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TABLE OF CONTENTS TOC o “1-3” h z u ABSTRACTi CHAPTER 11 INTRODUCTION1 1

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TABLE OF CONTENTS
TOC o “1-3” h z u ABSTRACTi
CHAPTER 11
INTRODUCTION1
1.1Introduction1
1.2Overview1-2
1.3Background of Study3-7
1.4Problem Statement7-9
1.5Research Objectives9-10
1.6Research Questions10-11
1.7Significance of Study PAGEREF _Toc511477958 h 11-12
1.8 Organization of the Thesis12-13
CHAPTER 214
LITERATURE REVIEW14
2.1 Introduction PAGEREF _Toc511477962 h 14
2.2 An Overview of the Listed Enterprises and the MalaysiaFinancial System14-16
2.3 Working Capital Definition and History16-20
2.4 Importance of Working Capital Management21-22
2.5 Theories Explaining Working Capital Management23
2.5.1 Trade-Off Theory23-24
2.5.2 Pecking Order Theory24
2.5.3 Agency Theory25-27
2.5.4 Transactions Costs Theory27-28
2.6 Metrics Used in Working Capital Management28
2.6.1 Inventory Turnover in Days28-29
2.6.2 Average Collection Period29-30
2.6.3 Average Payment Period31
2.6.4 Cash Conversion Cycle31-32
2.7 Outcome of the Research33-34
2.8 Control Variables34
2.8.1 Current Ratio (CR)34
2.8.2 Sales Growth (GROWTH)35
2.8.3 Debt Ratio (DR)35-36
2.9 Empirical Studies36-40
2.9.1 Malaysian Context40-43
2.10 Hypothesis Development43
2.10.1 The inventory turnover in days is negatively related to the company’s profitability.43-44
2.10.2 The accounts receivables of a firm are negatively related to the company’s profitability..44-45
2.10.3 The accounts payables of a firm are positively related to a company’s profitability..45-47
2.10.4 The cash conversion cycle of a firm is negatively related to a company’s profitability.47-48
2.11 Conceptual Framework49
2.12 Chapter Summary50
CHAPTER 351
METHODOLOGY51
3.1 Introduction51
3.2 Target Population52-53
3.3 Sampling Technique53-57
3.4 Sampling Size57
3.5 Instrument and Measurement58-59
3.6 Data Collection Method59-60
3.7 Data Analysis Tools60
3.7.1 Descriptive Analysis60-61
3.7.2 Pearson’s Correlation Coefficient61-62
3.7.3 Inferential Analysis62
3.7.3.1 Multiple Regression62-64
3.8 Chapter Summary64
REFERENCES65-68

CHAPTER 1INTRODUCTIONIntroductionThis chapter delivered a basic introduction to this thesis paper. The objective of this chapter was to provide readers an overview on this thesis topic. This chapter contained eight sections. Section 1.1 carried out the introduction of this chapter, while section 1.2 is an overview for the introduction and section 1.3 would explained about the research background of this thesis. Section 1.4 defined the problem statement related to this study and section 1.5 stated the research objectives of the study. Research questions were addressed by section 1.6 and significance of study was identified by section 1.7. Lastly, section 1.8 will discuss about the organization of the study.
Readers are expected to have ideas on the purposes of this research after reading this chapter. Besides that, readers are expected to see the structure of this research and know the target planned to achieve after doing this research.

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OverviewArises of uncertainties in global economy over the last decade has led the financial markets putting increasing pressures on companies and their supply chains. Many companies are therefore have limited access to credit and force to think another source of finance and managerial structure to ensure the company normal operation. In these critical times, people found the alternative of working capital as a source of finance because it is the cheapest source of cash and managerial tool that most businesses can access and available.

Working capital management is a managerial accounting strategy designed to maintain the optimal levels of a company’s current assets and current liabilities (Investopedia, 2018). According to Smith (1980), working capital management plays an important role in a firm’s profitability, risk, and as well as its future value. This is especially true when there is economic downturn during 2008 that threatened companies’ survival had consequently brought the attention of efficient working capital management to the forefront.
The elements normally managed in working capital management are inventories, cash, account receivable, account payable and etc. It is simple by looking at the fundamental idea of working capital management as it aimed to reduce inventory and account receivable whilst increase payables balances. However, it is not easy for a company to find the optimal level for its working capital as they need to account for the trade-off between profitability and liquidity accurately because increasing profits at the cost of liquidity can bring undesired outcome to the firm. If a firm concerns only about profitability but ignore the importance of liquidity, it is definitely cannot survive for a longer period because it will face insolvency problem in the near future. Similarly, the firm will experience low profit if it hold too much assets for liquidity purpose, which is unfavorable for a company if it want to attract the investors. For these reasons a company should give proper consideration when managing its working capital. If it is able to excel in its management of working capital, it will have a real competitive advantage in the profit enhancement.

Background of StudyAs mentioned above, global financial crisis began in United State during 2007 with the collapse of two hedge funds had brought to dramatically changes in companies’ financial structure worldwide. The ripple effects had spread to Malaysia economy mainly in country’s export and foreign direct investment (FDI). According to Department Statistic Malaysia, Malaysia’s export experienced sharply dropped during 2008 and 2009 (figure 1) especially on manufacturing sector because it was a strong emphasis sector placed by the government which accounted more than 80% of country’s total export. The economists conclude that this was owing to a decline in the dominant export-oriented industries together with weak support from the domestic market-oriented industries.

Figure 1 Malaysia Export Value from 2004 to 2012
The second impact had reflected on country’s FDI whereby there is an explicit drop recorded on FDI inflow into Malaysia during crisis period. Based on the figure 2, FDI inflows into Malaysia averaged 3.65% of GDP from 2004 to 2006, but declined to an average 2.68% of GDP from 2007 to 2009. The United Nations Conference on Trade and Development (UNCTAD) reported that Malaysia accounted for only 2.6% of the total FDI inflow to Asia in 2007, compared to 8% in 1990s and 10% in the 1980s (Goh and Michael, 2010).
Figure 2 Malaysia Net inflow FDI from 2004 to 2012
The aftermaths embedded on the loan activities of commercial banks that had become lacklustre notwithstanding the lower overnight policy rate (OPR), the lower statutory reserve requirement (SRR) and extra funds accessible for loans (Abidin and Rasiah, 2009). The Malaysian firms had no chance but have to look for other ways to gain liquidity and improve cash flows. In this sense, working capital could potentially be the answer to a company’s pursuit for additional funds. The goal of working capital management is to ensure that a firm is able to continue its operations by having sufficient cash flow to satisfy both short-term debts and operating expenses (Zariyawati, Annuar & Pui-San, 2016). A company is considered to achieve optimal working capital management when its current assets are higher than current liabilities. This showed that the company has the ability to continue its operations to generate profit and have adequate funding to satisfy all debts.

Besides, the insolvency rate of companies increased during crisis period. Small companies expose to higher bankruptcy rate compared to big companies. Small companies rely on owner financing, short-term bank loans, and trade credit to finance their investment in cash, inventory, and account receivable. According to Lazaridis and Tryfonidis (2006), the main factors cause failures on small companies are poor working capital management and inadequate long-term financing. ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.11648/j.ijefm.20140206.17”, “author” : { “dropping-particle” : “”, “family” : “Charitou”, “given” : “Melita Stephanou”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Elfani”, “given” : “Maria”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Lois”, “given” : “Petros”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “Journal of Business & Economic Research”, “id” : “ITEM-1”, “issue” : “12”, “issued” : { “date-parts” : “2010” }, “page” : “63-68”, “title” : “The Effect Of Working Capital Management”, “type” : “article-journal”, “volume” : “8” }, “uris” : “http://www.mendeley.com/documents/?uuid=5789745d-a8a6-4a7c-a7f7-d8f1517a4713” } , “mendeley” : { “formattedCitation” : “(Charitou et al., 2010)”, “manualFormatting” : “Charitou et al. (2010)”, “plainTextFormattedCitation” : “(Charitou et al., 2010)”, “previouslyFormattedCitation” : “(Charitou et al., 2010)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }Charitou et al. (2010) proposed that, it is important to manage their working capital efficiently during crisis period, because working capital management is an essential part of short-term finance for a company. A company can reduce their financial costs of a company and improve their profitability by managing their working capital efficiently.
Recently, the importance of the subject has increased again as Malaysia’s economy continues to be hit by low oil prices, and lower business and consumer sentiment. Therefore, researchers have studied working capital management in many different ways, for instances, Mohamad ; Noriza (2010) has been doing on working capital management from the perspective of market valuation and profitability; Hong, Ayrton, and Fábio (2011) done a research on working capital management in two separate groups of companies namely working capital intensive and fixed capital intensive; Ng, Ye, Ong, ; Teh (2017) on the other hand have conducted a study on working capital management from the aspects of aggressive working capital policy and efficiency of working capital management. All the finding results are valuable for the future researchers as well as corporate firms as they can have better insight on which type of working capital management best fitted to their company.
Working capital management can be managed through controlling the number of days account receivable, number of days inventories, and number of days account payable which are the components of the cash conversion cycle. Generally, the shorter the length of the cash conversion cycle, the higher the profitability. An efficient management of working capital is imperative to an overall corporate strategy in order to create shareholder value. Those firms who poses insufficient working capital due to inefficiencies of managing in a company’s operation may face financial distress and go insolvent in worsen case. For example, PNSB Development Sdn Bhd (PDSB) has suffered a total loss of 621.2% within a year, from a profit of RM3.21 million after tax in 2013 to net loss of RM16.75 million after tax in 2014. One of the reasons for its dismal financial performance is mismanagement of working capital as current liabilities has exceeded its current assets by a total of RM62.64 million. This can be attributed to its failure on timely projects delivery as much 167 days to 998 days delay on some of its projects. As such, PDSB was not able to pay their current liabilities using current assets during the year 2014 and auditor has expressed doubts on company’s ability to continue operation (New Straight Times, 2015).
In addition, the 2017 Malaysia Working Capital Study by PwC showed a result that there is RM71bn of cash tied up in working capital cycle across 376 Malaysian listed companies in which they can be extracted to better improve the working capital performance. The study also revealed that companies that actively manage their working capital will not only achieved stronger cash flows, but also benefitted from both higher revenue growth and profit margin. For example, Malaysia Airlines acknowledged that improvement in its revenue management with inventory allocation could improve its competitiveness, thereby it organized a transformation program in 2008 to change its inventory management structure in its Inflight Services and Engineering ; Maintenance departments, thus resulted a significant cost savings and revenue improvements (Shaista, 2015).
In the conclusion, working capital management is an essential tool in the success story of a firm in terms of liquidity, survival, solvency and profitability of business. Firms can manage its current assets and current liabilities to get rid of the possibility of insufficient capital, and also to prevent from excessive investment. In this regard, there is a needs for every company to rethink about their company’s structure and properly manage on working capital in order to improve shareholder’s value. The better the working capital is managed, the higher the profitability of a company will be.
Problem StatementDespite of having equal importance as other financial activities, the working capital management sometimes is neglected, whilst many companies lack a systematic approach to managing their working capital and treat the issue in an ad-hoc and decentralized way. This is probably due to the decision making involved in working capital is a routine and frequent activity that make it hard to find a balance or optimize the working capital. In Malaysia, working capital always disregards in financial decision making since it involved investment and financing in short time interval (Zariyawati et al., 2009) and some companies were more emphasis on other parts of corporate finance.
Even though there were numbers of studies give on ideas on working capital management from various perspectives, but the understanding on the way to apply working capital management from a whole organizational context is still not yet explicit (Darun, 2011). In fact, there is a dilemma in working capital management as there is always a trade-off between liquidity and profitability. According to Zariyawati, Annuar, Taufiq, ; Rahim (2009), by referring to risk and return theory, an investment with more risk will revert high return, indicates that firms with high liquidity of working capital may have low risk then low profitability, and vice versa.
Furthermore, the decision making become critical when there is economy turbulence causes more intense consideration needed by firms in order to sustain its economic profit. This is because a firm’s working capital will react to the changes in economic conditions. According to Zariyawati, Annuar & Pui-San (2016), the average current liabilities of all firms listed on the Bursa Malaysia stock exchange began to increase gradually during the early crisis period. Therefore, a firm should analyzed the subject carefully, and Reason asserts, “working capital can be managed strategically to improve competitive position and profitability, others emphasize on that improving working capital management is reasonably important for companies to withstand the impacts of economic turbulence” (as cited in ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.1108/17439131211216620”, “ISBN” : “17439132”, “ISSN” : “1743-9132”, “PMID” : “939133759”, “abstract” : “Purpose – The purpose of this paper is to examine the effect of working capital management on firms’ performance for a sample of firms listed on a small emerging market, namely Amman Stock Exchange. Design/methodology/approach – The paper includes a conceptual as well as empirical analysis, in which data from a sample of listed firms for the period from 2000 to 2008 are analyzed to examine if more efficient working capital management improves firms’ accounting profitability and firms’ value. Cash conversion cycles as well as its components are used as measures of working capital management skills. In this study, two performance measures are used: one accounting and one market measure, believing that wealth maximization is shareholders’ main concern. To bring up more robust results, this study used more than one estimation technique, including panel data analysis, fixed and random effects, and generalized methods of moments. Findings – Using robust estimation techniques this study found that profitability is affected positively with the cash conversion cycle. This indicates that more profitable firms are less motivated to manage their working capital. In addition, financial markets failed to penalize managers for inefficient working capital management in emerging markets. Originality/value – The paper’s originality and value lies in suggesting that policy makers in emerging markets need to motivate and encourage managers and shareholders to pay more attention to working capital through improving investors’ awareness and improving information transparency.”, “author” : { “dropping-particle” : “”, “family” : “Abuzayed”, “given” : “Bana”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “International Journal of Managerial Finance”, “id” : “ITEM-1”, “issued” : { “date-parts” : “2012” }, “page” : “155-179”, “title” : “Working capital management and firmsu2019 performance in emerging markets: the case of Jordan”, “type” : “article-journal”, “volume” : “8” }, “uris” : “http://www.mendeley.com/documents/?uuid=4dcd454e-8e78-4441-86c9-b00947c5a286” } , “mendeley” : { “formattedCitation” : “(Abuzayed, 2012)”, “manualFormatting” : “Abuzayed, 2012)”, “plainTextFormattedCitation” : “(Abuzayed, 2012)”, “previouslyFormattedCitation” : “(Abuzayed, 2012)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }Abuzayed, 2012). For example, Telekom Malaysia, one of the big companies in Malaysia has moved their attention to improve working capital management to maintain the operation of the company (Crane, 2001).

