See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/323394127

Impact of Working Capital Management on Profitability : A Case Study of ACC

Ltd.

Article · January 2012

CITATIONS READS

22 6,807

1 author:

Ashok Panigrahi
Narsee Monjee Institute of Management Studies
64 PUBLICATIONS   240 CITATIONS   

SEE PROFILE

All content following this page was uploaded by Ashok Panigrahi on 27 February 2018.

The user has requested enhancement of the downloaded file.

 Asian J. Management 3(4): Oct.-Dec. 2012

ISSN- 0976- 495X 1 www.anvpublication.org

RESEARCH ARTICLE

Impact of Working Capital Management on Profitability –A Case Study of

ACC Ltd.
Dr. Ashok Kumar Panigrahi
Associate Professor in Finance, NMIMS University, Shirpur.
*Corresponding Author E-mail: panigrahi.ak@gmail.com

ABSTRACT:
This study empirically examines the relationship between working capital management and profitability of ACC
Cement Company, the leading cement manufacturer of the country for assessing the impact of working capital
management on profitability during the period 1999-2000 to 2009-10. The study is based on secondary data collected
from the website moneycontrol.com as well as from the website of the company. The impact of working capital
management on profitability is analyzed by computing Pearson's simple correlation coefficients, multiple correlation
analysis and multiple regression analysis between Operating Profit and the selected independent variables affecting the
working capital. The ’t’ test has been used to judge whether the computed correlation and regression coefficients are
significant or not. Few variables show a strong and positive correlation with the profit whereas some others do not
have. Hence, the result concludes that there is a moderate relationship between working capital management and
firm’s profitability. It can be said that there exists a relationship between the efficiency of working capital and the
profitability, but the relationship is not statistically significant.

KEY WORDS: Working Capital, Profitability, Efficiency, Current Assets, Current Liabilities, JEL Classification:
G30, G32.

INTRODUCTION: Every organization whether, profit oriented or not,

Working Capital Management refers to all management
decisions and actions that ordinarily influence the size and
effectiveness of the working capital. It is concerned with the
most effective choice of working capital sources and the
determination of appropriate levels of the current assets and
their use. It focuses attention to the managing of current
assets, current liabilities and the relationships that exist
between them. In the present day of rising capital cost and
scarce funds, the importance of working capital needs
special emphasis. It has been widely accepted that the
profitability of a business concern likely depends upon the
manner in which its working capital is managed. The
inefficient management of working capital not only reduces
profitability but ultimately may also lead a concern to
financial crises. On the other hand, proper management of
working capital leads to a material savings and ensures
financial returns at the optimum level even on the minimum
level of capital employed.
Received on 28.09.2012 Modified on 16.10.2012
Accepted on 25.10.2012 © A&V Publication all right reserved
Asian J. Management 3(4): Oct.-Dec., 2012 page 210-218
irrespective of size and nature of business, requires
necessary amount of working capital. Working capital is the
most crucial factor for maintaining liquidity, survival,
solvency and profitability of business (Mukhopadhyay,
2004).
Working capital management is one of the most important
areas while making the liquidity and profitability
comparisons among firms (Eljelly, 2004), involving the
decision of the amount and composition of current assets
and the financing of these assets. The greater the relative
proportion of liquid assets, the lesser the risk of running out
of cash, all other things being equal. All individual
components of working capital including cash, marketable
securities, account receivables and inventory management
play a vital role in the performance of any firm. Shin and
Soenen, (1998) argued that efficient working capital
management is very important to create value for the
shareholders while Smith et. al., (1997) emphasized that
profitability and liquidity are the salient goals of working
capital management. Therefore, many organizations that
are profitable on which are forced to cease their operations
due to an inability to meet their short-term debt obligations.

210
 Asian J. Management 3(4): Oct.-Dec. 2012

In order to sustain the business, it is essential for any corporate citizenship. ACC is the most preferred cement
organization to successfully manage its working capital. brand name in India. ACC is now part of the worldwide
Holcim Group.
Firms may have an optimal level of working capital that
maximizes their value. Large inventory and a generous ACC (ACC Limited) is India's largest manufacturer of
trade credit policy may lead to high sales. Larger inventory cement and concrete. ACC's operations are spread
reduces the risk of a stock-out. Trade credit may stimulate throughout the country with 16 modern cement factories,
sales because it allows customers to assess product quality more than 40 Ready mix concrete plants, 21 sales offices,
before paying (Long, Maltiz and Ravid, 1993, and Deloof and several zonal offices. It has a workforce of about 9,000
and Jegers, 1996). Another component of working capital is persons and a countrywide distribution network of over
accounts payable. Delaying payments to suppliers allows a 9,000 dealers.
firm to assess the quality of bought products, and can be an
inexpensive and flexible source of financing for the firm. Since inception in 1936, the company has been a trendsetter
On the other hand, late payment of invoices can be very and important benchmark for the cement industry in many
costly if the firm is offered a discount for early payment. A areas of cement and concrete technology. ACC has a unique
popular measure of Working Capital Management (WCM) track record of innovative research, product development
is the cash conversion cycle, i.e. the time lag between the and specialized consultancy services. The company's
expenditure for the purchases of raw materials and the various manufacturing units are backed by a central
collection of sales of finished goods. The longer this time lag, technology support services center - the only one of its kind
the larger the investment in working capital (Deloof 2003). in the Indian cement industry.

According to a survey made by CFO Magazine, working ACC has rich experience in mining, being the largest user
capital management is one of the key issues facing by of limestone. As the largest cement producer in India, it is
financial executives in the 21st century. The most salient one of the biggest customers of the domestic coal industry,
example of working capital management importance and its of Indian Railways, and a considerable user of the country’s
effect on the companies relates to Amazon Company which road transport network services for inward and outward
is one of the biggest active companies in electronic business movement of materials and products.
and different kinds of goods. In about the middle of 2000, it
was specified that the working capital management in this Among the first companies in India to include commitment
company has caused share holding Price decrease according to environmental protection as one of its corporate
to the accomplished survey. objectives, the company installed sophisticated pollution
control equipment as far back as 1966, long before
OBJECTIVES OF THE STUDY: pollution control laws came into existence. Today each of
A longer cash conversion cycle might increase profitability its cement plants has state-of-the art pollution control
because it leads to higher sales. However, corporate equipment and devices.
profitability might also decrease with the cash conversion
cycle, if the costs of higher investment in working capital ACC plants, mines and townships visibly demonstrate
rise faster than the benefits of holding more inventories successful endeavors in quarry rehabilitation, water
and/or granting more trade credit to customers. This management techniques and ‘greening’ activities. The
discussion of the importance of working capital company actively promotes the use of alternative fuels and
management, its different components and its effects on raw materials and offers total solutions for waste
profitability leads us to the problem statement which we management including testing, suggestions for reuse,
will be analyzing. This study is specifically designed to recycling and co-processing.
investigate the dependence of profitability on working
capital management of ACC Ltd., the leading cement ACC has taken purposeful steps in knowledge building. We
manufacturer of Indian cement industry for the period run two institutes that offer professional technical courses
2000-2010. The problem statement to be analyzed in this for engineering graduates and diploma holders which are
study is, “Does Working Capital Management Affect relevant to manufacturing sectors such as cement. The main
Profitability of Indian Cement Companies?” beneficiaries are youth from remote and backward areas of
the country.
ABOUT THE COMPANY – ACC LTD.
ACC Limited is India’s foremost cement manufacturer with ACC has made significant contributions to the nation
a countrywide network of factories and marketing offices. building process by way of quality products, services and
Established in 1936, ACC has been a pioneer and trend- sharing expertise. Its commitment to sustainable
setter in cement and concrete technology. Among the first development, its high ethical standards in business dealings
companies in India to include commitment to environment and its on-going efforts in community welfare programs
protection as a corporate objective, ACC has won accolades have won it acclaim as a responsible corporate citizen.
for environment friendly measures taken at its plants and ACC’s brand name is synonymous with cement and enjoys
mines, and has also been felicitated for its acts of good a high level of equity in the Indian market. It is the only

211
 Asian J. Management 3(4): Oct.-Dec. 2012

cement company that figures in the list of Consumer Super Eljelly (2004) identified the relation between profitability
Brands of India. and liquidity who was examined, as measured by current
ratio and cash gap (cash conversion cycle) on a sample of
REVIEW OF LITERATURE: joint stock firms in Saudi Arabia. The study found that the
A significant portion of financial research is concerned with cash conversion cycle was of more importance as a measure
the management of working capital. This issue has been of liquidity than the current ratio that affects profitability.
extensively investigated at both conceptual and empirical The size variable was found to have significant effect on
levels. Very few studies have been made in relation to profitability at the industry level. The results were stable
Working Capital Management (WCM) especially in the and had important implications for liquidity management in
cement industry in India. The study made by S.K.Ghosh various Saudi firms. First, it was clear that there was
and S.G.Maji is worth noting. They examined the efficiency negative relationship between profitability and liquidity
of working capital management of Indian cement indicators such as current ratio and cash gap in the Saudi
companies by taking a sample size of 20 large cement sample examined. Second, the study also revealed that there
companies of India for the period 1992-93 to 2001-2002. was great variation among industries with respect to the
They observed that the Indian Cement industry did not significant measure of liquidity.
perform remarkably well during this period. Industry
average for efficiency index was greater than one in 6 years The study of, (KessevenPadachi 2006) used return on total
out of 10 years study period. Though some of the sample assets as a measure of profitability and the relation between
firms had successfully improved efficiency during these working capital management and corporate profitability is
years, the existence of a very high degree of inconsistency investigated for a sample of 58 small manufacturing firms,
in this matter clearly points out the need for adopting sound using panel data analysis for the period 1998 – 2003. The
working capital management policies by these firms. regression result of their study indicates that high
Further, they concluded that, in the matter of achieving the investment in inventories and receivables is associated with
target level (industry norm) of efficiency by the firms, lower profitability. The key variables used in the analysis
Associated Cement and Dalmia were the most successful are inventories days, accounts receivables days, accounts
firm followed by Decan, Kanoria& Madras. In view of the payable days and cash conversion cycle. Their study also
observed
values, once again it may not be unwise to reveals significant relationship between working capital
conclude that firms under study should take necessary steps management and profitability has been found in previous
in order to improve efficiency in this regard. empirical work. An analysis of the liquidity, profitability
and operational efficiency of the five industries shows
In other study, (Shin & Soenen, 1998) used net-trade cycle significant changes and how best practices in the paper
(NTC) as a measure of working capital management to industry have contributed to performance. The findings also
discover the relationship between efficient working capital reveal an increasing trend in the short-term component of
management and firm’s profitability. NTC is basically working capital financing.
equal to the CCC whereby all three components are
expressed as a percentage of sales. The reason by using Raheman and Nasr (2006) discussed working capital
NTC because it can be an easy device to estimate for management and its effect on liquidity as well as on
additional financing needs with regard to working capital profitability of the firm. They have studied the effect of
expressed as a function of the projected sales growth. This different variables of working capital management
relationship is examined using correlation and regression including the Average collection period, Inventory turnover
analysis, by industry and working capital intensity. Using a in days, Average payment period, Cash conversion cycle
sample of 58,985 firm years covering the period 1975-1994, and Current ratio on the net operating profitability of
in all cases, they found, a strong negative relation between Pakistani firms. Debt ratio, size of the firm (measured in
the length of the firm's net-trade cycle and its profitability. terms of natural logarithm of sales) and financial assets to
In addition, shorter NTC are associated with higher risk- total assets ratio have been used as control variables. The
adjusted stock returns. In other word, (Shin & Soenen, results found that there is a strong negative relationship
1998) suggest that one possible way the firm to create between variables of the working capital management and
shareholder value is by reducing firm’s NTC. profitability of the firm. It means that the cash conversion
cycle increases it will lead to decreasing profitability of the
Deloof (2003) found a significant negative relation between firm, and managers can create a positive value for the
gross operating income and the number of days accounts shareholders by reducing the cash conversion cycle to a
receivable, inventories and accounts payable of Belgian possible minimum level. They found that there is a
firms. These results suggested that managers can create significant negative relationship between liquidity and
value for their shareholders by reducing the number of days profitability. They also found that there is a positive
accounts receivable and inventories to a reasonable relationship between size of the firm and its profitability.
minimum. The negative relation between accounts payable There is also a significant negative relationship between
and profitability inconsistent with the view that less debt used by the firm and profitability.
profitable firms wait longer to pay their bills.

212
 Asian J. Management 3(4): Oct.-Dec. 2012
Lazaridis and Tryfonidis (2006) investigated the
relationship of corporate profitability and working capital
management. The purpose of there’s paper is to establish a
relationship that is statistically significant between
profitability, the cash conversion cycle and its components
for listed firms in the ASE. The results of their research
showed that there is statistical significance between
profitability, measured through gross operating profit, and
the cash conversion cycle. Moreover managers can create
profits for their firms by handling correctly the cash
conversion cycle and keep each different component (accounts
receivables, accounts payables, inventory) to an optimum.
Jafar and Sur (2006) studied the efficiency of the working
capital management in the National Thermal Power
Corporation (NTPC), and showed that the company
achieved a higher level of efficiency in managing its
working capital during the post-liberalization era by
adapting itself to the new environment which had emanated
from liberalization, globalization and competitiveness. They
pointed out that, while many of the public enterprises are
learning to survive and grow by adapting themselves to the
new situation, a large group of public sector undertakings,
significant both in number and investment, have been beset
with serious problems like slow growth, low productivity,
inadequate emphasis on research and development,
inefficient working capital management, and so on.
Vishnani and Shah (2007) investigated the impact of
working capital management policies on the corporate
performance of the Indian consumer electronics industry.
They noted that inventory holding period, debtors’
collection period and net working capital cycle had negative
relationship on the profitability of firms. Whereas, the average
payment period had positive correlation with profitability.
Chakraborty (2008) evaluated the relationship between
working capital and profitability of Indian pharmaceutical
companies. He pointed out that there were two distinct
schools of thought on this issue: according to one school of
thought, working capital is not a factor of improving
profitability and there may be a negative relationship
between them, while according to the other school of
thought, investment in working capital plays a vital role to
improve corporate profitability, and unless there is a
minimum level of investment of working capital, output and
sales cannot be maintained - in fact, the inadequacy of
working capital would keep fixed asset inoperative.
In their study of relationship between efficient working
capital management and firm’s profitability, A.K. Sharma
& Satish Kumar, 2008 collected data about a sample of 263
non-financial BSE 500 firms listed at the Bombay Stock
(BSE) from 2000 to 2008 and evaluated the data using OLS
multiple regression. Their findings significantly depart from
the various international studies conducted in different
markets. The results reveal that working capital Variables:
management and profitability is positively correlated in For analyzing the data, simple mathematical tool like ratio
Indian companies. Their study further reveals that number and percentages have been used. The dependent variable
213
of days and accounts payable are negatively correlated with
a firm’s profitability, whereas number of days accounts
receivables and cash conversion period exhibit a positive
relationship with corporate profitability.
Samiloglu and Demirgünes (2008) analyzed the effect of
working capital management on firm profitability in Turkey
for period of 1998-2007.Empirical results showed that
account receivables period, inventory period and leverage
significantly and negatively affect on profitability, while,
firm growth significantly and positively. And also they
proved that cash conversion cycle, size and fixed financial
assets had no statistically significant effect on profitability.
Singh and Pandey (2008) discussed the impact of working
capital management in the profitability of Hindalco
Industries Limited. Regression results showed that current
ratio, liquid ratio, receivable turnover ratio and working capital
to total assets had statically significant impact on profitability.
Ramachandran and Janakiraman (2009) analyzed the
relationship between working capital management
efficiency and earnings before interest and tax of the paper
industry in India. The study revealed that cash conversion
cycle and inventory days had negative correlation with
earning before interest and tax, while accounts payable days
and accounts receivable days related positively with earning
before interest and tax.
Dong and Su (2010) examined the relationship between
profitability, the cash conversion cycle and its component for
listed firms in Vietnam stock market for period (2006-
2008).They resulted that there is strong negative relationship
between cash conversion cycle and the profitability.
All the above studies provide us a solid base and give us
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.
Research Methodology
The following are the methods and techniques adopted for
collection of data and for their analysis in this study.
Collection of data:
The data of ACC Ltd. for the period 1999-2000 to 2009-10
used in this study have been collected from secondary
sources i.e. Annual reports of the company as well as from
the website moneycontrol.com. Editing, classification and
tabulation of the financial data collected from the above-
mentioned sources have been done as per the requirement
of the study.
 Asian J. Management 3(4): Oct.-Dec. 2012

was the Operating Profit Margin (PBIT/Sales) as a measure H1: There is a possible positive relationship between
of Profitability. In this study eight independent variables working capital management and profitability of ACC Ltd.
were taken to measure the Working Capital. These variables (Impact of Working Capital on Profitability)
include:
Independent Variables:
• Assets Turnover Ratio(ATR) : Net Sales/Total Assets
• Gearing Ratio (GRR) : Total Debt/Total Assets
• Current Assets to Total Assets(CATA): Current
Assets/Total Assets
• Total Debtors to Current Assets(TDCA): Total
Debtors/Current Assets
• Current Liabilities to Total Assets (CLTA) : Current
Liabilities/Total Assets
• Inventory Turnover Ratio (ITR): Net Sales/Average
Inventory
• Debtors Turnover Ratio (DTR) : Net Credit
Sale/Average Debtors
• Number of Days in Working Capital (NWC) : Average
Working Capital x 365 / Net Sales
• Current Ratio(CR) : Current Assets/Current Liabilities
• Quick Ratio (QR) : Quick Assets/Current Liabilities
Dependent Variable:
Operating Profit Margin (OPM) = PBIT/Net Sales
Hypotheses
Since the objective of this study is to examine the
relationship between profitability and working capital
management of ACC Ltd. only, only one testable
hypothesis is formulated for this study purpose; {The Null
Hypotheses H0 versus the Alternative ones H1}.
H0: There is no relationship between working capital
management and profitability of ACC Ltd.
Working Capital Profitability
CR
QR
ATR
GRR
ITR
DTR
NWC
CATA
TACA
CLTA
Statistical Tools used in the Study:
This study makes use of the Statistical tools for both its
descriptive and quantitative analysis. The Mean and
Standard Deviation are used in the descriptive portion of the
analyses to determine the Mean values of each set of
variables and their Standard Deviation. In the quantitative
analysis portion, a statistical Correlation analysis is made to
determine the relationship between an efficient management
of working capital and corporate profitability for the sample
under study. The Quantitative analysis also includes
Multiple Regression analyses in order to shed more light
on, and develop a better understanding of, the relationship
of WCM and Profitability of the firm under study.
The Regression Model:
The Multiple Regression analysis was employed in the
study to explore the combined effect of the variables of
working capital management on profitability. The
Regression Equation is given below:

Table – 1: The definition of variables and their predicted relationship

Dependent variable Definition Symbols Expectation
Operating Profit Margin Operating margin gives analysts an idea of how OPM much a company
makes (before interest and taxes) on each rupee of sales.
Independent variables
Current Ratio Describe the firm ability to meet its or cover its current liabilities using its CR Negative
current assets.
Quick ratio Describe the firm ability to meet its or cover its current liabilities using its QR Negative
current assets excluding inventories.
Current assets to Total Assets Describe the ratio of current assets to total assets of the firm. CATA Negative
ratio
Number of Days in Working Describe how many days it will take for a company to convert its working NWC Negative
Capital capital into revenue.
Total Debtor to Current Assets Describe the ratio of total debtors to current assets of the firm TDCA Negative
Current Liabilities to Total Describes the ratio of current liabilities to total assets of the firm. CLTA Positive
Assets
Assets Turnover Ratio Describes a firms’ efficiency at using its assets in generating sales or ATR Positive
revenue.
Gearing Ratio Describes the extent to which the firms’ activities are funded by owner’s GRR Positive
funds versus creditor’s funds.
Debtors turn over ratio Describe the efficiency of debtors to be DTR Positive
Converted into cash.
Inventory turn over ratio Describe the efficiency of inventory to be converted into C.G.S. ITR Positive

214
 Asian J. Management 3(4): Oct.-Dec. 2012

Table – 2 DESCRIPTIVE STATISTICS

YEAR OPM Independent Variables
(Dependent
Variable) ATR GRR CATA TDCA CLTA ITR DTR NWC CR QR
Mar '00 8.16 0.93 0.56 0.22 0.44 0.22 8.24 8.98 42.4 0.49 0.98
Mar '01 14.19 0.92 0.59 0.21 0.42 0.2 8.39 10.2 33.34 0.49 0.89
Mar '02 15.89 1.11 0.6 0.21 0.4 0.34 9.48 12.11 -8 0.32 0.59
Mar '03 11.73 1.17 0.57 0.22 0.32 0.39 8.53 14.52 -20.54 0.38 0.49
Mar '04 13.25 1.23 0.5 0.22 0.3 0.4 8.93 18.02 -24.27 0.43 0.49
Mar '05 17.02 1.3 0.47 0.26 0.24 0.41 7.27 20.91 -22.11 0.54 0.43
Mar '06 29.17 1.46 0.33 0.28 0.22 0.45 9.33 27.75 -6.96 0.77 0.61
Mar '07 28.15 1.55 0.2 0.25 0.21 0.41 24.85 27.4 -18.25 0.86 0.55
Mar '08 24.66 1.35 0.07 0.24 0.26 0.44 27.51 24.12 -17.02 0.89 0.61
Mar '09 31.95 1.23 0.08 0.16 0.19 0.39 25.22 31.22 -54.17 0.67 0.42
Mar '10 21.42 1.11 0.07 0.17 0.15 0.37 19.04 40.04 -63.76 0.68 0.43
Mean 19.6 1.21 0.36 0.22 0.28 0.36 14.25 21.38 -14.48 0.59 0.59
Median 18.31 1.22 0.415 0.22 0.27 0.39 9.4 21.14 -17.63 0.56 0.57
Standard 7.9 0.19 0.22 0.03 0.09 0.08 8.11 9.76 31.36 0.19 0.18
Deviation
Correlation Coefficient "r" 0.7129 -0.8105 0.031 -0.7687 0.6111 0.7299 0.7688 -0.5455 0.7936 -0.4544
"t" value of "r" 3.05 -4.15 0.09 -3.61 2.32 3.2 3.61 -1.95 3.91 -1.53

OPM = β0 + β1 (ATR) + β2 (GRR) + β3 (TDCA) + β4 Karl Pearson's correlation coefficients between OPM
(CLTA) + β5 (ITR) + β6 (DTR) + β7 (CR) + ε (Operating Profit Margin) and the selected ratios relating to
working capital management. Table No. 1 gives the
Where: predicted relationship of the dependent variable OPM with
OPM = Operating Profit Margin all the independent variables and the subsequent tables
ATR = Assets Turnover Ratio shows the actual result.
GRR = Gearing Ratio
TDCA = Total Debtors to Current Assets RESULTS OF CORRELATION ANALYSIS:
CLTA = Current Liabilities to Total Assets The results of the above tables show that, four of the ten
ITR = Inventory Turnover Ratio independent variables under study show a negative
DTR = Debtors Turnover Ratio relationship with the dependent variable operating profit.
CR = Current Ratio, and For example, there is a high degree of negative correlation
ε = The Error Term between gearing ratio (GRR) and operating profit (OPM),
which is -0.81. It indicates that higher the gearing ratio of
Note: While selecting the independent variables for the company, lower is the profit and vice versa. Hence
regression analysis, the variables having insignificant 'r' company should avoid debt capital to the extent possible for
value or ’t’ value has been ignored e.g. CATA, NWC and increased profitability. The result is against our predicted
QR. expectation. The computed value of the correlation
coefficient between OPM and GRR don't conform to the
Analysis & Interpretation of Data accepted principle as in general higher the gearing higher
In the above tables, an attempt has been made to examine should be the profitability and vice versa.
the impact of working capital on profitability by computing

Table – 3 CORRELATION MATRIX

r OPM (Dependent ATR GRR CATA TDCA CLTA ITR DTR NWC CR QR
Variable)
OPM (Dependent 1
Variable)
ATR 0.713 1
GRR -0.811 -0.503 1
CATA 0.031 0.555 0.231 1
TDCA -0.769 -0.684 0.824 0.042 1
CLTA 0.611 0.868 -0.53 0.335 -0.764 1
ITR 0.73 0.457 -0.897 -0.27 -0.593 0.398 1
DTR 0.769 0.527 -0.888 -0.207 -0.954 0.61 0.645 1
NWC -0.546 -0.431 0.671 0.382 0.852 -0.698 -0.509 -0.821 1
CR 0.794 0.669 -0.842 0.249 -0.666 0.482 0.773 0.684 -0.281 1
QR -0.454 -0.55 0.454 0.139 0.779 -0.801 -0.317 -0.652 0.931 -0.148 1

215
 Asian J. Management 3(4): Oct.-Dec. 2012

Similarly, total debtors to current assets (TDCA) also show
a high degree negative correlation with operating profit
which is -0.77. This is as per our earlier expectation which
indicates that, higher the ratio of debtors in current assets,
lower is the profit of the company and vice versa. It implies
that, company should take initiatives to reduce the level of
debtors and to speed up the collection process.
The next variable which shows a negative relationship with
operating profit margin is number of days in working
capital i.e. NWC, which matches with our earlier
prediction. The relationship is also significant as the result
is -0.55. This indicates that lesser the number of days that
company takes to convert its working capital into revenue,
higher is the profitability and vice versa.
company are covered by the current assets. Of course a too
high liquidity level is not at all acceptable, because that
could mean that the company stocks its money instead of
investing it in some productive purposes.
But a positive correlation of operating profit with current
ratio and a negative correlation with quick ratio indicates
that the company keeps large amount of inventory which
forms part of the total current assets. Hence steps should be
taken to reduce the inventory level to the extent possible.
High inventory levels are usually unhealthy because they
represent an investment with a rate of return of zero. It also
opens the company up to trouble if the prices begin to fall.
We can also see that correlation for explanatory variables is
significant at 5%.

The quick ratio also shows a negative relationship with the Results of Regression Analysis
profit, as expected earlier indicating that higher the firms In Table-4, multiple regression techniques have been
ability to meet its current liabilities from current assets applied in order to study the joint influence of the selected
excluding inventories, lower is the firms’ profitability and ratios relating to working capital management of the
vice versa. profitability of the company and the regression coefficients
have been tested with the help of the most popular 't' test. In
One more contradiction from our expectation is the result of this study, ATR, GRR, TDCA, CLTA, ITR, DTR and CR
current ratio. The accepted principle of relationship between have been taken as the explanatory variable and OPM has
current ratio to operating profit is that, higher the firms’ been used as the dependent variable.
ability to meet its current liabilities from current assets i.e.
higher the current ratio, lower the profit and vice versa. The correlation and determination coefficients are the
Hence, there should be a negative relationship between measures of the regression model. First, correlation
current ratio and operating profit margin. But in our study coefficient (91.38%) and the determination coefficient
there is a significant positive relationship between the (83.51%) show the degree of correlation among working
operating profit and current ratio which is 0.79. This capital and profitability of the company.
indicates that current liabilities and short term debts of the
Table – 4: Regression Analysis
Regression Model: OPM = β0 + β1 (ATR) + β2 (GRR) + β3 (TDCA) + β4 (CLTA) + β5 (ITR) + β6 (DTR) + β7 (CR) + ε

SUMMARY OF OUTPUT OF REGRESSION ANALYSIS

Regression Statistics Variables Coefficients Standard t Stat P-value Lower 95% Upper 95%
Error
Multiple 0.913865159 Intercept 26.52192968 106.9433547 0.24799979 0.82014064 -313.81955 366.8634139
R
R Square 0.835149528 ATR 67.34769458 64.02381411 1.05191631 0.37008724 -136.40466 271.1000452
Adjusted 0.450498427 GRR -88.31981843 125.8115454 -0.7020009 0.53324103 -488.70831 312.0686693
R Square
Standard 5.878840323 TDCA 42.41702439 107.3618591 0.39508467 0.71919584 -299.25633 384.0903764
Error
Observati 11 CLTA -89.67828773 113.288025 -0.79159547 0.48641111 -450.21134 270.8547689
ons
ITR -0.775299854 1.511119486 -0.51306324 0.64329869 -5.5843565 4.03375677
DTR -0.07503754 1.425201411 -0.05265048 0.96132018 -4.6106645 4.460589425
CR -38.8033625 59.31412613 -0.65420103 0.55965914 -227.56738 149.960659
Note: While selecting the variables for regression analysis, the variables having insignificant 'r' value or 't' value has been ignored e.g.
CATA, NWC and QR.

ANOVA
df SS MS F Significance F
Regressi 7 525.2652 75.03788576 2.171187152 0.28146468
on
Residual 3 103.68229 34.56076354
Total 10 628.94749

216
 Asian J. Management 3(4): Oct.-Dec. 2012

Table – 5 WORKING CAPITAL LEVERAGE ANALYSIS

PARTI- Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
CULARS '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Working 11.59 21.61 -330.23 -426.1 -490.84 -436.65 -548.3 -605.43 -892.25 - -
Capital 1480.41 1439.62
Investment
(Rs.in
Crores)
Change in 10.02 -351.84 -95.87 -64.74 54.19 -111.65 -57.13 -286.82 -588.16 40.79
WC
Investment
(Rs. In
Crores)
Total Assets 2,576.94 2,808.91 2,530.14 2,481.49 2,680.97 3,005.41 3,208.17 3,914.08 4,459.1 6,583.1 6,993.3
Investment 2 4 1
(Rs.in
Crores)
Total Assets 2,576.94 2,818.93 2,178.30 2,385.62 2,616.23 3,059.60 3,096.52 3,856.95 4,172.3 5,994.9 7,034.1
+ Change in 0 8 0
Working
Capital
Investment
(Rs.in
Crores)
Working 0.004498 0.007666 -0.1516 -0.17861 -0.18761 -0.14271 -0.17707 - - - -
Capital 0.15697 0.21385 0.24694 0.20466
Leverage
(WORKING
CAPITAL/T
A+CWC)
Working Capital Leverage = Working Capital Investment/Total Assets + Change in Working Capital Investment

The standard error value is 5.88 and F-statistics value is sensitivity of Operating Profit due to changes in the level of
2.17 which is significant at 5% and shows100% fitness of working capital investment is very less.
the model.
Table -4 which represents the regression results shows a
positive relationship of Operating Profit with ATR and
TDCA indicating that these variables significantly affects
the profitability of company. Hence company should speed
up the process of collection from debtors and it should be
ensured that assets of the company are used most efficiently
to generate revenue for the company. The variables GRR,
CLTA, ITR, DTR and CR show a negative relationship
with operating profit.
In Table-5 it has been attempted to measure the sensitivity
of Operating Profit due to variability in the level of working
capital (gross) with the help of computing the working
capital leverage of the company for all years under study.
The formula used for calculating the working capital
leverage is: WCL = WC /TA + CWC where WCL =
working capital leverage, WC = working capital
investment, TA = total asset investment and CWC = change
in working capital investment. In computing the WCL it has
been assumed that the change in working capital investment
in the previous year will be maintained in the current year
also. The higher the degree of WCL, the greater is the risk
and vice versa. But at the same time, it increases the
possibility of higher ROI. Table-5 discloses that only in the
year 1999-2000 and 2000-01 the WCL of the company
shows a positive figure and that too very insignificant. For
all other years it is negative. Hence it can be concluded that
217
CONCLUSION:
Efficient management of working capital is, thus, an
important indicator of sound health of an organization
which requires reduction of unnecessary blocking of capital
in order to bring down the cost of financing. Business
success heavily depends on the financial executives’ ability
to effectively manage receivables, inventory, and payables.
Firms can reduce their financing costs and/or increase the
funds available for expansion projects by minimizing the
amount of investment tied up in current assets. This paper
examines the relationship between working capital
management and firm’s profitability of ACC Ltd. The main
objective of the study was to find whether the working
capital management affects the performance of the firms in
the special context of ACC Ltd. In certain cases the result
shows as expected whereas in few cases it is not. Few
variables show a strong and positive correlation with the
profit whereas some others do not have. Hence, the result
concludes that there is a moderate relationship between
working capital management and firm’s profitability. To
sum up, it can be said that there exists a relationship
between the efficiency of working capital and the
profitability, but the relationship is not statistically
significant.
 Asian J. Management 3(4): Oct.-Dec. 2012

REFERENCES: The IUP Journal of Financial Economics, 2008, vol. VI, issue 4,
pages 62-72
1. Bhayani S.J. (2004), “Working Capital and Profitability 22. Shin, H.H & Soenen, L. (1998). “Efficiency of working capital
Relationship – A Case study of GujratAmbuja Cements Ltd.” and corporate profitability”, Financial Practice and Education,
SCM Journal of Indian Management, April-June 2004, pp. 98- Vol. 8 No 2, pp. 37-45.
111. 23. Sur, D &Jafar, A. (2006): “Efficiency of Working Capital
2. Bhunia, A, (2007), “Working Capital and Liquidity Management Management in Indian Public Enterprises during the Post
of Iron and Steel Enterprises in India: A Comparative Study Liberalization Era: A Case Study of NTPC”,The ICFAI Journal
between SAIL and TISCO”, Unpublished UGC-Minor Research of Management Research, Vol. V/ 6 , pp. 70-80
Project, Eastern Region, Kolkata, p. 3. 24. Vishnani, S. and K.S. Bhupesh, (2007). “Impact of Working
3. Chakraborty, K., 2008. “Working Capital and Profitability: An Capital Management Policies on Corporate Performance- An
Empirical Analysis of Their elationship with Reference to Empirical Study”, Global Business Review. 8. 267
Selected Companies in the Indian Pharmaceutical Industry”, The
Icfai Journal of Management Research
4. Deloof, M. (2003).“Does Working Capital Management Affect
Profitability of Belgian Firms”Journal of Business Finance &
Accounting, 30(3&4), 573-587.
5. Dong. Huynh, and Su. Jyh-tay,(2010)," The Relationship between
Working Capital Management and Profitability: A Vietnam
Case", International Research Journal of Finance and Economics,
Issue 49 (2010),pp:59-67.
6. Eljelly, A. (2004). “Liquidity-Profitability Tradeoff: An empirical
Investigation in An Emerging Market”, International Journal of
Commerce & Management, Vol. 14(2), pp 48-61.
7. Filbeck, G. and T. Krueger and D. Preece, 2007.CFO
Magazine’s.“Working Capital Survey”, Do Selected Firms
Work for Shareholders? Copyright, University of Nebraska-
Lincoln.
8. Ganesan, V. (2007). “An analysis of working capital management
Efficiency in telecommunication equipment Industry”, Riviera
academic journal, volume 3, number 2, fall 2007.
9. Gill. Amarjit, Biger. Nahum and Mathur. Neil(2010)," The
Relationship Between Working Capital Management And
Profitability: Evidence From The United States", Business and
Economics Journal, Volume 2010, pp:1-9.
10. Gopalakrishnan P (2002), Inventory and Working Capital
Mangement, New Delhi, Macmillan Publishers, pp. 165-183.
11. KessevenPadachi(October 2006) “Trends in Working Capital
Management and its Impact on Firms’ Performance: An Analysis
of Mauritian Small Manufacturing Firms”,International Review
of Business Research PapersVol. 2 No. 2, pp. 45-58.
12. Khan M.Y. & Jain P. K. (2000), Management Accounting, New
Delhi, Tata McGraw Hill Publishing Company Limited, pp. 4.23-
4.29.
13. Kothari C. R. (2004), Research Methodology, New Delhi, New
Age International (P) Limited Publishers, pp. 76-89.
14. Maynard E. Rafuse (1996). “Working capital management: an
urgent need to refocus”. Journal: Management Decision,
Volume: 34, pp: 59-63.
15. Nazir, M, Sajid and Afza, Talat(2009), “Impact of Aggressive
Working Capital Management Policy on Firms’ Profitability",
The IUP Journal of Applied Finance, Vol. 15, No. 8, pp.19-30.
16. Pandey I. M. (2007), Financial Management, New Delhi, Vikas
Publication, pp. 243-259.
17. Rajesh M. &Ramana Reddy N.R.V. (2011) “Impact of Working
Capital Management on Firm’s Profitability”, Global Journal of
Finance and Management, Volume 3, pp. 151-158.
18. Raheman, Abdul & Mohamed Nasr. (2007). “Working capital
management and profitability- case of Pakistani firms”,
International Review of Business Research Paper, Vol 3, No1,
pp.279-300.
19. Ramchandran, A. and Janakiraman, M. “The Relationship
between Working Capital Management Efficiency and EBIT”
Managing Global Transitions, 2009, vol. 7, issue 1, pages 61-74
20. Samiloglu, F. and K. Demirgunes, (2008), “The Effects of
Working Capital Management on Firm Profitability: Evidence
from Turkey” The International Journal of Applied Economics
and Finance. 2(1), 44-50.
21. Singh J.P. and Pandey S, (2008), “Impact of Working Capital
Management in the Profitability of Hindalco Industries Limited”

218

View publication stats