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Assessing working capital WCM efficiency

in Indian
management efficiency of Indian manufacturing
sector
manufacturing exporters
Himanshu Seth
Department of Management, Birla Institute of Technology and Science, Pilani, India
Received 12 February 2019
Saurabh Chadha and Namita Ruparel Revised 16 August 2019
Birla Institute of Technology and Science, Pilani, India 13 January 2020
Accepted 23 February 2020
Puneet Kumar Arora
Delhi Technological University, Delhi, India, and
Satyendra Kumar Sharma
Birla Institute of Technology and Science, Pilani, India

Abstract
Purpose – The purpose of this paper is to empirically investigate the relationship between working capital
management (WCM) efficiency and exogenous variables of the Indian manufacturing sector along with its sub-
industries that are involved in export activities.
Design/methodology/approach – Panel regression (fixed effects) was used on a sample of 563 Indian
manufacturing firms involved in export activities, covering a time period from 2008 to 2018.
Findings – Industry-wise results showed a significant relation of leverage, net fixed asset ratio, profitability,
asset turnover ratio, total asset growth rate and productivity with cash conversion cycle (CCC).
Research limitations/implications – Firstly, having taken a sample from a developing economy, the
results of our study may be generalizable only among developing contexts. Secondly, the time period taken in
this study (2008–2018) has witnessed several economic fluctuations such as recession and demonetization
which might differ for the firms or countries in normal conditions.
Practical implications – An improved working capital model could advance the firms’ performance by
reducing the CCC of the firm, thereby creating efficiency in WCM. In addition, the results of this study could be
helpful for many stakeholders such as working capital managers, debt holders, investors, financial consultants
and others for monitoring the firms.
Originality/value – This study contributes to the existing literature in the relation between WCM efficiency
and exogenous variables of the Indian manufacturing firms engaged in the export activities. Moreover, this
study is one of the few research studies to investigate this relationship among Indian export firms in different
industries, thus filling the gap in similar work done in other countries.
Keywords Working capital, Efficiency, Exports, Manufacturing, India
Paper type Research paper

1. Introduction
Since globalization, the economy has had a drastic shift in the functioning of economic
components, especially industries. Small elements (short-term decisions) have been
overlooked in a bid to understand long-term decisions. Short-term decisions, however, in
working capital management (WCM), are essential and cannot be neglected (Baker et al.,
2017). The papers in this series highlight the fact that WCM plays a crucial role in the
enhancement of the firms’ growth and profitability (Gill and Biger, 2013). The literature
shows inadequate control, ineffective planning and inefficient management of working
capital that has led to corporations’ downfall (Kroes and Manikas, 2014). Existing studies
have demonstrated a significant effect of macro-economic variables on the firms, particularly
on WCM (Goel and Sharma, 2015). Different firms act differently to business and economic
Managerial Finance
© Emerald Publishing Limited
0307-4358
We would like to thank an anonymous referee and editor for their comments and suggestions. DOI 10.1108/MF-02-2019-0076
MF situations (Gill et al., 2010). Thus, it is the imperative role of firm-specific as well as
macro-economic variables for studying the WCM determinants leading to its efficiency.
Factors explaining the working capital determinants have been examined vigorously in
numerous studies. These studies include factors essential to firms’ characteristics (e.g. age,
leverage, size, etc.), industry structures (demand–supply dynamics) and financial
environment. However, the working capital efficiency relationship with liquidity and other
exogenous variables of the firm is not addressed sufficiently (Goel and Sharma, 2015).
Furthermore, the focus of researchers has been on the developed countries (Li et al., 2014).
Although such studies contribute to the literature on WCM, their results cannot be
generalized in developing countries such as India.
Being the backbone of the economy, the role of the manufacturing sector in generating
employment and revenue cannot be ignored. As per the second advance estimates of annual
national income published by the Government of India, Indian manufacturing sector is the
major contributor to India’s gross domestic product (GDP) and is growing at a compound
annual growth rate of 4.34% during the financial year 2012–2018. Industries in developing
countries face challenges and constraints (financial and non-financial), and particularly
export industries are largely affected (Bellouma, 2011). As such, they compete globally, face
succeeding financial crisis and overcome impairments in assenting to capital markets. These
industries require additional capital for its growth which would result from the funds drawn
from internal or external sources (Bellouma, 2011). Due to their limited capacity of funds
available, it is very vital for such firms to manage its liquidity cycle, i.e. working capital cycle
efficiently. Such efficient WCM may facilitate promoting the growth of the firms, their
sectors, the country and overall economy (Goel and Sharma, 2015).
Sustained profitability results from high performance, and Sink and Tuttle (1989)
defined high performance as seven criteria: efficiency, productivity, effectiveness, quality,
quality of work life, budget ability and innovation. Evidently, one of the profitability’s
determinants is productivity. Subsequently, extensive studies are available on the
measurement of productivity (Tiruvengadam and Beruvides, 2016) but there is dearth of
studies highlighting the synergies between productivity and WCM, especially among
export business of Indian manufacturing sector.
The primary purpose of the study is to document the relationship of efficiency of WCM
with firm-specific as well as macro-economic variables among Indian manufacturing. The
study comprehensively contributes to the literature of WCM by providing a new perspective
of the variables such as productivity and exports which have not been studied earlier, despite
their high importance. Understanding these relationships bridges the gap in the academic
literature and provides the basis for propositioning solutions for further improvement in
WCM. Nevertheless, due to the paucity of the literature on development of a working capital
decision-making model, the focus that has mostly been on the investigation and recognition of
scarcity of financial resources, needs a shift toward a better holistic model of WCM. Empirical
findings suggest that firm-specific factors such as leverage, net fixed asset (NFA) ratio,
profitability, asset turnover ratio (ATR), total asset growth rate (TAGR) and productivity
impact the WCM efficiency of manufacturing firms. As far as macro-economic factors are
concerned, there is no significant influence of GDP and interest rate on the WCM efficiency.
The study provides new empirical evidence on the short-term liquidity management of Indian
manufacturing exporters. The findings are particularly relevant in the present scenario when
the export growth is decelerating, and there is a marked slowdown in private credit flows to
the manufacturing sector due to the problem of burgeoning non-performing assets.

