A STUDY ON WORKING CAPITAL MANAGEMENT

R. UDAYASANKAR
Assistant Professor in MBA
Sri Sairam Institute of Technology
West Tambaram, Chennai -600044.

PARTHIBAN
Research Scholar in MBA
Sri Sairam Institute of Technology
West Tambaram, Chennai -600044.

ABSTRACT
The purpose of this paper is to know the financial position of the organization and this
is solely on the internal analysis of the organization. Optimal management of working
capital is an important financial decision and contributes positively to the value
creation of business. Every business needs investment to procure fixed assets, which
remain in use for a longer period. Money invested in these assets is called ‘Long term
Funds’ or ‘Fixed Capital’. Business also needs funds for short – term purposes to
finance current operations. Investment in short term assets like cash, inventories,
debtors etc is called ‘Short-term Funds’ or ‘Working Capital’. The ‘Working Capital’
can be categorized, as funds needed for carrying out day-to-day operations of the
business smoothly. The management of the working capital is equally important as the
management long-term financial investment. It is also concerned with maintaining
liquidity in the business to ensure smooth running of day to day operations and to
meet its financial obligations. The role of finance manager, therefore, is a very vital
and vested with responsibility of maintaining the business operations in an efficient
and profitable manner. Mismatch, if any in effective management of current assets
and current liabilities would not only result negative impact of profitability and firm’s
growth but also financial distress and bankrupt of business entity. The project aims at
analysing the profitability and liquidity position of the organization. It also analyse
the various financial statement and studies about the utilization and position of
working capital. The analysis of data is done using various financial tools such as
statement of changes in working capital, ratio analysis. The project is based on
secondary data.
KEYWORDS - Ratio Analysis, Working Capital Analysis.

INTRODUCTION

Working Capital Management is an important component of Corporate Financial

Management. It is the relationship between current assets and current liabilities.
Management of working capital is important to carry the routine activities of a firm.
The objective behind working capital management is to ensure continuity in the
operations of a firm and that it has sufficient funds to satisfy both maturing short-term
debt and upcoming operational expenses. It mainly involves management of
inventories, accounts receivables, account payables and cash. The basic theme of
working capital management is to provide adequate support for smooth and efficient
functioning of day to day business operations by striking a trade between the three
proportions of working capital. They are liquidity, profitability and risk.

India considers growth in the manufacturing sector important for the overall
development of the economy. The government is extending support through training
programmes in order to ensure availability of skilled workforce. Also, measures have
been introduced to encourage FDI in the sector. As a result, India was ranked second
in the world as per the 2012 FDI Confidence Index prepared by A.T.Kearney. The
government has also set up NMCC to increase the sector’s global competitiveness
through various measures such as setting up of National Manufacturing and
Investment Zones (NMIZs). Furthermore, the government is offering various subsidies
and incentives for technological up gradation in each sub-sector of the manufacturing
activity along with special schemes focused on micro, small and medium enterprises
(MSMEs) for ensuring an overall development of the sector. Thus, growth in the
domestic market as well as traction from the export-driven demand has enabled India
to evolve on the global map as a key manufacturing hub.

Manufacturing Industry in India has gone through various phases of development over
the period of time. Since independence in 1947, the domestic manufacturing sector has
travelled from building the industrial foundation in 1950’s and early 1960’s, to the
license-permit Raj between 1965 to 1980. Then it underwent a phase of liberalization
of 1990’s and finally to the present phase of global competitiveness. The Indian
Manufacturing sector currently contributes 16-17% to GDP and gives employment to
around 12% (2014) of the country’s workforce. Various studies have estimated that
every job created in manufacturing has a multiplier effect in creating 2-3 jobs in the
services sector. In a country like India, where employment generation is one of the key
policy issues, this makes this sector a critical one to achieve inclusive growth.
Manufacturing is thus rightfully at the centre-place of the Hon’ble Prime Ministers
Vision for Make in India (MII), which is to increase contribution of manufacturing to
GDP to 25%. With a view to achieving this objective Prime Minister Narendra Modi
launched MII on September 25, 2014.

