THE IMPACT OF WORKING CAPITAL MANAGEMENT ON CONSTRUCTION FIRMS’ PROFITABILITY IN VIETNAM

This chapter summarize all the main analysis, findings chapter and give future research directions. Based on the results findings the researcher highlight some recommendations for the target populations. Finally, the researcher present the limitations of the study, future research directions. 5.1 Conclusions The object of this study is to examine the impact of working capital management on firms’ profitability. The researcher used quantitative method to test a series of research hypothesis. Then companies were selected a sample of thirteen audited companies which listed in Vietnam stock exchange for period three - year from 2010-2012. Data was collected then analyzed on quantitative basis through SPSS 16.0 software. From this study the research find that, most of Vietnam construction firms have large amounts of cash invested in working capital. Therefore, it can be expected that the way in which working capital managed will have a significant impact on profitability of those firms. The study have found a significant negative relationship between corporate profitability which is measured by Return on Assets and the average period, inventory turnovers in days and cash conversion cycle for a sample of Vietnam construction firms. The negative relationship between accounts receivables and firms’ profitability show that less profitable will pursue a decrease of their accounts receivables in an attempt to reduce their cash gap in the cash conversion cycle. The results suggest that managers can create value for their share holders by reducing the number of day’s account receivable and inventories to realistic minimum level. Moreover, cash conversion cycle that is used as measuring efficiency of working capital management shows that as cash conversion cycle is longer, profitability is smaller. Therefore, the researcher recommend that managers can build firms value by reducing the cash conversion cycle to a reasonable range or mangers can create profits for their firms by handling correctly the cash conversion cycle and keep each different component. 5.2 Recommendations Based on the study results the researcher recommended the following points: •Average collection period have negative relationship with firms’ return on assets. It means that if the average collection period is low, the firms’ profitability will decrease. Hence, companies have to maintain liberal credit or conservative policy so as to minimize bad debt and not to lose customers. •The negative relationship between inventory turnovers in day’s and firms profitability. With higher inventory turnover will have higher costs like storage, carrying, insurance and its hold opportunity costs too. As a result, companies’ manager has to look over the proper ways of inventory control techniques like economic order quantity or others depend upon the nature of materials they hold. •Similar to above, Cash conversion cycle has a negative relationship with firms’ profitability. Therefore, regarding the CCC, the researcher recommended that lowering working capital cycle as a measure of efficient working capital management is the one to be appraised. 5.3 Research limitation and future research directions This researcher tried to meet the gap between the existing literatures but it also has its own limitations and those limitations can be addressed by the researcher in the future. Firstly, This study was delimited in its title to the : “THE IMPACT OF WORKING CAPITAL MANAGEMENT ON CORPORATE PROFITABILITY IN CONSTRUCTION INDUSTRY IN VIETNAM”. Besides, the quality of this study is depending on the genuine information acquired from concerned companies. Hence, reliability of the data was the main problems face in the study and influence its output. Moreover, shortage of latest reference books and literature on the area in Vietnam content. Lastly, the most important factor that limited the study output was shortage of time. There are 11 Joint stock companies were chosen as a sample using simple random sampling method and the study took only three years data starting from year 2010 to 2012. The study limited to the sample of Vietnam construction share companies industry. The results of this study could only generalized to construction firms similar to those that were included in this research. Further, there are a lot of measures of profitability such as Gross operating profits, Return on investment but the researcher used one measure to measure the profitability of a firms is Return on Assets. Hence, if the researcher use other measures of profitability, the results may differ from this study. Therefore, the future researches should investigate generalization of the findings beyond the Vietnam construction sector and not only on share construction firms. Thus, the scope of the further research may be extended to the working components and profitability measures’ including cash, marketable securities and Gross operating profit, Return on Investment.

JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE

MASTERS FINANCE AND CONTROL

To start business, first of all we need finance and the success of that business initiallydepends on management of short term finance is called working capital management Theworking capital management plays an important role for the firm’s success or failurebecause it’s effect on firm’s performance and liquidity The effective working capitalmanagement is a fundamental part of the overall corporate strategy to createshareholders’ value (Nazir and Afza,2008) A lot of financial managers in the world haveresearched impact of working capital management on firms’ Profitability across countries

to find out how to use working capital effectively and maximize profit With the sametopic, this research aims to supply empirical evidences to examine such influence forVietnamese Companies

The study selected a sample of 11 audited construction companies listed in VietnamStock Exchange for the period of three years(2010-2012) with total 132 observations.Collected data was then analyzed on quantitative The researcher estimated regressionsbasis by using Pearson’s correlation and Linear regression analysis through SPSS 16.0software The results of Pearson’s an regression analysis found a significantnegative relationship between Receivables Collection Period, Inventory ConversionPeriod, Average payment period, Cash Conversion Cycle and profitability

This study can suggest the impact of working capital management on firm’sperformance and highlight how managers affect firm’s profitability by managingworking capital efficiently The theoretical contribution of this study is to enrich theexisting literature by investigate the impact of working capital management onconstruction firms’ profitability in Vietnam firms as a developing market

TABLE OF CONTENT

ABSTRACT 2

TABLE OF CONTENT 3

Chapter 1 5

INTRODUCTION 5

1.1 Overview of working capital management 5

1.2 Problem Statement 6

1.3 Research objective 6

1.4 Hypotheses of the study 6

1.5 Research method adopted 7

1.6 Significance of the study 7

1.7 Structure of the study 7

Chapter 2 8

LITERATURE REVIEW 8

2.1 Theoretical review 8

2.1.1 Working capital 8

2.1.2 Working capital management 10

2.1.2.1 Cash management 11

2.1.2.2 Receivable management 11

2.1.2.3 Inventory management 12

2.1.3 Distinction between profit and profitability 13

2.2 Review of empirical studies 13

Chapter 3 16

DATA AND METHODOLOGY 16

3.1 Data collection 16

3.2 Variables 16

3.3 Research Model 17

3.4 Methodology 18

3.4.1 Descriptive statistics 18

3.4.2 Correlation analysis 19

3.4.3 Regression analysis 19

Chapter 4 20

RESULTS AND ANALYSIS 20

4.1 Results for summary of descriptive statistic 20

4.2 Test results for CLRM assumption 21

4.2.1 Test results for multicollinearity 21

4.2.2 Test result for significance of the model 22

4.2.3 Results for Pearson’s correlation coefficient 23

4.2.4 Results for multiple regression 25

4.2.4.1 Result of regressing average receivable period as an independent variable : 25

4.2.4.2 Result of regressing inventory turnover as an independent variable : 26

4.2.4.3 Result of regressing average payment period as an independent variable : .27

4.2.4.4 Result of regressing Cash conversion cycle as an independent variable :28 4.2.4.5 Hypotheses testing 30

CHAPTER 5 31

CONSCLUSIONS AND RECOMMENDATIONS 31

5.1 Conclusions 31

5.2 Recommendations 31

5.3 Research limitation and future research directions 32

REFERENCES 33

Chapter 1 INTRODUCTION

This chapter provides background information on the thesis topic The purpose of thischapter to provide readers with an overview on the research The chapter consists ofseven sections:

Section 1.1 presents an overview of working capital management as a background of the research

Section 1.2 indicates statements of the problems

Section 1.3 identifies research objective

Section 1.4 presents hypotheses of the study

Section 1.5 discuss about research method adopted

Section 1.6 shows significance of the study

Section 1.7 draws an outline of the study

1.1 Overview of working capital management

Working capital is a critical component in the functioning of any business After theinitial investment of setting up the factory and installing plant & machinery, thecompany additionally requires funds to keep its machines working and churning outgoods Essentially the company must have funds to buy raw material, to pay wages toworkers and to bear other operating expenses required for daily production Afteroperating funds are spent and goods are produced, there is a time-lag before actual salesare realized Even after a sales transaction is concluded, it does not immediately bring incash for the company as a credit period is often extended to the buyer In a nutshell, acompany needs working capital to continuously produce sufficient goods as the actualcash realization of sale proceeds takes place much later after a sale is made In simpleword, working capital is that how much in liquid assets that a company has on hand.Therefore, working capital management means to take decision for bringing workingcapital at optimum level Only doing this, working capital management can controlworking capital efficiently

