Category: Working Capital Management

Under the case, BBC, a Chemical manufacturing organization built up in 2004 with its registered office situated in Bangalore, managed by Agarwal and Mukesh. They had an open door present to create contracts with Indian Railways, which would empower it to extend its range to different enterprises accessible in the Indian market. Notwithstanding, it was assessed that they were successful in picking up the agreement with IR. BBC would need to perform an explicit change in its business procedures, for example, setting up an on location IR office, alongside building a Warehouse, workshop and creating proper money reserve to meet and proceeds with its everyday generation exercises. Henceforth, it very well may be assessed that these improvements led, to meet the criteria of picking up the agreement, would open the association to noteworthy expenses adding up to INR2,400,000.

Then again, it was evaluated that the BBC was confronting explicit working capital difficulties, which could be brought about by its diminishing deals incomes from 2009 to 2011, which implied that, because of the decrease in deals incomes age. It made the association to enroll higher crude material turnover proportions in days as BBC was unfit to proficiently change over in crude material acquired using a credit card into completed items, making it bring about huge expenses, regarding crude material stock holding costs and altogether increment its stock turnover proportions in days. Moreover, it very well may be assessed that BBC could diminish its completed products stock turnover in days from 2010 at 20.8 to 2011 at 13.47, while it had appeared significant increment from 2009 at 4.87. Which implied that, in the year 2009, BBC was most effective in changing over its completed merchandise into deals incomes, contrasted with its two ensuing years.

Also, it tends to be evaluated that the BBC had altogether diminished its record payable turnover proportions in days from the year 2009 onwards, which could have contributed towards cheapening the endeavor estimation of the association, further improving the difficulties in its working capital. The receivable turnover in days has been fundamentally diminished from the years 2010 at 15.26 to 9.64 in 2011 though, the receivable turnover was at 7.92 in 2009, which implied that the organization was progressively productive in changing over its receivables from deals into money in 2011 contrasted with 2010, however less proficient compared with the year 2009. Also, it tends to be assessed that, the net revenues of the BBC has declined throughout the years, which could involve the capacity of the BBC to satisfy its liabilities while keeping up adequate working capital. To spend the measure of speculation required, to effectively profit or pick up the agreements with IR. Consequently, an irregularity between BBCs proportions was distinguished; for example, crude material turnover were excessively high, while the total merchandise turnover was proper in the year 2011end.

In this way, it very well may be prescribed to Agarwal that, he ought to improve the working capital circumstance of BCC, by fusing compelling and practical methodologies and policies in term of credit strategies given to its customers or borrowers while showing exacting powers over their systems created, which would radically diminish its receivable turnover in days, upgrading its working capital circumstance better empowering BBC to satisfy its liabilities. While adequately meeting the criteria for the agreement of IR, by spending capital venture from its working capital created.

Abstract: –

As we all know working capital management is a very important to any business since it can lead to increase the value of the business. This study will analyse the working capital management of the Raymond and Vardhman textile limited and try to conclude that which company is better in terms of the working capital management. This study has used only secondary data from company’s website and some financial website like moneycontrol.com. The technique of ratio analysis is used in this study for data analysis.

Introduction: –

Working capital management is defined as the strategies that different companies adopts to ensure that the day-to-day activities of the company runs smoothly.

It is also using the current asset and current liability in a most efficient way which will ultimately benefit the company’s overall value and performance.

A proper working capital management will lead to meet the sufficient cash needed for short-term operating cost and short-term debt obligations.

Working capital management is very necessary for a business as it determines the financial health and operational success of a company. A proper management of working capital will lead to the balance between growth, profitability and liquidity of the company. It also leads to maximise the overall operational efficiency of a business and therefore a huge emphasis is made in managing the working capital. Working capital management includes management of account receivables, management of account payable and the management of overall inventory of the company. The main objective of working capital management includes maintaining the working capital operating cycle and its ordered operation should be ensured, reducing the overall cost which is spent on the working capital, and increase the overall return from the current asset investments. There are very bad effects on the company if it not follows the working capital management properly like financial insolvency and also sometimes could lead to legal troubles, liquidation of assets and potential bankruptcy.

The difference between current asset and current liability is known as working capital.

Networking capital= Current Asset – Current Liability

The executives of working capital are a basic errand of money the board since it has the indispensable impact of any business firm since it is legitimately influencing the organizations profitability and liquidity. Liquidity presents the capacity of organization to pay its momentary obligations. Liquidity of an organization is associated with the limit of a firm to play out its transient liabilities. With the assistance of appropriate administration of working capital firm can develop it’s the dissolvability, improve its generosity, and it’s likewise can look out all the business tasks easily and it’s additionally can have the option to look out emergency.

With the goal that the points of Working capital administration are at keeping up a harmony among liquidity and profitability simultaneously as leading the everyday tasks of business. The main purpose of any firm is to maximize profit along with maintaining liquidity. Increasing profits at the cost of liquidity can create serious issues for the firm. Thus, there should be a balance between the two, liquidity and profitability.

To appropriately comprehend the requirements of working capital and its job in textile enterprises this examination has chosen two textile businesses one is Raymond and second is Vardhman textiles. Textile industry is driving area in the Indian economy. In India Textile industry is one of the greatest income workers in the mechanical segments. This area gives 45 million individuals as immediate utilize and Indian Textile division covers 61% universal Textile markets and 22% of the worldwide market. Textile division contributes 14% in industrial items and 4% to Gross domestic product.

For this investigation I have applied the technique for ratio analysis since ratio analysis is perceived as one of the most powerful method asset of financial analysis. It is a procedure of building up and deciphering quantitative connection among figures and gathering of figures. Ratios are the best markers of monetary quality, sufficiency, position, and shortcomings of a firm. Ratios can help the administration in its essential capacities like determining, arranging, planning, control, and correspondence. On the off chance that ratios are appropriately dissected and deciphered the administration can rise the estimation of firm.

Literature review: –

For this research ideas are taken from many different research papers and one of the research paper was “trend in working capital management and its impact on firms performance: an analysis of Mauritian small manufacturing firms” this paper was presented by Kesseven Padachi[endnoteRef:1]. In this research he has took 58 little assembling organizations and secured the period for research 1997 – 98 to 2002-03. For the investigation in this research he has used the strategy of correlation analysis and regression analysis. In this research he found that because of lacklustre showing of the management board higher measure of capital is occupied with various types of assets and due to this the organizations can’t accomplish its objective. [1: Padachi, K. (2006). Trends in Working Capital Management & its Impact on Firms Performance: An Analysis of Mauritian Small Manufacturing Firms. International Review of Business Research Papers , 2 (2), 45-58.]