Indeed, firm characteristics such as company’s size should be taken into consideration when deciding on working capital management due to policies implemented to manage working capital in small and large firms are different. It has been proved by the researchers that firm sizes is a factor in the length of the cash conversion cycle (CCC) which is widely used to represent working capital management (Zariyawati, Hirnissa ; Rose, 2017). Small firms are operating with fewer sources of both short and long term financing than larger firms. This is because lenders and investors are more conservative in supplying small firms with money, in considerate the risks are higher than with established companies. When less financing is available, small firms tend to rely and need to hold more asset in liquid form to meet the daily transaction, meanwhile large firms can easily access into external financing should therefore take a different step from small firms. According to Moss and Stein (1993), larger firms are able to manage their cash conversion cycles better as compared to small firms because larger firms has fewer borrowing constraints, thus cash would be kept at a minimum at the same time afford to have relaxed receivables and inventories policies. Therefore, there might be different working capital management effect perhaps exist in large, medium, and small sizes companies in term of profitability. It is important to know the effect of working capital management on different firm size to ensure they can sustain in the long term.

Lastly, there is a limited published study on the relationship between working capital management and firm’s performance in Malaysia, specifically across various economic conditions that based on different size companies. Accordingly, this thesis filled up the gap by adding on a study on the relationship between working capital management and corporate performance of listed companies in Malaysia across various economic conditions with considerate for small, medium, and large size companies.
Research ObjectivesThe intention of this study was to investigate the relationship between working capital management and corporate performance of different sizes listed companies in Malaysia across various economic conditions. There are numbers of popular measures of working capital management in financial study, but 4 main measurements of working capital management, also the independent variables of the whole study had been chosen for this study purpose including Cash Conversion Cycle (CCC), Inventory Turnover in Days (ITID), Average Collection Period (ACP), and Average Payment Period (APP).
The specific objectives of this study were established:
To investigate the relationship between working capital management and profitability of small, medium, and large sizes listed companies in Malaysia before crisis period.

To investigate the relationship between working capital management and profitability of small, medium, and large sizes listed companies in Malaysia during crisis period.

To investigate the relationship between working capital management and profitability of small, medium, and large sizes listed companies in Malaysia after crisis period.

Research QuestionsThis study investigates the relationship between working capital management and profitability of different sizes listed companies in Malaysia across various economic conditions; thereby it enabled to answer the research questions.

General Research Questions
Does working capital management influence profitability of different sizes listed companies in Malaysia across various economic conditions?
1.6.2 Specific Research Questions1. Does inventory turnover in days (ITID) influence profitability of different sizes listed companies in Malaysia?
2. Does average collection period (ACP) influence profitability of different sizes listed companies in Malaysia?
3. Does average payment period (APP) influence profitability of different sizes listed companies in Malaysia?4. Does cash conversion cycle (CCC) influence profitability of different sizes listed companies in Malaysia?
Significance of StudyThis study was carried out to investigate the relationship between working capital management and profitability of different sizes listed companies in Malaysia across various economic conditions which always neglected by most previous studies. Thus, this study adds to the limited literature on working capital management issues by provide an understanding of how different sizes’ firms can manage their working capital in an “optimal way” across different economic conditions in Malaysia.

The result of this study affected and brought advantages to managers and stakeholders, such as investors and policy-makers especially during the crisis period ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.11648/j.ijefm.20140206.17”, “author” : { “dropping-particle” : “”, “family” : “Charitou”, “given” : “Melita Stephanou”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Elfani”, “given” : “Maria”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Lois”, “given” : “Petros”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “Journal of Business & Economic Research”, “id” : “ITEM-1”, “issue” : “12”, “issued” : { “date-parts” : “2010” }, “page” : “63-68”, “title” : “The Effect Of Working Capital Management”, “type” : “article-journal”, “volume” : “8” }, “uris” : “http://www.mendeley.com/documents/?uuid=5789745d-a8a6-4a7c-a7f7-d8f1517a4713” } , “mendeley” : { “formattedCitation” : “(Charitou, Elfani, & Lois, 2010)”, “plainTextFormattedCitation” : “(Charitou, Elfani, & Lois, 2010)”, “previouslyFormattedCitation” : “(Charitou, Elfani, & Lois, 2010)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Charitou, Elfani, ; Lois, 2010). The findings of this study will provide useful information for the concerned managers on the company’s working capital management since it’s provide an important role in its profitability by furnish more attention towards working capital management (Nor ; Noriza, 2010). An investor will have a better perception toward the company and build up investors’ confidence to invest in that particular company (Abuzayed, 2012). Consequently, the confidence of investors to invest will boost the growth of economics in Malaysia. Policy-makers on the other hand, will create and implement suitable sets of policies regarding the working capital market in Malaysia according to the results of this study. This will help to ensure the continuous economics growth in our country (Zariyawati et al., 2009). Moreover, this study would provide additional information and references for relevant scholars and future researchers to develop new ideas, techniques and methods in respect of the management of working capital.
Lastly, the theoretical contribution of this thesis will be to extend the knowledge regarding the relationship between working capital management and profitability by taking into account of different companies sizes, and how would it react to various economic conditions in Malaysia. Investigating this issue provided additional insights and different evidences on the working capital management which is seldom cover by previous researchers and this definitely will enrich the financial literature on this issue.
1.8 Organization of the Thesis
This thesis was completed by five chapters. Introduction, which was the first chapter of this proposal, it provided an overview of this study context. Chapter 1 covers research background, problem statement, research objectives, research questions, significance of the study, and organization of the thesis. Chapter 2 included the overview on the parent concept of the study, relevant theoretical review, independent variables and dependent variable of the study, the empirical studies, hypothesis development, and conceptual framework of the study.
Meanwhile, Chapter 3 was an introductory overview of the research methodology. This chapter described on how the research was carried out. The methodology carried out during the research included research design, sampling design, and research instrument and measurement, data collection method, data processing and data analysis tools. The patterns of the empirical analysis results of the relevant research questions and hypotheses from the data collected to be showed in Chapter 4. Company’ annual report data which collected from Data Stream Web Base and Bursa Malaysia would be analyzed through descriptive statistics, regression analysis and correlation analysis.
Last but not the least, Chapter 5 provided all conclusion of the entire project. It covered the discussion of major findings and implications of the study. Besides that, the limitation of this study and the recommendations for future research were also included in this chapter.