Working capital management is a very important part of corporate finance because itdirectly affects companies’ liquidity and profitability (Deloof, 2003) Therefore,efficient management of working capital is a fundamental part of the overall corporatestrategy to create shareholder value In general, companies try to keep an optimallevel of working capital that maximizes their value (Deloof, 2003; Afza & Nazir,2009) However, preserving liquidity of the firm is an important objective as well Theproblem is that increasing profits at the cost of liquidity can bring serious problems tothe firm Therefore, there must be a tradeoff between these two objectives( liquidity andprofitability) One objective should not be at the cost of the other because both have theirown importance If firms do not care about profit, they can not survive for a long time Iffirms do not care abut liquidity they may face the problem of insolvency or bankruptcy.For these reasons managers should give proper consideration for working capitalmanagement as it does ultimately affect the profitability of firms Indeed firms may have

an optimal.

In general, working capital management is not only improving financial performance intoday’s cash-strapped and uncertain economy, but it is the question of meeting firm’sday to day operation Therefore, it may have both negative and positive impact on firms,profitability which in turn, the shareholders’ wealth has been negative and positiveimpact Therefore, it is a critical issue to know and understand the impacts of workingcapital management and its influence on firms’ profitability

1.2 Problem Statement

Working capital management plays an important role in any companies because withoutworking capital management, firms’ operation will not run smoothly Working capitalmanagement have a significant impact upon both the liquidity and profitability (Shin andSoenen, 1998; Dong and Su, 2010) Therefore, the crucial part of managing workingcapital is maintaining the required liquidity in day – to day operation to ensure firmsrunning and to meet its obligation (Eljelly,2004) As a result, in order to explain therelationship between working capital management and profitability, many researchershave been carried out in different countries, however, this issue is not attracted toresearchers in Vietnam Besides, the researcher find a little studies carried out bysearching on internet, books and journals Therefore, their researcher believed that theproblem is almost untouched and there is a knowledge gap on the area In its effect mostVietnam company managers thought regarding working capital management is toshorten the cash conversion cycle to increase firms’ profitability However, if firms havehigher level of account receivable due the generous trade credit policy, it would result tolonger cash conversion cycle In this case, the longer cash conversion cycle will increaseprofitability and thus, the traditional view of managers can not be applied to allcircumstances Hence, lack of proper research study on the area gives a chance for theVietnam companies’ managers to have limited awareness in relation working capitalmanagement with increasing firms’ profitability Therefore, the study try to find out theimpact of working capital management on firms’ profitability

1.3 Research objective

This research aims to examine whether working capital management can impact onconstruction firms’ profitability in Vietnam and if so, whether it is positive or negativeinfluence It provides insights to Vietnam Companies about influence of working capitalmanagement on firms’ profitability

1.4 Hypotheses of the study

The aim of this study is to understand the impact of working capital management oncompanies’ operating profitability, the following hypotheses that this study try to test:HP1: There is positive relationship between efficient working capital management andfirms’ profitability

HP2: There is a negative relationship between cash conversion cycle and firms’profitability

HP3: There is a negative relationship between liquidity and firms’ profitability

HP4: There is a positive relationship between firm size and firms’ profitability

HP5: There is a negative relationship between debt and firms’ profitability.

1.5 Research method adopted

In this study, a quantitative method is adopted to achieve the main research objective.Data were collected that help the researcher examine the influence of working capitalmanagement on firms’ profitability in audited financial statements and analysisstatements Acceptable data would be entry data of process was analyzed by using theSPSS 16.0 software program Analysis data was implemented to show importantrelationships of variables in the study

1.6 Significance of the study

There are a lot of researchers studied this topic in other countries by using panel datathrough multiple regressions to show the impacts of working capital components onfirms’ profitability However, as I know, very little research has been done in Vietnam.This limited evidence in the context of Vietnam along with the importance of workingcapital management calls for research on their impact on firms’ profitability In light ofthe above points, the general objective of the study will be to examine the impact ofworking capital management on the profitability of construction firms in Vietnam

