets daily cash requirement of the organization and can not be retained in the business for a longer period of time in a particul ar form. The money invested in working capital changes its form and substance during the normal course of any business operations and the need and importance for maintaining an adequate working capital in any industry including textile sector can not be neglected in any way. Just as human body can not survive without the circulation of blood in the body, the organization also requires sufficient flow of funds within the organization. If it becomes weak, the business can hardly survive, achieve and generate profit.In developing countries like Pakistan, working capital starvation is generally accredited as one of the most important reason which causes the decline of any industry. According to Rafuse, (1996), Working capital starvation is generally credited as a major cause if not the major cause of small business failure in many developed and developing countries. There are several problems that create starvation of cash in any business which include poor financial management and imp roper planning of cash management. Jarvis et al, (1996) said that the cash flow problems of many small businesses are exacerbated by poor financial management and in particular the lack of planning cash requirements. For the financial strength of the business, a company should have and will prefer to have a positive working capital rather than a negative working capital. Some of the best ways to acquire short-term working capital financing are equity, trade credit and short-term loans.2.4 Determinants of Working CapitalWorking capital management is an indispensable functional area of management. However the large number of factors influences the total working capital requirements of the firm. It may however be added that these factors affect differently to the different units and these keep varying from time to time. In general, the determinants of working capital, which are common to all organizations, can be summarized as underNature and Size of BusinessProduction CycleBusiness Cy cleProduction PolicyCredit PolicyGrowth elaboratenessProper availability of raw materialsProfit levelInflation direct Efficiency2.5 Sources of Working CapitalThe working capital necessary and what constitutes working capital have been analyzed in depth. Now we look out what are the ways we can generate working capital.Trade ascribeBank CreditCurrent provisions and non-bank short term borrowings and grand term sources i.e., equity share capital, preference share capital and other long term borrowings.2.6 The Management of Working CapitalAccording to train Horne (1977), working capital management is the management of current assets such as cash, marketable securities, receivables, and inventories. Osisioma (1997) described working capital management as the regulation, adjustment, and management of balance between current assets and current liabilities of a firm such that maturing obligations are met, and the fixed assets are properly serviced. In order to manage working capital ef ficiently, two elements must exist as necessary components and desirable quantities. Osisioma (1997) explained that efficient working capital management must guarantee an adequate relationship between the different components of a organizations working capital so as to make an efficient mix, which will guarantee capital adequacy. Thus, working capital management should ensure that the desirable quantities of each component of the working capital are available for organization. However, the question arises that What determines necessary components of an organizations working capital and how much of such necessary components can be considered as adequate or desirable?? Each organization working capitals necessary components depend on the type of business and industry. Cash, accounts payables, accounts receivables, marketable securities, inventories, and redeemable futures can be recognized as the common components of firms working capital. However, the question is to recognize the fac tors that determine the adequacy of working capital based on growth, size, operating cash flow, etc. The inability to understand the determining factors and measurement of adequate amounts of working capital will lead an organization to bankruptcy.The altitude of performance levels businesses have traditionally been attributed to many general managerial factors such as manufacturing cost, marketing strategies and operations. Working capital management may have a consequent impact on business survival and growth (Kargar and Blumenthal, 1994). The proper management of working capital is very vital for the financial health of businesses of all sizes. It is often observed that the amounts invested in working capital are high in percentage to the total assets employed. Therefore, it is imperative that these amounts should be used in an efficient and effective manner. However, there is substantiation that manufacturing sector which include textile industry as well are not very good at man aging their working capital. Reasons for that are many small businesses suffer from undercapitalization, increase cost of production, increase fixed asset cost and much of other factors. According to V MARIAPPAN, K CHIDAMBARAM) (2003), Productivity does not only mean the increase in production but it relates to the cost reduction and efficiency in the process of production. Therefore, the importance of exerting tight control over working capital investment, cost of production and cost of fixed assets can not be neglected.An organization can be highly profitable, but if it fails to translate this into cash from operations within the same operating period, the organization would require borrowing to support its continued working capital requirements. Hence, the dual objectives of profitability and liquidity must be synchronized and one should not impinge on the other for long. Investments by any business in current assets are inevitable to ensure delivery of goods or function to the ultimate customers and a proper management of same should create the in demand(p) impact on either profitability or liquidity. If different resources are blocked at the various phases of the supply chain, this will lengthen the cash operating cycle. However, profitability might increase due to increase sales but it may also adversely affect the profitability if the costs tied up in working capital surpass the benefits of carrying more inventories and/or allowing more trade credit to customers. (Padachi, Kesseven, Oct 2006)2.7 Production Cost ProfitProduction cost is the cost of materials and labor necessary to produce