Working Capital Management

  • P. K. Jain
  • Shveta Singh
  • Surendra Singh Yadav
Part of the India Studies in Business and Economics book series (ISBE)


Working capital management is concerned with the problems that arise in managing current assets (CA), current liabilities (CL) and the interrelationships that exist between them. Business success heavily depends on the ability of financial executives to manage effectively receivables, inventory and payables. While inadequate working capital has the potential to disrupt production/sales operations of otherwise well-run business enterprises, excessive working capital adversely impacts profitability. Therefore, the firms should strive to maintain adequate amount of working capital to ensure smooth production and sales operations. The importance of efficient working capital management (WCM) is therefore indisputable. This chapter is a modest attempt to gain insight on the working capital management practices of the sample companies.

The sample companies do not appear to face any problems in meeting their short-term maturing obligations, and therefore, the importance of liquidity is not lost on the sample companies. This is in tune with the findings on the importance of liquidity for a firm’s survival. However, the sample companies could do well to be less conservative with their working capital management as they are large and stable companies and may attempt a better trade-off between risk and profitability.

As far as cash management is concerned, it is gratifying to note that the sample companies are following sound cash management practices. While cash credit limit (from the banks) constitutes the major source of dealing with cash deficit situations, short-term deposit with banks has been identified as the important method of deploying cash by majority of the sample companies.

Another notable finding is that the sample companies adopt the scientific method of ‘determination of individual components of current assets and current liabilities (based on raw material holding period, debtors’ collection period, creditors’ payment period and so on)’ as the basis of working capital determination. As far as the policy towards financing working capital is concerned, ‘permanent needs from long-term sources and temporary/seasonal needs from short-term sources’ seem to be favoured by the majority. These findings are in conformity with sound theory of financial management.

Although extraordinary situations involving shortage and surplus of working capital (including cash) cannot be completely eliminated, their frequency can be minimised through rationalisation and standardisation of working capital management practices. It is encouraging to note that the majority of the sample companies have not experienced working capital shortage and even if they do, they face it only occasionally. Poor collections from debtors and accumulation of excess inventory have been cited as the two major reasons for working capital deficiency by such companies. In surplus working capital situation, it is equally satisfying to note that funds are not kept idle. They have been temporarily parked in banks in the form of special deposits/or utilised to retire short-term debt by most of the sample companies.

It appears that the components of cash and bank, inventory and debtors and bills receivables accounts for more than 60 % of the total current assets for the sample companies indicating a high degree of advances payments and/or prepaid expenses in the balance sheets of the companies.

Perhaps for the first time, the concept of zero working capital (inventory + debtors − payables) and its practice amongst the sample companies was studied. It is encouraging to note that one-fourth of the sample companies are operating on zero working capital. Even though the statistics supporting zero working capital seem modest, the trend does support growing aggressiveness/professionalism in the management of working capital by the sample companies.

Likewise, it is a matter of satisfaction to note that the sample companies have reasonably low holding period for raw materials, work-in-process and finished goods inventory. Given the fact that carrying inventory involves substantial financial costs, this is sound inventory management.

The constituent sectors exhibit variations amongst all aspects of working capital management. Some sectors (FMCG, housing, metals and power) appear to have been impacted from the recession, but most of the sectors seem to have withered the postrecession period with little/no alterations in their working capital management.


