INTRODUCTION

Working capital means the part of the total assets of the business that change from one form to another
form in ordinary course of business operations.
Working capital may be regarded as the life blood of business. Working capital is of major importance to
internal and external analysis because of its close relationship with the current day today operations of a
business. Every business needs funds for two purposes.

Long term funds are required to create production facilities through purchase of fixed assets such
as plants, machineries, lands, buildings & etc.

Short term funds are required for the purchase of raw materials, payment of wages, and other
day-to-day expenses. It is otherwise known as revolving or circulating capital It is nothing but the
difference between current assets and current liabilities. i.e.
Working Capital= Total Current Asset Total Current Liabilities

Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is
also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to
put a down payment down on a piece of commercial real estate. Working capital is essential for any
business to succeed. It is becoming increasingly important to have access to more working capital when
we need it.
WORKING CAPITAL IN TERMS OF FIVE COMPONENTS:
1. Cash and Equivalents: This most liquid form of working capital requires constant supervision.
A good cash budgeting and forecasting system provides answers to key questions such as: Is the
cash level adequate to meet current expenses as they come due? What is the timing relationship
between cash inflow and outflow? When will peak cash needs occur? When and how much bank
borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will
the cash flow cover it?
2. Accounts Receivable: Many businesses extend credit to their customers. If you do, is the amount
of accounts receivable reasonable relative to sales? How rapidly are receivables being collected?
Which customers are slow to pay and what should be done about them?

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3. Inventory: Inventory is often as much as 50 percent of a firm's current assets, so naturally it

requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature
of your business? What's the rate of inventory turnover compared with other companies in your
type of business?
4. Accounts Payable: Financing by suppliers is common in small business; it is one of the major
sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to
what you purchase? What is your firm's payment policy doing to enhance or detract from your
credit ratings?

5. Accrued Expenses and Taxes Payable: These are obligations of your company at any given
time and represent a future outflow of cash.
DETERMINANTS OF WORKING CAPITAL
The amount of working capital is depends upon following factors:
1. Nature of Business: Some businesses are such, due to their very nature, that their requirement of
fixed capital is more rather than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no founds are blocked in piling inventories and
also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure
oriented project etc. there requirement of working capital is less. On the other hand, there are
some businesses like trading activity, where requirement of fixed capital is less but more money
is blocked in inventories and debtors.
2. Length Of Production Cycle: In some business like machine tools industry, the time gap
between the Acquisition of raw material till the end of final production of finished products itself
is quite high. As such amount may be blocked either in raw material or work in progress or
finished goods or even in debtors. Naturally there need of working capital is high.
3. Size and Growth of Business: In very small company the working capital requirement is quit
high due to high overhead, higher buying and selling cost etc. as such medium size business

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positively has edge over the small companies. But if the business start growing after certain limit,
the working capital requirements may adversely affect by the increasing size.
4. Business/ Trade Cycle: If the company is the operating in the time of boom, the working capital
requirement may be more as the company may like to buy more raw material, may increase the
production and sales to take the benefit of favorable market, due to increase in the sales, there
may more and more amount of funds blocked in stock and debtors etc. similarly in the case of
depressions also, working capital may be high as the sales terms of value and quantity may be
reducing, there may be unnecessary piling up of stack without getting sold, the receivable may
not be recovered in time etc.
5. Terms of Purchase and Sales: Some time due to competition or custom, it may be necessary for
the company to extend more and more credit to customers, as result which more and more
amount is locked up in debtors or bills receivables which increase the working capital
requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of
goods and services, a part of working capital requirement may be financed by them, but it is
necessary to purchase on cash basis, the working capital requirement will be higher.
6. Profitability: The profitability of the business may be vary in each and every individual case,
which is in turn its depend on numerous factors, but high profitability will positively reduce the
strain on working capital requirement of the company, because the profits to the extent that they
earned in cash may be used to meet the working capital requirement of the company.
7. Operating Efficiency: If the business is carried on more efficiently, it can operate in profits
which may reduce the strain on working capital; it may ensure proper utilization of existing
resources by eliminating the waste and improved coordination etc.