A paper which was presented by M.A. Zariyawati, M.N. Annuar and A.S. Abdul Rahim[endnoteRef:2] and the title of their research was “Working capital management and corporate performance: case of Malaysian” for the research they have chosen board information of 1828 firms for the time of 1996-2006. For further investigation they have followed the method of regression analysis. After the entire procedure of exploration, they have inferred that there was Strong negative connection between CCC and profitability of the organizations. [2: M.A. Zariyawati, M. A. (2009). Working Capital Management and Corporate Performance: Case of Malaysian . Journal of Modern Accounting & Auditing , 5 (11).]

Another paper which was presented by Vedavinayagam Ganesan (2007)[endnoteRef:3] and the title of his research was “An Analysis of working capital management efficiency in telecommunication equipment industry” in this research he took 349 telecommunication organizations as test and covering the period 2001-2007 and for the research he used the method of Anova, correlation and regression analysis. The conclusion of his study was that days working capital adversely influence firm’s profitability. [3: “Vedavinayagam Ganeshan” An Analysis Of Working Capital management efficiency In Telecommunication Equipment Industryrivier Academic Journal, Volume 3, Number 2, Fall 2007]

Another paper on connection between working capital administration proficiency and ebit plays by Azagalah Ramchandrah, Muraildhran[endnoteRef:4]. It was point and investigation the connection between working capital administration proficiency, and earnings before taxes and taxes performance utilization and effectiveness of the paper business in India, its execution momentous well during the period, be that as it may, less exceptional gainful firms wait for longer to pay their bills. Of examine a decline in cash conversion cycle. [4: Azagalah ramchandrah,muraildhranJanakiraman on relation between working capital management efficiency and ebit research paper Volume 7 · Number 1 · Spring 2009]

Another paper in which conditions of Pakistan was studied by Asghar ali and syed atif ali[endnoteRef:5] and the title of their study was “working capital management is it really affects the profitability? Evidence from Pakistan” the investigation demonstrated a positive effect of working capital management on profitability, working capital on total assets and effect of all total assets on profitability of 15 organizations of 3 industrial segments of Pakistan. Considering the outcomes, it is obvious that proficient administration of working capital can lead a firm towards profitability. The organizations ought to improve their receivables and different flows resources segments for adequate working capital. Effective administration of inventories improves the benefit of firms. It is reasoned that organizations with higher working capital have higher proportion of productivity and firms with higher total assets additionally have higher profitability. The organizations having adequate working capital additionally have enough total assets. So, it is seen that organizations having adequate extent of working capital have constructive outcome on total assets and profitability of the organizations. [5: Asghar Ali and Syed Atif Ali“working capital management is It Really Affects the profitability? Evedence from Pakistan” research journal.]

Another research paper was presented by A.K Sharma[endnoteRef:6] and corresponding author Satish Kumar on topic of the “effect of working capital management on firm profitability: Empirical evidence from India.” The principle point of this article is to look at the impact of working capital on profitability of Indian firms. Researcher gathered information from 263 nonfinancial firm from 500 firms recorded at the Bombay Stock (BSE) and covering the period 2000 to 2008.for the examination purpose they have used the method of OLS multiple regression. The discoveries of their examination were altogether different from the different universal investigations led in various markets. The outcomes uncover that working capital management and profitability is emphatically related in Indian organizations. The examination further uncovers that stock of number of days and number of day’s records payable is adversely corresponded with a company’s profitability, though number of days accounts receivables and cash conversion cycle display a positive relationship with corporate profitability. The current examination adds to the current writing by inspecting the impact of working capital management on benefit with regards to a rising capital market, for example, India. [6: A.K Sharma and corresponding author Satish Kumar “Effect of working capital management on firm profitability empirical Evidence from India’’.Reserch journal]

Another survey was done by B. Bagchi, B Khamrui[endnoteRef:7] and the title of their study was “relationship between working capital management and profitability: A study of selected FMCG companies in India” in this research they have chosen ten FMCG organizations from India and secured information from 2000-2001 to 2009-2010. For coming to the conclusion, they have used correlation, multiple regression and t test. Subsequent to following all the strategy they have reason that among these organizations the positive connection between firm’s profitability and factors of the working capital management was missing. [7: B.Khamrui, B. &. (2012, May). Relationship between Working Capital Management & Profitability :A Study of Selected Companies in India. Business & Economics Journal , 1-11.]

Objectives of the study: –

• To examine the idea and significance of working capital and the idea of ratios, utility of ratio analysis.
• To compute the financial well-being through Ratio Analysis of Raymond textiles and Vardhman textiles ltd, on relative premise.

Research methodology: –

Scope of the study: –

The current examination is limited to a near investigation between two textiles ventures.

Data collection: –

To achieve the mentioned destinations information is gathered from auxiliary sources, similar to yearly reports, websites, and related other research papers.

Data analysis: –

The assembled information is analysed through ratio analysis and just significant tables are utilized for information conversation according to research need and which are taken for information investigation.

Ratio analysis: Ratio analysis is one of the most powerful tool and many of the companies as well as the researchers are using ratio analysis for determining a company’s present or future financial state.

The different ratio which are analysed for coming to a proper conclusion are as follows: –

1. Liquidity ratios: These ratios will help us in getting the liquidity condition of a business. In this part the following ratios are calculated for each company:
   1. Current Ratio: Current Ratio = Current Assets/ Current Liabilities
   2. Quick Ratio: Quick Ratio = Current Assets – Inventory/ Current Liabilities
2. Activity ratios: These ratios are a measure of how well a company manages its resources on assets. Since these ratios also indicate the speed with which an asset is converted into sales, they are also known as turnover ratios. In this part the following ratios are calculated for each company:
   1. Debtors Turnover Ratio: = Total Sales/Average Debtors
   2. Average Collection Period: = 365/Debtors Turnover Ratio
   3. Inventory Turnover in days: = Inventory/cost of goods sold*365

Figure 1. Raymond and Vardhman Current Ratio

From the above graph, it can be noticed that Raymond have highest current ratio in 2010. We can also infer from the graph that Raymond is having below 1 value for almost five years i.e. in 2012,2013,2017,2018 and 2019 but Vardhman is having current ratio below 1 for only one time i.e. in year 2017 for the span of these 10 years.

Figure 2. Raymond and Vardhman Quick Ratio

The chart shows that the Vardhman is having highest quick ratio value in the year 2011 and lowest in 2015 and 2017 where it is below 1. The year in which the quick ratio is lowest for Raymond is 2018.

Figure 3. Raymond and Vardhman Debtors Turnover Ratio

It is displayed in the graph that the debtor’s turnover ratio for Vardhman is always greater than that of Raymond for this span of ten years. The debtor’s turnover ratio for Raymond is always around 6 but for Vardhman it always greater than 7.

Figure 4. Raymond and Vardhman Average Collection Period

From the above graph we can infer that Raymond has highest average collection period for these ten years of study. The highest collection period of 72 days was there for Raymond in the year 2017. The average collection period for Vardhman is always less than 50 for the years of study.