  1. Afza T, Nazir MS (2009) Is it better to be aggressive or conservative in managing working capital? J Appl Finance 15(8):19–30Google Scholar
  2. Ali A (1994) The incremental information content of earnings, working capital from operations and cash flows. J Account Res 32(1):61–74CrossRefGoogle Scholar
  3. Banomyong R (2005) Measuring the cash conversion cycle in an international supply chain. Annual Logistics Research Network (LRN) Conference Proceedings ISBN 1-904564-13-5, pp 7–9Google Scholar
  4. Barth ME, Cram DP, Nelson KK (2001) Accruals and the prediction of future cash flows. Account Rev 76(1):27–58CrossRefGoogle Scholar
  5. Bates TW, Kahle KM, Stulz RM (2009) Why do U. S. firms hold so much more cash than they used to? J Finance LXIV(5):1985–2021CrossRefGoogle Scholar
  6. Cheng NS, Pike R (2003) The trade credit decision: evidence of UK firms. Manag Decis Econ 24:419–438CrossRefGoogle Scholar
  7. Chiou J-R, Cheng L (2006) The determinants of working capital management. J Am Acad Bus 10(1):149–155Google Scholar
  8. Dechow PM (1994) Accounting earnings and cash flows as measures of firm performance: the role of accounting accruals. J Account Econ 18:3–42CrossRefGoogle Scholar
  9. Deloof M (2003) Does working capital management affect profitability of Belgian firms? J Bus Finance Account 30(3 and 4):573–587CrossRefGoogle Scholar
  10. Dong HP, Su J (2010) The relationship between working capital management and profitability: a Vietnam case. Int Res J Finance Econ 49:59–67Google Scholar
  11. Fazzari SM, Petersen BC (1993) Working capital and fixed investment: new evidence on financing constraints. RAND J Econ 24(3):328–342CrossRefGoogle Scholar
  12. Filbeck G, Krueger T (2005) Industry related differences in working capital management. J Bus 20(2):11–18CrossRefGoogle Scholar
  13. Gentry JA, Vaidyanathan R, Lee HW (1990) A weighted cash conversion cycle. Financ Manage 19(1):90–99CrossRefGoogle Scholar
  14. Gill A, Biger N, Mathur N (2010) The relationship between working capital management and profitability: evidence from the United States. Bus Econ J BEJ-10:1–9Google Scholar
  15. Gitman LJ, Moses EA, Thomas I (1979) An assessment of corporate cash management practices. Financ Manage 8(1):32–41CrossRefGoogle Scholar
  16. Hill MD, Kelly WG, Highfield MJ (2010) Net operating working capital behavior: a first look. Financ Manage 39(2):783–805CrossRefGoogle Scholar
  17. Jain PK, Kumar M (1997) Comparative financial management: practices of India and South East Asia. Hindustan Publishing Corporation, New Delhi, pp 43–44Google Scholar
  18. Jain PK, Yadav SS (2000) Financial management practices in select private corporate enterprises – a comparative study of India. Hindustan Publishing Corporation, India/Thailand/SingaporeGoogle Scholar
  19. Jain PK, Yadav SS (2005) Financial management practices – a study of public sector enterprises in India. Hindustan Publishing Corporation, New DelhiGoogle Scholar
  20. Kaur J (2010) Working capital management in Indian tyre industry. Int Res J Finance Econ 46:7–15Google Scholar
  21. Kusnad Y, Wei KCJ (2011) The determinants of corporate cash management policies: evidence from around the world. J Corp Financ 17(3):725–740CrossRefGoogle Scholar
  22. Lamberson M (1995) Changes in working capital of small firms in relation to changes in economic activity. J Bus 10(2):45–50CrossRefGoogle Scholar
  23. Lazaridis I, Tryfonidis D (2006) Relationship between working capital management and profitability of listed companies in the Athens stock exchange. J Financ Manage Anal 19(l):26–35Google Scholar
  24. Long MS, Malitz IB, Ravid SA (1993) Trade credit, quality guarantees, and product marketability. Financ Manage 22:117–127CrossRefGoogle Scholar
  25. Mramor D, Valentincic A (2003) Forecasting the liquidity of very small private companies. J Bus Ventur 18:745–771CrossRefGoogle Scholar
  26. Opler T, Pinkowitz L, Stulz RH, Williamson R (1999) Determinants and implications of corporate cash holdings. J Financ Econ 52:3–46CrossRefGoogle Scholar
  27. Raheman A, Qayyum A, Afza T, Bodla MA (2010) Sector-wise analysis of working capital management and firm performance in manufacturing sector of Pakistan. Interdiscip J Contemp Res Bus 2(7):412–437Google Scholar
  28. Richards VD, Laughlin EJ (1980) A cash conversion cycle approach to liquidity analysis. Financ Manage 9(1):32–38CrossRefGoogle Scholar
  29. Saad N, Mohamad N (2010) Working capital management: the effect of market valuation and profitability in Malaysia. Int J Bus Manage 5(11):140–147Google Scholar
  30. Sastry ASR (1970) The effect of credit on transactions demand for cash. J Finance 25(4):777–781Google Scholar
  31. Smith KV (1973) State of the art of working capital management. Financ Manage 2(3):50–55CrossRefGoogle Scholar
  32. Sokoloff KL (1983) Investment in fixed and working capital during early industrialization: evidence from U.S. manufacturing firms. UCLA Department of Economics, Working Paper #311, pp 1–15Google Scholar
  33. Sur D, Chakraborty K (2011) Evaluating relationship of working capital and profitability: a study of select multinational companies in the Indian pharmaceutical sector. IUP J Manage Res X(2):7–36Google Scholar
  34. Teruel PJG, Solano PM (2007) Effects of working capital management on SME profitability. Int J Managerial Finance 3(2):164–177CrossRefGoogle Scholar
  35. Van Horne JC, Wachowicz JM (2004) Fundamentals of financial management, 12th edn. Prentice Hall, New YorkGoogle Scholar
  36. Ward P (2004) Cash-to-cash is what counts. J Commerce 5(7):54Google Scholar

Copyright information

© Springer India 2013

Authors and Affiliations

  • P. K. Jain
    • 1
  • Shveta Singh
    • 1
  • Surendra Singh Yadav
    • 1
  1. 1.Department of Management StudiesIndian Institute of TechnologyNew DelhiIndia

Personalised recommendations