An Investigation into the Impact of Power Outage on Working Capital Management in Textile Sector of Pakistan

Abstract

Purpose: Electricity, being the most important resource for any organization has substantial impact on working capital. So, it is substantial to analyze the impact of acute power shortage on firm’s liquidity and profitability. As acute power shortages in the country adversely affects the performance of firms by reducing profits and enhancing working capital investment cycle, it is noteworthy to analyze the effect of electricity crisis on firm’s need for liquidity. The aim of the research is to find the impact of power outage on working capital and profitability.
 Design/Methodology/Approach: Using annual financial data of 102 textiles firms from 2008-2020, the study employed panel data analysis to measure the impact of acute power outage on firm’s working capital management.
 Findings: The results revealed that acute power shortage significantly impact working capital management in textile firms of Pakistan. So, firms must go for alternative energy sources for long-run resulting into huge savings from losses for these firms.
 Implications/Originality/Value: Motivated by the scarcity of empirical evidences from emerging economies and the importance of working capital efficiency, current study is the need of the day. The impact of power outages need to be explored in detail to gauge its impact on industry’s financial performance.

The Impact of Sustainable Energy on Liquidity and Financial Performance of the Textile Industry

“…Hence, the shortage of working capital has become the primary motive for the firms' insolvency (Tufail, 2010). Therefore, the management of working capital is foremost indispensable for firms owing to the fact that it can generate balance between current assets and current liabilities to handle any imbalances in working capital needs but it also has the ability to handle unexpected liquidity shocks to cover operational expenditures (Asif et al, 2021).…”

“…The unsustainable power supply can hamper the performance of the business in many ways. Firstly, it can force firms to make heavy expensive investments for self-generation of sustainable electricity sources which can lead toward high operational expenses and ultimately high operational leverage (Asif et al, 2021; Xu et al, 2022). Secondly, due to incapability to invest in such expensive investment, the small businesses may have to shut down their productions owing to power failure which can further increased the cost of labor and raw materials into production process (Allcott et al, 2016).…”

“…This is because at high level of economic development, firms tend to adopt aggressive strategy to translate their assets into sales and hence tend to be more profitable but high inflation leads to high operational expense which ultimately adversely impact performance. These relations are as per the conventional wisdom define in the existing literature (Afzal, 2012; Asif et al, 2021). It can be suggested on the basis of obtained findings that the maintenance of efficient working capital is very significant for textile industry.…”