2. Prior literature and hypothesis development

Most of the existing studies which have empirically investigated efficiency of WCM and
profitability highlight that efficient WCM enhances profitability. In particular, Shin and
Soenen (1998) analyzed the relationship between profitability and net trade credit of US stock WCM efficiency
exchange listed firms for a period from 1974 to 1994. The results showed strong evidence of in Indian
the increased profitability by reduction in net trade credit. Maheshwari (2014) examined
return on capital employed, asset turnover and profit margin for analyzing WCM efficiency
manufacturing
by taking a sample of Indian steel companies over a period from 2008 to 2013. The results sector
approved the fact that for Indian steel companies, appraising the WCM efficiently would lead
to higher profitability. More recently, Humphrey (2017) investigated Nigerian companies for
measuring relationship of WCM efficiency to profitability and found evidence that reducing
the cash conversion cycle (CCC) leads to higher profitability and vice versa. But Panigrahi
(2017) examined Bombay Stock Exchange (BSE) listed Indian cement firms and found that
shorter CCC negatively affects the firms’ profitability. However, these relationships are not
found to be very strong if the analysis is done at a specific industry level (Soenen, 1993). To
come to a conclusion regarding these contradictory findings, we test the hypothesis:
H1. There is a significant relationship between CCC and profitability of the firm.
Goel and Sharma (2015) investigated leverage and WCM efficiency using a sample of Indian
manufacturing firms over a period of 10 years and stated a negative effect of leverage on the
WCM efficiency. On the similar lines, Naser et al. (2013) examined Abu Dhabi Securities
Exchange listed firms for a period from 2010–2011 and found similar negative relationship
between WCM efficiency and leverage. The results of this study implied that company with
lower net working capital looks for external sourcing for financing its activities which in turn
results into a high leverage. In contrast, Rimo and Panbunyuen (2010) indicated a positive
relationship between debt ratio (proxy for leverage) and CCC (proxy for WCM efficiency)
implying that higher debt ratio increases the CCC period and in turn reduces WCM efficiency.
These contrasting results on the leverage and WCM efficiency lead us to test the following
hypothesis:
H2. There is a significant relationship between CCC and leverage of the firm.
Sales growth is considered as a proxy for firms’ growth by studies (Naser et al., 2013; Goel and
Sharma, 2015). Both these studies found a negative relationship between sales growth and
CCC, implying that sales growth increases by the reduction in CCC which in turn signifies
WCM efficiency. Such companies need to maintain a certain cash holding and liquidity level
but these findings may vary with the change in the sector, firm or type of industry. This
motivates us to investigate upon the relationship of firms’ growth and WCM efficiency by
testing the following hypothesis:
H3. There is a significant relationship between CCC and growth of the firm.
The arguments on relationship of size of the firm and WCM efficiency in the existing
literature are speckled. Jeng-Ren et al. (2006) reported a positive relationship between size of
the firm and net liquid balance (proxy for cash conversion cycle) which implied that more net
liquid balance is produced by large-size firms than small-size firms. However, Uyar (2009)
found a negative relationship between CCC (proxy for WCM) and size of the firm by
investigating firms listed on Istanbul Stock Exchange and Swedish-listed firms. These
studies stated that large-size firms are more efficient in managing the working capital.
Various proxies have been used for measuring the size of the firm, such as total assets (Goel
and Sharma, 2015); total sales (Naser et al., 2013) and current assets (Singh, 2008). Looking at
the relevance of these proxies, in the present context we examine the relationship of size of the
firm and WCM efficiency:
H4. There is a significant relationship between CCC and size (total sales) of the firm.
H5. There is a significant relationship between CCC and size (current assets) of the firm.
MF Assets are considered as the lifeline of any firm and each type of asset is vital for the firms’
existence and growth (Seth et al., 2019). Goel and Sharma (2015) examined the relationship
of fixed asset ratio (ratio of net fixed assets to total assets) and return on assets (ratio of
profit after tax to total assets) with the WCM efficiency. The results of the study showed a
positive relationship of fixed asset ratio and return on assets with the WCM efficiency. The
findings of the study implied that firms higher on fixed assets ratio would be efficient in
managing working capital as such firms would have a portfolio of large value of fixed
assets investments, which makes the firms more careful toward managing investments in
working capital due to the large value of assets at stake. Additionally, high return on assets
indicates higher profit per unit of assets, which indicates overall efficient utilization of
assets, hence higher efficiency in management of working capital investment. Several other
authors have also highlighted the positive influence of fixed assets, total assets and income
on the WCM efficiency (Abbadi and Abbadi, 2013). These relationships are similar in terms
of their positive influence with WCM efficiency which might differ to the scale of firms,
their types or even the locations. High relevance of these determinants provide us a
direction to investigate the relationship of NFA ratio (measured as ratio of net fixed assets
to total assets), ATR (measured as ratio of total income to total assets) and total assets
growth rate (measured as ratio of change in total assets to total assets) with WCM
efficiency by testing the hypotheses:
H6. There is a significant relationship between CCC and NFA ratio of the firm.
H7. There is a significant relationship between CCC and asset turnover ratio of the firm.
H8. There is a significant relationship between CCC and total assets growth rate of
the firm.
Several studies have investigated the relationship of firms’ age with WCM efficiency and its
several components and got mixed results. Mathuva (2013) examined non-financial quoted
firms listed on Nairobi Securities Exchange over a period from 1996 to 2008 and their results
stated a non-significant relationship between age of the firm and inventory investment.
Whereas Niskanen and Niskanen (2006) stated in their findings that age is determined by the
ability of the firm to obtain external finance and influence the working capital. The existing
literature in working capital has been unclear on the influence of age of the firm on the WCM
efficiency which motivates us to test the following hypothesis:
H9. There is a significant relationship between CCC and age of the firm.
Change in macro-economic conditions such as GDP and interest rates affect the levels of
working capital components (Al Taleb et al., 2010). Qurashi and Zahoor (2017) investigated
UK Pharmaceutical firms over a period from 2009 to 2014 and found a positive relationship of
the economic activity level (proxy for GDP) with working capital. The results implied that a
company in a country with good economic activities would have a higher working capital as
there would be higher purchasing power in the hands of public leading to rise in sales which
in turn would require higher investment in working capital by the firms to meet the rising
demand and more funds. Similarly, Zariyawati et al. (2010) carried the similar investigation on
Malaysian firms and got positive influence of GDP on WCM. In addition to this, Garc
ıa-Teruel
and Mart
ınez-Solano (2010) stated that weakening macro-economic conditions provokes a
rise in account payables (a net working capital component) due to the delay by firms in
payment of their trade credits by examining small- and medium-sized companies based in
United Kingdom for a period from 1996 to 2001. Goel and Sharma (2015) found a non-
significant relationship of interest rates and GDP with WCM efficiency. Hence, to draw a
conclusion regarding influence of these factors on the macro-economic fluctuations on WCM
efficiency, we test for the following hypotheses:
 H10. There is a significant relationship between CCC and gross domestic product. WCM efficiency
H11. There is a significant relationship between CCC and interest rate. in Indian
Research has shown that firms which wish to enter foreign markets need to incur various
manufacturing
non-recoverable costs (Bernard and Jensen, 2004). These include the costs incurred in sector
understanding the needs, preferences and characteristics of foreign consumers; setting up
of distribution channels; product customization; marketing and advertising, etc. Hence,
only those firms that have enough liquidity to finance these costs, can export, making
WCM a necessary task for the survival of the firms. Habib and Huang (2018) examined
Pakistani export firms over a period from 2009 to 2015 in regard to influence of working
capital on the performance of the firms. The findings stated exporting as a vital business
component influencing the firms’ working capital. Bellouma (2011) examined Tunisian
exporters for a period from 2001 to 2008 and reported that reducing the CCC resulted in
better performance and productivity of the Tunisian exporters. It is easier for the more
productive firms that can generate enough liquidity from their domestic sales to fund the
costs associated with the foreign market entry (Chaney, 2016). Meanwhile, firms which are
in a weak liquidity position can obtain external finance for exporting, which, however,
depends on several firm-specific factors such as the firms’ size in terms of current assets,
leverage ratio, creditworthiness in the debt market, ownership structure, etc. Raheman
(2012) found a positive relationship among productivity in the Pakistani manufacturing
sector and WCM. The current study is based on the Indian manufacturing exporters
which needs to be productive to be efficient in managing working capital, hence motivates
us to test for the hypotheses:
H12. There is a significant relationship between CCC and productivity of the firm.
H13. There is a significant relationship between CCC and exports of the firm.
Although extant, the literature on WCM efficiency holds scope to investigate the
relationships of several determinants of Indian manufacturing exporters with efficiency in
WCM. Moreover, to the best of our knowledge, WCM efficiency of manufacturing exporters
has not been examined yet. Hence, the current study attempts to fills this gap by examining
the micro- and macro-economic determinants of the Indian manufacturing firms involved in
the export activities and their influence on the WCM efficiency.

