Small Scale

Topics: Working capital, Inventory, Cash conversion cycle Pages: 28 (8033 words) Published: May 31, 2013
Asian Journal of Business Management 5(2): 197-207, 2013
ISSN: 2041-8744; e-ISSN: 2041-8752
© Maxwell Scientific Organization, 2013
Submitted: March 26, 2012 Accepted: April 12, 2012 Published: April 15, 2013 Corresponding Author: Harsh Vineet Kaur, School of Management Studies, IET Bhaddal Technical Campus V-BHADDAL, Po Mainpur Distt Ropar, Punjab, India

Managing Efficiency and Profitability Through Working Capital: an Empirical Analysis of BSE 200 Companies
Harsh Vineet Kaur and Sukhdev Singh
School of Management Studies, IET Bhaddal Technical Campus V-BHADDAL, Po Mainpur Distt Ropar, Punjab, India
Abstract: Efficient management of working capital helps to avoid financial crises, thereby, increasing the profitability and enhances the firm value. The present study analyses the working capital performance of 164 manufacturing BSE 200 companies classified into 19 industries over the period of 2000-2010 based on working capital score calculated by using normalised values of Cash Conversion Efficiency, Days Operating Cycle and Days Working Capital. The study explores abundant scope to increase the efficiency of 145 companies by improving the parameters of analysis. The improvements are bound to generate increased profits and profitability of leading corporate of India. The study tests the relationship between the working capital score and profitability measured by Income to Current Assets and Income to Average Total Assets. The results of the study support earlier studies revealing that efficient management of working capital significantly affects profitability.

Key words:Cash conversion efficiency, correlation, days operating cycle, days working capital, efficiency of working capital management
Working capital policy is an important issue in any organization because without the proper management of working capital components it will be difficult for the organizations to run its operations smoothly. Working capital management is significant due to the fact that it plays a vital role in keeping the wheels of the business running (Lawrence and Charles, 1985). Its effective provision can ensure the success of a business while its

inefficient management can lead not only to losses but
also to the ultimate downfall of what might otherwise be
a promising concern. Business success heavily depends
on the ability of financial executives to effectively
manage receivables, inventory, and payables (Filbeck and
Krueger, 2005). Furthermore working capital policy has
been major issue especially in developing countries.
Adequate working capital needs to be maintained in order
to discharge day-to-day liabilities and to protect the
business from adverse effects (Sayaduzzaman, 2006;
Siddiquee and Khan, 2009). It aims at protecting the
purchasing power of assets and maximise the return on
Most of the Chief Financial Officers’ (CFO) time and
efforts are devoted to working capital management
(Gitman, 1976). A study of Fortune 1000 firms found out
that more than one-third of the financial management time
is spent in managing current assets and one-fourth of the
financial management time is spent managing current
liabilities (Gitman, 2004). Still, a large number of
business failures have been attributed to inability of
financial managers to plan and control properly the
current assets and current liabilities of their respective
firms, (Smith, 1973). Therefore, there is a need to develop
sustainable working capital management practices.
The issues involved in managing working capital of
any firm are concerned with the management of the firm’s
inventory, cash, marketable securities, receivables etc and
payables etc in order to achieve a proper balance between
risk and return. A well-designed and implemented
working capital management must contribute positively to
the creation of a firm's value (Zirayawati et al., 2009;
Afza and Nazir, 2007). For maximising profits or
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