Background The Influence of Working Capital Management and Liquidity Towards Profitability (Case Study: Automotive and Components Industry Listed in Indonesia Stock Exchange 2008-2012)

5 during the last 7 months of the year rose 8.8 from 29.5 million on the part of the same period last year to 32 million pieces kemenperin.go.id. Based on a survey of the basic plan Indonesian automotive industry with labor relations in Indonesia, the growth of investment in the automotive industry in 2011 reached 70 percent. In the third quarter of 2012, an investment of over 1.3 billion U.S. dollars. Thus, the automotive sector became one of the biggest in Indonesia 2012 kemenperin.go.id. One of the automotive industry that growing and sophisticating is a car. Car is the popular transportation and many of people needed this transportation. Figure 1.1 is the growth of automotive industry especially automobile sales data in 2001-2012: Source : data processed Gaikindo Based on figure 1.1 shows that automobile sales fluctuate from year to year. In 2009-2012 increased automobile sales each year. In 2009 amounted by 486,061 units then in 2012 amounted 1,116,230 units. 200000 400000 600000 800000 1000000 1200000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 Figure 1.1 Automobile Sales in Indonesia 2001- 2012 Sales 6 Increased automobile sales will increase revenue company that also increasing profitability in the company. According to Munawir 2003:64, profitability is one of the companys objectives in analyzing financial statements, that also profitability is the ratio of a companys success in using wealth productively, thus making a profit or a satisfactory profit. So if the company is able to produce a satisfactory profit will increase foreign investors to participate in developing its business in Indonesia. The rapid growth of the national automobile market began to have a positive impact on investment in the automotive components industry. Ministry of Industry projected investment in the automotive components sector by the end of this year could break the USD 10 trillion, an increase compared to the 2012 amounting to Rp 6 trillion. Investment growth in the automotive component industry in line with the rapid growth of industrial transport equipment, machinery, and equipment to Quarter I2013 recorded the highest growth of 10.51 percent Gaikindo. Along with a new strategy of automotive industry players in the world will make Asia as industrial base. This prompted the demand to various types of components also increase so that opportunities are not small for the automotive industry in Indonesia to compete, focus.news.co.id so that researchers are interested to know if the auto companies manage working capital well in improving profitability. 7 The few studies that have been done before, there is a difference in the results of research. There is a difference of research on working capital management and profitability. Deloof 2003 investigated the relationship between working capital management and corporate profitability for a sample of 1,009 large Belgian non-financial firms for the 1992-1996 periods. The result showed that there was a negative relationship between variables cash conversion cycle as well number of day’s accounts receivable and inventories toward gross operating income. He suggested that managers can increase corporate profitability by reducing the number of day’s accounts receivable and inventories. Less profitable firms waited longer to pay their bills. Singh and Pandey 2008 had an attempt to study the working capital components and the impact of working capital management on profitability of Hindalco Industries Limited for period from 1990 to 2007. Results of the study showed that current ratio, liquid ratio, receivables turnover ratio and working capital to total assets ratio had statistically significant impact on the profitability of Hindalco Industries Limited. Lazaridis and Tryfonidis 2006 have investigated relationship between working capital management and corporate profitability of listed company in the Athens Stock Exchange. A sample of 131 listed companies for period of 2001-2004 was used to examine this relationship. The result from regression analysis indicated that there was a statistical significance between profitability, measured through gross operating profit, and the 8 cash conversion cycle. From those results, they claimed that the managers could create value for shareholders by handling correctly the cash conversion cycle and keeping each different component to an optimum level. Raheman and Nasr 2007 have selected a sample of 94 Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999- 2004 to study the effect of different variables of working capital management on the net operating profitability. From result of study, they showed that there was a negative relationship between variables of working capital management including the average collection period, inventory turnover in days, average collection period, cash conversion cycle and profitability. Besides, they also indicated that size of the firm, measured by natural logarithm of sales, and profitability had a positive relationship. Finally, Afza and Nazir 2009 made an attempt in order to investigate the traditional relationship between working capital management policies and a firm’s profitability for a sample of 204 non- financial firms listed on Karachi Stock Exchange KSE for the period 1998-2005.The study found significant different among their working capital requirements and financing policies across different industries. Moreover, regression result found a negative relationship between the profitability of firms and degree of aggressiveness of working capital investment and financing policies. They suggested that managers could 9 crease value if they adopt a conservative approach towards working capital investment and working capital financing policies. Christopher et al 2009 study, they investigated a sample of 14 corporate hospitals in India using panel data analysis for the period 9697 to 200506. The independent variables used were current ratio, quick ratio, inventory turnover ratio, working capital turnover ratio, debtor´s turnover ratio, ratio of current asset to total asset, ratio of current asset to operating income, comprehensive liquidity index, net liquid balance size, leverage and growth. The dependent variable profitability is measured in terms of return on investment ROI. From multiple regression analysis, negative association with ROI can be seen in current ratio, cash turnover ratio, current asset to operating income and leverage. On the other hand, positive association with ROI are in quick ratio, debtor´s turnover ratio, current asset to total asset and growth rate. Conclusion is that hospitals should concentrate more on efficient use of working capital for increasing the profitability which would increase the value of hospitals. Anggarini 2009 in PT Perkebunan Nusantara II Persero Tanjung Morawa in the period 2004-2008. The independent variables used were current ratio, quick ratio, debt to total equity ratio, and debt to total assets ratio. The dependent variable is Return on Investment. The result is current ratio has positive significant effect toward ROI. While quick ratio, debt to total equity ratio, debt to total assets ratio have not significant effect toward ROI. 10 M. Rajesh et al 2011 conducted a study on impact of working capital management on firms profitability. This study uses nine variables, the current ratio, acid test ratio, current assets to total assets ratio, current assets to sales ratio, working capital turnover, inventory turnover, debtors turnover ratio, cash turnover and ROI. The results of this study indicate that the current ratio, working capital turnover, inventory turnover ratio and debtors turnover ratio has positive effect on ROI. While the acid test ratio, current assets to total assets ratio, current assets to sales ratio, cash turnover ratio and negatively affect ROI. Based on the description above, author is interestto use the title “ The Influence of Working Capital Management and Liquidity Toward Profitability” Case Study : Automotive and Component Industry listing in Indonesia Stock Exchange 2008-2012 .

