Liquidity

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Research and Social practices in Social Sciences
Vol. 7, No. 2 (February 2012) 44-58

Bhunia et.al

The Impact of Liquidity on Profitability: A Case Study of FMCG Companies in India
Amalendu Bhunia*
University of Kalyani, West Bengal
Bhaskar Bagchi**
Alipurduar College, West Bengal
Basanta Khamrui**
Alipurduar College, West Bengal

Abstract
This paper examines the impact of liquidity on profitability of the FMCG companies in India. The FMCG industry has emerged as one of the largest sectors in the Indian economy by registering an astonishing double-digit growth rate in sales in the past couple of years. The study is based on secondary data collected from CMIE database for the period from 2001 to 2010. In the course of analysis, normality test, descriptive statistics, correlation statistics and linear regressions have been used for the study. The results show that there are relationships exist between variables of the liquidity management and profitability of the firm.

Keywords: Profitability-Liquidity Trade-Off, FMCG Companies, Financial Ratios, Multiple Regression.

(*Amalendu Bhunia, Associate Professor, Department of Commerce, University of Kalyani, West Bengal, India, Email: bhunia.amalendu@gmail.com ** Bhaskar Bagchi & Basanta Khamrui, Assistant Professor in Commerce, Alipurduar College, West Bengal, India) 44

Research and Social practices in Social Sciences
Vol. 7, No. 2 (February 2012) 44-58

Bhunia et.al

Introduction
Working capital management is vital fraction in firm financial management decision. Management of working capital has profitability and liquidity implications. That is why; working capital proposes a familiar front for profitability and liquidity management. To reach optimal working capital management firm manager should control the trade off between profitability and liquidity accurately. An optimal working capital management is expected to contribute positively to the creation of firm value.

The crucial part in managing working capital is required maintaining its liquidity in day-today operation to ensure its smooth running and meets its obligation (Eljelly, 2004). Liquidity plays a significant role in the successful functioning of a business firm. A firm should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both the internal and the external analysts because of its close relationship with day-to-day operations of a business (Bhunia, 2010). Dilemma in liquidity management is to achieve desired trade off between liquidity and profitability (Raheman et all, 2007). Referring to theory of risk and return, investment with more risk will result to more return. Thus, firms with high liquidity of working capital may have low risk then low profitability. Conversely, firm that has low liquidity of working capital, facing high risk results to high profitability. The issue here is in managing working capital, firm must take into consideration all the items in both accounts and try to balance the risk and return (Lee et all, 2008).

The FMCG industry has emerged as one of the largest sectors in the Indian economy by registering an astonishing double-digit growth rate in sales in the past couple of years. Characterized by healthy distribution network, strong MNC presence, intense competition between the organized and the unorganized segments and low operational costs, it is one of the rapid growing industries in India with a total market size US $13.1 billion (CMIE, 2011). But the production capacity and growth rate in the FMCG Company did not increase promptly due to poor financial management in terms of liquidity and profitability. This call for a full diagnosis of the malady, that is identification, analysis and quantification of the interfering constraints in achieving full utilisation of the capacities, thus opens a vast field for research and enquiry. In the present study,...
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