Figure 5. Raymond and Vardhman Inventory Turnover Ratio (in days)

From the graph it can be easily noted that Raymond is having higher inventory turnover ratio as compared to Vardhman between these ten years of study.

Limitation of the study: –

The ratios have been determined, investigations and deciphered for the period under examination i.e.2010 to 2019. Ratios are determined based on previous financial reports. Due to this we are not able to predict the future performance of the company.

The figures comes here may be ornamental as ratio analysis is principally quantitative examination and not subjective investigation.

Conclusion: –

Working capital management is one of the most significant angles for monetary choices in any specialty unit. This study had attempted to do a comparative examination on working capital management. The chart of current ratio of Raymond Ltd. Has enrolled blend pattern during the most recent ten years, which was most elevated in 2010 and least in 2017, whereas current ratio of Vardhman Ltd. Was solid and sound in comparison of Raymond Ltd. It is found in the chart of debtors turnover ratio that Raymond Ltd. Has less recuperation time than that of Vardhman Ltd. It likewise showed that Raymond as a organization has no more hazard from debtors in contrast to Vardhman. Inventory turnover ratio demonstrated that Raymond Ltd has quicker turnover of crude material than that of Vardhman. Turnover ratio of Raymond Ltd had stayed stable during the study time frame, whereas Vardhman Ltd demonstrated blend pattern according to inventory turnover ratio which showed that Raymond Ltd has persistent creation and deals of its products. From above conversation, it very well may be inferred that Raymond Ltd has sound and more successful working capital framework than Vardhman Ltd has. Raymond Ltd has kept up all perfect degree of working capital and steady increment is indication of sound situation of business from the view point of capital.

References: –

• Debtor Turnover Ratio
  • Raymond 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 5.58 6.48 6.47 5.92 5.73 6.01 5.22 5.1100000000000003 5.52 5.61 Vardhman 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 8.16 7.73 7.15 7.22 7.64 8.09 7.43 7.94 8.3699999999999992 8.81
• Average Collection Period
  • Raymond 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 65.412186379928315 56.327160493827158 56.414219474497685 61.655405405405403 63.69982547993019 60.732113144758735 69.923371647509583 71.428571428571431 66.123188405797109 65.062388591800357 Vardhman 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 44.730392156862742 47.21862871927555 51.048951048951047 50.554016620498615 47.774869109947645 45.117428924598272 49.125168236877528 45.969773299748105 43.608124253285546 41.430192962542563
• Inventory Turnover Ratio
  • Raymond 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4.82 4 4.04 4.37 4.2 4.6399999999999997 4.41 4.18 3.67 3.46 Vardhman 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2.77 2.3199999999999998 3.05 2.81 2.81 3.56 3.06 3.44 2.77 2.63
• Current Ratio
  • Raymond 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1.38 1.03 0.93 0.89 1.1299999999999999 1.1000000000000001 1.06 0.86 0.87 0.69 Vardhman 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1.65 1.31 1.45 1.26 1.24 1.36 1.03 0.87 1.32 1.35
• Quick ratio
  • Raymond 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1.1299999999999999 0.97 0.9 0.86 1.1100000000000001 1.08 1.1399999999999999 0.95 0.74 0.85 Vardhman 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1.52 1.7 1.33 1.44 1.1399999999999999 0.98 1.17 0.95 1.23 1.19

Introduction

This section provides an overview of the study. It includes background of the study, statement of the problem, research objectives, and research questions, scope of the study, significance of the study and justification of the study. Conceptual framework and definition of terms are also included in this section.

Background of Study

The financial institutions like banks are the most important sector in the development of the country’s economy as they serve as an essential tool for administering excess funds from the surplus spending sector to the deficit spending sector of the economy. They act as middleman and this is done through intermediation by collecting funds in form of savings and deposits and afterwards makes the funds available to the deficit spending sector in form of loans and subsidies. The loans granted to their customers it gives a positive impact on a country’s economy as it enables the firms to increase their productive capacity thereby increasing a country’s Gross domestic product. (Olaitan, 2010). This will eventually lead to the increase of average incomes for the residents as their income per capita will be increased and hence a better standard of living.

Banks in developing countries are known to offer services to the general public and to companies. Essentially on granting a permanent post facility to customers. This is largely attributed to the source of funds at their disposal which is usually short tenured. It is known that markets for long term funds are not so developed hence the scenario described above. The above situation implies that banks always put forward to grant short term credits hence the importance of working capital management (Olaitan, 2010).

Working capital management is a process of managing activities and processes related to working capital. Keynesians Theory on Cash Conversion Cycle Theory argues that a company has to ensure an effective working capital management and this is done through establishing an optimal level of working capital. This level of management serves as a counterbalance system to ensure that the amount of cash flowing into the business is enough to sustain the company’s operation. This is an ongoing process that must be evaluated using the current level of asset and liabilities. This is very essential after realization that working capital elements including cash, inventories, accounts receivables, accounts payables are keys to the better performance of the business but on the other hand it’s a cost to the business. Baumol (1952) and Tobin (1956) noted that optimal cash balances, just like inventory models have cost associated with sourcing, maintenance, beside the benefits that companies obtain from optimal cash levels.

Working capital management includes implementing short-term decisions that may or may not extend from one earning period to the next. Working capital management deals with management of current assets and current liabilities with two objectives of minimizing the risk of failure while maximizing return on assets (Sagner, 2014).

Working capital has become an important element in investment decisions since the amount and day to day management has become an important determinant of profitability (Deloof, 2013). However, significant consideration is not often made of working capital when financing decisions are made by firms because it involves investment and financing in the short term. Companies often desire to maintain liquidity and operational efficiency by minimizing their investment in working capital (Brigham & Campsey, 2011).

Implementing an effective working capital management system is an effective way many companies uses to improve their profit. The main aspects of working capital management are cash, inventories, accounts receivables, accounts payable. Financial analysts argue that ineffective working capital management is one of the most significant hindrances to profitability growth of banks and in reaching out to more customers (Lyngstadaas & Berg, 2016). Although, the commercial banks sometimes find it hard to obtain external loans from other corporate financial institutions to expand their working capital requirements. Where the borrowing is convenient and the cost of borrowing from that sources has an unsupportable arising from high interest costs. Also, the government policies such as excessive debt burden, persistent increase in inflation, increase in minimum capital requirement of the central banks and intense competition in the banking industry are indications of the need to undertake a study into working capital management (Brigham & Campsey, 2011).

The main key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management (Samiloglu & Demirgunes, 2016). The results of fixed and random effects models show a negative relationship between performance and the different working capital components. This reveals that commercial banks and other financial institutions which deal with financial affairs should shorten their cash conversion cycle by reducing the number of days of accounts receivable and payable to increase their performance. As the result, the commercial bank fails to meet its obligations such paying creditors on time, purchasing raw materials for production and so on. All these may be due to mismanagement of the working capital (Samiloglu & Demirgunes, 2016).

