Working Capital Management

Topics: Working capital, Inventory, Regression analysis Pages: 13 (4975 words) Published: October 25, 2009
Impact of Working Capital Management in the Profitability of Hindalco Industries Limited J P Singh* and Shishir Pandey**

For the successful working of any business organization, fixed and current assets play a vital role. Management of working capital is essential as it has a direct impact on profitability and liquidity. An attempt has been made in this paper to study the working capital components and the impact of working capital management on profitability of Hindalco Industries Limited. The paper also makes an attempt to study the correlation between liquidity, profitability and Profit Before Tax (PBT) of Hindalco. The study is based on secondary data collected from annual reports of Hindalco for the study period 1990 to 2007. The ratio analysis, percentage method and coefficient of correlation have been used to analyze the data. Multiple regressions were used to check the significant impact on the profitability of Hindalco.

A successful commercial organization needs two types of assets, viz., fixed assets and current assets. Fixed assets include—land, building, plant, machinery, furniture, etc. These are not only purchased for the purpose of sale, but also for the purpose of earning profit for many years. Current assets include, raw materials, work-in-progress, finished goods, sundry debtors, bills receivables, cash, bank balance, etc. These are purchased for the purpose of production and sales, like raw material into semi finished products, semi finished products into finished products, finished products into debtors and debtors transferred into cash or bills receivables. The fixed assets are used in increasing production of an organization and the current assets are used in using the fixed assets for day to day working. The management of this working capital is known as working capital management. The term working capital refers to the amount of capital which is readily available to an organization. Management of working capital deals with the problems that arise in managing the current assets, the current liabilities and the interrelationship that exists between them. It should neither be inadequate nor excessive. Working capital is an important part of finance having a decisive influence on the liquidity, which is regarded as the lifeblood of a business. It plays a pivotal role in keeping * Reader, Faculty of Commerce, Banaras Hindu University, Varanasi 05, India. E-mail: * * Research Scholar, Faculty of Commerce, Banaras Hindu University, Varanasi 05, India. E-mail: 62 © 2008 The Icfai University Press. All Rights University Journal of Financial Economics, Vol. VI, No. 4, 2008 The Icfai Reserved.

the wheels of a business moving. Working capital management has always been a fascinating subject from the academic point of view and it must be admitted that in a real world situation, the efficiency with which working capital is managed in an organization, is of great significance for its overall well being.

Literature Review
An enterprise requires fixed as well as working capital. Firms can minimize their investments in fixed assets by renting or leasing plant and equipment, but they cannot avoid investment in current assets. A firm can exist and survive without making profit but cannot survive without working capital. Thus, working capital management is important because of its effect on the firm’s profitability and risk and consequently its value (Smith, 1980). The literature of finance traditionally focused on long term financial decisions. There has been a concerted effort by theoretical economists to analyze financial decisions of business firms within the context of the equilibrium models of financial markets. While these models have been employed to analyze the long term corporate investment and financial decisions, virtually no research has been conducted in an attempt to apply them to working capital decisions (Cohn and Pringle,...
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