Similarly, it benefits the managers and policy makers of those selected companiesregarding decision on optimum level of working capital, ways of managing it and overallpolicies on working capital management Through this study gives clear understandingabout the relation between working capital components and corporate profitability.Besides, the study helps as a guideline for those who conducts their study on similar topicand it gives brief information for the shareholders, prospective customers and creditors offirms regarding profitability in relation to efficient working capital management andpolicy Finally, the study benefits the researcher to obtain new knowledge about theproblem and give clear picture about the discipline called research

1.7 Structure of the study

The thesis is organized as follows:

The first chapter is introduction, This chapter provides background information on the

thesis topic

The second chapter is literature review This chapter provides overview on workingcapital, working capital management, distinction between profit and profitability ofcompany and the impact of working capital management on the company profitability.The third chapter is data and methodology This chapter discusses the data collection,chosen variables and method used to describe and analyze data

The fourth chapter is result and analyzing This chapter provides empirical results The fifth chapter is conclusions and recommendation This chapter consists of summaryand conclusions for finding, limitations, recommendations for future research

Chapter 2 LITERATURE REVIEW

The purpose of this chapter is to review the evidence on working capital management andprofitability measures of a firm This chapter is arranged into three sections The firstsection

Presents the theoretical review of working capital management, the second sectionreviews the empirical evidence and the third section present conclusions on the literaturereview and identifies the knowledge gap that this study attempts to fill in

2.1 Theoretical review

2.1.1 Working capital

The term working capital is used for the capital required for day-to-day businessactivities such as purchasing raw material, expenditure on salaries, wages, rents rates,administration, advertising Working capital refers to funds which are used during anaccounting period to generate a current income of a type which is consistent with majorpurpose of a firm existence

Working capital is an excess of current assets over current liabilities In other words, Theamount of current assets which is more than current liabilities is known as workingcapital If current liabilities are nil then, working capital will equal to current assets.Working capital shows strength of business in short period of time If a company havesome amount in the form of working capital , it means company have liquid assets, withthis money company can face every crises position in market

To understand working capital it is better to have basic knowledge about various aspect

of working capital as table following:

To start with, there are two concepts of working capital know as: Gross working capital

and Net working capital

Gross Working Capital

In this concept of working capital, we study gross working capital It presents total value

of current assets In other words, it is the sum of total of net working capital and current liabilities It is a quantities concept showing the total amount available for financing the current assets It cannot reveal the true position of the company

Net Working Capital

It presents excess of current assets over current liabilities Current assets include cash, debtors, stocks and bills receivable Current liabilities include bills payable, accounts payable, expenses payable It indicates the liquidity position of an enterprise i.e the soundness or otherwise of the current financial position This can be presented as:

Net working capital = Current assets – Current Liabilities

In this equation net working capital may be positive or negative A positive net workingcapital when current assets exceed current liabilities and A negative net working capitalarises when current liabilities exceed current assets

Gross working capital indicates firm’s investment and financing of current assets Net

working capital, on the other hand, shows the liquidity of a firm As the result, net

working capital indicates the financing needs of a firm, both through long-term and

short-term financing sources.

Working capital is the part of firm’s capital that is used for routine day-to-day businessoperations In other words, working capital refers to the funds needed by the business torun its operations for one accounting year Working capital reflects the amount of money

a firm has at its immediate disposal For more information about working capital refer totutorial liquidity and working capital analysis

Adequate working capital is important for any business operations Working capitalfinancing, however, can be a challenge for a business, especially for a small firm Inorder to understand the best way to finance working capital, it is important to understandthe difference between the two types of working capital: Permanent working capital andTemporary working capital

Permanent working capital is the minimum level of current assets required by a firm to

carry-on its business operations Permanent working capital is also called fixed working

capital Permanent working capital does not depend on the level of production or sales It

is similar – in some sense – to fixed assets because of its permanent (fixed) nature.Important to note, however, that permanent working capital is not literally fixed: its levelcan change over time The level of permanent working capital depends on the businesscycle as well as the growth of a firm

Temporary working capital is the excess of working capital over the permanent workingcapital Temporary working capital differs from permanent working capital because of itscyclicality As the result, temporary working capital usually requires a different source offinancing than permanent working capital While permanent working capital is usuallyfinanced through a long-term financing source such as equity capital and debt, temporaryworking capital is often financed by short-term funds

2.1.2 Working capital management

Working capital represents the operating liquidity available to a business firm Acompany can be endowed with assets and profitability but short of liquidity if its assetscannot readily be converted into cash Positive working capital is required to ensure that afirm is able to continue its operations and that it has sufficient funds to satisfy bothmaturing short-term debt and upcoming operational expenses The management ofworking capital involves managing inventories, accounts receivable and payable andcash Inadequate working capital can put a company in jeopardy rather quickly due toliquidity problems On the other hand, excessive working capital strains the companyfinances When there is deficiency of working capital – remedies are a Raise Equity b.Sell out Non-current Assets Having Too Much working capital is Bad – This is due torise in inventories and trade debtors – Problems with Excessive inventories : 1.Obsolescence risk viz., physical deterioration, technical or market obsolescence 2

Inventories drain cash Liquid cash is tied up until the products are sold and the moneycollected from customers 3 Inventories require storage facilities This takes up valuablespace and may cost a business in terms of rental expense or opportunity cost in terms offacilities tied up Trade Debtors - Trade debtors represent financing by the company to itscustomers When trade debtors build up, it may also be an indication of poor credit policyand poor follow up on outstanding debts The more efficient a business can manage itsinventories and trade debtors, the better it is for liquidity More cash would then beavailable for growing the business, reducing finance costs and paying shareholders Foreffective working capital management to pay attention on things is very important Theyare: Cash management, inventory management , Account payable management andAccount receivable management.

The formula used to calculate cash conversion cycle is represented as follows:

CCC = Average collection period + Inventory turnover in day – Average payment period

This cycle is extremely important for retailers and similar businesses This measureillustrates how quickly a company can convert its products into cash through sales Theshorter the cycle, the less time capital is tied up in the business process, and thus thebetter for the company's bottom line

2.1.2.2 Receivable management

Businesses have products or services to sell to their customer, in order to maximize theirsales, They use different policies to attract customers and one of them is offering a tradecredit Trade credit refers to a situation where a company sells its products and now toreceive the payment at a specified date in the future Trade credit creates accountsreceivable and it is also have opportunity cost associated with them, because firms cannot invest this money elsewhere until and unless it collects its receivables Morereceivables can raise profit by increasing sales but firms may receive risks such as baddebts Therefore, Receivable management aims to maximize the value of the firm byachieving a tradeoff between risk and profitability For this purpose, the finance have tocontrol the cost of receivables, cost of collection, administrative expenses, bad debt and

so on

Companies can control how well accounts receivable are managed using aging schedulesand financial ratio Whereas, financial ratio can be used to get an overall picture of howfast credit manager collect accounts receivable

It is the length of time it takes to clear all accounts receivable, or how long it takes to receive the money for goods it sells This is useful for determining how efficient the company is at receiving whatever short-term payments it is owed.

The for average collection period is:

Average collection period= (Accounts Receivable)/(Net sales/365)

This ratio measures the quality of debtors A short collection period implies promotion payment by debtors It reduces the chances of bad debts Vice verse, a longer collection period implies too liberal and inefficient credit collection performance

Successful inventory management involves creating a purchasing plan that will ensurethat items are available when they are needed (but that neither too much nor too little ispurchased) and keeping track of existing inventory and its use Two common inventory-management strategies are the just-in-time method, where companies plan to receiveitems as they are needed rather than maintaining high inventory levels, and materialsrequirement planning, which schedules material deliveries based on sales forecasts Company can control its inventory by looking its financial ratios likes that ofmanagement receivables Inventory turnover ratio in days indicates the number of timethe stock has been turned over sales during the period and evaluates the efficiency withwhich a firm is able to manage its inventory It is calculated:

Inventory turnover in day = Inventory/(cost of sales/365) 2.1.2.4 Payable management

Payable management is the administration of a company's outstanding debts, orliabilities, to vendors for purchases of goods and services made on credit