TVS is one of the India’s largest diversified industrial conglomerates with its principle
headquarters located in Madurai and international headquarters in Chennai. It has a
presence in 129 countries with 73 holding group companies. The largest and most
visible subsidiary is TVS motor company the third largest two-wheelers and three-
wheelers, auto components, hardware electronics, high tensile fasteners, die casting
products, brakes, axles, fuel injection components etc. manufacturer in India.
Sundaram Fasteners Limited is part of the TVS group of companies. It was founded in
1911 by T.V. Sundaram Iyengar, TVS has grown rapidly expanding its portfolio to
become India’s largest automotive component manufacturer. The group has over the
years diversified into many businesses, with total sales exceeding USD 8.5 billion.

A Sundaram fastener limited has grown into a global leader, manufacturing critical,
high precision components for the automotive, Infrastructure, windmill and aviation
sectors. Sundaram Fasteners Limited is one of India’s largest and most diversified
auto components company. It has diversified over the years into other products like
cold extruded parts. Powdered metal parts/iron powder, precision formed gears, pump
assemblies (water, oil and fuel), rocker arm assemblies, belt tensioners radiator caps,
gear shifters and spare wheel tyre carriers. It was one of the first Indian auto
component companies to tap the global markets for its products and set up operations
outside India.

REVIEW OF LITERATURE

Baig Viqar Ali (2019) aims at reporting comparative findings of a survey of working
capital management practices of selected agribusiness firms from diary co-operatives,
private and MNC dairy firms as a part of the research thesis completed in July 2008.
Besides, an attempt has been made to know the effect of the ownership, government
regulations, managerial empowerment and cultural factor on the working capital
decision making.
Mohammad and Saed (2018) Used Bloomberg’s database 172 listed companies
randomly selected from Bursa Malaysia main board for five years period from 2003 to
2007, applying correlation and multiple regression analysis, they found that current
assets to total asset ratio shows positive significant relationship with Tobin Q, ROA
and ROL. Cash conversation cycle, current asset to current liabilities to total assets
ratio illustrates negative significant relations with Tobin Q, ROA and ROIC.

Vadakari (2018) In this study titled with “A Study on Working capital management
variables and Investments in Plant & Machinery” found that the Working Capital
management variables depend upon the investment made in plant and machinery
equipment’s.
OBJECTIVES OF THE STUDY

 To analyze and understand the financial position of the company using

working capital management.
 To evaluate the inventory, receivables and cash management performance of
TVS Sundaram Fasteners Limited.
 To study the optimum level of current assets and current liabilities and find out
short comings.
 To study the liquidity and profitability position through various working
capital related ratio.
 To suggest measure for effective management of working capital.

SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The study
of working capital is based on tools like working capital statement, Ratio analysis.
Further the study is based on last 6years Annual reports of the organization. And even
factors like competitor’s analysis, industry analysis were considered while preparing
this project. The ratio taken for the study includes current ratio, debt ratio, financial
asset to total asset, average collection period, cash conversion cycle, inventory
turnover (in days) ratio. Average payment period ratio.

METHODOLOGY

This study is based on secondary data. In this research we will see the different
working capital management practices. The study for a period of 6 years from 2013-
2019. The data for this study is collected using the non-survey method. This is due to
 the fact that the accounting information required for this study is easily obtainable
from the published annual reports and accounts from the different websites.
Accordingly, relevant balance sheet and profit and loss items, such as Return on
Assets, Average Collection Period, Inventory conversion Period, Cash Conversion
Cycle, Debt Ratio, Current Ratio. In order to measure the profitability calculation of
variables is done. This is done by using different formulas.