GROSS WORKING CAPITAL AND NET WORKING CAPITAL

There are two concepts of working capital management:
1. Gross Working Capital: Gross working capital refers to the firms investment in current assets.
Current assets are the assets which can be convert in to cash within year includes cash, short term
securities, debtors, bills receivable and inventory.

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2. Net Working Capital: Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment
within an accounting year and include creditors, bills payable and outstanding expenses. Net working
capital can be positive or negative efficient working capital management requires that firms should
operate with some amount of net working capital, the exact amount varying from firm to firm and
depending, among other things; on the nature of industries.net working capital is necessary because
the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current
liabilities are relatively predictable. The cash inflow are however difficult to predict. The more
predictable the cash inflows are, the less net working capital will be required. The concept of working
capital was, first evolved by Karl Marx. Marx used the term variable capital means outlays for
payrolls advanced to workers before the completion of work. He compared this with constant capital
which according to him is nothing but dead labor. This variable capital is nothing wage fund
which remains blocked in terms of financial management, in working-process along with other
operating expenses until it is released through sale of finished goods. Although Marx did not
mentioned that workers also gave credit to the firm by accepting periodical payment of wages which
funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in
his variable capital

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PERFORMANCE OF WORKING CAPITAL MANAGEMENT

Working Capital Management: Working capital management involves management of the current
assets and the current liabilities of a firm. A firms value cannot be maximized in the long run unless it
survives the short run. Thus, sound working capital management is a requisite for a firms survival.
Working capital policy refers to the firms basic policies regarding target levels for each category of
current assets and how current assets will be financed.
The four main dimensions of Working Capital Management are:
1. Cash Management
2. Management of Accounts Receivables
3. Management of Inventory and
4. Management of Accounts Payables

Performance of working capital management of Square pharmaceuticals: (all in BDT)

NET WORKING CAPITAL (NWC):
NWC= Current asset Current liabilities

2014: 7499373281- 2394537126 = Tk. 5104836155

2013: 6946361767- 3275407433= Tk. 3670954334
2012: 8248571022- 4315390357= Tk. 3933180665

Net Working Capital

9000000000
8000000000
7000000000
6000000000 Current Assets
5000000000

Current Liabilities

40000000007499373281
3000000000
2394537126

4315390357
8248571022

3275407433
6946361767

2000000000
1000000000
0

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Figure: Net Working Capital

Square Pharmaceuticals Limited has its net working capital surplus of Tk. 5104 million in 2014, Tk. 3670
million in 2013 and tk. 3933 million in 2012 which indicate the firm has the efficiency in its short-term
financial health. The firm is able to pay off its short-term liabilities with the current asset easily which
could be a good sign for short-term & long-term creditors for the firm.

NET TRADE CYCLE (NTC)

NTC= Inventory Conversion Period + A/R Conversion Period - A/P Conversion Period
Inventory Conversion Period=

Ending Inventory
Cost of Goods Sold / Day

A/R Conversion Period=

Endings A / R
Sales/ Day

A/P Conversion Period=

Ending A/ P
Purchase /Day

For the Year 2014:

Inventory Conversion Period

2737085779
= 76.03 days
12960738683/360

766634978

=
A/R Conversion Period
23268413217 /360

A/P Conversion Period

217855755
=
4407563630/360

11.86 days

17.79 days

*Purchase = COGS Beginning Inventory + Ending Inventory Depreciation

= 12960738683 3091263712 + 2737085779 8198997120

= 4407563630
So, NTC= 76.03 + 11.86 - 17.79 = 70.1 days

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For the Year 2013:

Inventory Conversion Period

A/R Conversion Period

A/P Conversion Period

3091263712
= 98.04 days
11308857708 /360

812741029
=
20202005922/360

7034724
=
3977664271/360

14.48 days

0.64 days

*Purchase in 2013= Cost of Goods Sold Beginning Inventory + Ending Inventory Depreciation
=11308857708-3178672614+3091263712-7243784535
=3977664271
So, NTC= 98.04 + 14.48 -0.64 = 111.88 days

SQUARE PHARMACEUTICALS LIMITED

Common-Size Analysis (Current Asset Segment)
Particulars
2014
%
2013
Inventories
2737085779
36
3091263712
Trade Debtors
766634978
10
812741029
Advances, Deposits and Repayments
671749541
09
952411276
Short-term Loan
1161185776
15
1108757914
Cash and Cash Equivalents
2162717207
30
981187836
Total Current Assets
7499373281
100
6946361767

%
45
12
14
16
13
100

CASH BASED RATIO ANALYSIS

Cash to Current Asset Ratio

Cash+Cash Equivalents+ Marketable Securities

Total Current Assets

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Cash to Current Asset Ratio of 2014 =

2162717207
=
30%
7499373281

Cash to Current Asset Ratio of 2014 =

981187836
=
13%
6946361767

SQUARE has the increasing drift of Cash Ratio resulting 13% in 2013 and 30% in 2014 which reflecting
the firm is improving its amount of most liquid asset in its current asset segment which indicates the firms
liquidity strength is increasing. This position of the firm will be able to attract potential credit relationship
with other parties.

Cash to Current Liability Ratio

Cash+Cash Equivalents+ Marketable Securities

Total Current Liabilities

Cash to Current Liability Ratio of 2014 =

2162717207
=
90%
2394537126

Cash to Current Liability Ratio of 2013 =

981187836
=
30%
3275407433

SQUARE is improving itself in terms of the Cash Availability to pay its current obligations which
reflected in liquidity measure of cash to current liability ratio. SQUARE has 30% in 2013 and 90% in
2014 indicating the flexibility of payment of its bills and payables. With the help of this information
SQUARE will be able to build some goodwill to their existing and potential creditors.

OPERATING ACTIVITY OF ACCOUNTS RECEIVABLES

Accounts Receivables Turnover Ratio =

Annual Net Credit Sales

Average Receivable

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23268413217
Accounts Receivables Turnover Ratio in 2014 = 789688004

= 29.47 times

*Average Receivable = (766634978+ 812741029)/2= 789688004

20202005922
Accounts Receivables Turnover Ratio 2013 = 815871831

= 24.76 times

*Average Receivable = (812741029+ 819002633)/2= 815871831

SQUARE has efficient rate of A/R Turnover which reflects the firm can receive cash from its
credit sales proficiently. The firm has 24.76 times in 2013 and 29.47 times in 2014 which
indicate the firms comfortable position in its liquidity of collecting cash form receivables and
they have a decent credit policy.

ACCOUNTS RECEIVABLE COLLECTION PERIOD

Accounts Receivable Collection Period=

360
Accounts Receivable Turnover

360
Accounts Receivable Collection Period in 2014= 29.47

= 12 days

360
24.76

= 16 days

Accounts Receivable Collection Period in 2013=

SQUARE has very efficient rate of A/R Collection which reflects the firm can receive cash from its credit
sales within very short period of time. The firm has only 16 days in 2013 and 12 days in 2014. Though
one day has been increased but still its a very comfortable position for a big-time firm like SQUARE
reflects its speed of collecting cash form receivables.