CHAPTER 2LITERATURE REVIEW2.1 IntroductionThis chapter reviewed the literature on working capital management and it consisted of twelve sections. Firstly, section 2.1 explained the introduction of this chapter. Section 2.2 will provide an overview of Malaysia financial system, while section 2.3 and 2.4 are discussing about general concept ; history of working capital and the important of working capital management respectively. Section 2.5 described the theories which explaining working capital management and section 2.6 demonstrate the metrics of working capital management used in the study. Next, outcome of the research and control variables were parked in section 2.7 and section 2.8 respectively. Then section 2.9 discussed on empirical studies and the hypotheses development will be described under section 2.10. Section 2.11 showed the conceptual framework of the study. The last section, section 2.12 covered the conclusion of the chapter.
In summary, this chapter provided the basic understanding of working capital management and explained how working capital management influenced the corporate performance.
2.2 An Overview of the Listed Enterprises and the Malaysia Financial SystemMalaysia’s corporatization process started from 1983 when Prime Minister first announced in a national policy statement stated as it is a part of reformulated macro-economic strategy which aimed at restructuring the economy. This privatization programme has been successfully facilitated Malaysia’s remarkable economic recovery especially after 1989 and enlarged the security base and volume of transactions at the Malaysia’s financial market in 1990s (Dholakia. B & Dholakia. R, 1994). Malaysia’s first formal securities business organisation was Singapore Stockbrokers’ Association established in 1930. Later, the Malayan Stock Exchange was formed and the public trading of shares commenced in 1960. In 1973, due to secession of Singapore and Malaysia, the Kuala Lumpur Stock Exchange (KLSE) was incorporated and active until now. Today, it emerged as the one of the largest bourses in ASEAN and according to Sustainable Stock Exchanges Initiative (SSE), Bursa Malaysia Berhad, also known as Kuala Lumpur Stock Exchange (KLSE) has a total of 903 listed companies across 60 economic activities as of December 2016.

The Malaysian financial system has evolved with the changing of economy structure along the years. Based on IMF Country Report 2014, the Malaysian financial system can be categorised into 3 broad sectors: banking intermediaries, insurance companies and capital market intermediaries. Banking intermediaries can be classified into two groups. The first group is commercial banking institutions (including Islamic), investment banks (coregulated with the Securities Commission) and development financial institutions (DFIs) which are supervised by Bank Negara Malaysia (BNM). The second group comprising non-bank financial institutions such as credit co-operatives, other DFIs and a building society, which falls under the supervision of various government departments and agencies. Insurance companies also supervised by BNM, and its functioning on mobilize the public saving for rendering other financial services. Lastly, capital market intermediaries is a market for the exchange of capital credit such as fund management companies, investment banks, and the securities and derivatives market, which are on the other hand regulated by the Securities Commission. Malaysia’s financial sector has experienced fast growing over the last decade resulted from strong regulatory oversight, the diversity and depth of financial markets, as well as the growing integration with the global economy and financial system.

2.3 Working Capital Definition and History
The widest and most used definition of working capital is contributed by Guthmann and Dougall (1948) in which they define working capital as current assets less current liabilities. Some people referred this as net working capital (Talonpoika, 2016). It is the most vigorous part of a company’s capital structure because it influence the operation of the company directly as it is necessary for carry on the day-to-day operating transactions of a company. ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “ISBN” : “20737122”, “abstract” : “This study examines the relationship between the working capital management and profitability of Indian private sector small-medium steel companies obtained from CMIE database. Working capital management indicators and profitability indicators over the period from 2003 to 2010 are moulded as a linear regression system in multiple correlation and regression analysis. The study shows a small relationship between WCM including working capital cycle and profitability. Multiple regression tests confirm a lower degree of association between the working capital management and profitability. PUBLICATION ABSTRACT”, “author” : { “dropping-particle” : “”, “family” : “Bhunia”, “given” : “Amalendu”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Das”, “given” : “Amit”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “Interdisciplinary Journal of Contemporary Research In Business”, “id” : “ITEM-1”, “issued” : { “date-parts” : “2012” }, “page” : “957-968”, “title” : “Affiliation between Working Capital Management and Profitability”, “type” : “article-journal”, “volume” : “3” }, “uris” : “http://www.mendeley.com/documents/?uuid=8aa7b853-34a8-439a-abd9-183194372a81” } , “mendeley” : { “formattedCitation” : “(Bhunia & Das, 2012)”, “manualFormatting” : “Bhunia and Das (2012)”, “plainTextFormattedCitation” : “(Bhunia & Das, 2012)”, “previouslyFormattedCitation” : “(Bhunia & Das, 2012)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }Bhunia and Das (2012) stated that working capital was crucial for financial decision making since its being a part of investment in assets which appropriate financing investment is required.

Net Working Capital = Current Assets – Current Liabilities
The elements made up working capital are from the components of current assets and current liabilities. Current assets are the items that can convert to cash in short-time normally within 1 year, which included cash, inventory, account receivable and equivalents. Current liabilities are the debt such as account payable that companies will incur during the operating period to meet its operations budget. It can also be considered as indirect sources of external financing for a firm particularly importance for smaller firms that may face problems in acquiring long-term loans or financing constraints (Berry and Jarvis, 2006).

Figure 3 A typical working capital cycle and other cash flow (Source: Arnold, 2008)
Working capital can be illustrated by the working capital cycle as shown in figure 3. Inventories are often divided into raw materials, working-in-progress, and finished goods. The cycle begins with purchase of raw materials, then process it into semi-finished and finished goods to fulfil the customer’s requirement. Then, these goods will be stocked in form of inventory and ready to sell. When make purchasing, the customers can either pay cash or by credit term. If the customer choose to purchase by trade credit, the seller will proceed a delay in cash receive, thus increase in account receivable. The money derived from sales are used to pay debtors, finance new investments and others operating activities. Every step of the cycle would associated with costs either direct costs or opportunity costs that should be accounted by the stakeholders.
Before 1970s, researches focused only on the optimization of each component of working capital. When comes to the late 1980s, working capital management has become an integrated approach in the operation of companies (Li, 2016). In the early stage, working capital management has been focused on the close relationship between working capital and the company’s liquidity and profitability. Later, working capital management has expanded to a wider concept that covers both inventory and work in progress and thereby combining elements of operations, production and financial management (Podilchuk, 2009).

Working capital management is concerned with management of firm’s short-term capital that is planning and controlling the firm’s current assets and current liabilities to reduce the risk of unable to cover the company’s short-term obligations and avoid excessive investment in assets. Since its introduction in the 1980s, the cash conversion cycle (CCC) has become a key measurement for corporate working capital management because it is operationalized by the cash conversion cycle. As shown in figure 4, the cash conversion cycle or Operating Cycle is the number of days a firm’s cash remains tied up within the operations of the business. With reference to Ross et al. (2003), CCC is refer to the difference between the operating cycle and the account payable period, which means that it is the time lag between the conversion of the product (as inventory) in receivable and the period of account payable. When inventory is bought on credit, both the inventory and accounts payable balance are increased. As the inventory is sold, the inventory account is reduced; but, the accounts payable balance is not changed until a cash payment is made (Moss and Stine, 1993). Based on this concept, it shows that all the components from working capital are interrelated and thus decisions and actions regarding one component should expect to bring effects on other parts of working capital. A cash flow analysis using CCC also reveals in, an overall manner, how efficiently the company is managing its working capital.

Figure 4 The Operating and Cash conversion cycle (Source: Fundamentals of corporate finance, 2003)
According to Arnold (2008) firms’ working capital management can be categories into two extreme strategies. The conservative approach is to have plenty of current assets and cash reserves, warehouses full of inventory, more generous customer credit, and payable all up to date. This approach is adopted by companies which operate in an uncertain environment, specifically crisis period where buffers are needed to avoid production stoppages. When there is economic downturn, firms are protected against price fluctuations, and high inventories can ensure the normal business operation and then increasing in sales and profit. In this situation, the risk of default payment is low, but in the long-term profitability might be hurt if the current asset is beyond a certain level. Unlike a conservative policy, the aggressive approach is relatively risky in term of short-term cash shortage because firms is motivated to have a low level of current assets in hope to generate a high return on profit with the money releasing from current asset. This stance is taken by companies when there is a stable and certain economic environment where working capital is to be kept at a minimum. The advantages of this approach are mainly the reduction in costs due to the low levels of inventories and account receivables. But, this is criticised by Wang (2002) that if the inventory levels are reduced too much, the firm risks in sales losing will increase. The study conducted by Ng et al (2017) in Malaysian manufacturing firms shows that company’ profitability is negatively related to the degree of aggressiveness of investment policies but positively related with the degree of aggressiveness of financing policies. This implies that by increasing investment in current assets (conservative investment working capital policy) will increase firms’ profitability. On the other hand, firms can increase their profit by increasing investment in current liabilities is associated with aggressive financing working capital policy.
Working capital management was essential because efficiency of management on working capital brought firms to respond quickly and appropriately to the unexpected changes in market variables, such as fluctuation of raw material prices and interest rates. Therefore, working capital management helped firms to gain competitive advantages over its competitors as well as creating value for the shareholders. According to Alipour (2011), a company will face the problem of default payment when the company managed their working capital incorrectly which lead to decline in company’ sales and profit.

2.4 Importance of Working Capital Management
There are many reasons why a company need to have well-managed on its working capital. The most important was to maintain the company’s liquidity in order to meet the daily transaction and ensure the company’s operation smooth running. A business can run smoothly in the presence of adequate working capital. Zariyawati et al. (2016) stated that firms should control their liquidity in an optimal level. This is because high liquidity is costly as it incurred high inventory storage cost and obsolete stock, which can further reduce firm profitability. However, when liquidity is too low, there is high probability that firms cannot pay back their short term debts. A firm has to make the trade-off decision between risk and return. Despite it is low efficiency, some of the firms were insisted to hold larger cash in order to defend themselves from unwanted takeover attempts resulted from unable to pay back the debts, therefore these firms might have high working capital level which can helps to strengthen the business solvency position (Opler, Pinkowitz, Stulz, and Williamson, 1999).

Besides that, working capital management is a measure of both a company’s efficiency and its short-term financing. Companies considered as efficient when the company keep their inventory turnover in days and average collection period short. This is evidenced by findings of Deloof (2003), in which the firms can increase their profitability by decrease the days-in-inventory period and debtors’ collection period. Normally, firms with high effectiveness on working capital management will associate with competitive advantage because these firms are often able to sell their products at a discount compare to similar firms with least efficient sourcing. These types of short-term financing decisions are important for the sustainability of the companies regards business operation efficiency, yet it is not an easy job. There were the possibilities of mismatch of the amount of current assets and the amount of current liabilities (Zariyawati et al., 2009). If this situation happened continuously without awareness from the company, the company would probably facing low return, hence affect the company’s growth in long term. This would further lead to financial distress and finally firms could go insolvent (Bhunia ; Das, 2012).
Furthermore, a good working capital management will increase cash flow, there is less external financing needed thus low default payment. A firm need the cash for financing the operating expenditure and business costs such as buying of raw materials, production and sales of goods. If there is short of internal financing resources, a firm will go for riskier option, borrowing debts. This is the main reason that a company go bankruptcy as the result of failed to pay back the high borrowing debts which is sometime couple with economic depression, currency fluctuation, and strike. The availability of working capital in sufficient volume acts as a cushion for business, which can temporary help to release the debts burden.