The research intends to assess how commercial Banks, especially how Equity manage their working capital and contribution it has on the performance. The working capital management deals with the levels of Working capital to optimum, because if a concern has inadequate opportunities and if the working capital is more than required then the concern will lose money in the form of interest on the blocked funds. Therefore, the Working Capital management plays a very important role in performance of commercial Banks (Iyewumi, Remy, & Omotayo, 2015).

Statement of the Problem

The main objective of working capital management is to manage the company’s current assets and current liabilities in such a way that a satisfactory of working capital is maintained. It is due to the fact that if the company cannot sustain an acceptable level of working capital management certainly may lead into what is termed insolvency and may end up into bankruptcy (Berry, Faulkner, Hughes, & Jarvis, 2013). Current assets must be large as much as necessary to be able to cover its current liabilities to guarantee a reasonable margin of safety. All of the current assets are to be managed efficiently so as to maintain the liquidity of the company; while not keeping too high a level of any one of them. Hence, the interaction between current assets and current liabilities is the main premise of the theory of working capital management.

The problem generally explains that, less attention has been paid to the area of short term finance, in particular that of working capital management. Such as neglect might be acceptable were working capital considerations of relatively little importance to the firm, but effective Working capital management has a crucial role to play in enhancing the performance and growth of the firms indeed, experience shows that inadequate control of working capital is one of the Common causes of business failure (Abosede & Luqman, 2014).

The efficient management of working capital is very vital for a business survival. This is premised that having too much working capital means efficiency, whereas too little cash at hand means that the survival of business is trembling. However, implementing best practices of Working capital management has becomes one of the most exciting and challenging operational areas of business. Therefore, it has always been for any commercial banks to survive with competitive environment, Working Capital Management practices is one of the most important elements of increasing performance of any company and have been done to analyze importance of working capital practices in selected commercial banks in Nandi County.

Research Objective

The main objective of this study is to analyze the effects of working capital management to the financial performance of selected commercial banks in Nandi County.

Specific Objectives

1. To establish the effect of accounts receivable on the financial performance of selected commercial banks in Nandi County.
2. To establish the effect of cash conversion cycle on the financial performance of selected commercial banks in Nandi County.

Research Questions

1. What are the effects of accounts receivable on the financial performance of selected commercial banks in Nandi County?
2. What are the effects of cash conversion cycle on the financial performance of selected commercial banks in Nandi County?

Research Hypothesis

H0: There is no significant effect of accounts receivables and cash conversion cycle on the financial performance of selected commercial banks in Nandi County.

Conceptual Framework

Figure1: Conceptual Framework

Independent variables Dependent variables

(Accounts Receivables)

(Cash Conversion Cycle)

(Financial Performance)

Source: Researcher’s Compilation 2019

Significance of Study

The study will improve the skills and knowledge of the researchers by learning some skills on the working capital management and its performance on commercial Banks. The study will help Equity to better manage its working capital in order to get much of liquidity/cash, which will help to cover its obligations and It will also enable the management to know with reasons the basic causes of the changes in net working capital through suggestions and recommendations, this study will help the commercial Banks to improve their working capital management and solve problems related to customer’s satisfaction. The result of this study will be useful to the commercial banks and future researchers to understand management of working capital and its effects on their performance.

Scope and Limitations of the Study

This study will be faced with limitations in terms of space and period to be covered. This study will be carried out in Equity and will be aimed at finding the effects of working capital management on the performance of the bank.

[bookmark: _Toc6145368]Operation Definition of Terms

Accounts Receivable: Accounts receivable is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers (Gaur & Raman, 2015).

Cash conversion cycle: Sometimes referred to as an asset conversion cycle or a net operating cycle, the cash conversion cycle is a simple process that is used to evaluate the current financial stability of a business (Joshi, 2015).

Working Capital: Working capital, also known as net working capital, is the difference between a company’s current assets, like cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, like accounts payable (Shin & Shoenen, 2014).

Performance: Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues (Smith, 2010).

Introduction

[bookmark: _Toc23693773][bookmark: _Toc23694080]Working capital management is important because of its effects on the firm’s profitability and risk, consequently its value. Specifically, working capital investment involves a trade-off between profitability and risk. Some of organizations are still focused to enhance the financial long-term decision traditionally, instead of investment that firms in the short-term assets (Teruel & Solano, 2007). Some of the factors in the working capital are the type of source of finance own by firm. To create the maximum profit, the organization needs to apply the effective working capital management into all decisions making processes. This essay would elaborate all the factors of working capital management and the risk-return of it. Furthermore, the recommendation to the firm base on the advantages and disadvantages of sources of finance.

Working capital management

Working capital management in an organization relies heavily on the selection of the source of finance used. Working capital is the assets that to be use by the organization to carry out its business activity, however the rotation not more than 1 year (Cristiani, et al., 2019). The working capital must be managed effectively that could be determined the adequate financial resources for organization’s business and avoid issues that may incur substantial costs for the organization. One of the effective ways is manage the current assets and debt smoothly so that the organization gets enough net working capital and guarantees the level of liquidity of its organization. Through the utilization of working capital owned by the organization has a purpose to obtain an optimal profit, in result the organization could maintain the level of profitability.

In addition, working capital is current assets minus current liabilities, where the current assets including cash, investments, prepaid expenses, account receivable, and inventory. Then current liabilities including taxes payable (sales, payroll, income), interest payable, bank account overdrafts, accrued expenses, and customer deposits. In order to choose the source of finance that most suitable base on the condition or project, a financial manager should be considering thorough characteristic of each source and the costs of it.

Source of Finance

Every organization established should have a goal to maximize the wealth of their owners. One of the important factors to achieve its goal is the role of financial managers in managing funds of its organization. Management source of finance includes the way that financial managers obtain efficient sources of funds and allocate them or invest it effectively, with optimal management in terms of funding and investment, the organization’s goal to maximize the wealth of the organization’s owners can be achieved (Ida, 2010). It could be mean, source of finance plays the strong role in the organization to achieve its goal, its included equity, debt, debentures, retained earnings, term loans, etc. this area that the most explorable but also the toughest part to running a business in the same time. According to (e-Managing Finance, 2019), sources of finance can be categorized into three part; based on the time period, basis of ownership and control, and basis of source of generation. However, this essay only elaborate the source of finance base on the time period.

[image: Hasil gambar untuk source of finance chart]

Figure 1/Source of finance, source: e-Managing Finance

Use of source of finance depends on the organization’s needs whether it’s the short project, medium, or maintaining on the wide scale. Source of short-term financing typically have a short period of time and use not exceed 1 year. Moreover, it’s involve a small amount of funds relatively, and usually used to finance working capital needs, daily operational costs of the business such as procurement of cash, inventory, the purchase of equipment, payment of salaries for employees, financing of trade receivables, rent payments, and other operational costs. The examples of short-term finance include trade credit, short-term bank loans, facilities overdraft, line of credit, and commercial paper. Medium-terms finance means financing over a period of 3 into5 years when the long-term capital is not available. The sources in medium-term usually loans with a repayment to the financial institution, government, or banks. It would be great option for start-up business which the loan is set repayment time frame and predictable (Priyanka Prakash, 2019). On the other hand, long-term finance generally takes more than 5 years and involves large amount of funds. Due to its long-term nature, usually its used to invest in a big project such as the construction of new factories, the purchase or acquisition of other business, purchased fix assets as machinery, land, vehicles, factories, etc. The sources of long-term finance might be from debt or from its own capital of the owners (Team, 2019).