3. Data and methodology

3.1 Data explanation
This paper uses the data of BSE-listed companies of the Indian manufacturing sector for
examining the relationship between WCM efficiency and exogenous variables. The focus is
on the manufacturing firms exporting in the international markets. The data are extracted
from the Prowess database which is managed by Center for Monitoring Indian Economy
(CMIE). The risk of using this database can be that those firms would not be included in our
analysis for which no information is available on the Prowess database. However, previous
studies have used this database for extracting information on Indian listed firms and viewed
the information availability and relative accuracy of this source as positive (Elango and
Pattnaik, 2007; Elango and Pattnaik, 2011; Seth et al., 2019). Also, for ensuring the reliability
and validity of the data taken from Prowess database, we performed a random cross-check on
about 20% data with other publicly available sources, like information on the company
website or its annual reports. Further, the data for macro-economic variables, namely, GDP
and interest rate have been taken from the Reserve Bank of India website. Only those
manufacturing firms involved in exporting activities and having complete dataset is taken in
MF this study for the analysis. There are 563 listed companies having 10 years of complete set of
data from 2008–2009 to 2017–2018 becoming our sample for this study. Previous studies
signify the effect of industries to be varying for working capital determination (Goel and
Sharma, 2015). So, keeping the industry effect in line for our analysis, we have alienated our
sample across nine key manufacturing industries. This sector classification is based on the
industry-wise information of the Indian manufacturing industry available on the Prowess
database. Also, several studies have analyzed similar classification for the manufacturing
sector for studying the industry effect.
The Table I below shows the bifurcation of the manufacturing sector into nine key
industries.

