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Working Capital Management

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

Abstract

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.

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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

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