Effective Working Capital Management

A healthy financial business may be determined with sufficient cash in hand and consistent revenue to take care of all liability obligations, without have more debt. Monitoring the current assets and liabilities to figure the level of liquidity available in the business become a key. In this case, when the business faced with less residual assets, a strategy of processing the source of finance effectively is needed. The effectiveness of working capital management in a business operation include the followings

1. Operational Efficiency

Efficient working capital management will increase the efficiency in the operational process in daily basis as well. In the same time, it would help to maintain the business earnings and profitability. From that characteristic, it can be identified that a firm can take advantage from short-term finance if necessary. If the business faced insufficient net working capital to purchase the obligation, the trade credit can be a solution. Trade credit usually provide by the supplier or other firms. In this transaction, the firm as a debtor has the obligation to pay back within the certain date made by a creditor and the maximum date of pay back after the transaction occurs. The creditor not provide finance in cash, but in form of facilitation of goods. The relation here only made by the mutual trust between supplier and the organization, so there is no require collateral in the form of assets from the buyer, however the creditor still can monitor from a track record.

On the other hand, effective working capital management help to ensure the production process not face any kind of interruptions. The supply of raw material and other goods to the business will be consistent, contributing to acquisition of economies of scale in the business and thus achieving long-term cost efficiency.

2. Improve Cash Flow

The other importance of effective working capital management in a business also help to improve cash flow through the assessment process. Khoshbakht (Morgan, 2015) argued, all levels in the organization should be educated to understand the meaning of effective working capital, the scope and scale of imminent changes as well as their areas of responsibility. Performance benchmarking to evaluate working capital performance and also growth of its own business must be considered also from its shareholders to concern into these metrics. The factor is because each types of business may face the changes of economic demand and supply. Make a smart inventory management decision may be a key as well. In a small business, a firm have to the right amount of inventory to satisfy sales orders without spend much money unnecessary.

Operating liquidity has always been crucial to long-term financial health. Therefore, external finance sources are limited, and attempts are made to cash the exchange bills in order to fulfil the business’s liquidity requirements. This will make the best allocation of resources so that successful cash management can lead to an increase in the availability of working capital needed to meet the business’ everyday obligations.

3. Development of Favourable Financing Conditions

With all fulfilled liquidity positions and working capital needs, there will be a range of financial institutions that will be willing to finance the firm in order to bear with the favourable finance conditions. A business with good relations with suppliers and creditors will also be able to secure payment discounts and interest rate concessions, that will be easier for the company to prepare for more growth and developing for the next projects. Furthermore, effective working capital management help to prepare to face crisis or depression condition in the business market. It would contribute towards regular movement of funds to business process to that changes of demand can be met.

4. Create Value and Increase Profitability

In the term of small and medium-sized business, the firm can create value by reducing their inventories and the number of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle also improves the firm profitability. The size of inventory directly affects working capital and its management, so inventory must control carefully (Nia, et al., 2012).

5. Arrangements In Multinational Business

On the other hand, the limited access to required information in the multinational organization may lead the issues to managing its working capital in its parent company. For example as Coca-Cola company, they expand the business to all countries around the world, then they need a proper strategy to arrange a huge amount of money to achieve effective working capital management. However, because of the demographic issue, sometimes the funds prove more than required and other times may lower than required. Therefore a firm need to make the right estimates to have unlimited access information to all branches they have, in order to make a correct and fair estimates about working capital that is required for the business. Therefore, the right amount can be made to supplied, not more or less than that.

Risk and return trade-off

The purpose of working capital management is to achieve a balance between profitability and risk. Every investment decision inherent with its risk, though its scale differs depend on the instrument. Otherwise, return might be the most needed aspect in the business. In order to increase the possibility of higher return, investors need to increase the risk taken. The firm’s movement tend to maximize profitability with accept high risk will reduce the level of organization liquidity. Otherwise, a firm that tend to maximize its liquidity will reduce the firm’s profitability potential. It happens because if the firm wants to maximize profitability, it will reduce the current assets, because current assets produce low returns, however if a firm increasing fixed assets which provide high returns, the consequence is reducing liquidity. Conversely, if the firm wants to maximize liquidity, it will increase current assets, but the rate of return will be low so that profitability is also low. However, if the firm have greater sales with a soft credit policy, it can extend the cash cycle. Thus, the longer cash conversion cycle, the higher profitability can achieve. This is contrary to the traditional view that the longer conversion cycle, the lower profitability can achieve by a firm.

To maximize shareholders wealth, there are 3 financial decisions that must be made;

• a. Investment decisions
• b. Funding decisions
• c. Working capital decisions

In working capital decisions policy, there is a trade off between risk and return. A proper strategy must be developed in the business in order to allocate the funds in proper way. If the firm allocating the fund through external sources as financial institutions or creditor, it may lead earn lower profits. It because lesser risks are taken will impact to the opportunity of development and growth as well. Therefor it is better to find a feasible level in asset or cash allocation process in order to increase the ability of its business to fulfil short-term obligations and achieve long term targets of sustenance, growth and development of business (Ermawati, 2011).

Challenges encountered in managing working capital and the solutions

1. Difficulty in medium-low sized business

[bookmark: _Hlk23689222]Political and economic uncertainty continuous give a direct impact to a crisis finance in ab business. This also has impact on the payment of capital in productivity in a firm, cuts employee’s salaries, and also tightening organization expenses. Most large and medium-sized companies downwards rely on loans to bank, they may be in trouble to repay with a huge interest amount. According to Perkin (2012), the credit requirements and availability for middle to lower companies are more difficult then bring greater constraints due to the unstable amount of income or revenue of it compared to the mature business.

2. Diverse Shareholders

The other challenges when a firm prevent to lend the capital from bank, and come up with different shareholders. It may be the best solution at the beginning in order to prevent the huge interest amount from bank loans in the long-term finance. However, usually different perspectives from diverse stakeholders may led inefficient use of funds.