goods and there are two types of profit that is generated from a business. The first is gross profit which is the difference of the total revenue generated after the sale of each item by the production cost for that item.Second is net profit which is calculate once the company pays taxes, rent, and other expenses that might come with running and owning the business .However lack of technology, increase labor and material cost, higher cost of debt and other factors increases production cost and decrease profit but if production increases, businesses are able to purchase more materials at a discounted rate, which can help them to reduce the production cost.2.8 Textile Sector Cost of ProductionThe relationship of cost of production with profit of any sector is the key element used to evaluate the productivity of that particular sector including textile sector. Productivity is often mixed with increased production. However, higher production does not always mean higher productivity. Higher productivity can be achieved only by better utilization of resources and reduction of cost. So the importance of production cost can not be neglected and is closely related to the increase productivity of industrial sector on any economy. According to the Michael porter of the Harvard University says the competitiveness of any sector is totally depend on the pr oductivity of its industrial sector. Productivity does not only mean the increase in production but it relates to the cost reduction and efficiency in the process of production (V MARIAPPAN, K CHIDAMBARAM) (2003).The competition from international market has been increased due to the continuous innovation on technology used in the industrial sector of textile which ultimately increases the cost. The protection from international competition of the earlier semi-insular phase has given rise to high cost manufacturing, which is inhibiting both the expansion of the domestic market and more rapid development of exports India, 198516.(Aug 29 1989). However, the intense competition in international market leads to the high domestic growth with increased in the level of exports. Productivity is getting dead mainly due to under- utilization of machines, inefficient working, poor machinery maintenance, over- spinning, lack of modernization, power shortage and unhealthy labor and management r elations Gulrajani 1982. (2003) with reference to above saying the same situation is related to the Pakistans textile sector the machines used in the textile sector is either underutilized or very old which became the hurdle in productivity of the sector and the labor related with this textile sector is also effected due to strong labor unions in the country which increase cost and decrease productivity and eventually profit of the textile sector.The government policies related to the investment on technological innovation also effect textile sector Government policies in these sectors, it is argued, have been biased against fresh investments and import restrictions on capital goods and advanced technology have condemned entire industries to obsolete technologies (1989). The restriction on the imports and other obligations imposed by the Government on the purchase of machinery from outside country force the entire industry to obsolete technologies as well the continuous capital requ irement for the expansion of production and other raw material cost force the textile sector to borrow money from bank to quit working capital. One of the most important concepts that a new business owner should know is how working capital and financing helps them survive and grow in a competitive world. The difference between current assets and current liabilities is known as net working capital (Jonathan Keith Gober). The data of textile sector used in this research shows that most of the companies have negative working capital which means the current liabilities of the textile sector is more than the asset which again increase the cost of the textile sector of Pakistan.2.9 Textile Sector Cost of Fixed AssetsWith increasing global competition, the survival of any industry is getting difficult day by day especially in developing countries like Pakistan. Textile sector or any other sector of all developing countries used machineries and fixed assets which are obsolete and outmoded which increases their cost of production and decline productivity, efficiency and profitability. According to V. Mariappan and K. Chidambaram (2003), proper machine utilizations, the effective cost management and quality of material supplies are the three vital factors that determine the operating efficiency of a textile mill.Developing countries lack in most of the industrial resources same as the case with textile sector in Pakistan we have to import most of the technical machinery and equipment used in textile sector from other developed countries and this increases the overall cost of textile sector in Pakistan. Although the cost of textile sector increases with purchase of new machineries and equipment but this advancement in technology create the positive impact on performance of textile sector because this not only increase productivity, efficiency and profitability but also it helps textile firms to compete in the global market. Increase productivity of the textile sector i s not only the outcome of advancement in the level technological development but other factors such as relative cost of labour and equipment, the cost of material, effective management of working capital and other resources also create an impact on it. Thus, higher productivity is not an accident. It is the result of effective planning and the judicious use of resources, V. Mariappan and K. Chidambaram (2003).Chapter 3 METHODOLOGY3.1 Statement of ProblemWhat is the impact of working capital, cost of production and fixed assets cost on profitability of textile sector in Pakistan?3.2 HypothesesH1 Increase in working capital negatively affect the profitability of textile sector by increase in short term liabilities.H2 Investment in technological instruments (Fixed Assets) has the positive impact on the profitability of textile sectorH3 High production cost has a negative impact on the development of textile sector.3.3 Data accretionThere are two major sources of data collection use by the researchers for research purposes. They arePrimary DataPrimary data is used for the first through questionnaires, interviews and service and this is not published anyplace before.Secondary dataSecondary data is used for the researches which are based on already published in different newspapers, research journals and each year companies reports.Chapter 4 STATISTICAL ANALYSISIn