WORKING CAPITAL - OVERALL VIEW Working Capital management is the management of assets that are current in nature.

Current assets, by accounting definition are the assets normally converted in to cash in a period of one year. Hence, working capital management can be considered as the management of cash, market securities receivable, inventories, and current liabilities. In fact, the management of current assets is similar to that of fixed assets, the sense that is both in cases the firm analyses their effect on its profitability and risk factors, and hence they differ on three major aspects: 1. In managing fixed assets, time is an important factor discounting and compounding aspects of time play an important role in capital budgeting and a minor part in the management of current assets. 2. The large holdings of current assets, especially cash, may strengthen the firm’s liquidity position, but is bound to reduce profitability of the firm as ideal car yield nothing. 3. The level of fixed assets as well as current assets depends upon the expected sales, but it is only current assets that add fluctuation in the short run to a business. To understand working capital better we should have basic knowledge about the various aspects of working capital. To start with, there are two concepts of working capital:  Gross Working Capital  Net working Capital Gross Working Capital: Gross working capital, which is also simply known as working capital, refers to the firm’s investment in current assets: Another aspect of gross working capital points out the need of arranging funds to finance the current assets. The gross working capital concept focuses attention on two aspects of current assets management, firstly optimum investment in current assets and secondly in financing the current assets. These two aspects will help in remaining away from the two danger points of excessive or inadequate investment in current assets. Whenever a need of working capital funds

arises due to increase in level of business activity or for any other reason the arrangement should be made quickly. Net working capital can be positive as well as negative. . For purposes of the working capital management. the goal of working capital management is to manage the current assets and liabilities in such a way that an acceptable level of net working capital is maintained. and similarly if some surpluses are available. The net working capital helps in comparing the liquidity of the same firm over time. Net Working Capital: The term net working capital refers to the difference between the current assets and current liabilities. therefore Working Capital can be said to measure the liquidity of the firm. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. they should not be allowed to lie ideal but should be put to some effective use. In other words.

Title Effect of Working Capital Management on Profitability: An Empirical Study Objectives  To assess the joint effect of the different ratios upon the profitability with the help of multiple correlation coefficient and multiple regression equation. .  To ascertain the working capital leverage. Insurance and Telecommunications sector. Information Technology.  To examine the impact of working capital on profitability of Banking.

On basis of these results. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable. 2008 discussed that most firms had a large amount of cash invested in working capital. First.com/Term-Paper-on-Alternate-Working-CapitalPolicy/4656/ Many researchers have studied working capital from different views and in different environments. Literature Review http://www. he suggested that managers could create value for their shareholders by reducing the number of days’ accounts receivable and inventories to a reasonable minimum. The relation between profitability and liquidity was examined. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. 2009 elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. the study also revealed that there was great variation among industries with respect to the significant measure of liquidity. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills.cyberessays. . The size variable was found to have significant effect on profitability at the industry level. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. it was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined. The following ones were very interesting and useful for our research: Eljelly. inventories and accounts payable of Belgian firms. The results were stable and had important implications for liquidity management in various Saudi companies. Second. Deloof.

This article evaluated the association between traditional and alternative working capital measures and return on investment (ROI).Ghosh and Maji. In addition. Utilization. Findings of the study indicated that the Indian Cement Industry as a whole did not perform remarkably well during this period. Setting industry norms as target-efficiency levels of the individual firms. The way working capital was managed had a significant impact on both profitability and liquidity. For measuring the efficiency of working capital management. The relationship between the length of Net Trading Cycle. 2008 in this paper attempted to examine the efficiency of working capital management of the Indian cement companies during 1992 – 1993 to 2001 – 2002. performance. The results of their stepwise egression corroborated that total current liabilities divided by funds flow accounted for most of the . specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE). Results indicated that there were no significant differences amongst the years with respect to the independent variables. shorter net trade cycles were associated with higher risk adjusted stock returns. this paper also tested the speed of achieving that target level of efficiency by an individual firm during the period of study. Smith and Begemann 2005 emphasized that those who promoted working capital theory shared that profitability and liquidity comprised the salient goals of working capital management. The problem under investigation was to establish whether the more recently developed alternative working capital concepts showed improved association with return on investment to that of traditional working capital ratios or not. and overall efficiency indices were calculated instead of using some common working capital management ratios. Shin and Soenen. 2006 highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. by industry and capital intensity. corporate profitability and risk adjusted stock return was examined using correlation and regression analysis. The problem arose because the maximization of the firm's returns could seriously threaten its liquidity. and the pursuit of liquidity had a tendency to dilute returns. They found a strong negative relationship between lengths of the firm’s net trading Cycle and its profitability.

the comprehensive liquidity index. indicated significant associations with return on investment. . displayed the greatest associations with return on investment. current liabilities divided by funds flow. Well known liquidity concepts such as the current and quick ratios registered insignificant associations whilst only one of the newer working capital concepts. The statistical test results showed that aditional working capital leverage ratio.variability in Return on Investment (ROI).

which gives a concrete answer to a problem. Telecommunications operating in India Data Collection: Secondary Data . Basically.e. Telecommunications operating in India Sampling Unit: Any single company operational under 4 sectors i. It is like to discover to Question through the application of scientific procedure. Information Technology. Information Technology. This research may be Problem Solving or Problem Oriented. Banking. Both types of research are usually known as Applied Research. Insurance.RESEARCH METHODOLOGY Each research study has its own specific purpose. the Research Methodology includes the following: Research Design: Descriptive Research Design Sampling Technique: Convenience Sampling Universe: All business and service sectors operating worldwide Population: All business and service sectors operating in India Sample Size: 4 sectors i. Banking. project study is usually based on a research. In order to achieve the objectives of the study. But the main aim of our research to find out the truth that is hidden and which has not been discovered as yet.e. Insurance.

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