3. Prescriptive analytic

To start a business, it is certainly necessary to have a procurement process in order to now the estimated amount of the right inventory and also the amount of working capital for basic needs that are bound in raw materials. By evaluating millions of scenario outcomes, prescriptive analytics will interpreting information to deliver the best course of action that the firm can take to defined their objectives (Logic, 2018). Subsequently , the firm need a formal structure to increase its working capital, means that the analysis that has been done previously must be allocated in accordance with the estimate of the funds will increase the working capital. Without a formal structure, it will cause unclear funds in the business, inn result in increased use of working capital uncertainty. This waste the using of incompetent working capital in the future. On the other hand, the firm can apply root and branch approach to keep on the key operational and implement a robust supporting system of infrastructure which include aligned incentives, focus metrics and strong management policies. In this scenario, the key enablers would be the implementation of lean production system and efficient supply chain management that will help to reduce costs and make more funds available as working capital. Furthermore, audit and compensation changes with consumers and distributors would help to balance current assets and current liabilities (Arun & Kamath, 2015).

Bibliography

1. Arun & Kamath, 2015. Financial Inclusion: Policies and Practices. IIMB Management Review, 27(4), pp.267-87. Available at: DOI: 10.1016/j.iimb.205.09.004.
2. Cristiani, N. and Husaini, A. (2016). Efektifitas Manajemen Modal Kerja Dalam Upaya Meningkatkan Likuiditas Dan Profitabilitas Perusahaan. Jurnal Administrasi Bisnis, 33(1), p.206.
3. Efinancemanagement. (2019). Sources of Finance | Owned-Borrowed, Long-Short Term, Internal-External. [online] Available at: https://efinancemanagement.com/sources-of-finance [Accessed 27 Oct. 2019].
4. Ermawati, W. J., 2011. Pengaruh Working Capital Management terhadap Kinerja dan Risiko Perusahaan. Jurnal Manajemen dan Organisasi, 11(1), p. 5.
5. Ida (2010). Pemilihan Sumber Pendanaan Perusahaan Berdasarkan Hipotesis Pecking Order. Jurnal Akuntansi, 2(1), p.93.
6. Logic, R., 2018. Working Capital Management: Two Challenges and How to Address Them. [Online]
7. Available at: https://blog.riverlogic.com/working-capital-management-two-challenged-how-to-address-them [Accessed 3 November 2019].
8. Morgan, J., 2015. Optimizing Cash Flow How to Manage Working Capital. In: Commercial Banking . United State: JPMorgan Chase & Co., p. 3.
9. Nia, N. M., Alouj, H. A., Gezelbash, A. & Amiri, S. M. S., 2012. An Analytical Review of the Effect of Working Capital Development on Financial Performance Measures. American Journal of Scientific Research, 1(77), pp. 110-122.
10. Priyanka Prakash, J. (2019). Medium Term Loans: Advantages and Disadvantages. [online] Fundera Ledger. Available at: https://www.fundera.com/blog/medium-term-loans-advantages-and-disadvantages [Accessed 27 Oct. 2019].
11. Teruel, P. and Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, [online] 3(2), p.164. Available at: https://www.emerald.com/insight/content/doi/10.1108/17439130710738718/full/html?casa_token=vgso5vGF5FgAAAAA:n8NxUUW8IJ6tt1XHdE8LxevgBCq2NIPUpXzHYroWHh3onMkjw1MkZmpWWBNRv4eO__sRtauxyotscePVEplow1GR8-SC2xBkUroVTwJAmvvs1qD16sXV5Q [Accessed 27 Oct. 2019].

Abstract

Working Capital (wc) is the flow of ready funds necessary for the working of a concern. It comprises funds invested in Current Assets , which in the ordinary course of business can be turned into cash within a short period without undergoing diminishing in value and without disruption of the organization. Current Liabilities are those which are intended to be paid in the ordinary course of business within a short time.This paper highlights the importance of managing working capital requirements to ensure an improvement in firm’s market value and profitability and this aspect must form part of the company’s strategic and operational thinking in order to operate effectively and efficiently.. Main purpose of the study is to identify the impact of working capital management on profitability of selected listed manufacturing companies .Correlation and regression analysis were performed. Results reveals that cash conversion cycle (CCC) and return on assets (ROA) are negatively correlated the value of -0.127 which is highly significant at 1 percent level of significance, which means that as the cash conversion cycle increases ROA decreases. The study results advocated that the financial planning of selected firms is influenced by WCM. By validating the findings with previous researchers, this endeavor will contribute to the literature. It will be beneficial to the academic, social and practical department. The study findings endowed with deeper insights into WCM practices and present recommendations that in turn bring improvements in the Financial planning of the targeted firms.

KEYWORDS – Cash conversion cycle,working capital,financial planning,correlation and regression analysis

1. Introduction

Working capital is the difference between the current assets and current liabilities. Current assets consist of all those assets that transformed to the form of cash within a year and all those investment that may be easily altered into cash without any hassle when needed. Working capital management is “The management of the short-term investment and financing of a company”. Working capital management plays an important and vital role in the firm growth and profitability and it affect the success and failure of a firm because of its influence on firm’s growth and profitability

A key factor in the working capital management is the cash conversion cycle (Deloof, 2003). Cash conversion cycle is defined as the time lag between the purchasing of raw materials or rendering of services and the collection of cash from the sale of goods or services rendered. The longer the lag, the greater the investment in working capital, and thus the financing needs of the firm will be greater. Interest expense will be also higher, which leads to higher default risk and lower profitability

The ultimate objective of any firm is to maximize the profit, but, preserving liquidity of the firm is also an important objective. The problem is that increasing profits at the cost of liquidity can invite serious problems to the firm. Therefore, there must be a tradeoff between these two objectives of the firms. Firms may have an optimal level of working capital that maximizes their value

A financial manager takes decisions regarding the current assets and current liabilities this is called working capital management. While making decisions he must consider the fact that a certain level of current assets is necessary to meet the short term liabilities and liquidity. On the other hand Current assets also play a role to freeze the capital of a company. As a result of which profitability is affected. Profitability or rate of return on investment is suffered by the decision of management about working capital. Profitability can also termed as the rate of return for particular investment. Imbalance of current assets and liabilities can negatively affect the rate of return. This is the basic purpose of managing working capital so that to control the current financial resources of a firm in such a way that a balance is created between profitability of the firm and risk of insolvency.

So, the objective of this study is to find out “Does efficient working capital management have any impact on the profitability of AUTO MOBILE INDUSTRY OF INDIA.

2. Indian automobile industry.

The Indian auto industry became the 4th largest in the world with sales increasing 9.5 per cent year-on-year to 4.02 million units (excluding two wheelers) in 2017. It was the 7th largest manufacturer of commercial vehicles in 2017.

The Two Wheelers segment dominates the market in terms of volume owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector.

India is also a prominent auto exporter and has strong export growth expectations for the near future. Automobile exports grew 20.78 per cent during April-November 2018. It is expected to grow at a CAGR of 3.05 per cent during 2016-2026. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the two-wheeler and four wheeler market in the world by 2020.

