The Role of Macroeconomic Indicators and Strategies to Finance Working Capital on Profitability in Pakistan

Abstract

Change in economic environment of any country impacts WCF of a nation. It effects the ability of  lenders to offer financing source to the operational activities of businesses and influence the decision-making ability of managers. This investigation examines that fluctuation of macroeconomic factors influence the connection between (WCF) and profitability of a firm. Data includes from 2015 to 2023 and analyzed by employing random effects model. We detect a concave and inverted U-shape association between both WCF and profitability of a firm. This is moderated by several essential macroeconomic indicators, which counting as gross domestic product (GDP), inflation rate, and interest rate. To check out external shocks of economic factors. The study categorized data into specific regulation, plus the effects of  Covid-19 crisis in relationship among WCF and firm’s profitability. At that moment change occurred due to change in economy. Because the previously non-linear relation became linear and negative relationship. It suggests that working capital influences firm’s profitability differently in economic distress and trouble. In addition to this, it also indicates that fluctuations in GDP, variations in inflation rates and change in rate of interest had no notable effect on the relationship between WCF and profitability of a firm during Covid-19 period of pandemic. These findings deliver important insights for managers of company, financial institutions and policymakers. It is to develop better strategies to finance in light of macroeconomic conditions in Pakistan. Researchers are further recommended to find out the effect of macroeconomic factors on agricultural and service businesses in Pakistan.