Managing accounts payable is a crucial part of the cash flow cycle Cash goes out of abusiness in 5 broad areas: Operating costs, Capital expenditure, Loan repayments, Tax,Profits and dividends Account payable are a part of all business and have someadvantages associated with it For example: It is available to all companies regardless ofthe size of the company and earlier payment can bring cash discount with it Companiesnot only need to manage their account payables in good way but they should have theability to generate enough cash to pay the mature account payables It leads to thenegative signal to the market and it will affected the share price, relationship with

creditors and suppliers Thus, the company is difficult to raise more funds by borrowingmoney or get more from their supplies Therefore, Payable management is veryimportant There is one way of controlling accounts payables is the average paymentperiod Average payment period means the average period taken by the company inmaking payments to its creditors It is computed by dividing the number of working days

in a year by creditors turnover ratio Formula for its computation is given below:

Average Payment Period = Account Payables/(Cost of good sold*365)

2.1.3 Distinction between profit and profitability

Profit is an actual amount of business owners that is made from an investment, sale ormanufacturing Profit is a valuable return which measured for given period such as afinancial quarterly or a financial year Profit is calculated by revenues obtained formbusiness activities minus the expenses used to achieve those revenues

Profit = Revenues – Expenses

There are some important profit measures in common use as below: Gross profit,Operating profit, Earning before interest and taxes, Net profit While profitabilitymeasures how well a company is making use of it's capital by investing in resources thatmake goods and services that generate profits Profitability is usually measured as a ratioexplaining the rate of some profit amount against assets, investment or equity ofcompany such as: Return on Assets (ROA), Return on investment (ROI), Return onEquity(ROE) Percentage (%) is used as the unit measure of those ratios

Profitability = Profit/ base measurement 2.2 Review of empirical studies

The previous section was presented the overviews of working capital management, in thissection the researchers reviews the empirical studies on the impact of working capitalmanagement on firms’ profitability There are a lot of studies on this topic in manycountries such as:

Shin and Soenen(1988) investigated American Companies during the period between

1975 and 1994 with total of 59 985 observations The research found evidence of anegative relation between profitability and cash conversion cycle

Deloof(2003) used a sample of 1,009 large Belgian non-financial companies during theperiod 1992-1996, he found a significant negative relationship between grossoperating income and the number of days of accounts receivable, inventories andaccounts payable of Belgian companies The result suggest that managers can createvalue for their shareholders by reducing the number of days accounts receivable andinventories to reasonable minimum The negative relation between accounts payable andprofitability is consistent with the view that less profitable firms wait longer to pay theirbills

Afza and Nazir(2009) carried out survey the relationship between working capitalmanagement and firms’ profitability for a sample of 204 non – financial companies listed

on Karachi Stock Exchange for the period 1998- 2005 The study found significantdifferent among their working capital requirements and financing policies throughdifferent industries Moreover, they suggested that managers could increase value if they

adopt a conservative approach toward working capital investment and working capitalfinancing policies.

Mohammadi (2009) in their study investigated the impact of working capitalmanagement on profitability of listed companies in Tehran stock exchange betweenthe years 1996-2005 in 92 companies as the sample Research results suggest thatthere is a significant inverse relationship between the profitability of the companiesand cash conversion cycle and its components (inventory turnover period,receivables collection period and creditors' settlement period) It also states thatcompanies that are profitable, have shorter term creditors' settlement period

Gill et al (2010) in their study Surveyed the relationship between working capitalmanagement and profitability for the 88 U.S companies listed on the New YorkStock Exchange during the years 2005 to 2007 The results suggest that statisticallythere is a significant relationship between the cash conversion cycle (evaluationcriterion of working capital management) and gross operating profit (a measure

of profitability in companies), and management can also make profits for companies

by using from the cash conversion cycle and the maintenance of accounts receivable

Izadinia and Taki (2010) in their study investigated the impact of working capitalmanagement on profitability potential companies listed in Tehran Stock Exchangeduring the period 2001-2008 In this study, the dependent variable, return on totalassets considered as a criterion of measure for profitability potential The resultsshowed that there is a significant negative relationship between the cash conversioncycle with return on assets Also, they expressed that high investment in inventory andaccounts receivable will lead to lower profitability of companies

Dong and Su (2010) in a study that performed in direction with the Gill, Bigerand Mathurs’ study (2010) investigated 130 companies in Vietnam during 2006 and