the model summary table he capital R? in this table is coefficient of correlation which is .775 which shows that there is high correlation(relationship) between dependent (net income) and independent variables (fixed assets, working capital and cost of good sold) the second column which shows R Square (coefficient of determination or regression coefficient) which shows that 60% Of variation in net income amount is caused by predictors third column is Adjusted R square 59.7% variation is caused by predictors considering number of observations and the number of predicted variables.The ANOVA table tests the model acceptability and how model fits the first row which shows regression displays information about the variation accounted for by your model and the second row of Residual shows information about the variation is not accounted by your model the significance value of F is .000 which is less than 0.05 so it means than model is acceptable and the variation explained by the model is not due to chance.The coefficients table the first row shows constant which is second column of first row -38.373 shows that when all predictors (cogs, working capital and fixed assets) are held to zero the amount of net income is -38.373 and the constant is also significant P0.05, p=0.641 which means that change in fixed assets will not bring any change in net incomeOn the basis of correlation matrix fixed assets is again rejected of being related to net income R=0.309 which is very low correlation it is also peanut as shown in coefficient table.Chapter 5 CONCLUSION RECOMMENDATIONS5.1 ConclusionAfter e valuating the full-page textile sector I reached to a point that cost is greatly affect the productivity, efficiency and profitability of every sector same as the case with textile sector. In Pakistan, the textile sector is considered the most important investment sector which greatly push Gross Domestic Product (GDP) and National Income (NI) of the country. So to study such an important sector these variables help me in evaluating the relationship of cost with the performance of textile sector.The hypothesis used in conducting this research shows the impact of fixed assets, working capital, cost of production with the net income of the sector my finding shows that there is no impact of fixed asset cost on net income of the textile sector so my hypothesis is rejected which shows that increase in the investment of technology and equipment improve the efficiency and productivity of textile sector.Secondly, the research contain other variable relationship with the development of texti le sector in which the working capital plays an important role my research results clearly shows the impact of working capital with net income because the increase in current assets help this sector to better maintain its current liabilities which ultimately reduces the addition cost incurred by the sector. In Pakistan textile sector needs continuous short term investment which forced the sector to increase it short term debt by borrowing from bank to meet its short term expenses. So the sample size taken in the research shows that both of them are highly agree but they have inverse relationship increase in working capital decreases the net income as vise a versa. So my hypothesis for the working capital is accepted and it is proved that independent variable is explained by dependent variable.The third and last variable is the cost of production which combine all costs incurred while production of the textile items. It include the prices for all raw materials which are essential f or the production process fuel, oil inventories, transportation, cotton prices, yarn prices which bring significant changes in the profitability of textile sector . The hypothesis used for the cost of production shows that there is inverse relationship on cost of production and profitability as cost for producing the textile items is increasing the profitability becomes falling and in result the development of textile sector faced hurdles in growing.The overall analysis shows that we cannot considered the increase in production only until or unless the cost structure is not clearly defined although the production of textile sector is increased in last few years but simultaneously the cost is increased with greater extend which reduces the profit margins with very less proportion which does not support the economy of Pakistan which has the major share in growth of the Pakistans economy.5.2 RecommendationsPakistan is a one of the leading country producing raw yarn, cotton, and fabrics . If we focus on the value added products like garments, hosiery, knitwear and other textile products, the production volume of textiles can be enhanced by tremendously. In this respect top priority should be given to cost reduction, easy availability of working capital and employment creation.The Government of Pakistan has created a special Textile Board for the promotion of Textile Industry as predicted in Textile Vision 2005 but unfortunately its performance and productivity is still below expectation of the government of Pakistan. So the guess is that government should establish a Ministry of Textile to meet the demand of private sector.Whole economy of Pakistan is suffering due to energy crisis. Therefore, the increase in double digit inflation causes great discrepancy in the production of textile industry which forces most of the textile firms to wind up their business and to set up their business in other countries in our region. Therefore, my suggestion for government is tha t the government should take concrete steps on priority basis to resolve energy crisis and control inflation in Pakistan.The government of Pakistan has recently imposed tax of the import of thread from other countries which is severely affecting the productivity and profitability of the textile sector and tremendously increases the cost of production of textile industry. To resolve this issue, the government needs to mischievously look into this matter and try to find a solution to it to boost the textile industry in Pakistan.Government should either set up joint ventures in textile related areas or should provide subsidized credit to textile manufacturers to upgrade their technology and capacity building through Technology Upgradation Fund. (TUF). It is also suggested that smaller units of power looms (up to 50 looms) should be upgraded to auto looms and power loom units larger than 50 looms into air jet looms.At present cost of doing business in Pakistan is higher as compared to the regional countries, which has resulted in bitter competitiveness to Pakistani Products in Foreign Markets. China and India are the bigger co