B. Problem Formulation

Based on the background that has been presented, the problem formulation in this study are: a. How does the influence of working capital turnover, receivable turnover, inventory turnover, and current ratio toward profitability ROI of automotive and component industry in Indonesia by simultaneous and partial. b. Which is the most dominant effect of independent variable working capital turnover, receivable turnover, inventory turnover, or current 11 ratio toward profitability ROI of automotive and components company.

C. Research Objectives

Based on the problem formulation, this study aims to: a. To analyze the influence of working capital turnover, inventories turnover, receivable turnover, and current ratio toward the profitability ROI of automotive and components industry in Indonesia by simultaneous and partial. b. To analyze the most dominant effect of independent variable working capital turnover, inventories turnover, receivable turnover, or current ratiotoward profitability ROI of automotive and components industry.

D. Benefits of Research

Based on the research of working capital management and liquidity toward profitability at companies listed in the Indonesia Stock Exchange, it will obtain some benefit to the parties as follows: 1. For the Companies a. As suggestion to formulate estimate of company especially for job which is need in a periods. 12 b. As inputs for the company to use the existing working capital as effectively and efficiently as possible to increase the profitability of the company 2. For the Investors The study is expected to provide information on the importance of working capital management that affect the companys business continuity and feasibility assessment consideration in making investment decisions. 3. For the Academics From this research author expects to provide the empirical information about working capital turnover, receivable turnover, inventory turnover, and current ratio toward profitability. Otherwise it can be used as reference to further research. 13 CHAPTER II LITERATURE REVIEW

A. Working Capital Management

1. Definition of Working Capital

Working capital is very required to operating the company. Working capital is the assets which is required to operating the daily for several periods. For the example to buy raw materials, pay the employee salaries, pay the direct labor, and pay the debt. Kasmir, 2008 :250 Working capital refers to a firm’s short term assets such as inventory, and its short-term liabilities, such as money owed to suppliers. Managing the firm’s working capital is day-to-day activity that ensures that the firm has sufficient resources to continue its operations and avoid costly interruptions. Ross et al, 2010 : 4 According to Markus 2008: 138, working capital is a short-term asset or assets and current liabilities, such as accounts receivables, inventory, and accounts payable when the company moves through a cycle where the raw materials purchased, the goods are produced and sold. So called working capital as short-term assets and liabilities. Djarwanto 2004: 87 said that working capital is the excess of current assets to short-term debt. This excess is called net working capital which is 14 sourced from long-term debt and equity capital. The benefits of sufficient working capital is Djarwanto, 2004 : 87 : a. Protect the company from the bad consequences where the value of current assets decreased. For example the financial loss because the debtor does not pay out, and the value of inventory decreased because the price declined. b. Enabling the company to pay short-term liabilities on time. c. Enabling enterprises to be able to buy goods with cash so that they can reap the benefits in the form of rebates. d. Ensured the company to has credit standing so can solve unforeseeable. e. Enabling to have sufficient supplies to serve the demand of consumers. f. Enabling the company to give credit requirement which is profitable for customers. g. Enabling the company to operate more efficiently, because there is no difficulty in obtaining raw materials, services and supplies needed. h. Enabling the company to survive in recession and depression periods.

2. Factors Determining Amount of Working Capital

According to Jumingan 2006 : 69, the factors which is influence the amount of working capital: