REVIEW OF LITERATURE - 3

Working capital measures the financial strength of the company and it is playing an
important role in maximizing shareholders wealth. Every day finance managers spend
significant amount of time to strike a balance between the working components, this is to
meet the company’s short term obligation. The purpose of this research is to investigate the
relationship between the working capital components inventories, trade receivable and
trade payable and firm’s profitability. In addition, we will evaluate whether the financial
debt, size of the firm and sales growth affects the profitability of the firms.

3.1 Brief Theoretical Construct related to the Problem

3.1.1 Theoretical Framework

 Topic of study is the impact of working capital management on profitability in
manufacturing sector.
 Return on assets, asset test ratio, current ratio, inventory turnover ratio, operating
cash flow to debt ratio are the variables used in this study.
 Working capital means current assets of the firm. We have to maintain the current
assets to meet the short term obligations as well as to run the operating activities.
But this is observed that maintaining the high level of working capital may harmful
for the profitability of the company because high level of current assets means high
level of investment freeze. On the basis of this logic research is attempt to explore
the effect of working capital on profitability of Asian Paints.

3.1.2 Models of working capital management and impact on profitability

Guthmann and Dougall (1948) defined working capital as current assets minus
current liabilities. This is the capital that is used for day-to-day operation of a business.
“Current” is a period of one year, or less than one year (Emery and Finnerty, 1997). The
conceptual model is the critical portion of the financial management components for this
study. The focus is on the operating cycle and the four main components of Working
Capital; cash, debtors (accounts receivable), inventory, and creditors (accounts payable).

Working capital management is very important component of manufacturing sector

because it directly affects the liquidity, profitability and growth of business and is
important to the financial health of businesses of all sizes as the amounts invested in
working capital are often high in proportion to the total assets employed (Atrill, 2006). It
involves the planning and controlling of current assets and liabilities in a manner that
eliminates the risk of inability to meet short-term obligations and avoid excessive
investments in these assets (Lamberson, 1995). This management of short-term assets is as
important as the management of long-term financial assets, since it directly contributes to
the maximization of a business’s profitability, liquidity and total performance.
Consequently, businesses can minimize risk and improve the overall performance by
understanding the role and drivers of working capital (Lamberson, 1995). Also, as
established by several researchers (Peel and Wilson, 1997; Padachi, 2006; Kotut, 2003)
efficient management of working capital is pivotal to the health and performance of small
firms hence their view that firms should employ the use of efficient working capital
management practices as a strategy of improving their value. The investigation on the
working capital management is focused on three constructs: cash management practices,
receivables management practices and inventory management practices.

Fig 3.1 Models of Working Capital Management and Impact on Profitability

 Efficiency of Cash Management

Cash management is the process of planning and controlling cash flows into and out
of the business, cash flows within the business, and cash balances held by a business at a
point in time (Pandey, 2004). Efficient cash management involves the determination of the
optimal cash to hold by considering the trade-off between the opportunity cost of holding
too much cash and the trading cost of holding too little (Ross et al., 2008) and as stressed
by Atrill (2006), there is need for careful planning and monitoring of cash flows over time
so as to determine the optimal cash to hold.

Cash management has been explained by several theories, some of which are;
Baumol model and Mille-Orr model. Baumol model of cash management helps in
determining a firm’s optimum cash balance under uncertainty. According to the model,
cash and inventory management are the same. William J. Baumol developed a model called
the transaction demand for cash, an inventory theoretic approach. The model trades off
between opportunity cost of carrying/holding cost and the transaction costs. The firms
attempt to minimize the sum of holding cost and the cost of converting marketable
securities to cash. The model enables companies to find out their desirable level of cash
balance under certainty.

The model relies on trade-off between the liquidity provided by holding money (the
ability to carry out transactions) and the interest foregone by holding one’s asset in terms
of non-interest bearing money. The assumptions are that, the company should be able to
change the securities that they hold into cash keeping transaction costs constant, the
company is capable of predicting its cash necessities with certainty, the company is aware
of the cash holding cost which should be constant for a given period, the company should
make its payments at regular intervals over a certain period regularly.

The limitations of this model are that it does not allow cash flow to fluctuate,
overdraft is not considered and there are uncertainties in the pattern of future cash flows.
The second model is the Miller-Orr model. This model helps companies to manage their
cash while taking into consideration the fluctuation in daily cash flow. Here, the companies
let their cash balance move within two limits; the upper limit and the lower limit. The
companies buy or sell their marketable securities only if the cash balance is equal to any
one of these. When the cash balance touches the upper limit, it purchases a certain number
of saleable securities that help them to come back to the desirable level. If the cash balance
of the company reaches the lower level, then the company trades its saleable securities and
gathers enough cash to fix the problem. It is normally assumed that the average value of the
distribution of net cash flow is zero. It is also understood that the distribution of net cash
flow has a standard deviation. The model also assumes that the distribution of cash flow is
normal. The model is applicable in finding the approximate prices at which the saleable
securities could be sold or bought, deciding the minimum possible levels of desired cash
balance, checking the rate of interest and calculating the standard deviation of regular cash
flows.

 Efficient receivables management

Provision of trade credit is normally used by businesses as a marketing strategy to

expand or maintain sales (Pandey, 2004). Efficient receivables management augmented by
a shortened creditor’s collection period, low levels of bad debts and a sound credit policy
often improves the businesses’ ability to attract new customers and accordingly increase
financial performance hence the need for a sound credit policy that will ensure that SSEs’
value is optimized (Ross et al., 2008). Costs of cash discounts, losses of bad debts and costs
of managing credit and credit collections constitute the carrying costs associated with
granting a credit which increase when the amount of receivables granted are increased.
Lost sales resulting from not granting credit constitute the opportunity cost which
decrease when the amounts of receivables are increased. Firms that are efficient in
receivables management should determine their optimal credit which minimizes the total
costs of granting credit (Ross et al., 2008).

As observed by Michalski (2007) in his study, an increase in the level of accounts

receivables in a firm increases both the net working capital and the costs of holding and
managing accounts receivables and both lead to a decrease in the value of the firm. A study
by Lazaridis and Dimitrios (2005) found out that firms whopursue increase in their
accounts receivables to an optimal level increase their profitability resulting from
increased sales and market share. A study by Juan and Martinez (2002) emphasized that
firms can create value by reducing their number of days of accounts receivable, thus
confirmed the finding of Deloof (2003) who established that the length of receivables
collection period has a negative effect on a firm’s performance. A study by Sushma and
Bhupesh (2007) also affirmed that, putting in place a sound credit policy ensures proper
debt collection procedures and is pivotal in improving efficiency in receivables
management hence the performance of firms.

 Efficiency of inventory management

The models that discuss inventory management are the Economic Order Quantity
(EOQ), also known as Wilson Formula. The model was developed by Ford W. Harris in
1913, but Wilson, a consultant who applied it extensively, is given credit for his in-depth
analysis. As Ross et al. (2008) observed the Economic Order Quantity model as one of the
approaches of determining the optimal inventory level takes into account the inventory
carrying costs, inventory shortage costs and total costs helps in the determination of the
appropriate inventory levels to hold. Economic Order Quantity is the order quantity that
minimizes total inventory holding costs and ordering costs. The model only applies when
demand for a product is constant over the year and each new order is delivered in full
when inventory reaches zero. There is a fixed cost for each order regardless of the quantity
ordered. There is also a holding cost for each unit held in storage. The model also assumes
that the lead time is fixed, the purchase price of the item is fixed, there is no discount, the
replenishment is made instantaneously, the whole batch is delivered at once and that only
one product is involved. The model is given by the formula:

Where:

Q* = optimal order quantity

D = annual demand quantity

K = fixed cost per order, setup cost (not per unit, typically cost of ordering and shipping and
handling. This is not the cost of goods)

h = annual holding cost per unit, also known as carrying cost or storage cost (capital cost,
warehouse space, refrigeration, insurance, etc. usually not related to the unit production
cost) The other model is Newsvendor model, also known as newsboy or single period
model. It is used to determine the optimal levels of inventory and is usually characterized
by fixed prices and uncertain demand for perishable product.

The objective of Inventory management is to turnover inventory as quickly as

possible without losing sales from stock-outs. It is an important aspect of working capital
management because inventories themselves do not earn any revenue. Holding either too
little or too much inventory incurs costs. Inventory is generally made up of three elements;
raw materials, work-in-progress (WIP) and finished goods (Arnold, 2008; Cinnamon,
Helweg-Larsen, & Cinnamon, 2010; Gitman, 2009). Minimizing of the raw materials is ideal
in this particular part of working capital. However, this must be offset by the economic
order quantities available from suppliers. The costs of carrying too much inventory are
opportunity cost of foregone interest, warehousing costs, damage and pilferage,
obsolescence and insurance. The costs of carrying too little inventory are stock out (i.e. lost
sales, delayed service), and ordering costs (i.e. freight, order administration and loss of
quantity discounts).

On the other hand, work in progress concern when the product has left the raw
material storage area, until it is declared for sale and delivery to customers. In this process
the working capital must be considered in terms of reducing the buffer stocks, eliminating
the production process, reducing the overall production cycle time. The raw materials and
finished goods must be minimized in the production area. WIP must be carefully examined
to justify how long it takes for products to be cleared for sale. This stage is normally done
by the quality control (QC) procedures (Birt et al., 2011; Cinnamon et al., 2010). Finished
goods refer to the stock sitting in the warehouse waiting for sale and delivery to customers.
The owner/manager of the business should find what options are available to dispose of
the slow moving items. For example, should the stock be repacked or reprocessed, and sold
at lower discount prices? JIT system can be used to minimize or eliminate both raw
material stock and work in progress, as the stock is now in finished goods (Brealey, Myers,
& Allen, 2006; Cinnamon et al., 2010; Van Horne & Wachowicz, 2008). When using the JIT
system, goods can be delivered directly to the production area, eliminating raw material
storage areas. The purpose of using just-in-time approach is to have the supplier carrying
the goods rather than being carried by the purchaser (Cinnamon et al., 2010; Zietlow et al.,
2007).

3.2 An Overview of Earlier Studies

For conducting the study to find whether there is any impact of working capital
management on the profitability of the firms by considering some working capital variables
like current ratio, liquid ratio, working capital turnover ratio, Inventory conversion period,
Average payment Period, and Debtors turnover ratio. For this purpose various articles on
these variables have been reviewed for the purpose of understanding that will there be any
impact or not.

J P SINGH AND SHISHIR PANDEY (2008) has studied on topic impact of working
capital management on profitability of Hindalco Industries Limited. This study is based on
secondary data and data are collected from annual reports of company for 17 years period
i.e. 1990 -2007. The research methodology used in this paper is ratio analysis, percentage
method, correlation coefficients and multiple regression analysis. Regression results of the
study show that current ratio, liquid ratio, receivables turnover ratio and working capital
to total assets ratio have statistically significant impact on the profitability of Hindalco
Industries Limited.

JAKPAR S, TINGGI M, SIANG TK, JOHARI A, MYINT KT AND SADIQUE MS (2017) in

their study on Working Capital Management and Profitability: Evidence from
Manufacturing Sector in Malaysia, the main aim of this research is to examine the
relationship between the working capital management and firm’s profitability. Under this
research paper many past studies are used for identifying profitability of firm’s
performance. Regression and Pearson correlation are used to analyzing of working capital
management on profitability. The findings also show that a significant inverse relationship
between debt ratio (leverage) and firm’s profitability in analysis of working capital
management on profitability. So it concluded that the outcomes also show that there is a
positive relationship between the size of firms and the firm’s profitability. This implies that,
when the firm size is large, the profitability of a firm will potentially increase.
 JEAN BOSCO NZITUNGA (2019) in their study focused on analysis of the Effect of
Working Capital Management Practices on Profitability in State-Owned Enterprises (SOEs).
Working capital management concerned with to maintain an optimum balance of each
working capital component thereby ensuring that firms operate with sufficient funds (cash
flows) and that will help to handle effectively for the smooth running of their long-term
debt and short-term obligations and upcoming operational expenses. The basic tools are
cash management; debtor management, creditor management and stock management are
used for analyzing of profitability. The findings of this study show that profitability is
positively influenced by cash management, debtor management, creditor management, and
stock management. So, it concluded that working capital management is essential for
earning of profit in SOE (State-Owned Enterprises).

RIMSHA KHALID, TEHREEM SAIF , ABDUL REHMAN GONDAL AND HAMZA

SARFRAZ (2018) in their study focused on analysis of the Effect of Working Capital
Management and profitability of Electrical machinery and apparatus sector of KSE listed
companies of Pakistan. In this study say that working capital management is an essential
part of every business activity. The purpose of this study is to find out the basic impact of
working capital management on profitability and to find out the significant relationship
between Inventory turnover ratio and profitability of the firm. The methods are used in
this study like current ratio, debt to equity ratio, operating profit to debt ratio, and
inventory turnover ratios of the firms. The findings involve Results showed significant
positive results on the basis of analyzing of working capital management. It is concluded
that working capital management has positive significant impact on profitability of the
firms.

AHMED SU, MAHTAB N, ISLAM N AND ABDULLAH M (2017) in their study focused
on analysis of the Impact of Working Capital Management and profitability of Textile
Companies of Bangladesh. In their study of Working capital management can improve a
company's earnings and profitability through efficient use of its resources. Management of
working capital includes inventory management as well as management of accounts
receivables and accounts payables.  Generating of profit in any business sector there is
need to management of short term asset and liabilities. The researchers find the world
have done a lot of work on the basis how to effectively utilize working capital at optimum
level. Similarly, in Bangladesh, textile sector has concentrated to ensure efficient working
capital management. The objective of this study is to examine the impact of different
components of working capital management on profitability of the Bangladeshi textile
companies. Current ratio, correlation analysis and regression analysis are used for the
analysis of working capital management on profitability. In this study there is statistically
significant relationship between working capital management and profitability of the
Bangladeshi textile companies. It is concluded that an effective management of working
capital have significant impact on profitability of the Bangladeshi garments companies. So,
this study state that, an efficient working capital management can increase profitability of
all garments in the textile industry of Bangladesh.

ASIF IQBALA AND ZHUQUAN WANGB (2018) this research is mainly conducted to
know effect of working capital management on profitability in the manufacturing firms of
Pakistan listed on Karachi Stock Exchange. The purpose of working capital management is
to profitability and liquidity. Statistical tools are applies to analyzing of working capital
management on profitability and firm performance in manufacturing industry Pakistan.
The findings of our study suggest that paying full attention to the cash conversion cycle has
enormous effect on working capital.it concluded that the firm’s managers can enhance the
profitability of their firms by reducing the collection period.

JACOB AKOMEAH, SIAW Frimpong (2019) in their study focused on analysis of the
Effect of Working Capital Management and profitability of Listed Manufacturing Companies
in Ghana, this paper say that Working capital management play an important role in the
success of businesses. The purpose of this study is to determining the effect of working
capital management on the profitability of listed manufacturing firms in Ghana. The
profitability as dependent variable was measured in terms of gross operating profit. The
working capital was determined by Accounts Receivables Period, Accounts Payables
Period, Inventory Conversion Period and Cash Conversion Cycle are used as independent
variables. Moreover, current ratio used as liquidity indicator and firm size as measured by
logarithm of sales is used as control variables. The study find that cash conversion cycle
(CCC), current ratio (CR), and firm size (LOS) had a significant positive impact on the
profitability. The study concluded that manufacturing firms should adopt efficient and
effective ways of managing these components of working capital management for earning
of profitability and making of better decision making.

DR. ASHOK KUMAR PANIGRAHI, (2012) analyses the impact of working capital
management on profitability of ACC Cement Company. The study is based on secondary
data, data are collected from the websites money control as well company websites and
study periods are for 10 years i.e. 1999-2000 to 2009-2010. The research methodology
used in this paper is correlations coefficient, multiple correlation analysis and multiple
regression analysis. In this paper few variables show a strong and positive correlation with
the profit whereas some others do not have. The results show that there is moderate
relationship between the efficiency of working capital and the profitability.

MR. SHIVAKUMAR, DR. N BABITHA THIMMAIAH (Dec.2016) analyses the impact of

working capital management on profitability of coal India ltd. The paper seeks to examine
the effect of working capital management and obtain its impact on liquidity and
profitability of the firm. Liquidity and profitability is one the most important aspect of
every organization otherwise it affects the organizational stability. Working capital
management has to be done for ascertainment of liquidity and financial position of the
company. The management of working capital there is needed to apply of such methods
like correlation and spearman’s method. The correlation and spearman’s methods are used
to identification of weak correlation and negative relationship between liquidity and
profitability of the firm. The purpose of this paper is to study on working capital
management and to know liquidity position of the firm. The findings involve the liquidity
ratio helps to determining of liquidity position and It helps to determining of relationship
between liquidity and profitability.

RAMAMURTHY, R.RAMAMOORTHY, S.FABIYOLA KAVITHA (2017) the purpose of

this study is to examine the effect of working capital management on firm’s profitability of
GOOGOLSOFT TECHNOLOGIES. This paper is to study about Ratio Analysis. This paper
mainly deals with the financial statement of the organization. By using the important key
ratios of the company with the help of knowing the financial statement of the company and
researcher can determine the market position of the company and competitors in market,
in order to predict the future of the company. Under this study not only considered the key
ratios and also considering the current trend in the market to predict the future. The paper
not only considered the revenues and recent growth, and also the assets, companies past
experiences and the rating given by the suppliers. A personal talk with the finance
department and with the business accountants has been made. This discussion has helped
a lot in the analysis of ratios. Statistical tools are used like Comparative size balance sheet
analysis and Ratio analysis. The finding involve this study helps the organization to identify
the area of the problem and suggest way to improve working capital of the company.

MR.V. VENKATACHALAM (JUNE 2016) analyses the impact of working capital

management on profitability of Mahindra and Mahindra Private Limited. Working capital is
the life blood of organization. It is essential for business of your company as blood is
essential for the operation of your body. You and your company can not live without either
blood or working capital. So, without an adequate amount of working capital, affirm may
not be successful. Working capital management is the device of finance. It is used for day to
day operation of an enterprise. It is related manage of current asset and current liabilities.
Working capital refers to the amount of fund required to cover the cost of day to day
operation of the enterprise. 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. Statistical tools are used for studying of working capital management like Ratio
analysis and Statement of changes in working capital. The findings involve, it helps to
determining of relationship between liquidity and profitability.

DINA KORENT AND SILVIJE ORSAG (2018) in their study on the purpose of
evaluates working capital management on profitability in Croatian Software Companies.
Management of working capital is very important for evaluating financial performance and
future decision making. Under this study descriptive and correlation as well as panel
regression analysis, Net working capital and company’s profitability are used for analyzing
working capital in six-year period (2008-2013). The findings show that after evaluating
and analyzing of working capital management a significant impact on profitability of
Croatian Software Companies. So it concluded that an existence of an optimal level of net
working capital that balances costs and benefits and maximizes profit ability of analyzed
companies.

PROF. RITESH KUMAR VERMA, AMAN AGARWAL (October2018) in their study on

working capital management on Profitability and Market Capitalization of the Indian
Companies: A Study and Sectorial Analysis are very important for the management of firm’s
money. Therefore Working Capital Management is the key area for sectors and companies
in the economy. Objective of this research is to find the relationship of working capital with
profitability and market capitalization of the company. Sampling method is applied to
collect the secondary data collected from annual reports of the companies which are
further used for data analysis to find out the working capital, profitability and the market
capitalization of a firm. In this research, we would establish the relation of working capital
with various other factors statistically.

AHM YEASEEN CHOWDHURY, MOHAMMAD ZAHEDUL ALAM, SABIHA SULTANA,

AND MD. KAYSHER HAMID (2018) in their study on empirically examine the relationship
between working capital management and profitability of Pharmaceutical Companies of
Bangladesh for assessing the impact of working capital management on profitability during
the period2001-2015. The main purpose of this study is to empirically test the impact of
working capital management on profitability and to find out the relationship between
working capital management and profitability in Pharmaceuticals industry of Bangladesh.
Return on asset (ROA), return of equity (ROE) and earning per share (EPS) have been used
as the measures of profitability and average collection period (ACP), average payment
period (APP), inventory conversion period (ICP), cash conversion cycle (CCC), and
investment in marketable securities (INV) served as the representatives of working capital
management. The findings involve in regression analysis, at 5% significant negative
relationships are observed between return on asset and average collection period,
inventory conversion period, and cash conversion cycle; return of equity and average
payment period; earning per share and average collection period and average payment
period where significant positive relationships are seen between average payment period
and return on asset; and cash conversion cycle and return of equity. Therefore, this
research concludes that efficient working capital management is critical for the profitability
of firms and firms decision making.

DR. SASMITA MISHRA (February-2018) in their study on empirically examines the

relationship between working capital management and profitability of a case of JK Lakshmi
Cement Limited for assessing the impact of working capital management on profitability
during the period of 12 years (from 2004-05 to 2015-16). For the analysis of the data,
ratios relating to working capital management have been computed on the basis of the data
available of JK Lakshmi Cement Limited like Current Ratio(CR),Quick Ratio(QR),Current
Asset to Sales Ratio(CASR),Current Assets to Total Assets Ratio(CATAR),Working Capital
Turnover Ratio(WCTR),Debtors Turnover Ratio(DTR),Inventory Turnover Ratio(ITR),and
Creditors Turnover Ratio(CTR) are the ratios which are used for highlighting the efficiency
of working capital management and the Return On Net Worth (RONW)has been selected as
the measure of profitability.

Dr. DC GUPTA (2018) in their study focused on analysis of the Effect of Working
Capital Management on Corporate Income Empirical Evidence from India. The main
objective of this article is to examine the impact of working capital of Indian companies on
profitability. In this study there are five tools are used for the analysis of working capital
management. They are Regression, Asset Income, Accounts Payable, Current Ratio, and
Leverage as it helps to identification of working performance of firm and future decision
making. Under this study the results show that working capital management and
profitability are positively correlated with Indian companies. So it concluded that working
capital management has significant impact on profitability on the basis of analysis working
capital management.

PROF. KUSHAGRA GOEL, SURYA JAIN,(2017) in their study on Impact of Working

Capital Management on Profitability. This study attempts to identify the effect of working
capital on profitability in the Indian Textile Industry. The purpose of this study is to suggest
some measures for improvement in of working capital management in day to day activities
of business. Variables used in this study include Return on Assets and Return on Equity for
profitability and Debtor's Collection Period (DCP), Inventory Holding Period (IHP),
Creditor's Payment Period (CPP), Cash Conversion Cycle (CCC) and Current Ratio (CR) for
working capital management. The research methodology used in this study is descriptive
statistics, correlation analysis and regression models. Under this study it show that there is
a significant correlation between the profitability and working capital variables, for
instance, there exists a negative correlation between Return on Assets and Debtor's
Collection Period (DCP), Inventory Holding Period (IHP), Creditor's Payment Period (CPP)
and Cash Conversion Cycle (CCC). So it can conclude that Working capital is an important
part of the capital of firm which helps to carry out day to day activities.

SUMATHI A AND NARASIMHAIAH T(2016) in their study on the effect of working

capital management and profitability of Infosys. The efficient management of working
capital is crucial to the profitability of firms, so the current and fixed assets are provide an
important role in the success of any company. The main objective is to maintaining the
liquidity of the firm. The various components for measuring the working capital
management include the receivable days, Inventory turnover ratio, Payable days, Cash
conversion cycle, Current ratio and Quick ratio on the Net operating profitability position of
the Indian companies. In this research find that increase in working capital helps in
improving its Liquidity and decrease in working capital that inversely affect the liquidity of
the company. Thus, a company needs to have a correct balance between the liquidity
position and the profits of the company.

Dr. E. LOKANADHA REDDY (2017) in their study focused on analysis of the impact
of working capital management on performance of Excel Tube Corporation. The objective
of this study is to find out whether a significant impact on profitability and performance of
an organization. The data has been collected from secondary sources like annual reports
published the organization, and trade journals from international repute organizations.
Ratio analysis techniques have been adopted to analyze the data to determine the financial
performance of Excel Tube Corporation. So it can conclude that Working capital is an
important part of the capital of firm which helps to carry out day to day activities.

ALBERT AMPONSAH ADDAE, MICHAEL NYARKO-BAASI (2013) in their study on

Working Capital Management and Profitability: An empirical Investigation in an Emerging
Market. The fixed and current assets play a crucial role in the success of any company.
Those current assets are essential for smooth business operations and proper utilization of
fixed assets. Working capital is an effective tool for the measurement of both company
effectiveness and its short-term financial position. The main aim is to examine the effect of
working capital management (WCM) on firms’ performance for non-listed Ghanaian firms.
The paper includes conceptual as well as empirical analysis in which data from a sample of
non-listed firms from 2004-2009 are analyzed to examine if efficient WCM improves firms’
profitability. Managing the working capital is mandatory because, it has a huge significance
on profitability and liquidity of the business concern. The increase in working capital helps
in improving its liquidity. The various components are used for measuring the working
capital management includes the receivable days, Inventory turnover ratio, Payable days,
Cash conversion cycle, Current ratio and Quick ratio on the Net operating profitability
position of the companies. The various factors like fixed assets on total assets, the Debt
ratio and the size of the firm have also been used for measuring of the working capital
management. In this research we can find that the effects of different components of
working capital on the profits of the firm are essential for the growth of the company and
making of better decision. Thus, a company needs to have a correct balance between the
liquidity position and the profits of the company.

The model hypothesizes that efficiency in working capital management practices as

measured by efficiency in cash management, efficiency in receivables management and
efficiency in inventory management has an influence on the growth rate of businesses’
sales, market share, profits and total assets.

3.3 Uniqueness of Research Study

All the above studies provide us a solid idea regarding working capital management
and its components. They also give us the results and conclusions of those researches
already conducted on the same area for different countries and environment from different
aspects. On basis of these researches done in different countries, we have developed our
own methodology for research.
 The Uniqueness of this study is to investigate the relationship between working
capital management and firm profitability in manufacture sector. Efficient management of
working capital means management of various components of working capital in such a
way that an adequate amount of working capital is maintained for smooth running of a firm
and for fulfillment of twin objectives of liquidity and profitability. Also it is the most crucial
factor for survival and solvency of a concern. The present paper attempts to measure the
efficiency of working capital of firms in manufacture Sector in India. The study reveals that
most of the firms of this sector have efficiently managed their current assets for the
purpose of generation of sales. Further more efficient management of working capital has a
positive effect on Income to Average total assets.