Despite the commonly held belief that the prime source of profits for a manufacturing company is the efficiency of its production plant, good financial managers know that they can significantly improve the bottom line (and other important metrics) by adopting the right working capital policy. All investments are expected to produce returns appropriate to their costs - this is equally true of the funds invested by manufacturing companies in the current side of their operations. Using ratio analysis, multivariate and logistic regression techniques, we were able to establish two broad actualities: firstly, multinational firms operating in the manufacturing sector of Pakistan generally use conservative working capital policies and generally produce better overall financial results; and secondly, domestic firms are more inclined towards aggressive working capital policies and generally have poorer financial results. We investigate the extent to which the selection of working capital policy influences the financial performance of these companies and the causes thereof. This article contributes to the published research by exploring the impact of working capital policies on the financial performance of manufacturing companies, both domestic and multinational, operating in Pakistan. However, due to a fair degree of similarity between the manner in which domestic and multinational companies conduct their affairs in most developing countries, we believe the paper has relevance for companies in all such countries.
Keywords: Domestic Firms, Multinational Firms, Ratio Analysis, Working Capital Policy