3.2 Variables interpretation

The current study takes CCC as an explained variable for measuring the WCM efficiency of
listed manufacturing firms indulged in exporting activities. CCC represents the time lag
between working capital payment and cash collection from selling finished products or
services (Malm and Sah, 2019). The formula for CCC is taken from Goel and Sharma (2015)
and is calculated as follows:
Cash conversion cycleðCCCÞ ¼ Receivable days þ Inventory days  payable days

where
Receivable days ¼ ðAccount receivablesÞ=ðAnnual salesÞ 3 365

Inventory days ¼ ðInventoryÞ=ðCost of salesÞ 3 365

Payable days ¼ ðAccounts payableÞ=ðPurchasesÞ 3 365

This study prominences on the relation of WCM efficiency with exogenous variables of the
firm and the set of independent variables used are leverage, NFA ratio, size of the firm
(measured as total sales), size of the firm (measured as current assets), profitability, ATR, age
of the firm, TAGR, growth of the firm, GDP, interest rate, productivity and export, which have
been used in research in earlier studies in working capital context or associate these with
firms’ performance. List of variables with their acronym used for this study is shown in

Industry Number of firms

Food and agro 72

Textiles 118
Chemical and chemical products 148
Consumer goods 33
Construction material 31
Metals and metal products 72
Machinery 54
Transport 29
Miscellaneous 6
Table I. Total 563
Showing the industry- *Source(s): CMIE Prowess
wise list of Indian Note(s): We are not including the miscellaneous industry in the industry-wise analysis as there are only six
manufacturing firms in firms (n 5 557). But the miscellaneous industry is included while performing the analysis for the whole
this study manufacturing sector (n 5 563)
Table 2. Variance Inflation Factor (VIF) is applied for checking the multicollinearity and WCM efficiency
reliability of all the explanatory variables used in this study (Habib and Huang, 2018). The in Indian
VIF test values are less than 2, hence indicates that no significant correlation exists among
the independent variables indicating they may become a part of the equation (Makori and
manufacturing
Jagongo, 2013). Moreover, Table II also illustrates the VIF values. sector

3.3 Summary statistics

Table III presents the summary statistics (mean, median, SD) for the independent variables
taken in the current study. This table specifies considerable variability in the sample that
may well be supporting better analysis.

3.4 Methodology
After the reliability check of explanatory variables, panel data methodology is applied in this
study to estimate the relationship between WCM efficiency and exogenous variables of the
firm. The panel data technique was employed for the equation due to its various advantages
such as it controls the unobservable heterogeneity, minimize measurement errors and bias of
the sample arising from the existence of individual effects (Gujarati, 2009). Also, modeling
dynamic responses with micro data and testing implicit assumptions in cross-sectional
analysis is possible through panel data methodology (Hsiao, 1985).The current study tries to
correlate unobserved individual specific effects with the regressors and rely on strict
exogeneity assumption which includes that idiosyncratic errors and regressors to be
uncorrelated for all periods, which makes panel data methodology suitable for this study.

Multicollinearity
Variables Formula Source Acronym VIF

Leverage Total debt/Total assets Goel and LEV 1.01

Sharma (2015)
Net fixed asset ratio Net fixed assets/Total assets Panda (2012) NFA 1.07
Size of the firm (a) Total sales Naser et al. SIZE 1.23
(2013)
Size of the firm (b) Current assets Singh (2008) SIZCA 1.05
Profitability Profit after tax/Net sales Habib and PFT 1.01
Huang (2018)
Asset turnover ratio Total Income/Total Assets Salehi (2012) ATR 1.13
Firms’ age Year of study – year of Vaidya (2011) AGE 1.59
incorporation
Total assets growth (Current year TA – past year Panigrahi TAGR 1.23
rate TA)/past year TA (2017)
Firms’ growth (Current year sales – past year Naser et al. GRT 1.68
sales)/past year sales (2013)
Gross domestic Final value of goods and services Goel and GDP 1.43
product produced in an economy at a Sharma (2015)
given period
Interest rate Mean interest rates of (Indian) Palit (2013) INT 1.14
central government securities
Productivity Sales/wages Raheman PRD 1.07
(2012) Table II.
Export Export earnings/total income Habib and EXP 1.04 Estimation of the
Huang (2018) variables and their
Source(s): Authors acronym
MF Mean (Rs Median (Rs Maximum (Rs Minimum (Rs SD (Rs
Variable Million) Million) Million) Million) Million)

LEV 0.418 0.346 16.339 0 0.770

NFA 0.351 0.340 0.957 0 0.169
SIZE 22431.760 2520.800 4013020 0.100 155,222.700
SIZCA 8423.839 992.400 1,046,360 0.900 46219.050
PFT 0.012 0.028 42 33.750 0.967
ATR 1.123 1.037 5.363 0.005 0.604
AGE 34.958 29 139 3 19.635
TAGR 0.153 0.072 243.763 0.797 3.167
GRT 0.697 0.083 3258.429 0.998 42.223
GDP 0.069 0.067 0.093 0.045 0.016
INT 0.079 0.079 0.085 0.072 0.005
PRD 34.942 17.937 2273.875 0.059 86.726
EXP 0.223 0.109 1.648 0 0.260
Table III. Note(s): This table presents summary statistics of the independent variables used in the current study. The
Summary statistics at sample consists of BSE-listed 563 Indian manufacturing firms covering data for a period from 2008–2009 to
firm year level 2017–2018; Rs 5 Indian National Rupees