Tools Used in the Study

Since the project work is done in the area of Finance, most of the applied are tools of
financial analysis. Statistical tools such as trend line graphs and charts are also used
for analysis. The tools of financial analysis such as

 Statement of changes in working capital

 Ratio Analysis

LIMITATIONS OF THE STUDY

 The analysis is limited to five years of data (from FY 2013 to FY 2019)

 The Past statement can never be a hundred percent of helpful for the future.
 No standard norm or rule of thumb is for most of the ratio so comparison
cannot be made.
 The reliability of the information and data are limited by time factor.
 Some information is confidential to the organization and its non-availability
also limited the scope of the project.

ANALYS TABLE SHOWING THE RATIO ANALYSIS OF THE YEAR

Ratio/years 2013 2014 2015 2016 2017 2018 2019

Current ratio 1.228 1.182 0.994 1.018 1.131 1.26 1.28
Debt 0.384 0.323 0.226 0.249 0.226 0.323 0.235
Ratio
Financial Asset to Total 0.347 0.389 0.423 0.434 0.417 0.406 0.429
Asset
Average collection period 75.5 75.39 63.178 65.74 71.462 75.18 64.187
4 7
Cash Conversion Cycle 101.43 89.066 84.673 87.34 88.215 84.82 77.632
8 4 9
Inventory turnover (in 55.93 51.14 58.12 65.74 49.74 49.54 46.29
days)
APP 30 37.466 36.631 44.14 32.722 39.89 32.845
 4 9

 The current ratio rate is between 1 and 1.3 which indicates a sound liquidity
position of the company. But the quick ratio which was 0.38 started to
increase, though it is still very low. Most of debts consist of creditors, accrual
and bank overdraft where borrowing cost is insignificant.
 Asset-liability management efficiency increased day by day. The company
increases its sales through inventory control and was efficiently managing and
selling its inventory so they tied up the fewer funds. After analyzing the
correlation between profitability and working capital components, it has been
found that inventory period, CCC and size of the firm have significant impact
on profitability.
 After regression analysis shows a positive relation of profitability with payable
days, gearing ratio and size of the firm. The analysis shows negative relation of
receivable period and inventory period with profitability.

STATEMENT OF CHANGE IN WORKING CAPITAL

Particular 2013 2014 Increase Decreas 2014 2015 Increase Decreas

s e e

Total
Current 94537.2 88789.6 78693.1 95097.4
Asset 5 6 3 6
Total
Current 76965.1 75068.7 75169.8 95622.4
Liabilities 3 9 1 2
17572.1 17572.1 11008.6 11008.6 20917.6 20917.6
TOTAL 2 2 3 3 3523.32 3523.32 6 6

1.The working capital for the year 2013-2014 current asset is 88789.66 and the current
liabilities is 75068.79. The net changes in working capital is 13720.87and the net
working capital is in positive and ideal. Having enough working capital ensures that
the company fully cover its short-term liabilities.
 2.The working capital for the year 2014-2015 current asset is 95097.46 and the current
liabilities is 95622.42. The net changes in working capital is -524.96 and the net
working capital is in negative. It typically indicates that the company may have
incurred a large cash outlay or substantial increase in its account payable as a result of
a large purchase of products and services from its vendors.

Particulars 2015 2016 Increase Decrease 2016 2017 Increase Decrease

Total
Current 107999.9
Asset 95097.46 92856.93 93441.13 7
Total
Current
Liabilities 95682.42 91328.03 91726.46 95434.52
Total 21011.5
1528.90 1528.90 21011.50 0 12565.45 12565.45 21545.52 21545.52

1.The working capital for the year 2015-2016 the current asset is 92856.93 and the
current liabilities is 91328.03. The net changes in working capital is 1528.90 and the
net working capital is in positive and ideal. Having enough working capital ensures
that the company fully cover its short-term liabilities.