On the other hand, companies can create shareholders’ and stakeholder’ value by managing their working capital efficiently. A well-managed working capital helps a firm to pay dividends quick and regularly to its investor thereby providing confidence to its investors, while payment of employees’ salaries and other daily commitments on time can increase employee’s morale as well as their efficiency. There is economic benefit to keep their working capital at optimal level, which could achieve by managing the trade-off between profitability and liquidity of a company. As the conclusion, companies should manage to keep working capital optimal to avoid any negative effect on the operating aspects of the company.

2.5 Theories Explaining Working Capital Management
2.5.1 Trade-Off Theory
As referred to the theory of risk and return, the higher the risk of an investment, the higher the return (Zariyawati et al., 2009). Thus, a firms might have lower risk due to higher liquidity of working capital that might resulted lower profitability to the firm. Inversely, an adventurous firm would prefer lower liquidity of working capital thus high investment return because of higher risk inherited (Bhunia ; Das, 2012). To manage working capital, firms must balance the risk and return and considered all the items in both accounts (Zariyawati et al., 2009). Risk and return trade-off stands for a balance between low risk and high return. Investors would consider between risk and return when making investment decisions.
In particular, the lesser the inventory kept by a company, the higher the expected return. However, lesser inventory would increase the risk of running out of stock which caused the company to lose potential customers and revenues (Bolek, 2013). Also, large cash investment and marketable securities balances helped companies increase liquidity of the company, and decrease the risk. However, invested in cash and marketable securities earned lower returns when compared with the company’s other investments (Kimani et al., 2014). Due to this, the company which had larger investments in cash and marketable securities would reduce its overall rate of return. The increase the company’s liquidity would decrease the return on investment.
It is important to manage the trade-off between risk and return in working capital management. Risk and return trade-off would consider during the time to choose current or long-term debt (Bhunia ; Das, 2012). The higher the current liabilities used to finance its assets, the higher the risk. Although use current liabilities will cause higher risk, but current liabilities are less costly compared to long-term financing. Return management process’s purpose is to maximize profit in the context of an acceptable level of risk.
2.5.2 Pecking Order Theory
Myers’ (1984) pecking order theory states that firms should finance investments first with internal funds or retained earnings, then with riskless debt, followed by risky debt and finally with new issue equity. The implication of this theory is that firms do not have a target debt-equity ratio, rather they choose their leverage ratio based on their financing needs for operation (Wasiuzzaman ; Arumugam, 2013). There is no targeting cash level either in a company, as the result, the firms will decrease on leverage if their cash balances are enough to meet the short term obligations. Working capital is a readily available internal source of financing, whereby most of the firms used it as alternative of external source of financing, especially for the purpose of fixed-investment in order to ensure a smooth and stable fixed-investment process. Leverage can be very costly due to flotation costs, and high cost will proportional to low profitability. This is in line with Fama and French (1988), whereby they found that leverage is negatively related to profitability, and it is explained by pecking order assumption that debt is only issued when internal funds are insufficiently to finance new investment.

2.5.3 Agency Theory
Agency theory explained the relationship between principal and agent in business (Psaros, 2009). It concerned to solve the problems in the agency relationship. The first problem addressed was the conflict arose when the desires or goal of the principal and agent were different. The second problem was the conflict when the principal and agent have different attitudes towards risk. While Jensen and Meckling (1976) stated that agency theory explained the conflict of interest between shareholders and managers which influenced the effect of investment and liquidity decisions of management. This would bring significant effect on working capital (as cited in Kwaku, Marfo, ; Ansong, 2013).
Normally, companies’ manager chose the way to finance their working capital depends on their company’s desire for profit or degree of risk aversion (Bolek, 2013). Short-term borrowing, long-term borrowing, equity financing were the way a company could choose to finance their working capital. Companies’ manager trade-off between risk and return of the financing option based on the company’s financing approaches (Kimani et al., 2014). Besides that, management’s attitude toward risk and return will affect the optimal level of each current asset in the company.

Besides that, the main reason caused agency problem to occur is the manager does not own the company’s shares. Managers would make decisions which maximized their own wealth although managers are employed to maximise shareholders’ and owners’ wealth (Kwaku et al., 2013). Managers would take care about their own interests before they take care on the shareholders’ interests. Besides that managers would maximize their own wealth by focusing on the company’s short-term performance rather than long-term growth and get excessive self-remuneration from expenses of shareholders’ wealth (Psaros 2009).
In addition, managers or executives made the operational and strategic decisions in an organisation, at the same time increased the agency costs and brought impacts on investment appraisal decisions (Kwaku et al., 2013). Corporate governance policy is to reduce the agency costs and maximise the company’s value. Developed a corporate policy that assigned decision making to the managers and control to the shareholders was one of the ways that would minimise the possibility of managers to invest in risky projects which would increase agency costs (Edi, Binti, ; Elias, 2013). This could help shareholders to determine their own level of risk which they could control.

Managers might accept the short-term investments which was more risky but will not harm their short-term interests (Psaros, 2009). A big amount of money often used for investment, this gave incentive to managers to make decisions which could maximise their own wealth at the expense of the shareholders (Edi et al., 2013). Managers would not choose the capital investment projects which did not maximise their wealth in the short term. However, this decision of investment would not maximise the shareholders’ wealth in the long term.
Agency costs included offered types of incentives to managers so that they would act appropriately according to the interests of stakeholders. According to Jensen and Meckling (1976), agency costs was the sum of the bonding expenditures by managers, monitoring expenditures by shareholders, and the residual loss (as cited in Kwaku et al., 2013). There were different researchers from different disciplines resulted different corporate theories which included agency theory for economics and finance, stewardship theory, stakeholder theory, and resource dependency theory (Edi et al., 2013). According to Kiel and Nicholson (2003), there was no specific one theory among different disciplines that completely explained the relationship between corporate performance and corporate governance. Therefore, the main objective of the organisational theories was to maximise the value of the company by minimizing the agency cost.
2.5.4 Transactions Costs Theory
Transaction cost theory explains why firm exist, expand or source out activity to the external environment and try to minimize cost of exchange resource with the environment at the same time try to minimize the routine costs of exchange within the firm (Bei and Wijewardana, 2012). According to Zariyawati, Hirnissa, and Rose (2017), transactions costs theory implied that the firms might invest in the area that they think will offer them the highest marginal return, especially small firms. The firms will employ the systems which will brought to higher benefit than the cost incurred, and invest resources where they expect to achieve the greatest marginal returns. Some of the small firms would prefer to hold low amount of working capital because it presumed that the marginal return on investments of resources in any area of working capital is likely to be lower than others potential uses. Inversely, some small firms may invest resources in a particular area of working capital management that is perceived to be generated high marginal return. For less resource constrained, smaller firms that facing diminishing marginal returns on their initial focus may invest in additional areas of working capital management.
Charitou, Lois, and Santoso (2014) stated that this transaction cost theory can be associated with the levels of inventory that a company holds, because cost motive is the most widely and simple motive of managing inventories for a company. In general, in order to stay competitive, companies need to decrease their costs as low as possible and this can be accomplished by keeping the storing of inventory and opportunity costs to a reasonable minimum. However, there is not necessary for every company to practicing the similar due to the motives for holding low or high levels of inventories is highly depends on what business a company is in. This practice is also favourable among stock market analysts.
2.6 Metrics Used in Working Capital Management
For the future orientation, researchers need the knowledge on how working capital management methods and models have effects on the aspects of the financial situation of the company. There are numbers of metrics used in working capital management when doing this research which included inventory turnover in days, average collection period, average payment period, and cash conversion cycle. It is basically derived from the operating and cash conversion cycle based on figure 4.

2.6.1 Inventory Turnover in Days
Inventory turnover in days is the average length of time required to convert raw material, work in process, and finished goods into product sales. In other words, it is the time takes to turn inventory into revenue. Inventory turnover in days is affected by the time used for production and sales process (Deloof, 2003). The production time depends on the nature of the product and the technology used in the production process.

A company must control between the time used during production, the quality of the product and the cost of spending on the manufacturing technology. While the sales process of a company is depending on whether the product supply meet the demand of the customers. The objective of inventory management is to minimize the costs of storing while keeping the inventories at the satisfying level.The inventory turnover in days can be used to estimate the liquidity of the business’s inventory to determine how fast the inventories are sold and refill (Deloof, 2003).
742952230755Inventory turnover in Days = Inventory ×365Cost of goods sold0Inventory turnover in Days = Inventory ×365Cost of goods soldThe inventory turnover in days is calculated by dividing inventory by cost of goods sold and times the answer with 365 days. As Melicher ; Leach (2009) assert, “the rationale for this formula is that when raw materials and labors are bought, they are correspondingly booked into the account of costs for inventories. When the products are finished and sold, those costs are transferred into the account of cost of goods sold” (as cited in Huynh, 2012). 2.6.2 Average Collection PeriodAverage collection period is the average time needed for converting the company’s account receivables into cash (Alipour, 2011). The average collection period is similar to “days of sales outstanding” or “account receivable period”. Companies can manage its debtors by reducing the interval of time between sales and collect payment from customers (Falope & Ajilore, 2009). Changes in credit and collection policy could have a direct impact on the average collection period relative to a firm’s annual sales. The shorter the average collection period, the quickly the company is able to collect money from their customers. However, a shorter average collection period not necessary shows that the company has good performance in working capital management, it could be also a company with good working capital management may have longer average collection periods depending on the nature of the business. Decisions that led a firm to maintaining longer average collection time period will inevitably result in higher current ratios. The time gap between the sales inflow and outflow for raw materials and labor can be minimized when debtors pay to the company in short-time after getting the product from the company.
552452523303Average Collection Period = Receivable accounts ×365sale00Average Collection Period = Receivable accounts ×365saleThe average collection period is computed by dividing accounts receivable by sale, then times the answer with 365 days. As Melicher ; Leach (2009) proposed, “the rationale for this measure is that the company’s revenue account will be booked at sales price including cost and profit when a sale occurs. Similarly, the account receivable will be recorded with the sales price when sales made on credit. As a result, this formula can provide us an idea on how many days of sales are being supported by trade credit.” (as cited in Huynh, 2012).

2.6.3 Average Payment Period
Average payment period is the average length of time which the company is able to delay payment on the purchase of materials until making actual cash payment to suppliers. It indicates the time interval for a company takes to pay the invoices counting from day of inventory purchasing. Average payment period can be seen as a short term loan, or in other words, a source of funding. To save the expensive costs from getting external financing, payment in delay is seen as an internal financing applied by the company. By this, the company will have more working capital on their hands and can meet their operating obligation without getting support from external financing. The longer the average collection period, the bigger the amount of cash hold on-hand. The average payment period is also similar to “account payable period” and “number of days account payable”.
1250951126490Average Payment Period = Payable accounts × 365cost of goods sold0Average Payment Period = Payable accounts × 365cost of goods soldThe average payment period is formulated by dividing the payable accounts by the cost of goods sold, then times the answer get from the previous step with 365 days.