This study analyzes the panel data under regression model, namely, random effect (RE) or
fixed effect (FE). By applying the panel FE model to estimate the equation in this study, the
effect of serial correlated error is also minimized (Habib and Huang, 2018). The Hausman test
is taken to discover the exogeneity in the unobserved errors and for choosing RE or FE model
(Goel and Sharma, 2015). The null hypothesis of the Hausman test is rejected as the value
(27.19) of cross section fixed chi. Square statistics is significant. Since the RE model comes out
to be inappropriate and FE model is preferred.
Following model is used in this study for testing the hypotheses.
CCC ¼ α þ β1 LEVit þ β2 NFAit þ β3 SIZit þ β4 SIZCAit þ β5 PFTit
þ β6 ATRit þ β7 AGEit þ β8 TAGRit þ β9 GRTit þ β10 GDPit þ β11 INTit
þ β12 PRDit þ β13 EXPit þ εit

4. Results
Table IV presents the results under the FE model used for this study and the adjusted
R-square values. High values of adjusted R-square for all the industries and manufacturing
sector implies high explanatory power of the regression model for all industries and the
manufacturing sector. The results are for industry-wise division of the Indian manufacturing
sector as well as for the whole Indian manufacturing sector. This study reveals that under the
head manufacturing sector in Table IV, CCC has significant (at 99% confidence) positive
relation with SIZCA, GRT and INT whereas CCC has significant negative relation with NFA,
SIZE, ATR, TAGR, PRD and EXP. LEV, AGE and GDP came out to be insignificant toward
CCC. However, the results of the manufacturing sector differ in terms of significance of the
variables in the industry-wise classification results as only NFA, ATR, TAGR and PRD came
out to be significant to CCC in most of the industries while leaving other remaining variables
mostly insignificant.
The regression coefficient sign for any independent variable is vital in the analysis only
when that variable is significant to the model (Goel and Sharma, 2015). Table V highlight only
the significant variables along with total number of industries under which these variables
 Chemical and
Dependent Food and chemical Consumer Construction Metals and Manufacturing
variable CCC agro Textiles products goods material metal products Machinery Transport sector

LEV 0.118 0.048*** 0.050 0.163 0.102 0.070 0.115 0.724*** 0.006
NFA 0.377 0.451*** 0.448*** 0.518*** 0.084 0.372*** 0.370*** 0.110 0.330***
SIZE 0.000 0.000 0.003 0.004 0.000 0.000 0.000 0.000 0.000***
SIZCA 0.000 0.000 0.150*** 0.000 0.000 0.000 0.000 0.000 0.000***
PFT 0.004 0.071 0.009 0.146 0.049*** 0.079*** 0.102*** 0.246 0.007
ATR 0.367*** 0.369*** 0.332*** 0.313*** 0.362*** 0.192*** 0.254*** 0.055 0.321***
AGE 0.003 0.002 0.006*** 0.005 0.001 0.005 0.006 0.000 0.000
TAGR 0.157*** 0.159*** 0.046*** 0.197*** 0.017 0.081 0.093 0.067 0.091***
GRT 0.029 0.026 0.003 0.041 0.041 0.068*** 0.010 0.027 0.006***
GDP 0.410 0.354 0.077 0.236 0.220 1.033 0.422 0.684 0.136
INT 3.364 4.107*** 1.379 1.848 2.649 2.006 3.894 0.252 1.613***
PRD 0.000 0.000 0.000*** 0.002 0.000 0.000*** 0.007*** 0.015*** 0.000***
EXP 0.174 0.021 0.043 0.007 0.170* 0.129 0.258*** 0.528 0.089***
Adj. R-Square 0.710 0.771 0.655 0.784 0.721 0.736 0.749 0.768 0.722
Note(s): *** Denotes significant at 0.01
Analysis of the relation

WCM efficiency
amid WCM efficiency

manufacturing
and independent

in Indian
Table IV.
variables

sector
MF are falling and direction of the relationship of these variables with CCC. Only those variables
that are significant in at least two out of eight industries are presented in Table V and
discussed further.
From Tables IV and V, we can therefore infer about the industry-wise results that:
The LEV coefficients have significant positive relation with CCC for the transport
industry whereas a significant negative relation with CCC for the textile industry. A positive
relation of CCC with leverage is because a highly levered firm adopts a conservative policy for
working capital and maintain higher levels of current assets and therefore, higher working
capital. This increases the inventory days outstanding and a longer CCC, thus requiring an
efficient management of working capital. However, as these firms have enough funds
availability and are in a better position to obtain credit from its suppliers as suppliers feel safe
in providing extra materials, which makes the CCC shorter and hence makes a significant
negative relation with leverage. Hence, there is a significant relationship between CCC and
leverage (LEV) of the firm as described in hypothesis H2.
The NFA coefficients have significant negative relation with CCC for food and agro,
textiles, chemical and chemical products, consumer goods, metals and metal products and
machinery industry. Firms with high NFA will have low investments in current assets, low
inventories and low liquidity. This will increase the time taken for credit payment to the
suppliers leading to a shorter CCC. A shorter CCC is an indication of better WCM efficiency.
This shows that there is a significant relationship between CCC and NFA of the firm as
described in hypothesis H6.
The coefficients of PFT have a significant negative relation with CCC for textiles,
construction material, metals and metal products and machinery industry. A profitable firm
can adopt conservative working capital policy and have huge investments in current assets.
This provides the firm with enough stock availability to meet the fluctuating demand and
order requirements of every type of customer. These firms due to their money-making
capacity provide a better credit facility to their customers and get extra facilities from its
suppliers. This helps the firms in having a shorter CCC and better management of WCM
efficiency. This describes the hypothesis H1 that there is a significant relationship between
CCC and profitability of the firm.
The coefficients of ATR have a significant negative relation with CCC for food and agro,
textiles, chemical and chemical products, consumer goods, construction material, metals and
metal products and machinery industry. Firm having high ATR has high net income in
proportion to its total assets and has enough funds available to be invested in working capital.
These firms can adopt conservative as well as aggressive working capital policies depending
on their preferences, but these firms get a larger credit period from their suppliers as these
firms require huge raw material supplies without any risk of non-payment to its suppliers.
This makes a shorter CCC for these firms and efficiency in WCM. Hence, this describes the
hypothesis H7 that is there is a significant relationship between CCC and ATR of the firm.