2.The working capital for the year 2016-2017 the current asset is 107999.97 and the
current liabilities is 95434.52. The net changes in working capital is 12565.45 and the
net working capital is in positive and ideal. Having enough working capital ensures
that the company fully cover its short-term liabilities.
Findings of the study

 After conducting the report through various analysis and evaluation of influence on
Profitability, many findings have been found; it includes both positive and negative
findings.
 The function of corporate finance department is distinguished and certain. This has
sound standard operating procedures for accomplishing every task.
 Has an efficient and effective distribution strategy. An aggressive working capital
policy. It’s collection of sales proceeds system and fund disbursement systems are
convenient for both customer and suppliers.
 For effective fund collection system, the collection of account receivable is excellent
over the years and it takes in between 2 to 6 days low processing time to collect fund
 which is satisfactory. For efficient liquidity management the department is able to
make payment to its creditor as early as possible.
 Hence accounts payable period is comparatively low in this organization which is
129.72 and above in the year 2014 and 2015. The inventory conversion period is too
high hitting a maximum of 171.78 in the year 2013-2014. Since it cannot convert
inventory into sales quickly enough, its inventory increases resulting in decreased
quick ratio. This higher inventory period ensures smooth supply of the products to the
customers. Has strong and good liquidity position and had no opportunity to run out
from short-term financial solvency and this ability rises gradually
(Current/Quick/Cash).
 The current ratio rate is between 1 and 1.3 which indicates a sound liquidity
position of the company. But the quick ratio which was 0.38 started to
increase, though it is still very low. Most of debts consist of creditors, accrual
and bank overdraft where borrowing cost is insignificant.
 Asset-liability management efficiency increased day by day. The company
increases its sales through inventory control and was efficiently managing and
selling its inventory so they tied up the fewer funds. After analyzing the
correlation between profitability and working capital components, it has been
found that inventory period, CCC and size of the firm have significant impact
on profitability.
 After regression analysis shows a positive relation of profitability with payable
days, gearing ratio and size of the firm. The analysis shows negative relation of
receivable period and inventory period with profitability.

SUGGESTIONS

 Working capital of the company has increasing every year. Profit also
increasing every year this is good sign for the company. It has to maintain it
further, to run the business long term.
 The Current and quick ratios are almost up to the standard requirement. So, the
Working capital management satisfactory and it has to maintain it further.
 The company has sufficient working capital and has better liquidity position.
By efficient utilizing this short-term capital, then it should increase the
turnover.
  The company should take precautionary measures for investing and collecting
funds from receivables and to reduce the bad debts.
 The company has sufficient working capital and has better liquidity position.
By efficient utilizing this short-term capital, then it should increase the
turnover.
 The company is utilizing working capital effectively this is good for the
company. It has to maintain it further.

CONCLUSION

One of the best ways to judge a company's cash flow health is to take a deep look on
its working capital management. The better a company can manage its working capital
the lower company's need of borrowing. Working capital management is highly
effective. The project is very much profitable. There is available internal source of
fund due to satisfactory amount of period during the period under study. They have no
difficulties in management of inventory, debtors, cash balances and current liabilities.
The liquidity position of the company is also very much satisfactory due to good
turnover of current assets, inventory debtors and cash balances. The company enjoys
good facility of cash credit and other working capital loan though the borrowing
amount of the company is very low. There is no difficulty in repayment of current
liabilities out of the operating profit. Working Capital Management has been doing
very important to the company. It has lots of challenges as competition increases in
the market and also has lots of scope of developing in several areas. If challenges can
be faced technically by maintaining continuous support to sales teams and dealers then
the credit management practice of this company can be more effective to the overall
development of the company.

BIBLIOGRAPHY

 Deloof, Marc. (2003), Does Working Capital Management Affect Profitability

of Belgian Firms? Journal of Business Finance and Accounting, Vol.30,
No.3&4, pp. 573-587.
 Filbeck Greg and Krueger Thomas M., (2005), An Analysis of Working
Management results Across Industries, American Journal of Business Finance,
Vol.20, No.2, pp.5-11.
 Dinesh, M., (2008) Working Capital Management: Challenges and Strategies,
The Accounting World, ICFAI University Press, April 2008, pp. 37-40
  Baig Viqar Ali, (2009), Working Capital Management: A Comparative Study
of Different Ownerships, Management and Change, Vol.13, No.1, pp.85-13

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