2008 Research results that were performed based on Pearson correlation and multipleregression analysis indicates that there is a significant inverse relationship between thecash conversion cycle and its components with profitability of companies

Chawla et al (2010) in their study investigated the relationship between workingcapital management and liquidity of companies with profitability of companies Inthis study, three companies of the petrochemical industry in India between 2004 and

2009 were investigated Research results that were performed based on Pearsoncorrelation and linear regression analysis, indicates that there is a significant inverserelationship between the cash conversion cycle and its components including

inventory turnover period, receivables collection period and creditors' settlementperiod with company's profitability that indicated by increasing the cash conversioncycle, profitability of company are reduced and management can make a positivevalue for the shareholders by reducing the cash conversion cycle at the lowest possiblelevel Also the research results showed that statistically there is a significant inverserelationship between liquidity and profitability of companies.

Mobeen Alam et al (2011) in a study that performed in direction with the BintiMohammad and Binti mohd sads' study (2010), examined 65 companies in Pakistanbetween 2005 and 2009 in this study they used from cash conversion cycle, currentassets to current liabilities ratio (current ratio), current assets to total assets ratio,current liabilities to total assets ratio and total debts to total assets ratio as workingcapital management criteria, Tobin Q ratio as a criterion of market value, and return onassets ratio and return on invested capital ratio as a criterion of company's profitability.The evidence showed that there is significant correlation between the components ofworking capital with market value and profitability of the company and concluded thatPakistani companies correlated heavily on current assets to maximize profits And

be approved the result of Binti Mohammad and Binti mohd saads' study (2010).All the literature review shows that they are mixed research and indicates workingcapital management has impact on profitability of firms

Chapter 3 DATA AND METHODOLOGY

This chapter describes techniques used for collecting data and choosing variables Thechapter is organized as follows:

Section 3.1 present data collection

Section 3 2 shows the variables chosen

Section 3.3 presents models used in this study

3.1 Data collection

The data set in this research was obtained from the Stock Exchange of Vietnam Theselected companies belong to construction sector Some companies with missing datawere also removed from the sample The sample consisted of 11 firms that had all theneeded data for the three-year period from 2010 through 2012 Therefore, data obtainedfrom this study were panel data on 132 firms’ observations

- T he last independent variable is cash conversion cycle (CCC) which is used as

a comprehensive measure of working capital management

 Control Variable:

- Current ratio (CR) is used as a traditional measure of firm’s liquidity

- Size were calculated as Natural logarithm of Total assets

- Debt ratio (DR) is also used as a proxy for leverage and is computed by dividing totaldebt by total assets

- ε is used as error term

 Dependent Variable: Return on asset (ROA)

To examine the relationship between working capital management and corporation’sprofitability, the ratio of Return on Assets (ROA), which calculate as the net incomedivided by total assets, was used as the dependent variable Several recent studies haveused ROA as a proxy for firms profitability such as Nazir & Afza, 2009

This ratio explains that how efficient a company is to utilize its available assets to

generate profit It calculates the percentage of profit a company is earning against per

dollar of assets The higher value of ROA shows the better performance and it can be

computed as follows:

ROA = (Earning Available/ Total assets)*100

The table below summarizes all the variables that were used in this, along with

their abbreviations and formulas:

Table 3.2 Measurements of variables

Types of

Average Collection Account Receivable/Net Sales *365 ARD IndependentPeriod

Inventory Turnover (in Inventory/ Cost of Goods Sold * 365 ITD IndependentDays)

Currents Assets/ Current Liabilities Control

Firm size The natural logarithm of total assets SIZE Control

3.3 Research Model

The impact of working capital management upon corporate profitability was tested by

panel data methodology The panel data methodology used has certain benefits like

using the assumption that companies are heterogeneous, more variability, less

collinearity between variables, more informative data, greater degree of freedom and

more efficiency (Baltagi, 2001) In panel data regression, several cross-sectional units

are observed over a period of time This method is more useful in studying the

dynamics of adjustment, and is better able to identify and measure effects that are

simply not detectable in pure cross-sections or pure time-series data (Raheman & Nasr,

2007)