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Topics: Working capital, Inventory, Balance sheet Pages: 15 (5014 words) Published: May 2, 2013

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Negative Working Capital and Indian Corporates - A Conceptual Analysis

Working capital is important for smooth operation of day to day activities of a corporate. As working capital is defined as current assets over current liabilities, at the time of determination of working capital, quality of current assets especially size of debtors and inventory are important factors. Significance of working capital also increases, as it is directly associated to the liquidity position of the corporate. However, in some cases, current assets are lower as compared to current liabilities (known as negative working capital) then how can a firm manage the level of liquidity. Negative working capital arises in cash base business, efficient utilisation of resources and sound inventory management etc, which leads to minimum stock of inventory etc., and the overall impact is lower level of current assets. On the other hand, due to better contract and negotiations to the creditors and suppliers, they are extending more liberal credit, which enhances the level of current liabilities. Study of negative working capital is important to understand the efficiency of the corporate, which enhances the earning capacity. Concurrently, liquidity is also significant from short term solvency point of view, which does not exist in case of negative working capital. Keeping these views in mind, this research article explains the conceptual background of the negative working capital and how it affects profitability of the corporates. Leading FMCG companies are taken as a case, to analyse the negative working capital and its impact on the profitability and earning capacity of the firms. Finally, it is found that companies in which negative working capital exist, profitability is more and shareholders are getting more dividend and capital appreciation, which maximises the shareholders value in the long run.

Dr. Pradeep Kumar Singh
(The author is an Asstt. Professor, Department of Commerce, Mahatma Gandhi Government Arts College, Mahe, Pondicherry)

Introduction The term working capital refers to current assets which may be defined as (i) those which are convertible in to cash or equivalents within a period of one year, and (ii) those which are required to meet day to day operations. "Working capital, also called net current assets, is the excess of current assets over current liabilities. All organisations have to carry working

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capital in one form or the other. Working capital also gives investors an idea of the company's underlying operational efficiency. The efficient management of working capital is important from the point of view of both liquidity and profitability. Poor management of working capital means that funds are unnecessarily tied up in idle assets, thereby reducing liquidity and also reducing the ability to invest in productive assets such as plant and machinery, affecting the profitability"1. The working capital management refers to management of the working capital, or to be more precise the management of current assets. Working Capital and Liquidity When we are focusing on working capital, its main aim is to analyse liquidity position of the company. Liquidity plays a significant role in the successful functioning of a business unit. Liquidity refers to the ability of a concern to meet its current obligation as and when these become due. The short-term obligation is met by realising amounts from current, floating or circulating assets. The current assets should either be liquid or near liquidity. These should be convertible in to cash for paying obligations for short-term nature. Comparing them with short-term liabilities would assess the sufficient or insufficient current assets. If current assets can pay-off current liabilities, then the liquidity position will be satisfactory. On the other hand, if...

References: companies in India, regularly using negative • A.Vijay Kumar & A.Venkatachalam(1996): “Responsiveness of Working capital Management–A case study of Tamilnadu Sugar working capital for their day to day operations. Corporation “-Finance India Vol. X No 3, page 647-655. • An important observation is, rather than negative impact of poor working capital (negative working • B. Banerjee(1982): "Cash management: A Practical approach " the world press Pvt. Ltd. p.57. capital) FMCG companies are having greater advantages because of brand image and lower • Debasis Sur (1997): “Working capital management in Colgate Palmolive (India) Ltd. -A case study", The Management operating cost for their product (because of strong Accountant, November. influence of brands). • In FMCG companies early cash realisation and • Khan and Jain(2004): "Financial Management", Tata Mcgraw Hill publishing company, New Delhi 4th edition . minimum chances for bad debts (due to lower level of debtors) are the key areas responsible for higher • Nitin Balwani(2000): "Accounting and Finance for Managers", Amexcel publisher 's private ltd. edition ,pp 772. profitability. • Brand image of the products (intangible assets) • R.P.Rustagi (2000): "Financial Management, theory, concept and problems", second edition pp860 Galgotia Publishing Company, enhances marketing efficiency and profitability New Delhi (2000). (higher demand for the product). • Another important area of advantages is; in FMCG • Subir Kumar Banerjee(2000): "Financial management". S.Chand and company, New Delhi . companies contribution of intangible assets are more than 90% of the market capitalisation, that will • Walker E.W(1974): "Essentials of Financial Management", New Delhi, Prentice Hall of India Pvt. Ltd. provide them unique opportunity to enhance market • V.K.Bhalla(1997): "Financial management and policy", Anmol share of the product. publications Ist edition,New Delhi . • Intangible assets such as brand, internal operation methodologies, strong supply chain networkand • Pradeep Kumar Singh (2005): “Liquidity Management & Working Capital In Indian Farmers Fertilizer Cooperative Limited” in strong customer base etc. are the key areas responsible Research Bulletin Vol. XXVI No.2 JULY, published by Institute of for lower requirement of working capital. Conclusion Negative working capital indicates non-liquidity or
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Cost and Works Accountant of India, (ICWAI) Kolkata, pp78-88. Annual reports of ITC, HUL, Dabur, Britannia, Nestle, and Colgate from 2001 to 2011.
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