INTRODUCTION-1

1.1 BACKGROUND OF THE STUDY

Working capital management related to the management of current assets

and current liabilities. Working capital management is considered very important in
the sustainability process of production or operation activities of the company. If the
working capital cannot be fulfilled, then the production process in danger. Certainly,
this can be overcome by borrowing capital to banks or other financial institutions.
But that would automatically increase the liquidity risks faced by the company.
Therefore working capital management is very important to prevent this from
happening in the future.
The management of working capital involves inventories, account receivable
and payable, and cash. Implementing an effective working capital management
system is an excellent way for many companies to improve their earnings. The two
main aspects of WCM are ratio analysis and management of individual components
of working capital. A few key performance ratios of a working capital management
system are the working capital ratio, inventory turnover and the collection ratio.
Ratio analysis will lead management to identify areas of focus such as inventory
management, cash management, account receivable and payable management.
Working capital management is an essential tool in the success story of any
firm in term of profitability. This management of working capital needs to be
evaluated, which is done with its effect on firm’s profitability. In this regard, the
better working capital is managed, the higher the profitability of a firm will be. Then
on basis of this information the best way of managing working capital is assessed for
both periods. Furthermore these periods are then compared and then determined,
whether companies have to alter their management concerning their working
capital management during times of a crisis. In this study, working capital
management components and working capital management policy are analyzed on
their effect towards the firm’s profitability.
Simultaneously, in determining the firm’s profitability, the finance manager
also need to take into account the firm’s working capital management , which
basically means managing the firm’s current assets and liabilities at satisfactory
level. Generally in a balance sheet, current assets consist of raw materials, work in
progress, finished goods or inventories, account receivables, cash and bank balances
which are short term in nature that are used for production and sales; which are
able to be converted to cash within the year. On the other hand, current liabilities
refers to obligations that need to be paid within the year or not beyond the business
operating cycle, whichever is earlier. Generally, current liabilities comprise of
accounts payable, accrued wages, taxes and other expenses payable and short term
debt. Hence, it is vital in managing the working capital efficiently as it is able to
increase the firm’s profitability and shareholders value.
Working capital management is an essential tool in the success story of any
firm in terms of profitability. Aminu (2003:95) defines working capital or gross
working capital as a firm’s investment in short term assets that is cash, account
receivable, short term or marketable securities and inventories.
A good or positive working capital enables a firm to access finance from
short term creditors and even long term creditors. In the long run creditors seek
firms with a positive working capital since it serves as an assurance of loan
repayment.
The goal of working capital management is to ensure that the firm is able to
continue its operation and that it has sufficient cash flows to satisfy both maturing
short term debt and upcoming operational expenses. This will obviously have
significant effect on the firm’s financial performance. According to Smith (1980)
management of these short term assets and liabilities warrant investigation since
working capital management plays an important role in firm profitability and risk as
well as its value.
Although there are different variables/components of working capital
management policies, this study however concentrates on only three working
capital management policies namely, account receivable period policy, inventory
period policy and cash conversion cycle policy.
 In other words the study tries to ascertain the impact of working capital
management policy variables like account receivable period policy, inventory period
policy and cash conversion cycle policy on organization profitability taking ASIAN
PAINTS LIMITED Company. The purpose of this paper is to study on working capital
management and to know today’s economy that helps us to sustainable
development in the future.

1.2 STATEMENT OF THE PROBLEM

Working capital management is important area of finance because without

proper management of working capital it is difficult for organization to run its
operations smoothly. So working capital management is a managerial accounting
strategy focusing on maintaining efficient levels of both components of working
capital, current assets and current liabilities in respect to each other. Generally
speaking, the immediate problem facing most financial managers always centers on
the best way to ensure suitable survival of the business as well as its expansion in
terms of working capital management.

The chief finance officers of most companies spend most of their time and
effort on day to day working capital management. Still, due to the inability of
financial managers to properly plan and control the current assets and current
liabilities of their companies, the failure of a large number of businesses can be
attributed to the inefficient working capital management. So by keeping in view the
study is conducted to find out the relationship between working capital
management and profitability of the ASIAN PAINTS, and will also try to meet the gap
between existing literatures.

1.3 RELEVANCE & SCOPE OF THE STUDY

The present study focused on the working capital position and the impact of
working capital on the profitability in ASIAN PAINTS LIMITED. This study pursued
into four parts, is concerned with the working capital management of the ASIAN
PAINTS Company. The first part deals with brief history, growth and development of
chemical industry in India. Comprehensive study regarding the present scenario of
chemical industry and various problems influencing the growth also comes under
this part. The second part of the study confined to the financial literature pertaining
to the working capital management. This part makes elaborate discussions on the
concept, composition and financing sources of working capital are discussed in this
part. The third part deals with the analysis and interpretations of working capital
management. Analysis of growth trends of gross and net working capital in relation
to sales, patterns of investment in the components of gross working capital, pattern
of financing the gross working capital and performance evaluation of working
capital and comparative performance evaluation of working capital by using ratios
and impact of working capital on profitability are broadly enumerated under this
part. The fourth part deals with the establishment of the working capital
management practices.
The study shall cover a period of 5 years from 2015 -2019. Because of the
importance of working capital management as a tool for cost reduction and
improvement in profitability, the study is been conducted in other to evaluate the
effect of working capital management on firm’s profitability.

1.4 OBJECTIVES OF THE STUDY

The main objective of the study is to examine the effect of working capital
management on the profitability of Asian Paints Limited. The objectives are;
 To obtain liquidity position of the Asian Paints Company Limited.
 To determine the relationship between liquidity and profitability in Asian Paints
Company Limited.
 To understand and analysis the relationship between management of working
capital and profits of the firm.
 To find out the effect of different components of working capital on the profits of
the firm.
 To determine which theory would best fit in explaining the relationship between
the working capital management and firm’s profitability.