Here are some leading two wheeler companies of India who are gaining more business for their products:

1. Hero MotoCorp

It is the largest and most popular two wheeler manufacturing company in the world. According to studies, rural population of the nation has always prefered Splendor when looking to buy a two wheeler. It is still the popular choice for many because of the company’s consistency in delivering quality products and sturdy construction. The company made headlines with their most innovative fuel-efficient vehicle, Splendor iSmart, which promises to deliver a mileage of 102 km per litre. This year, the sales percentage of Splendor and Splendor iSmart have increased by 10% making them the leader of the board. All though Hero Glamour sales have declined by 35%, other models like Passion, HF Deluxe, CBZ, Karizma, and Achiever have managed to do good business. Initially, the company was known as Hero Honda Motors Ltd, but the partnership between Honda Motors of Japan and Hero Cycles of India ended in the year 2010 and the companies have been competitors ever since.

2. Honda Motorcycle & Scooter India

Everyone who opts to buy a moped range, instantly thinks of Honda Activa which has been in the lead since early 2000s. It has dominated the scooter segment ever since and no other model has come close to Activa’s popularity. This model alone has a domestic monthly sales of over 2.15 lakh units. Honda is the second largest two wheeler manufacturer in the country. The company in the late 1980s had dominated the market with the manufacturing of the evergreen Kinetic Honda. This was in with Kinetic Engineering Limited and it was on every other street in the city. HMSI (Honda Motorcycle & Scooter India)ended its partnership with Honda MotoCorp in 2010 and ever since then the company has been responsible for its own manufacturing of vehicles. Some of their other models are Unicorn, Shine, CBR 150R, Dream Yuga, Aviator, etc.

3. Bajaj Automobiles

Bajaj Chetak is perhaps the oldest and favorite model of our parents and why not, seeing dads drop off their kids on Chetak is one of the fondest childhood memories we have. It was also considered to be the coolest model of that time and we all know the legendary bike even today. Bajaj is one of the oldest automobile company in the country which is successful and still popular among the youth crowd pleaser even today. The company has reinvented itself constantly since 1930s (the year of establishment), one can still see the quality and commitment to customer service being the same over the years. Bajaj came back into the market with its winner Pulsar variants which was the ‘it’ 2 wheeler among the youth. Its stylish and sleek looks swept everybody off their feet and it’s still the third popular choice for bike in the country. Vespa 150 is one of the top 3 best-selling scooters in the country. Most of the vehicles from Bajaj Automobiles is in the top of the board. Their other bikes include Avenger, Platina, Discover, CT100, Kawasaki Ninja and KTM Duke.

4. TVS Motor Company

Since 19s55, TVS has focused only on automobile industry alone from finance and insurance (It also use to operate for automobiles as well in the 1870s). It partnered with Suzuki motors and gained worldwide recognition for its mammoth collaboration. Suzuki Samurai, Shogun and Fiero were top selling models back then. How can we miss their scooter range! It is a popular choice among the youngsters and working women. Models like Jupiter, Wego, Scooty Pep and Zest are very common among women. They are light, stylish and gives great performance. Their yearly production is nearly 3.2 million units and you can imagine the demand they have in the market. Some of their other top selling models are Apache RTR, Star City+ and TVS Sport.

5. Royal Enfield

No one owns this beast until and unless you a area motorcycle rider. It was earlier known as Enfield Cycle Company. But it was crowned as ‘Royal’ in the late 1890s by the queen of England for its performance and looks. Since then the English company is known as Royal Enfield. Owning this bike is a dream of every two wheeler rider, such is the magic of this bike. Its performance, suspension, looks, engine capacity and performance; everything is topnotch with this handsome looking two wheeler. This makes it one of the leading bike manufacturers of the country and the world. Its masculine looks is appealing to everyone and it is the best bike if you want to go on off roads, long rides, etc. All of their model is similar yet different in their feel. Some of their top selling variants are, Cruiser, Retro Street, Himalaya café racer, Classic 350, Thunderbird 350, Classic Desert Storm and the brand new Continental GT 650 and Interceptor 650.

The number of 2 wheeler fanatics has increased in India with more models and companies coming in. The world favorite, Harley Davidson has steadily increased its number on Indian roads in the last 3 years. Some of the other popular bike manufacturers are Triumph Motorcycles, Piaggio, Mahindra and Yamaha.

2. Research Objective

General objectives-

The objective of this research is to discover if the working capital management has an impact on the profitability of the firm and its growth. The main objective is to find out the important variables that might affect the profitability and risk situation of the firm so that they can be included in the firms’ financial planning. Certain variables in the field of financial management have a cause and effect relationship. Thus, those variables must be identified that affect the firms’ profitability and growth.

Specific Objectives –

General objectives are further divided in to specific objectives which are as follow-

• To determine whether there is significant relationship between Inventory turnover ratio and profitability of the firm
• To examine the significant relationship between current ratio and firms profitability
• To evaluate the significant relationship between debt to equity ratio and profitability of the firm
• To ascertain if there is significant impact of operating cash flow to debt ratio on profitability of the firm

3. Literature review

Many previous research studies have indicated the relations between working capital management, liquidity, profitability, risk and many more factors of a company in different environments-

Deloof (2003) advocated firms attempt to maintain a most favorable level of WC that in turn enhances the wealth of shareholders. The results of this study found that WCM has a negative relation between firms performance. The major part of literature review mentioned above typically focuses on the association of the WCM with firms’ FP. Most of the researchers have applied correlation and multiple regression analysis to empirically test the impact of WCM elements on f irms’ performance. In several studies they have applied CCC, RCP, inventory turnover (ITO), average payment period (APP), as key measures of WCM whereas for measuring FP ROA, ROE, and EBIT, GOP.

(Dong & Su, 2010) observed the significant positive association of cash conversion cycle with the return on assets of the firms. (Kumar & Sharma, 2011) observed that in India cash conversion cycle has positive significant relationship with profitability of the firm. (Johnson & Templar, 2011) Stated that there is passively significant impact of current assets on the return on capital employed

Kruti A. Patel (2015) studied on impact of working capital management on profitability of Indian Oil Corporation. The study was based on secondary data and study period was 2009-10 to 2013-14. Pearson correlation, descriptive statistic and INM SPSS were applied as research methodology. The results show that there is significant negative correlation between working capital management and net profit and it also indicates that there is negative relationship between liquidity and profitability.

Kaushik Chakraborty [5] checked the various studied done on management of working capital and its components. The studies related to working capital management as a whole would necessarily discuss the individual components of working capital and thus exclusive studies on individual factors of current assets and current liabilities were found to be very few. A deeper look into survey indicated that there were only a few studies available abroad and plentiful of studies in India. The survey also revealed that, though a few case studies on individual components automobile companies were present, there was no attempt in India to study the working capital management in any specific industry

(Napompech, 2012)Argued that working capital is needed for day-to-day operations of a firm. The regression analysis was based on a panel sample of 255 companies listed on the Stock Exchange of Thailand from 2007 through 2009.The result showed significant negative relationship between gross operating profits and inventory conversion period and the receivables collection period.