Total number of industries Number of industries with Number of industries with

where variable is significant positive coefficient (out of A) negative coefficient (out of A)
Variables A B C

LEV 2 1 1
Table V. NFA 5 0 5
Industry-wise PFT 3 0 3
significance and ATR 7 0 7
relation of variables TAGR 4 0 4
with CCC PRD 4 0 4
 The coefficients of TAGR have significant negative relation with CCC for food and agro, WCM efficiency
textiles, chemical and chemical products, consumer goods, metals and metal products and in Indian
machinery. The rise in TAGR might be because the current assets are also increased in
proportion to the rise in total assets. The rise in current assets could be due to the increased
manufacturing
cash sales which in turn reflect the high liquidity position of the firm in comparison to its sector
competitors. These firms get an added advantage from its suppliers in terms of long
payables period. This results in a shorter CCC for the firms and efficiency in WCM. This
describes the hypothesis H8 that there is a significant relationship between CCC and TAGR
of the firm.
The coefficients of PRD have a significant negative relation with CCC for chemical and
chemical products, consumer goods, metals and metal products, machinery and transport. A
higher productivity is a result of higher sales in comparison to the wages paid. This
enhances the liquidity levels in the firms and provides confidence among the stakeholders
regarding the firm’s growing performance. Such firms get a longer payables period from the
suppliers and as the firms have enough funds and inventory available, the productivity
keeps on rising. Thus, the firm has a shorter CCC and an efficient WCM. Hence, it describes
the hypothesis H12 that there is a significant relationship between CCC and productivity of
the firm.