OPERATING ACTIVITY OF INVENTORY

Inventory Turnover Ratio (ITO) =

Cost of Goods Sold

Average Inventory
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ITO in 2014 =

12960738683
=
4.45 times
2914174746

ITO in 2014 =

11308857708
=
3.61 times
3134968163

*Average Inventory in 2014= (2737085779+3091263712)/2= 2914174746

*Average Inventory in 2013= (3091263712+3178672614)/2=3134968163
The average rate of speed of inventory is very efficient for SQUARE also it has the upward trend having
3.61 times in 2013 and 4.45 times in 2015. The high rate of turnover of inventory shows the inventory is
high moving, high sales volume and high demand for the product. SQUARE has the high quality
inventory turnover to dominate in the market.

DAYS TO SELL INVENTORY

Days to Sell Inventory=

360
Inventory Turnover

Days to Sell Inventory in 2014=

360
4.45

= 81days

Days to Sell Inventory in 2013=

360
3.61

= 100 days

The liquidity of Average Inventory is moderate or good for SQUARE PHARMA. The firm takes 100 days
in 2013 and 81 days in 2014 to sell its average inventory. The trend is downward and number of days is
lower than other big firms which may reflect it has the moderate or good liquidity in selling average
inventory. But industry average is needed to explain more clearly.

OPERATING ACTIVITY OF ACCOUNTS PAYABLE

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Annual Credit Purchase

Accounts Payable Turnover=
Average Payable

Accounts Payable Turnover in 2014=

4407563630
112445240

= 39.2 times

*Purchase in 2014= Cost of Goods Sold Beginning Inventory + Ending Inventory Depreciation

= 12960738683 3091263712 + 2737085779 8198997120

= 4407563630
*Average Payable (2014) = (217855755+7034724)/2=112445240

Accounts Payable Turnover in 2013=

3977664271
269165076

= 14.78 times

*Purchase in 2013= Cost of Goods Sold Beginning Inventory + Ending Inventory Depreciation
=11308857708-3178672614+3091263712-7243784535
=3977664271
*Average Payable= (7034724+531295427)/2=269165076
The pay-off rate of A/P Turnover is increasing for SQUARE which reflects the firm is taking less time to
pay its payables. The firm has 14.78 times in 2013 and 39.2 times in 2014. This scenario cannot be good
for the firm, because if the firm cannot delay its payments, if they could retain those the amount of money
can be invested in short-term marketable securities and can earn profit which will be reflected in the
bottom line.

OPERATING CYCLE
Operating Cycle = Average collection + Days sales to inventory

Operating Cycle in 2014= 12+81= 93 days

Operating Cycle in 2013= 16+100= 116 days

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The speed of inventory converted into cash is moderate or good for SQUARE PHARMA. The firm takes
116 days in 2013 and 93 days in 2012 to convert its inventories into cash. The decreased days from year
2013 to 2014 indicates the firm is improving its ability but we need industry average to make more
concrete comment. Here Quality & Liquidity of Inventory is moderate or good for the firm and lawful. So
we can interpret that Inventorys liquidity measure is good for SQUARE PHARMACEUTICALS.

LIQUIDITY INDEX 2014:

SQUARE PHARMACEUTICALS
Particulars
Cash and Cash Equivalents
Inventories
Total Debtors

