Working Capital Management

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The Relationship between Working Capital Management Efficiency and ebit Azhagaiah Ramachandran Muralidharan Janakiraman
This paper is aimed at analyzing the relationship between Working Capital Management Efficiency (wcme) and Earnings before Interest & Taxes (ebit) of the Paper Industry in India during 1997–1998 to 2005– 2006. To measure the wcme three index values viz., Performance Index (pi), Utilization Index (ui), and Efficiency Index (ei) are computed, and are associated with explanatory variables, viz., Cash Conversion Cycle (ccc), Accounts Payable Days (apdays), Accounts Receivables Days (ardays), Inventory Days (invdays). Further, Fixed Financial Assets Ratio (fixdfara), Financial Debt Ratio (findbtra) and Size (Natural log of Sales) are considered as control variables in the analysis, and are associated with the ebit. The study reveals that the Paper Industry has managed the wc satisfactorily. The apdays has a significant (–)ve relationship with ebit, which indicates that by deploying payment to suppliers they improve the ebit. The Paper Industry in India performs remarkably well during the period, however, less profitable firms wait longer to pay their bills, and pursue a decrease in ccc. Key Words: Working Capital Management Efficiency, Earnings before Interest and Taxes, Current Assets, Current Liabilities, Performance Index, Utilization Index, Efficiency Index jel Classification: g30, g32

Working Capital (wc) is the flow of ready funds necessary for the working of a concern. It comprises funds invested in Current Assets (cas), 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 (cls) are those which are intended to be paid in the ordinary course of business within a short time. Every company has to make arrangements for adequate funds to meet the day-to-day expenditure apart from investment Dr Azhagaiah Ramachandran is an Assistant Professor of Commerce in the Department of Commerce, Kanchi Mamunivar Centre for Post Graduate Studies, India. Muralidharan Janakiraman is a Research Scholar in the Department of Commerce, Kanchi Mamunivar Centre for Post Graduate Studies, India. Managing Global Transitions 7 (1): 61–74


Azhagaiah Ramachandran and Muralidharan Janakiraman

in Fixed Assets (fas). The internal resources of a business organization often are insufficient for meeting all its needs. Also it is not always possible for the owners, promoters or the entrepreneurs to mobilize finance from their personal resources. Resources, therefore, have had to be financed through borrowing, keeping in view the short, medium and or long term requirements of trade or industry for funds. Statement of the Problems, Significance and Scope One of the serious problems faced by the Paper Industry in India is the incidence of sickness. There are many reasons for the sickness of the paper industry. One of the important reasons is low per capita consumption of paper in India. The industry experiences frequent dwindling demands and low ebit. The paper industry is highly capital intensive. Some of the units that are installed in the backward areas suffer from inadequate infrastructure facilities such as lack of trained manpower, transportation and sustained power supply, the failure of industry in maintaining adequate liquidity leading to imbalanced capital structure, thereby affecting ebit. Very few studies have been made in relation to Working Capital Management (wcm) especially in the paper industry in India. Therefore, the present study is a maiden attempt to analyze the relationship between wcm efficiency and ebit in the paper industry in India. The study covers only the listed paper companies on Bombay Stock Exchange (bse) in India, for which an attempt is made to provide an empirical support to the hypothesized relationship between wcm efficiency and ebit. Objectives of the Study The objective of the...
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