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09 Chapter 1
09 Chapter 1
IlMTROdlJCTiON
CHAPTER I
INTRODUCTION
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over a period of time. In addition, working capital has acquired a great
significance and sound position for the twin objects of Profitability and
Liquidity. It consumes a great deal of time to increase profitability as well as
to maintain proper liquidity at minimum risk. Leslie R. Howard rightly
pointed out that a deeper understanding of the importance of working capital
and its satisfactory provision can lead not only to material savings in the
economical use of capital but can also assist in furthering the ultimate aim of
a business, namely, that of maximizing financial returns on the minimum
amount of capital which need to be employed.
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The mismanagement of working capital will lead to loss of profits in
the short-run but it will ultimately lead to the downfall of the enterprises in
the long-run. An excessive investment in working capital will lower the rate
of return while inadequate investment will hamper the solvency position and
growth thereby affecting the operation of business. The adequacy of working
capital together with its efficient handling virtually determines the survival or
demise of an enterprise5. Thus this study attempts to determine the operational
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It is observed that different authors have approached the study of
working capital management in different ways. The major inferences of
almost all the studies concerning the approaches of working capital
management centres around risk-return trade off. Based on these approaches,
this study also attempts to develop an approach with the help of which risk-
return analysis of working capital position can be conducted for the selected
enterprises.
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Selection of Automobile Industry
Transport sector is the backbone of countrys economic growth and
development. Transportation throughout the world has made possible an
unprecedented level of mobility across the geographical boundaries. The
mobility has given many people more options about where to live and work
than they had years ago. Similarly, mobility has broadened the access of
business to new markets and more choices by increasing the available pool of
resources. From the economic point of view, transportation is a vital factor for
steady economic growth and development. The trade facilitated by
transportation has been a growing component of national income in all the
countries. Studies show that the contribution of transportation in GDP has a
positive impact. The structure of the economy also influences the transport
system because consumer expenditure on transportation contributes to
national economy. Transport sector is equally important for both
industrialized and developing economics. Transport sector including water
transport, aviation and surface transports are major players of Gross Domestic
Product (GDP), which includes the value of all goods and services. Being the
largest transport networking in the world, particularly in road transportation,
automobile industry plays a significant role in the GDP of the country.
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industry has been selected for this study in order to determine its working
capital performance during the study period. In this study researcher focuses
on automobiles such as commercial vehicles, passenger cars and multiutility
vehicles and two and three wheelers.
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capital management of Indian automobile industry after liberalization.
Therefore, to cover the gaps in the earlier studies, the present study is
undertaken to give an insight into the working capital management of selected
sectors of Indian automobile industry. It would also enable shareholders,
investors and investment analyst to identify the determinants of corporate
performance. Further, it would provide insight to banks, financial institutions
and long - term lenders to understand the financial capability and
effectiveness of the companies. Moreover, it would open up new vistas to the
industry association and the government in understanding the characteristics
of the companies for their and intra - firm comparison. It might also help the
academic researchers in securities, industry and company by providing
different perspective of the analysis.
Research Questions
Based on earlier studies the following questions have been arisen,
necessitating the present research.
1. What is the structure of working capital in the selected enterprises? Is
there any significant change taking place over a period of time?
2. Is investment in current assets utilized effectively?
3. What is the pattern of financing working capital?
4. How can a discriminant analysis be useful in assessing the short-term
liquidity position of enterprises?
5. What is the impact of working capital ratios on profitability of
enterprises?
6. Do transactions demand for working capital and its various
components vary proportionately to changes in the volume of sales?
These are some of the important questions this study seeks to answer.
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References
1. Cohn, R.A. and Pringle, J.J. (1975), Steps Towards an Integration of
Corporate Financial Theory, in Management of Working Capital:
A Reader, Keith V. Smith (ed.), New York: West Publishing Co., p.369.