Profitability and Expanding Collection Period in Bangladesh

Literature Review

An effective working capital management policy requires determining the optimal level of current assets and current liabilities that a firm should hold for optimal operation. Such a policy will maintain an optimal level of working capital so that firms can avoid excessive investment in current assets and increase profitability (Şen, & Oruç, 2009). However, it is difficult to specify what is an optimal level of working capital structure, and conflicting evidence has been presented by researchers. Baños-Caballero et al. (2012, 2014) and Mun and Jang (2015) found that there is indeed an inverted U-shape relationship between a firm's value (and profitability) and working capital level. While this idea has gained wide acceptance, its validity is in question in the context of developing countries and emerging economies. Within a given industry, many firms may have a level of working capital that maximizes their profits or values; however, that does not necessarily mean that the same level is optimal for all firms. Firms on the left side of the curve’s peak can, theoretically, improve performance by moving toward the peak, and firms on the right side of the peak can improve by moving left toward where the peak is. However, Ahkam et al. (2021) provided evidence that such movements do not improve performance. When a firm with very low ACP fails to improve profitability by relaxing receivable collections, that points to a difficult credit collection environment. Ahkam and Alom (2019) argued that benefits from any attempt to move toward the middle would be available only to the firms that are positioned to the extreme, either heavily overinvested in working capital or significantly underinvested in working capital.