2.6.4 Cash Conversion Cycle
Introduced by Gitman (1974) as a vital element in WCM and refined by Gitman and Sachdeva (1982), the CCC approach is the most recommended and has been widely used in empirical studies. It is a key factor and popular measure of working capital management. According to Alipour (2011) and Abuzayed (2012) stated, the efficiency of working capital management can be calculated by using cash conversion cycle. Eljelly (2004) mentioned that cash conversion cycle can be used to examine the relation between profitability and liquidity of the company. The policy of working capital management is to minimize the time between expenses to get the inventory and cash reception resulted of selling stock to customers (Banomyong, 2005). Multivariance regression analysis shows that the cash conversion cycle and all its components will affect the company’s profitability ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.11648/j.ijefm.20140206.17”, “author” : { “dropping-particle” : “”, “family” : “Charitou”, “given” : “Melita Stephanou”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Elfani”, “given” : “Maria”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Lois”, “given” : “Petros”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “Journal of Business & Economic Research”, “id” : “ITEM-1”, “issue” : “12”, “issued” : { “date-parts” : “2010” }, “page” : “63-68”, “title” : “The Effect Of Working Capital Management”, “type” : “article-journal”, “volume” : “8” }, “uris” : “http://www.mendeley.com/documents/?uuid=5789745d-a8a6-4a7c-a7f7-d8f1517a4713” } , “mendeley” : { “formattedCitation” : “(Charitou et al., 2010)”, “plainTextFormattedCitation” : “(Charitou et al., 2010)”, “previouslyFormattedCitation” : “(Charitou et al., 2010)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Charitou et al., 2010).
457203272155Cash Conversion Cycle = Operating Cycle – Account Payable Period
= (Inventory Turnover in Days + Account Collection Period) – Account Payment Period
0Cash Conversion Cycle = Operating Cycle – Account Payable Period
= (Inventory Turnover in Days + Account Collection Period) – Account Payment Period
Cash conversion cycle shows the number of days the company takes to convert its operating activities requiring cash into cash returns. It can also be denote as the time lag started when the company pays cash for buying raw materials from their suppliers and ended when cash is collected from their creditors ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “author” : { “dropping-particle” : “”, “family” : “Kwaku”, “given” : “Samuel”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Marfo”, “given” : “Isaac”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Ansong”, “given” : “Abraham”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “id” : “ITEM-1”, “issued” : { “date-parts” : “2013” }, “page” : “35-51”, “title” : “Determinants of working capital requirement and policies of banks in Ghana”, “type” : “article-journal”, “volume” : “1” }, “uris” : “http://www.mendeley.com/documents/?uuid=7e2a1791-9d42-41b0-ad43-2d6495156eb9” } , “mendeley” : { “formattedCitation” : “(Kwaku et al., 2013)”, “plainTextFormattedCitation” : “(Kwaku et al., 2013)”, “previouslyFormattedCitation” : “(Kwaku et al., 2013)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Kwaku et al., 2013). Cash conversion cycle is composed of the cycle times of account receivable, inventories, and account payables. Basically, cash conversion cycle is calculated as operating cycle minus account payable period. Operating cycle is the sum of inventory period and account receivable period. So working capital management is the sum of inventory period and account receivable period minus account payable period.
2.7 Outcome of the ResearchProfitability is used as a measurement for corporate performance because it evaluates how efficiency a company utilised its assets to transform into profit. There are many different measurements of firm profitability among the researchers who studied the relation between WCM and firm profitability such as return on assets (ROA), return on equity (ROE), gross and net operating income (GOI), and return on invested capital (ROIC). For example, Deloof (2003) uses GOI in his study because he excluded the participation of any financial activity from operational activity by claiming that financial assets on their balance sheet will not receive most of their ROA from operating activities. In more recent studies, such as García-Teruel and Martínez-Solano (2007) has used ROA as measures of profitability. They were excluding industries that normally associated with high levels of financial assets, such as bank and insurance industry due to it will reflect the return from operating activities, and thus be a valid measure of profitability (as cited in Lyngstadaas and Berg, 2016). Moreover, in the study of Lyngstadaas and Berg (2016), the result show that using ROIC as a proxy for profitability will get the similar results of using ROA.

Return on invested capital (ROIC) can be used to assess a company’s efficiency at allocating the capital or how well a company is using its money to generate returns. Companies are seen to be able achieve higher margins, stronger cash flow, and low cost of capital when there is an improvements in ROIC. The theory behind ROIC is to present public with an accurate measurement of the return on cash investment. Therefore, the most appropriate outcome of this research is return on invested capital (ROIC). ROIC can be computed by using net income divided the total capital of the company. 5651526409Return on invested capital = Net IncomeTotal Capital00Return on invested capital = Net IncomeTotal Capital
2.8 Control VariablesCurrent ratio, sales growth and debt ratio are taking into account for control purpose in the regression analysis. There are few purposes to apply control variables. First purpose is to enhance robustness of the study. Second purpose to apply control variables is to determine the extent of the independent variables influence towards the dependent variables.2.8.1 Current Ratio (CR)110490133663800Current ratio was included in regression model as control variable in this study to measure the liquidity position of the firm (Zariyawati et al., 2009). In fact, current ratio has been popularly used as measure of corporate liquidity conventionally. In this study, current ratio is measured by using the following formula:
Current Ratio = Current AssetsCurrent LiabiltiesDue to the trade-off relationship between liquidity and profitability, higher current ratio will contribute to lower profitability and vice versa. Based on the study conducted by Eljelly (2004), there is a negative relationship between profitability and liquidity position of firms that is measured by current ratio. Therefore current ratio has been used as control variable to make its effect on profitability neuter.2.8.2 Sales Growth (GROWTH)
Sales growth is calculated by current year sales minus last year sales divided by last year sales. Sales growth is included as control variable because it may affect the trade and trade credit received by a firm. When firms are in a business circle, they need to seek cash to meet the daily financing and transaction needs, and cash are normally raise from the sales. Therefore, higher sales are needed when company expanding its business due to higher demand receive from the customers. However, there is possibility that profit might be dropped when the sales is increasing due to the fact that some firms will prefer trade credits as a source of financing to finance their growth, and profit might not increase when the cost associate with trade credit is high.

9278517631Sales Growth = Current year sales–Last year salesLast year sales00Sales Growth = Current year sales–Last year salesLast year sales
For this study, the profit is expect to grow when a firm’s sales growth increases. Hence, a positive relationship is expected to exist between sales growth and profitability, this results are found in the research from Deloof (2003), Lazaridis and Tryfonidis (2006), Garcia-Teruel and Martinez-Solano (2007), and Wasiuzzaman and Arumugam (2013).

2.8.3 Debt Ratio (DR)
The third control variable used for this study is Debt Ratio. Debt Ratio is calculated by total debts over total assets. According to the pecking order theory which suggests that due to the cost associated with external financing and the increasing attention from both creditors and shareholders, a firm should go for cheaper internal resources before seeking for external resources for financing the operation (Ng et al, 2017). However, a firm may have to use external funds which is relatively higher cost when there is a lack of internal funds. The firms can use this external funds to make higher profit if they can manage it efficiently. In other word, firms with relatively high level of debt are able to operate more efficiently under this theory.
33020-48260Debt Ratio = Total DebtsTotal Assets00Debt Ratio = Total DebtsTotal Assets
The empirical evidence demonstrates a negative relation between and debt ratio and profitability (Deloof, 2003; Lazaridis and Tryfonidis, 2006; Garcia-Teruel and Martinez-Solano, 2007; Wasiuzzaman and Arumugam, 2013; Jakpar et al, 2017). Hence, a significant negative relation is expected between debt ratio and profitability, which is measured as the value of a firm’s long-term and short-term debts.

2.9 Empirical Studies
Moss and Stine (1993) studied the relationship between the firm size and the length of CCC in the retail sector from 1971 to 1990. By using the regression analysis, they found that smaller firms have a significantly longer cash conversion cycle than the largest firms as the result of the longer inventory and receivables conversion periods possessed by the small firms. Ideally, a firm would like to have a negative CCC. Therefore, it is suggest that the smallest firms may improve their cash conversion cycles by shorten their inventory and receivables conversion periods such as better managing credit sales, collections, and inventory. Besides, they also found the CCC is positively related to both the current and quick ratios regardless of firm size, and a shorter CCC is associated with larger amounts of cash flow to the firm which normally happened on larger firms. This finding was supporting by Uyar (2009) who found similar results in his empirical investigation in Turkey.
Deloof (2003) examined the relation between working capital management and corporate profitability of 1009 large Belgian non-financial firms for the 1992-1996 period. Based on the regression analysis, the result shows that there is significant negative relationship between gross operating income and all the components of CCC. This results suggest that managers can increase corporate profitability by reducing the number of days accounts receivable and inventories. Moreover, he also finds that less profitable firms will wait longer to pay their bills. Yet, the results obtained may be affected by potential endogeneity problems which future researchers should be taken into considerate on their research.

Lazaridis and Tryfonidis (2006) have conducted a studied on the relationship between corporate profitability and working capital management in Greece for the period of 2001-2004. The regression analysis results showed that there is statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. Lower gross operating profit is associated with an increase in the number days of accounts payables as the result that less profitable firms wait longer to pay their bills taking advantage of credit period granted by their suppliers. While the negative relationship between accounts receivables and firms’ profitability suggests that firms tend to decrease their accounts receivables in order to reduce their cash gap in the cash conversion cycle which can lead to higher profit return. Likewise the negative relationship between number of days in inventory and corporate profitability suggests the possibility of tying up excess capital (inventories) at the expense of profitable operations. Thus, managers should manage correctly the cash conversion cycle by keeping each component (accounts receivables, accounts payables, inventory) at an optimum level in order to maximise profitability of the companies. This research was extended by Gill et al (2010) and similar results were obtained in his study conducted on American firms for a period of 2005 to 2007.

Garcia-Teruel and Martinez-Solano (2007) provide an empirical evidence on the effects of working capital management on the profitability of small and medium-sized Spanish firms during 1996 to 2002. The panel data methodology was used to test the relationship and the results are similar to those found in previous studies that focused on large firms. Their results indicate that there is a significant negative relation between an SME’s profitability and the number of days accounts receivable and days of inventory. However, there was no evidence shows that the number of days accounts payable affects significantly on SME’s return on assets when they account for possible endogeneity problems that suggested by Deloof (2003). Yet, Lyngstadaas and Berg (2016) suggest that even though endogeneity may exist, this does not affect the results from the previous analysis. And they found that negative relationship was existed between profitability and the INV, ACR, ACP and CCC variables in Norwegian firms.