5. Discussion
The current study highlights the influence of several exogenous variables on the WCM
efficiency of Indian manufacturing firms involved in the exporting activities. While several
researchers, managers and policy makers are interested in maximizing the potential of
manufacturing firms in terms of liquidity, there is very little evidence available on what
determinants at the firm level and macro-economic level add to the efficient management of
working capital for Indian manufacturing exporters. The findings of the current study
found LEV, NFA, PFT, ATR, TAGR and PRD to be significantly influencing the WCM
efficiency.
Leverage facilitated the CCC in transport manufacturing. This suggests that higher
leverage in the firm maintains greater assets, therefore improving the efficiency of CCC.
Contrarily, leverage was negatively related to CCC in Indian textile manufacturing. Such a
finding could be because high debt for a firm is unconventional for the management of
working capital. If the relationship is negative, firms save large stocks inventories as assets
and use their credit with care, therefore leading to a hindrance in efficiency of WCM. The
negative association between leverage and working capital was found to be consistent with
the results of several developing countries such as Nigeria (Akinlo, 2012), Pakistan (Tahir
and Anuar, 2016) and India (Seth et al., 2019; Goel and Sharma, 2015). Similarly, Raheman
et al. (2010) investigated the working capital performance of the manufacturing sector in
Pakistan and found a negative relation of leverage with working capital performance. As
the leverage makes a part of internal or external financing, Raheman et al. (2010) suggested
specialized personnel must be allotted for policy formulations. Moreover, the degree of
aggressiveness of such policies would create shareholders’ wealth by increasing market
performance. Garc
ıa-Teruel and Mart
ınez-Solano (2007) investigated small- and medium-
sized Spanish firms and found that highly levered firms lengthen the payment deadlines
of their clients, which results in a larger CCC and higher sales. Contrastingly, Deloof
(2003) suggested providing less time for dues to the clients or restrictive credit policy is
beneficial to the working capital performance for levered firms by examining large
Belgian firms. Further, a less levered firm having low liquidity levels and inventory could
enhance the WCM efficiency by keeping inventories for a lesser period (Lazaridis and
Tryfonidis, 2006).
MF The NFA ratio was found to have an inverse relationship with CCC in numerous sectors.
These include food and agro, textiles, chemical and chemical products, consumer goods,
metals and metal products and machinery industry. These results are supported by
Morawakage and Lakshan (2010) among Sri Lankan firms and Salawu and Alao (2014)
among Nigerian firms. Earlier researchers such as Fazzari and Petersen (1993) exhibited that
in firms with financial constraints, fixed assets investments strive for funds with WC levels.
This finding was further backed by Kieschnick et al. (2006), who also highlighted the negative
influence of fixed assets on the CCC. Contrastingly, in comparison to fixed assets, intangible
assets are more capable of generating asymmetric information. Hence, while raising funds for
working capital investment, firms with substantial fixed assets would incur lower costs and,
thus, CCC might enhance (Ba~ nos-Caballero et al., 2010). However, Wesley et al. (2013)
examined listed manufacturing firms of Nairobi Stock Exchange and found NFA to be
positively influencing WCM efficiency, which is similar to the results of the study by Nazir
and Afza (2009) who investigated firms listed on Karachi Stock Exchange.
Profitability was found to be negatively related to CCC in the textiles, construction
material, metals and metal products and machinery industry. These findings are in line
with the results of Seth et al. (2019) and Goel and Sharma (2015) wherein both the studies
investigated the Indian manufacturing sector for working capital performance and
suggested that higher funds availability in terms of profits with the firms makes them to
be in a bargaining position with the suppliers. This helps such firms to have a larger
payables period and, a shorter CCC, thereby making such firms efficient in WCM (Vural
et al., 2012). Furthermore, firms with negative earnings and low profitability cannot avail
tax shields on interest payment which in turn increase the effective cost of debt that
diminishes the need for debt and thereby firms rely on equity capital. Additionally, in the
scenario of ideal capital markets, investment and financing decisions are independent of
each other. Thus, investment policies are formulated with regard to projects with positive
net present values (Modigliani and Miller, 1958) because firms have boundless entr
ee to
several sources of finance and funds from external sources are considered above internal
source of funds as its substitute. However, in case of market imperfections, issuing new
shares, debt or external finance may be more expensive in comparison to internal finance.
This influences the financing and investment decisions, and further, CCC as the benefits
and costs need to be balanced. Also, firms with enough funds available would not go for
any external financing and could utilize the part of profits for benefiting customers in
terms of higher credit period and discounts (Vural et al., 2012). This might enhance the
length of the CCC and firms need to take care of the opportunity cost associated with it.
Similarly, negative relationship between profitability and CCC was reported in the
context of several countries such as in Nigeria (Akinlo, 2012) and Latin America
(Mongrut et al., 2014). Also, Deloof (2003) explained firms with lower profits incentivize
its customer base by providing large payment deadlines and firms wherein sales are
weakening realize their stock levels piling, hence leading to a larger CCC and a need for
better WCM efficiency.
ATR was negatively related to CCC among the food and agro, textiles, chemical and
chemical products, consumer goods, construction material, metals and metal products and
machinery industry. Similar results were found in the context of Tehran (Salehi, 2012)
and India (Seth et al., 2019; Goel and Sharma, 2015). The possible reason that explains this
relationship could be that liquidity facilitates firms to use credit. Since there is high liquidity,
suppliers are assured of having their dues cleared in time, allowing a longer period for credit
and reduced investment in working capital, thus making the firms efficient in WCM. In
addition to this, external sources are costlier than internal sources for generating funds due to
the situation of asymmetric information among inside and outside parties of the firms.
Therefore, on lines of pecking order theory (Myers, 1984), generating funds through internal
sources is given priority over debt and issuing equity. Moreover, profitable firms have WCM efficiency
enough funds available to finance its requirements and may go for conservative or in Indian
aggressive working capital policies, depending on its necessities (Chadha and Seth, 2020).
Moreover, profitable firms generate funds internally and can maintain higher levels of
manufacturing
current assets (Ba~ nos-Caballero et al., 2010). Such firms provide better credit facilities to its sector
customers and have a higher receivables period, which further results into a shorter CCC.
Similarly, Chiou et al. (2006) also found a negative influence of ATR on CCC among
Taiwanese firms and suggested that firms with capability of generating higher income in
terms of total assets available, have better efficiency in WCM.
TAGR was found to be negatively related to CCC in the food and agro, textiles, chemical
and chemical products, consumer goods, metals and metal products and machinery sectors.
These results are consistent with the findings from studies conducted in Malaysia
(Zariyawati et al., 2010) and Tehran (Salehi, 2012) which suggested that growth rate in total
assets might be a result of higher fixed investments, increased inventory, rise in debtors,
forecasting future demands and growth opportunities. However, firms with such growth in
total assets maintain low working capital investments as these firms receive a larger
payables period or trade credit from its suppliers (Cu~ nat and Maffezzoli, 2007), hence leading
to a shorter CCC and better WCM efficiency. Contrastingly, Kieschnich et al. (2006) found a
positive influence of TAGR on the CCC among US corporations. He suggested that firms with
large assets in terms of inventories can avert disruptions in the process of production that
emerge out of price fluctuations, changing trend or varying economic conditions. But he
found that such firms would provide a larger receivables period to its customers to enhance
the declining sales that would make the CCC large. Chiou et al. (2006) found TAGR to be
positively influencing the CCC in case of Taiwanese firms and suggested that firms with less
TAGR are considered smaller in size in comparison to other firms with growing total assets.
The study added that rise in total assets is proportional to the working capital requirements
and cost of funds needed for current assets investment reduces with the rise in total assets.
Further, firms with lower TAGR incur higher cost of funds for current assets investment and
would have lower inventories and accounts receivables. These firms would depend more on
trade credit from its suppliers which reduces the length of the CCC (Ba~ nos-Caballero
et al., 2010).
Productivity was found to have a negative relationship with CCC in the chemical and
chemical products, consumer goods, metals and metal products, machinery and transport.
These results are consistent with the findings of Raheman (2012) wherein Pakistani firms
were investigated for analyzing efficiency in WCM. The current study suggests that higher
sales in proportion to wages paid improve productivity of the firm. This enhances the
liquidity position of the firms and makes it in a better condition to sustain any uncertain
demands and challenges. Such positive condition of the firms acts as a goodwill and boosts
the investors’ and suppliers’ faith in them. Hence, firms with higher productivity obtain a
better bargaining situation against the suppliers for trade credit and use the facility of longer
payables period. This further reduces the CCC. Similarly, Seth et al. (2019) found negative
influence of productivity on the CCC among Indian manufacturing firms and suggested that
the presence of rigid labor laws in India has led firms to shift to labor contracting and
outsourcing. Such practices despite of benefitting the labor led to their downfall. The wages
paid to the labors by such outsourcing organizations have been very less as compared to the
industry standards and the working conditions were not suitable (Sharma, Chadha and Seth,
2020). These situations lead to the dissatisfaction of the labor and further reduce their work
contribution. Overall, the sales and productivity are reduced and dampens the liquidity levels
of the firms. Henceforth, such firms in order to increase the sales go for trade discounts and
higher receivables period. Also, higher sales require greater investment in inventories which
increases the CCC.
MF 6. Conclusion
Our study examined the relation between WCM efficiency and several firm-specific and
macro-economic variables for the Indian manufacturing sector as well as the sub-industries
falling under it. Using CCC as a proxy to measure WCM efficiency, the total manufacturing
sector results revealed that CCC develops a significant positive relation with SIZCA, GRT and
INT. The significant negative relation of CCC is found with NFA, SIZE, ATR, TAGR, PRD
and EXP.
Further, the effect of exogenous variables on the WCM efficiency is analyzed by alienating
the manufacturing sector into eight industries, i.e. food and agro, textiles, chemical and
chemical products, consumer goods, construction material, metals and metal products,
machinery and transport. Industry-wise results revealed a significant positive as well as
negative relation between CCC and LEV, whereas a significant negative relation of CCC is
found with NFA, PFT, ATR, TAGR and PRD. The justification for dividing the
manufacturing sector industry wise and analyzing it is reflected by the results of the
manufacturing sector and industry-wise results that differ from each other. This study
reveals the vital role played by several firm-specific and macro-economic variables on the
WCM efficiency of the Indian manufacturing firms involved in the exporting activities.
Collectively, these pieces of evidences present a better approach for managing the working
capital efficiently.

7. Managerial implications and recommendations

The current study draws some vital managerial implications for the manufacturing sector as
well as the industries prevailing under it that are involved in the exporting activities. The results
revealed that shortening the CCC is beneficial. However, this situation also depends on the debt
level, profitability, assets, productivity, etc. of the firm as discussed in this study. Hence, the
policy makers for short-term financial decisions must formulate strategies in line with these
vital variables for achieving efficiency in managing the working capital. Additionally, financial
managers and policy makers must design the working capital policies such as payment and
collection policies after thorough review. The findings of the current study indicate that
reducing the CCC or inventory days enhances the firms’ performance in terms of sales and
profitability. Hence, the components of CCC such as receivable days, inventory days and
payable days must be dealt individually and optimally. In general, firms must focus on
accelerating the cash collections and delaying the payments. But firms must perform it with
adequate supervision and professional advice. For that purpose, experts from respective fields
of finance must be hired for professional advice that could add to WCM efficiency.
Further, it is beneficial for the exporting firm from developing economy, such as India to
chase the CCC by adopting liberal policies of trade credit, doing more investments in
inventories and making early payments to trade payables. However, firms with good cash
generating capabilities need not hold much cash for financing the inventories and
receivables. On the other hand, firms not good at generating cash from the operations
must secure assets swiftly either by delaying supplier’s payments, dropping expenses or
raising debt for evading the adverse effects of cash shortage. For efficient management of
working capital in the manufacturing firms involved in exporting activities, a proper review
of inventory turnover, existing inventory levels, age analysis of the inventory along with a
cash budget that tracks inflows and outflows of cash must be performed. In addition to this,
before opting for any credit facilities or loans, proper comparative analysis of the available
sources and costs associated to them must be performed. Also, financial managers must
ensure that their payables, collections and billing systems are functioning efficiently. The
results of this study could be helpful for many stakeholders such as working capital
managers, debt holders, investors, financial consultants and others for monitoring the firms.
 The current study measures quantitatively the influence of productivity in WCM WCM efficiency
efficiency, but the existing literature provides some qualitative measures that could be in Indian
helpful in improving the productivity, shortening the CCC and consequently improving the
WCM efficiency (Sharma, Chadha and Seth, 2020). Dubey et al. (2019) suggested in their study
manufacturing
that managers need to encourage employee empowerment, recognition, performance-based sector
appraisals, positive work culture, informal interactions for improving the productivity of
the firms.
The current study examines and highlights the determinants that are vital to achieving
WCM efficiency and which should be dealt carefully by the manufacturing exporters.
Furthermore, considering the positive role that exports play in the growth of an economy
(Seth et al., 2019), the current study recommend that government must restructure the
professional education system to foster creativity, international mindset and competitive
spirit. Such practices would provide the manufacturing exporters with dynamic capabilities,
innovative culture, international experience and strong network relationships, thereby
creating successful manufacturing exporters. Additionally, government must conduct
training programs for manufacturing firms regarding adoption and implementation of
inventory management, receivables management, cash management and payables
management. All these practices would add to the manufacturing exporters’ development
and future growth. Also, this would assist the firms in improving its overall performance
and getting prepared for the uncertainty by taking step toward adequate working capital
levels.

8. Limitations and future work

Despite being the first study to assess the WCM efficiency of exporters in the context of India
and having significant implications, our study has scope for improvement. Firstly, having
taken a sample from a developing economy, the results of our study are generalizable only
among developing contexts. Therefore, to overcome this shortcoming, we suggest a
comparison to be carried out in a developed and developing economy. Secondly, the time
period taken in this study (2008–2018) has witnessed several economic fluctuations such as
recession and demonetization. These are situations in which the companies may have had to
switch their working capital strategies to adapt to the markets. Therefore, we suggest that
future studies address these market variations and draw emerging trends to delineate the
strategies to greater efficiency of WCM. Also, the current study is quantitative in nature and
is focused on the accounting figures available for the manufacturing firms. However, there
might be several qualitative determinants that could influence the efficiency of WCM in the
firms and needs to be investigated, which further opens the avenues for future research.

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Corresponding author
Himanshu Seth can be contacted at: p20170015@pilani.bits-pilani.ac.in; hseth91@gmail.com

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