4. Research Methodology

The methodology states that managing the working capital is an atmost important part of short-term financial management. The long-term financial management often receives more attention although many researchers, Jose et al. (1996) ²⁹, Deloof (2003) ³⁰ have shown that short-term financial management also has a clear effect on the profitability of a firm. Mulins (2004) ³¹ noted that the working capital management often can be used to gain successful competitive advantage. In India the corporate sector often seems to have awonderful and satisfactory level of working capital as it has been reflected in their liquidity ratios. The foreign based companies are placed in a better relative than the domestic companies. There is a wide inter-industry variation in liquidity ratios and performance of the working capital requirements of the corporate enterprises.

4.1 Concepts and Its Importance

The management of working capital is essential for a company to remain liquid, and to meet its short-term obligations. Continuous and efficient management of working capital will make the company more profitable. The company always needs to know about the metrics and techniques which are going to be used to manage the working capital in order to meet the competition as well as to maximize profitability. This article’s main aim is to concentrate on the different metrics and process around the working capital management in automobile sector and to find out how companies can manage the working capital in a better way. The method used in this study will be quantitative in nature of how the working capital management affects the profitability of automobile sector.

4.2 Objective for the study

To study the relationship between Working Capital Management and Profitability of Leading Listed Automobile companies at S&P CNX top 500 in India from (2006-2012).

4.3. Methods of Data Collection

The purpose of this research is to contribute towards a very important aspect of financial management known as the working capital management with reference to India. The research intends to reveal relationship between the working capital management and its effects on the profitability of 10 automobile manufacturing firms from CMIE prowess Database for a period of 2006 – 2012. This section of the paper discusses the firms and variables included in this study the distribution patterns of data and applied statistical techniques in investigating the relationship between the working capital management and the profitability. This is important as the Indian economy endured the 2008 financial crisis and it’s after effects which drained liquidity out of the system. In addition, to that the annual reports of companies have been used in order to understand the company back ground and industry type. The study involves only secondary data.

. The Secondary Sources To achieve the above noted objectives, extensive use of libraries was done. This study is based on the secondary data. The secondary data were collected through the Government reports, official records, Journals ,magazines, Books, websites of Internet and financial statements, such as income statements, balance sheets of S&P CNX 500 companies. For the purpose of arriving at meaningful inferences a six-year period beginning with 2006-2012 was derived from CMIE Prowess Database listed in NSE from the top S&P CNX 500 companies. There are about 10 automobile companies listed in the top S&P CNX 500 companies has been shortlisted which had similar business module and the financial information pertaining to income statements, balance sheets, and cash flow statements etc. and also supports the study variables. The other non-financial firms which lack in data were eliminated from this study.

4. Analysis and Interpretation

This chapter deals with the analysis and interpretation of data obtained from 10 automobile manufacturing companies from CMIE PROWESS DATABASE in India which is listed in National Stock Exchange. The secondary data includes Income Statements, balance sheets, Profit and Loss Accounts and Cash Flow Statements etc. The data collected has been dealt with the descriptive and inferential statistics on the sample which is based on the following tools like Mean, Standard deviation, forWorking capital components for the selected 15 manufacturing sectors

4.1. Table showing the Descriptive Statistics (Mean and Standard Deviation) of 162 Firms, (i.e) 15 Manufacturing Sectors, for a period of 2006-2012

AUTOMOBILE SECTOR DCP ITP APP CCC

MEAN 45.48 67.4 160.31 155.4

S.D 16.43 27.7 253.66 271.29

The above has arrived at the descriptive statistics (i.e) Mean and standard deviation for Working capital components such as DCP, ITP, APP, and CCC. Among the working capital components, the Average payment period has got the highest mean of 160.3, followed by the Cash conversion cycle 155.4, Inventory turnover period 67.4 and Debtors conversion period 45.48etc. This implies that automobile sector takes too long time to pay for its suppliers.

5. Findings and Recommendations

On the whole the study identifies the issues related to the working capital management undertaken by manufacturing industries through various secondary data analysis. The findings of the sector –that is a wise study based on the secondary data have now been discussed below. From the study it has been significantly found that among the working capital components, inventory turnover period is affecting the Net Operating profitability of automobile sector. It has been found that there is a negative relationship exists (i.e) reduction in the inventory days will increase the company’s profitability. The Inference stated that an increase in the number of Inventory turnover days (i.e) if inventory takes more days to sell then it results in decrease in profitability or vice versa. Because it would lead to increase in the storage and insurance cost and as a result the profitability may decrease. Highly expensive Inventories’ tied up in the firm may cause severe loses in the business because the amount of capital would be blocked. So the study states that decrease in the inventory days will increase the profitability. So, the automobile firms should concentrate more on reducing the Inventory turnover days. Hence from the study it is evident that inventory plays a major role in automobile sector. The results for the Inventory turnover period are consistent with the studies of Kaddumi and Ramadan (2012), Ganesan (2007), Khamrui (2012), Bieniasz & Golas (2011). Whereas the study on the effect of independent variables such as current Ratio, Quick Ratio, Firm Size, Fixed Assets to total Assets and Debt to Equity Ratio on Net Operating Profitability.

5.1. Conclusion

The Government of India plans to make automobile manufacturing the main driver of ‘Make in India’ initiative, as it expects the passenger vehicles market to triple to 9.4 million units by 2026, as highlighted in the Auto Mission Plan (AMP). In any sector efficient management of working capital has been recognized as one of the basic and most important function of finance for the successful conduct of business operation. Thus this strategy not only influences profit earning capacity of business undertakings, but also includes the content of operations of automobile sector. The present study pertaining to working capital management is an attempt to examine the structure of working capital in such a way as to assess the performance of inventory management, investigate the credit periods, to examine the utilization of cash resources, to check periodically the payment received before and after the due date, to frequently prepare the inventory budgets, to assess the inventory levels, to verify the liquidity position and to identify to what extent working capital financing impacts the profitability of selected automobile companies in India. Also the implementation of inventory models such as JIT, EOQ, FSN will also help to reduce the overstocking of inventories in the automobile enterprises in India. So, the automobile firms should focus more on managing and reducing the Inventory turnover days in order to maximize profitability and to withstand the competitive environment in today’s competitive era .

5.2. Scope for Future Research

The Present study aims to investigate the impact of working capital management and profitability considering the various parameters such as working capital components, Liquidity, solvency and profitability. The research was undertaken in 10 automobile companies, and the companies considered for the study falls under S&P CNX 500 companies alone. The area working capital is Vibrant and has its significance not only in top performing firms, but also in the Small and medium sized firms. The idea or the framework adopted for the study can be applied to SME’s as well as Distressed firms, to find out their performance in working capital management and also to test their significance. This framework will be helpful for future researchers to find out the issues relating to liquidity and profitability associated with the management of working capital in detail and also by exploring more variables in various sectors.