Samiloglu and Demirgunes (2008) analyze the effect of working capital management on manufacturing firm’s profitability in Turkey from 1998 to 2007. By using multiple regression model, the empirical results show that accounts receivables period, inventory period and leverage significant affect negatively on the firms’ profitability, but positively correlated with firm growth as growth reflect the firm’ economies of scale. The explanation of the result for each variable is as similar with previous findings. However, unlike other findings, there is no statistically significant effects found between CCC, size, fixed financial assets and company’ profitability within the study period.
Dong and Su (2010) investigated the relationship existing between profitability, the cash conversion cycle and its components in Vietnam stock market for 2006 to 2008. From the result under multiple regression analysis, it showed that there was a strong negative relationship between profitability, measured through gross operating profit, and the cash conversion cycle. Additionally, Tran, Abbott, and Yap (2017) further carried out a similar studies in Vietnam during 2010 to 2012 by using multiple regression analysis, the results also indicates that SMEs firms in Vietnam can increase their profitability by reducing the number of days of accounts receivable, accounts inventories and accounts payable to an optimal minimum. Their findings are supported for existing literatures, Deloof (2003) who proved there is the negative effect of number of days accounts receivable, number of days inventories and cash conversion cycle on corporate profitability; Dong and Su (2010) who claimed there was a positive relationship between number of days accounts payable and profitability. Similar results also found by Alipour (2011) in Iran, and Garg & Gumbochuma (2015) in South Africa.
Hong, Novazzi, and Gerab (2011) intended to investigate if there is any difference between corporate profitability and working capital management in two separate groups of companies namely working capital intensive and fixed capital intensive in Brazil across 2005 to 2009. The results analysed through multiple regression analysis showed that days inventory has negative relationship with ROS and ROA but has no statistical evidence in ROE improvement in working capital intensive group. It has also identified days of working capital positively affect ROS in the fixed capital intensive group while debt ratio is the only variable that negatively affects ROA. These result indicates that working capital intensive type of company should focus on managing inventory as well as cash conversion efficiency to an optimum level, while fixed capital intensive type of company should focus on debt ratio and days of working capital in order to create more profits to the companies.
However, there are some researchers found the positive relation between working capital management and corporate performance. For example, Mousavi and Jari (2012) conducted a study on working capital management and firm performance in Iran from 2003 to 2007, by using the linear regression model result showed that there is positive relationship between working capital management, measured by Net Liquidity Balance (NLB) and corporate performance.

2.9.1 Malaysian Context
Mohamad and Saad (2010) attempted to bridge the gap in the literature by offering empirical evidence about working capital management and its effect to the performance of Malaysian listed companies from the perspective of market valuation and profitability from 2003 to 2007. By applying correlations and multiple regression analysis, they found that there are significant negative relationship between working capital variables with firm’s performance, measured by Tobin Q (TQ), return on asset (ROA) and return on invested capital (ROIC). Just like other research findings, this result highlights the importance of managing working capital requirements and should form part of the company’s strategic and operational thinking to ensure an improvement in firm’s market value and profitability.
Wasiuzzaman and Arumugam (2013) examines the determinants of the level of investment in net operating working capital by firms in Malaysia for years 2000 to 2007. Based on the OLS regression analysis, the study finds that in times of economic expansion, younger and smaller firms which generally have less tangible assets, low leverage, high immediate sales growth, high operating cash flows, less volatile revenues and low levels of asymmetric information are likely to have the highest investments in operating working capital. Other characteristics such as size and the independence of the board, are not found to have any significant influence on the working capital investment of firms. Specifically, the significantly negative relationship between leverage and working capital is consistent with the pecking order theory stated that when a firm will go for external sourcing only if it does not have enough internal financing. Positive effect of sales growth indicates that customers were stimulated through the granting of credit which resulted higher receivables, thus again increasing the working capital cycle.

Yunos et al (2015) examined the influence of working capital management of the government-linked companies (GLC) on their financial performance covering the period from 2003 to 2014. By applying panel data regression model, there were mixed results obtained depending on the measure used for the profitability. For example, ROA is not affected by the firm working capital management, instead GOI was affected positively by days payable outstanding.
Wasiuzzaman (2015) investigated the relationship between efficiency of working capital on firms’ value by considering the influence of financing constraints during the period of 1999-2008. By employed the ordinary least squares regression, he found that by reducing the investment in working capital to improve the efficiency working capital, the firms’ value improved. In addition, he argued that working capital efficiency will significantly increases the financial constrained firm’s value and vice versa.

Misbah et al (2015) using Pearson correlation technique, paired sample t-test and descriptive statistical analysis found that the days account receivable, days inventory turnover, days account payable, cash conversion cycle as well as liquidity element have a significant negative relationship with the profitability of the firms from industrial product sector for year 2002 to 2011. Contradicts with the previous studies, Ng et al (2017) carried out a similar study on Malaysian listed manufacturing firms from 2007 to 2012 by using regression analysis, but the results indicate that cash conversion cycle is positively related to GOI, particularly in inventory conversion period. Besides, they also found that GOI is negatively related to the degree of aggressiveness of investment policies but positively related with the degree of aggressiveness of financing policies.
Zariyawati, Annuar, and Pui-San (2016) has investigated on the working capital management determinants among small and large firms listed on the Bursa Malaysia stock exchange from 2009-2013 using panel data analysis. For small firms, the results of random effects model demonstrate that firm leverage, firm performance, executive compensation and economic conditions were found to be negatively correlated with working capital management, while capital expenditure is positively correlated with working capital management. However, for large firms only operating cash flow is negatively affect the working capital management. Therefore it is concluded that small firms and large firms have different working capital management strategies.In summary, various studies have analysed the relationship of working capital management (WCM) and firm profitability in various markets. The finding results are quite mixed, and the term profitability was measured in different ways by the authors. It was measured in terms of ROS, ROA, ROE, gross operating income, gross operating profit and net operating profit. But majority of the studies found negative relationship between WCM and firm profitability. The studies reviewed have used various variables to analyse the relationship, but most of them would still using the main components of WCM, including inventory turnover in days, average collection period, average payment period, and cash conversion cycle. Also, there are different methodology such as linear regression and panel data regression have been employed by the researchers in different market. In this study, multiple regression analysis would be the most appropriate methodology to use to investigate the relationship between working capital management and corporate performance of different sizes listed companies in Malaysia across various economic conditions.
2.10 Hypothesis Development
2.10.1 The inventory turnover in days is negatively related to the company’s profitability.According to the risk and return theory, higher risk faced by a company, the higher the return. Company will expose to high risk of running out of stock when keeping lesser inventory. Lesser inventory keep will induce shorter inventory turnover in days and resulting higher expected return. However, high investment in stock will cause big amount of working capital bind in the storage, company have no extra cash to invest in other assets which generate extra profit to the company. Even though high inventory will minimize the risk of insufficiency stock level, it will minimize the company’s profitability as well.
Apart from the supporting of theory, there are many studied has been carried out to investigate the relationship between inventory turnover in days and profitability of the companies. Most of the findings showed that there is a negative relationship between both variables regardless market and sector (Deloof, 2003; Lazaridis and Tryfonidis, 2006; Garcia-Teruel & Martinez-Solano, 2007; Samiloglu & Demirgunes, 2008; Gill et al, 2010; Mohamad and Saad, 2010; Lyngstadaas and Berg, 2016; Tran, Abbott, and Yap, 2017). The explanation of this negative relationship is when companies keep their inventory at low level, there is relative low opportunity cost because companies can use the money to invest in other places rather tied up in stock to generate higher profit. Moreover, costs associate with high inventory level includes storage cost, insurance costs, and management costs that many companies are trying to avoid of due to it is expensive to hold. Togetherness, all the other researchers found evidence of a negative effect of inventories on a firm’s profitability, the following hypothesis developed:
Hypothesis 1: There is a negative relationship between inventory turnover in days and profitability.

2.10.2 The accounts receivables of a firm are negatively related to the company’s profitability.Longer average collection period incur higher current ratio. High current ratio shows the companies have made large investment in current assets, means the companies will get a low rate of return on investment (Zariyawati et al., 2009). This is because excess investment in current assets will not generate high return. While a low current ratio shows the companies made a small investment in current assets which means the companies will have a high rate of return on investment as no idle investment is tied up in current assets. Therefore, shorter average collection period may induce high profitability of the company.
Numbers of researches have been carried out to identify the relationship between average collection period and profitability of a company. Most of the researchers proposed that there is a negative relationship between the average collection period and profitability of a company (Deloof, 2003; Garcia-Teruel & Martinez-Solano, 2007; Samiloglu & Demirgunes, 2008; Dong and Su, 2010; Mohamad and Saad, 2010; Alipour, 2011; Wasiuzzaman, 2015; Tran, Abbott, and Yap, 2017). Therefore, companies should keep the risks cause by account receivable to a reasonable minimum by keeping the average collection period short. When the accounts receivables keep growing, funds cannot be released and therefore can be seen as opportunity costs. Companies should keep the cost of account receivable which included debt management cost and opportunity cost to minimum. Due to the result found by others research, the hypothesis below is developed:
Hypothesis 2: There is a negative relationship between average collection period and profitability.

2.10.3 The accounts payables of a firm are positively related to a company’s profitability.To save the expensive costs from getting external financing, payment in delay is seen as an internal financing applied by most of the companies. By this, the company will have more working capital on their hands and can meet their operating obligation without getting support from external financing. The longer the average payment period of a company, the bigger amount of cash hold by a company before paying to the creditors, therefore account payable will be accumulated. As supported by risk and return theory, the higher the current liabilities used to finance its assets, the higher the risk. Although using current liabilities will cause higher risk, but current liabilities can be less costly compared to long-term financing. Return management process’s purpose is to maximize profit in the context of an acceptable level of risk. Longer average payment period may induce high profitability for a company.
Researchers who have studied the relationship between average payment period and profitability of companies found there is a significant positive relationship between both variable, since in the measurement of the Cash Conversion Cycle, the number of days accounts payables needs to be deducted from it. Therefore, people always expect there is a positive relationship between average payment period and profitability due to the negative relationship between cash conversion cycle and profitability. However, there are some researchers found that there is a significant negative relationship between average payment period and profitability of a company such as Deloof (2003), Garcia-Teruel and Martinez-Solano (2007), Mohamad and Saad (2010), Misbah et al (2015). This is because some researchers find out that paying their early may get discounts from their creditors and save the cost involved using account payable.

The empirical evidence found by Lazaridis & Tryfonidis (2006) and Dong & Su (2010) were accounts payables have a positive influence on a company’s profitability by claiming that less profitable companies will extend longer time to pay their bills. The longer the time a company delay for their payment, the higher the level of working capital the company reserves which can use to improve profitability. By applying risk and return theory, and supporting evidences from Lazaridis ; Tryfonidis (2006) and Dong ; Su (2010), the relation is expected and will be tested using the following hypothesis:
Hypothesis 3: There is a positive relationship between average payment period and profitability.