Amount
2162717207
2737085779
766634978

Days Away from Cash

--93
12
Total

Amount x Days
--254548977447
9199619736
263748597183

So, the Liquidity Index 2014= 263748597183/7499373281=35.17

Working capital management is important part in firm financial management decision. The ability of the
firm to operate continuously for longer period depends on how they deal with working capital. The
optimal level of working capital management is could be achieve by firm that manage the tradeoff
between profitability and liquidity. By considering all of the key factors and analysis, I like to say that the
SQUARE PHARMACEUTICALS is efficient in terms of short-term liquidity and the firm has the
opportunity of huge growth in the future. But to make more concrete comment analysis of more sections
is needed and industry average data is required.
IMPACT OF WORKING CAPITAL MANAGEMENT ON OVERALL PERFORMANCE OF THE
COMPANY
Working capital management is the functional area of finance that covers all the current accounts of the
firm. Working capital management also involves the relationship between a firm's short term assets and its
short-term liabilities. So, the goal of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and
upcoming operational expenses.
The management of working capital involves managing inventories, accounts receivable, accounts
payable and cash. In the present day context of rising capital cost and scarce funds, the importance of
working capital needs special emphasis. It has been widely accepted that the profitability of a business
concern likely depends upon the manner in which its working capital is managed.
The inefficient management of working capital not only reduces profitability of the company but
ultimately may also lead a concern to financial crisis. On the other hand, proper management of working
capital leads to a material savings and ensures financial returns at the optimum level even on the
minimum level of capital employed.
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Both excessive and inadequate working capital is harmful for the firm. Excessive working capital leads to
un-remunerative use of scarce funds. On the other hand inadequate working capital usually interrupts the
normal operations of firm and impairs profitability. There are many instances of the company failure for
inadequate working capital. Further, working capital has to play a vital role to keep pace with the
scientific and technological developments that are taking place in the concerned area of pharmaceutical
industry.
If new ideas, methods and techniques are not injected or brought into practice for want of working capital,
the concern will certainly not be able to face competition and survive. In this context, working capital
management has a special relevance and a thorough investigation regarding working capital practice in
the Square Pharmaceuticals Ltd. is of utmost importance.
HOW THE COMPANY CAN IMPROVE ITS WORKING CAPITAL MANAGEMENT
Manage working capital actively throughout the organization: Its not the responsibility of the finance
department alone. Companies should implement a cash-focused management system, which advises on
working-capital issues. The way to make sure that cash-focused management happens is to use key
performance indicators (KPIs) on working capital all the way down the business to operational level.
Ensure that the KPIs are aligned with individual managers responsibilities. Cash management should be
an active process, linked to improvements in working processes.
Manage stock actively: Holding unnecessary levels of the wrong stock can be one of the biggest drags on
working capital. Stock problems often result from a lack of communication among different departments.
Regular (monthly or quarterly) stock checks are part of the answer. But the information emerging from
these checks needs to be reviewed and acted upon.
Pay supplier on time: Now theres a counterintuitive way of improving your working capital. But Clive
Adolph, a partner with PBA Accountants, argues that companies that pay on time develop better
relationships with suppliers and are in a position to negotiate better deals. If the company doesnt have a
good relationship with its suppliers, the company could end up not receiving goods when it needs them.
And, if the company cant fulfill its commitments, thats not good for the companys cash flow either.
Manage the payment process more effectively: Customers will give all sorts of excuses to pay late. One of
the most common is an inaccurate invoice, so make accurate invoices a key performance measure for
receivables billing. Bad debts, a particular drag on working capital in tough times, can often be reduced
by making more rigorous credit checks on new customers and managing credit limits more carefully
Make expenses visible: Even expenses claims with small excess amounts can have a cumulatively
negative impact on working capital. The key is to set clear rules in areas such as travel and
accommodation and then to ensure that these are followed.
Consider alternatives funding: the banks unwillingness to lend, especially to SMEs, has put a strain on
the working capital of many businesses. But bank loans and overdrafts arent the only source of working
capital. Firms are turning to asset-based finance such as invoice discounting, while others are harnessing
the power of the web to raise finance.

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CONCLUSION
Pharmaceutical Industry in our country is a profitable sector. It is due to the reason that the firms in the
industry are very competitive and has gained efficiency in managing its resources competently. The
impact of overall working capital policy on profitability in this industry is proved to be significant and the
ratios related to working capital can explain the differences between the firms.
Square Pharmaceuticals is running in a nice way in Bangladesh. It is developing our national growth
throughout increasing national income, reducing unemployment rate, enhancing the technological sectors
through inspiration and demand, again its helping the government by providing them with a huge tax.
Growth rate of their business is very encouraging for the young entrepreneur to come forward. The nicest
thing about Squares business is its total accountability. Still government should be more cautious about
the companys flexibility and transparency.

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