2.10.4 The cash conversion cycle of a firm is negatively related to a company’s profitability.Cash of a company is available for other usages like investing in equipment and infrastructure or innovating manufacturing, and selling process when the cash conversion cycle of the company is short. Cash of the company is tied up in the company’s operation activities when the cash conversion cycle of the company is long. This will cause that cash flow to have less chance to make investment in other assets.

According to risk and return theory, investing in large cash and marketable securities balances can help companies increase liquidity of the company and decrease the risk. However, investments in cash and marketable securities will earn lower returns when compared with the company’s other investments ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “author” : { “dropping-particle” : “”, “family” : “Kimani”, “given” : “James Gitau”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Nyangu00e1u”, “given” : “Benson Onguso”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Karungu”, “given” : “Robert Mugo”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Kirui”, “given” : “Kibet”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “id” : “ITEM-1”, “issue” : “10”, “issued” : { “date-parts” : “2014” }, “page” : “34-50”, “title” : “What Are the Implications of Working Capital Management on Liquidity Risk ? A Case of Listed Commercial Banks in Kenya”, “type” : “article-journal”, “volume” : “5” }, “uris” : “http://www.mendeley.com/documents/?uuid=ccc4c848-f710-41cb-88c4-d6fa2851ad48” } , “mendeley” : { “formattedCitation” : “(Kimani et al., 2014)”, “plainTextFormattedCitation” : “(Kimani et al., 2014)”, “previouslyFormattedCitation” : “(Kimani et al., 2014)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Kimani et al., 2014). Due to this, the company that has larger investments in cash and marketable securities will reduce its overall rate of return. The increase the company’s liquidity will decrease the return on investment. In addition, liquidity and profitability theory stated that the longer cash conversion cycle length, the higher the current ratio. Higher liquidity of the company will cause lower companies’ profitability.

Cash conversion cycle is expected to have negatively related to the profitability of a company because the inventory turnover in days and average collection period which are part of cash conversion cycle are negatively related to the profitability of a company. The relation between average payment period and profitability is positive will not change the expected negative effect of cash conversion cycle. Negative relationship between cash conversion cycle and companies’ profitability was supported by the evidence found by many researchers (Deloof, 2003; Lazaridis and Tryforidis, 2006; Garcia-Teruel and Martinez-Solano, 2007; Samiloglu and Demirgunes, 2008; Dong and Su, 2010; Mohamad and Saad, 2010; Alipour, 2011; Misbah et al, 2015; Wasiuzzaman, 2015; Tran, Abbott, and Yap, 2017). According to Deloof (2003), the rational to keep low CCC is that greater costly external financing is needed when there is longer CCC in a company. Therefore, higher interest expense for the financing will be incurred and consequently cause to higher default risk and lower profitability. In other word, a firm can operate more economically by reducing the time that funds are tied up in working capital. To verify the relationship between two variables, the following hypothesis is proposed:
Hypothesis 4: There is a negative relationship between cash conversion cycle length and profitability.

2.11 Conceptual Framework-798747495Independent Variables
Inventory Turnover in Days
Average Collection Period
Average Payment Period
Cash Conversion Cycle
00Independent Variables
Inventory Turnover in Days
Average Collection Period
Average Payment Period
Cash Conversion Cycle

323097275588Dependent Variable
Return on Invested Capital
00Dependent Variable
Return on Invested Capital

2823348319979002471688319979
1864880156461Control Variables
Current Ratio
Sales Growth
Debt Ratio
00Control Variables
Current Ratio
Sales Growth
Debt Ratio

2.12 Chapter SummaryThe intention of this chapter is to discuss the literature review about working capital management and its relationship with the profitability of a company. Firstly, Malaysia financial system is discussed included corporatization process and the financial intermediaries. Then the components of working capital management can be illustrated through working capital cycle, which are cash, inventories, account receivable, and account payable. These are also the elements made up of current assets and current liabilities where can find from the annual report of a company.

Besides that, the metrics of working capital management used in this thesis which are cash conversion cycle and its components also discussed in this chapter. The components of the cash conversion cycle included inventory turnover in days (ITID), average collection period (ACP), and average payment period (APP). The hypothesis of this research also developed in this chapter based on the prediction on the relationship between independent variables and dependent variable applied in this study.
As a summary, ample of studies found that there is a negative relationship between cash conversion cycle and profitability of a company. Longer length of cash conversion cycle may induce lower the profitability of a company. While the length of cash conversion cycle decrease, the higher the profitability of a company. Therefore, companies should manage it well to make sure to generate high profit to the company.

CHAPTER 3DATA AND RESEARCH METHODOLOGY3.1 IntroductionChapter 3 discussed the research methodology used in this thesis. Basically, this chapter consisted of nine sections. Firstly, section 3.1 described the introduction of this chapter and section 3.2 explained the target population of this thesis. Section 3.3 described the sampling technique, while sampling size consisted in section 3.4. Next, section 3.5 discussed about instrument and measurement, and section 3.6 consisted of the data collection method used in this research. While section 3.7 discussed the application of data analysis tools to analyze the data obtained. The last section of this chapter, section 3.8 covered the conclusion of this chapter.
Secondary data was used to examine how the working capital management affected the profitability of listed company in Malaysia by using cash conversion cycle and its components. The data used in this thesis was collected from both Bursa Malaysia and Data Stream Web Base. In summary, this chapter provided the supporting reason to explain why the specific data analysis tools used to analyze the data in this study. Moreover, this chapter provided basic awareness on the statistical techniques.

3.2 Target PopulationSection 3.2 clearly determined the target population focused in this thesis. Generally, population is the group of people or objects which fulfilled the characteristics of the data needed for the study. Researchers must identify all the specific criteria that are common to all the people or objects in focus to clearly determine the target population.
This study targeted on the listed companies in mainboard Bursa Malaysia as the main purpose is to study the relationship between working capital management and profitability of listed companies in Malaysia. Specifically, this thesis is going to study the relationship between working capital management and profitability of small, medium and large size of listed companies in Malaysia across different economic conditions. For the purposes of this study, small, medium and large enterprises will be selected based on company’ market capitalization. Market capitalization or market cap is a measurement of the size of a business enterprise, and can be calculated by multiplying a company’s share outstanding by the current market price per share. The companies were divided into small-cap, mid-cap, and large-cap based on the size of market capitalization. The benchmark of market capitalization is as follow:
Small-cap: RM 100 million – RM 1 billion
Mid-cap: RM 1 billion – RM 10 billion
Large-cap: RM 10 billion – RM 100billion
Listed companies were chosen because the annual report for listed companies was available online such as Bursa Malaysia website. Therefore, ample of data can be collected easily for this study used. Besides that, listed companies are stable company, so profitability of the companies can analyze and compare for long-term period, which included before crisis, during crisis and after crisis period.

A good operational definition is important in selecting the target population (Cooper ; Schindler, 2011). Non-finance companies which exceptional operating characteristics such as credit card companies, stock brokerages, utility companies, insurance companies, credit unions, banks, investment fund, and consumer finance companies were not included in the target population due to the concern that the cash conversion cycle, which is employed in this study, is inappropriate to measure and present working capital management of companies in this nature of business. Also, these companies have different working capital management strategies from other business sectors. There were certain criteria to fulfill before a company being included as target population of this thesis, which was the companies must be continuously listed in Bursa Malaysia from year 2004 to year 2012. Besides that, any companies with missing data of financial statement were ignored from the target population of the study.
3.3 Sampling TechniqueThere are probability samplings and non-probability samplings can be used as the sampling technique in choosing sample from the target population. Probability sampling is a technique in which every element in the target population has a known, non-zero probability of selection. While non-probability sampling is a sampling technique in which sample are selected on the basis of personal convenience and judgment. The probability of any particular element of the population being chosen is unknown. Probability sampling included simple random sampling, systematic random sampling, stratified random sampling and cluster sampling.
To investigate the relationship between working capital management and profitability of different size companies, stratified random sampling was applied to be the sampling technique and there were certain criteria need to be fulfil among the element in the target population, such as it must continuously listed in Bursa Malaysia from year 2004 to year 2012 and fall into one of the groups setting in accordance market capitalization’ benchmark as discussed above. In stratified random sampling, target population will be divided into 3 groups (small-cap, mid-cap, large-cap), then sample was selected from each group by simply lucky draw on the number which assigned to all the elements. Every element had equal chance of being selected to be the sample in this thesis. Therefore, there will be a total of 83 companies, in which 30 companies from small-cap, 30 from mid-cap, and 23 from large-cap were chosen as representatives or sample of the population which used to determine the relationship between working capital management and companies’ profitability for before crisis, during crisis, after crisis and overall period.
Table 1: Small-cap companies list
No. Company Name
ANCOM BERHAD (4758)
APOLLO FOOD HOLDINGS BERHAD S (6432)
ASIA BRANDS BERHAD S (7722)
ASTRAL SUPREME BERHAD S (7070)
BONIA CORPORATION BERHAD S (9288)
CAB CAKARAN CORPORATION BERHAD S (7174)
CENTURY BOND BHD (7171)
DOMINANT ENTERPRISE BERHAD S (7169)
EG INDUSTRIES BERHAD S (8907)
FACB INDUSTRIES INCORPORATED BERHAD (2984)
FIMA CORPORATION BERHAD S (3107)
GUH HOLDINGS BERHAD S (3247)
HEXZA CORPORATION BERHAD (3298)
HUP SENG INDUSTRIES BERHAD S (5024)
LB ALUMINIUM BERHAD S (9326)
LION INDUSTRIES CORPORATION BERHAD S (4235)
MAGNI-TECH INDUSTRIES BERHAD S (7087)
MWE HOLDINGS BERHAD (3921)
NTPM HOLDINGS BERHAD S (5066)
NYLEX (MALAYSIA) BERHAD S (4944)
O;C RESOURCES BERHAD S (7071)
PARKSON HOLDINGS BERHAD S (5657)
POH KONG HOLDINGS BERHAD S (5080)
SINOTOP HOLDINGS BERHAD S (8532)
SPRITZER BHD S (7103)
TASEK CORPORATION BERHAD S (4448)
TECNIC GROUP BERHAD S (9741)
THE STORE CORPORATION BERHAD S (5711)
UNIMECH GROUP BERHAD S (7091)
YEN GLOBAL BERHAD S (7184)
Table 2: Mid-cap companies list
No. Company Name
AEON CO. (M) BHD S (6599)
AJINOMOTO (MALAYSIA) BERHAD S (2658)
AMWAY (MALAYSIA) HOLDINGS BERHAD (6351)
ANN JOO RESOURCES BHD (6556)
ATLAN HOLDINGS BHD (7048)
CAHYA MATA SARAWAK BERHAD (2852)
CARLSBERG BREWERY MALAYSIA BHD (2836)
DENKO INDUSTRIAL CORP BHD (8176)
DRB-HICOM BERHAD S (1619)
DUTCH LADY MILK INDUSTRIES BHD (3026)
ECO WORLD DEVELOPMENT GROUP BHD (8206)
EASTERN ; ORIENTAL BHD (3417)
HEINEKEN MALAYSIA BHD (3255)
HENGYUAN REFINING CO BHD (4324)
KECK SENG (MALAYSIA) BERHAD (3476)
KIAN JOO CAN FACTORY BHD (3522)
KOSSAN RUBBER INDUSTRIES BHD (7153)
LAFARGE MALAYSIA BERHAD S (3794)
MALAYSIAN RESOURCES CORP BHD (1651)
ORIENTAL HOLDINGS BERHAD (4006)
PANASONIC MANUFACTURING MALAYSIA BERHAD (3719)
PHARMANIAGA BERHAD S (7081)
SCIENTEX BERHAD S (4731)
SUPERMAX CORP BHD (7106)
SKP RESOURCES BHD S (7155)
TA ANN HOLDINGS BHD (5012)
UCHI TECHNOLOGIES BHD (7100)
UMW HOLDINGS BERHAD S (4588)
V.S. INDUSTRY BERHAD S (6963)
WAH SEONG CORP BHD (5142)
Table 3: Large-cap companies list
No. Company Name
AIRASIA BHD (5099)
BRITISH AMERICAN TOBACCO MALAYSIA BHD (4162)
DIALOG GROUP BHD (7277)
DIGI.COM BHD (6947)
FRASER ; NEAVE HOLDINGS BHD S (3689)
GAMUDA BHD (5398)
GENTING BHD (3182)
GENTING MALAYSIA BHD (4715)
HAP SENG CONSOLIDATED BHD (3034)
IOI CORP BHD (1961)
KUALA LUMPUR KEPONG BHD (2445)
MALAYSIA AIRPORTS HOLDINGS BHD (5014)
MISC BHD (3816)
NESTLE MALAYSIA BHD (4707)
PETRONAS DAGANGAN BHD (5681)
PETRONAS GAS BHD (6033)
PPB GROUP BERHAD S (4065)
PRESS METAL ALUMINIUM HOLDINGS BHD (8869)
QL RESOURCES BERHAD (7084)
SIME DARBY BHD (4197)
S P SETIA BHD (8664)
TOP GLOVE CORP BHD (7113)
YTL CORP BHD (4677)
3.4 Sampling SizeThere are two types of research methods which are quantitative and qualitative can be used to determine the sampling size of a thesis. The quantitative and qualitative methods are applied to get and evaluate the data. It is important to identify which type of data either words data or numerical data needed to collect before choosing the appropriate method. According to Bryman and Bell (2011), the qualitative method is kind of inductive approach that focus more on deep understanding and words, in which it can be used to generate new theories. While the quantitative method is associated with the deductive approach which concerned on the collection of numerical data to test the existing theories, therefore contributing to strengthen it or revising it through new findings.
In this study, quantitative method will be employed as it enables the research to reason from generic to specific which is applicable to this paper of having both general and specific objectives. Therefore, the numerical data from annual report of the 83 companies was collected to analyse and determine the relationship between working capital management and its profitability. The data of financial statement in annual report for the selected companies were used widely for this thesis. Cash conversion cycle and its components were used to determine the relationship between working capital management and profitability.
3.5 Instrument and Measurement
The source used to collect data was the financial statement of the listed companies in Bursa Malaysia. Secondary data was used to run data analysis instead of primary data. Therefore, no questionnaires used in this research. Every single data was obtained directly from the financial statement. Table 4 showed the measurement of the independent variables, dependent variable and control variables used in this study. Independent variables for this thesis were inventory turnover in days (ITID), average collection period (ACP), average payment period (APP), and cash conversion cycle (CCC). Dependent variable used to measure the profitability of companies was return on invested capital (ROIC). Meanwhile, Current ratio (CR), Sales Growth (GROWTH), and Debt Ratio (DR) were the control variables employed in this study.
Table 4: Measurement of variables
Variables Sample Item
1. Inventory Turnover in Days (ITID) InventoryCost of goods sold×3652. Average Collection Period (ACP) Receivable accountSales×3653. Average Payment Period (APP) Payable accountCost of good sold×3654. Cash Conversion Cycle (CCC) Inventory Turnover in Days + Average Collection Period – Average Payment Period
5. Return on invested capital (ROIC) Net IncomeTotal Capital6. Current Ratio (CR) Current AssetsCurrent Liabilties7. Sales Growth (GROWTH) Current year sales–Last year salesLast year sales8. Debt Ratio (DR) Total DebtsTotal Assets3.6 Data Collection Method
This section explained the data collection procedures for this thesis. Secondary data were chosen to determine the relationship between working capital management and profitability of the companies in this thesis. Secondary data were less costly and faster to collect compared to primary data because secondary data had been collected and published by other users. Secondary data can be categorised into 2 groups, which were internal secondary data and external secondary data. Internal secondary data can only obtain within the company while external secondary data can acquire from other sources besides than the company, such as annual report from Bursa Malaysia and Data Stream Web Base.
The data used for this thesis were retrieved from the annual report of selected companies in Bursa Malaysia and Data Stream Web Base. Annual report of 83 companies was collected and the duration chose were from year 2004 to year 2012. The duration set to collect data was 9 years to fulfil the sample period which contained before crisis period, during crisis period and after crisis period. The sample period before crisis were from the year 2004 to 2006, while sample period for during crisis were from year 2007 to year 2009, and sample period for after crisis were from year 2010 to the year 2012. Therefore, the data collected for 83 companies for 9 years period from year 2004 to 2012 will resulted a total of 747 company-year observations which robust the finding results.
3.7 Data Analysis ToolsThis section described the techniques and procedures used to explain the sample, examine the data, and test the hypothesis. There were four independent variables used in this thesis which were cash conversion cycle, inventory turnover in days, average collection period, and average payment period, while the dependent variable of this thesis was return on invested capital. Each of these four different variables will be analysed using the Ordinary Least Square (OLS) regression analyses. The data used were extracted from the annual report of the selected listed companies in Malaysia. Descriptive Analysis, Pearson Product-Moment Correlation, and Multiple Regressions were the statistic test for this thesis, which was carried out by using SPSS software.

3.7.1 Descriptive Analysis
Descriptive analysis was used to explain and discuss the characteristics of the collected sample of this thesis. It is necessary to carry out by every researcher before conducting the next analysis. Descriptive analysis is a division of statistics which represents many kinds of techniques can be applied to summarize the collected data. It is regularly used to report the big amount of quantitative or qualitative data. Besides that, descriptive analysis is needed for using all normative and cause-and-effect statistical techniques effectively. Descriptive analysis showed the statistics summary of the collected data related to the independent variables which influenced the profitability of the listed companies in Malaysia.

Four independent variables and one dependent variable were tested to determine the relationship between working capital management and the profitability of the companies. All variables were calculated through accounting ratios. Mean, Median, Maximum level and Minimum level, and Standard Deviation can be used to explain more specifically and perfectly to support the descriptive statistic of the collected data.
3.7.2 Pearson’s Correlation Coefficient
The calculation of correlation was one of the basic methods used to analysis the collected data. There are two ways to calculate correlation, which are Pearson’s Correlation Coefficient or Spearman Rho. Both ways can be calculated through SPSS. Pearson’s Correlation Coefficient was chose to use in this thesis. Pearson’s Correlation applied to identify the relationship between independent variables, control variables and dependent variable (Warrack, 2003). Pearson’s Correlation also used to explain the degree of relationship between the variables. Pearson’s Correlation matrix can use to detect problem of Multicollinearity (Falope ; Ajilore, 2009).

There were four criteria which independent variables and dependent variable needed to fulfil before Pearson’s Correlation test. Firstly, both independent and dependent variables must be interval or ratio measurements. Next, both independent and dependent variables must be normally distributed. Third, both independent and dependent variables must form a straight line and not a curve when plotted on a scatter plot. Therefore, there must be a linear relationship between the independent and dependent variables (Moore, McCabe, Duckworth & Alvan, 2009). Last but not least, there must be no significant outliers on the collected data (Statistics laerd, 2013).
The range of scales used to measure Pearson’s Correlation is from -1.00 to + 1.00 (Saunders, Lewis ; Thornhill, 2009). The value of -1 represents a perfect negative correlation, the value of dependent variable will decrease when the value of the independent variable increase. The value of +1 represents a perfect positive correlation, means both the independent and dependent variable is precisely related. The value of the dependent variable will increase when the value of independent variable increase. Correlation value of 0 means the independent and dependent variable are lack of correlation or perfectly independent.

3.7.3 Inferential Analysis
3.7.3.1 Multiple RegressionMultiple Regressions was used to study the influence of the components of working capital management (independent variables) to companies’ profitability (dependent variable) in this research. Inventory turnover in days, average collection period, average payment period, and cash conversion cycle were the independent variables and return on invested capital was the dependent variable of this research.
The four general regression models applied in this analysis were:
Model A: the first hypothesis test model; the relation of inventory turnover in day and profitability.

ROIC it = ?0 + ?1 (ITID it) + ?2 (CR it) + ?3 (GROWTH it) + ?4 (DR it) + ?
Model B: the second hypothesis test model; the relation of average collection period and profitability.

ROIC it = ?0 + ?1 (ACP it) + ?2 (CR it) + ?3 (GROWTH it) + ?4 (DR it) + ?
Model C: the third hypothesis test model; the relation of average payment period and profitability.

ROIC it = ?0 + ?1 (APP it) + ?2 (CR it) + ?3 (GROWTH it) + ?4 (DR it) + ?
Model D: the fourth hypothesis test model; the relation of cash conversion cycle and profitability.

ROIC it = ?0 + ?1 (CCC it) + ?2 (CR it) + ?3 (GROWTH it) + ?4 (DR it) + ?
Where:
ROIC= Return on invested capital
ITID= Inventory Turnover in Days
ACP= Average Collection Period
APP= Average Payment Period
CCC= Cash Conversion Cycle
CR= Current Ratio
GROWTH = Sales Growth
DR= Debt Ratio
?= Error
?1, ?2, ?3, ?4 = Regression model coefficient
By carrying out the Multiple Regression analysis, this thesis was able to identify which independent variable had a significant influence on the profitability of companies.

3.8 Chapter SummaryThis chapter was carried out to form the basic and brief guide of the relevant data for the next chapter which statistically test the research questions. The data collected from Bursa Malaysia and Data Stream Web Base while SPSS was used to determine the relationship between independent variables and dependent variables. Descriptive Analysis, Pearson’s Correlations Coefficient and Multiple Regression analysis were carried out in order to test the significance of the hypotheses in the next chapter.

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