WORKING CAPITAL MANAGEMENT PPT

A STUDY ON TRENDS IN WORKING CAPITAL MANAGEMENT WITH REFERENCE TO SELECT MANUFACTURING COMPANIES IN INDIA.

The working capital meets the short-term financial requirements of a business enterprise. It is a trading capital, not retained in the business in a particular form for longer than a year. The money invested in it changes form and substance during the normal course of business operations. The need for maintaining an adequate working capital can hardly be questioned. Just as circulation of blood is very necessary in the human body to maintain life, the flow of funds is very necessary to maintain business. If it becomes weak, the business can hardly prosper and survive. Working capital starvation is generally credited as a major cause if not the major cause of small business failure in many developed and developing countries (Rafuse, 1996).

According to Weston and Brigham ”Working capital refers to a

firm’s investment in short term assets- cash, short term securities, accounts receivables and inventories”.

A firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations

Liquidity is a precondition to ensure that firms are able to meet its short-term obligations and its continued flow can be guaranteed from a profitable venture.

The importance of cash as an indicator of continuing financial health should not be surprising in view of its crucial role within the business.

This requires that business must be run both efficiently and profitably. In the process, an asset-liability mismatch may occur which may increase firm’s profitability in the short run but at a risk of its insolvency.

To analyse the trend in working capital needs of the firms and to examine the causes for any significant differences between the industries.

To examine the impact of return on total assets on working capital management.

Thus the empirical study is based on a sample of 25 small manufacturing companies. The data has been collected from the financial statements of the sample firms having a legal entity and have filed their annual return to the Registrar of Companies. The sample was drawn from the directory of Small Medium Industrial Development Organisation (SMIDO), a database for registered manufacturing firms operating in diverse activities and for which data was available for a 5 years’ period, covering the accounting period2007-08 to 2010-11. Thus the data set covers 25 firms from five industry subsectors: auto mobiles, cements, two wheelers Telecomm and Chemicals furniture. This has given a balanced panel data set of 25 firm-year observations for a sample of 25 firms.

The annual reports collected from the internet of select non-financial industries are named as Automobiles Industry ,Cement Industry ,Two Wheeler Industry, Pharmaceutical Industry, Telecom communication Industry under that the select sample companies are:

1.Setco Automotive Ltd2.Autoline Industries Ltd3.Steel Strips Wheels Ltd4.Kar Mobiles Ltd5.Wheels India Ltd

1.Hathway Bhawani Cabletel & Datacom Ltd2. Delton Cables Ltd3.Mahanagar Telephone Nigam Ltd 4.Tulip Telecom Ltd 5.Hartron Communications Ltd

1.Balaji Amines Ltd2.Aarti Industries Ltd3.Aditya Birla Chemicals (India) Ltd 4.Aban Offshore Ltd5. Lime Chemicals Ltd

1.Bajaj Auto Ltd2.TVS Motor Company Ltd3.Hero MotoCorp Ltd.4.Mahindra & Mahindra Ltd5.Maruti Suzuki India Ltd

1.Kesoram Industries Ltd2.NCL Industries Ltd3. OCL India Ltd4.J. K. Cement Limited 5.JK Lakshmi Cement Ltd

The period of the study is 2007-2008 to 2010-2011

TOOLS OF ANALYSIS

The tools of analysis is divided into two types which are :1. Financial tools2. Statistical tools

1. FINANCIAL TOOLS: Financial Tools which used for the study are:

OPERATING PROFIT MARGIN

It measures the percentage of each sales amount remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted

Net Sales

Operating ProfitOperating Profit Margin = *10

0

RETURN ON TOTAL ASSETS

The return on total assets (ROA), often called the return on investment (ROI), measures the overall effectiveness of the management in generating profits with its available assets.

Total Assets

Earning After tax Return On Total Assets = *100

ASSETS TURNOVER RATIO

A_TURN =

CURRENT RATIOCurrent ratio is the ratio between current assets and current liabilities the firm is said to be comfortable in its liquidity position if the current ratio is 2:1.

Current liabilities

Current assets Current ratio =

QUICK RATIO

Quick ratio is also called acid test ratio. It measures the firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities.

Current liabilities

Quick assets Quick ratio =

CURRENT ASSETS TO TOTAL ASSETS RATIO

Higher the investment in current assets, the more will be the liquidity of a firm but the same time it decreases profitabilityThe optimum level of current assets that should be maintained in the firm by considering the both liquidity and profitability

Total Assets Current assets to Total assets ratio =

Current Assets

Trade debtors to current assets ratio

Current Assets

Trade Debtors Debtors Turnover Ratio =

Statistical tools.

REGRESSION ANALYSISROTA = + β1 sales + β2 gear + β3 cata + β4 clta + β5 turnca

Table 1: Profitability Liquidity and operation efficiency of Select Auto Mobiles Industries during the year 2007-08 to 2010-11.

Name of the Companyt OPM ROTA A_TURN GEAR CR QAR CATA CL/TA

Setco Automotive Ltd 45.16 0.28 1.63 1.04 3.12 3.12 0.65 0.068

Steel Strips Wheels Ltd 13.92 0.14 1.14 1.13 1.67 1.67 0.36 0.51

Autoline Industries Ltd 3.76 0.14 0.87 0.9 1.62 1.62 0.36 0.44

Kar Mobiles Ltd 4.67 0.14 1.59 0.66 1.83 1.83 0.7 0.7

Wheels India Ltd 2.79 0.13 1.7 0.7 1.53 1.53 0.56 0.51

Mean 14.06 0.17 1.39 0.89 1.95 1.95 0.53 0.45

Standard Deviation 17.95 0.06 0.36 0.21 0.66 0.66 0.16 0.23

Interpretation:Operating Profit Margin

From table 1, it is observed that the Operating Profit Margin of Secto Automotive Ltd is high (45.16%) because the operating profit of the company is increased year after year. The Mean operating profit Margin is 14.06% with Standard Deviation of 17.95 %. Out of the five companies only one company Secto Automotive Ltd Operating Profit Margin value is more than the Mean value. So, the Secto Automotive Ltd performance is good during the study period.

Return on Total Assets The Return On Total Assets of Secto Automotive Ltd is high (0.28%)

when compared to the other companies. The Mean of Return on Total Assets is 0.17 with Standard Deviation of 0.06% out of the five company’s only one company Secto Automotive Ltd Rota on Total Assets value is more than the

Mean value. So, the Secto Automotive Ltd performance is good.

Table 2: Profitability Liquidity and operation efficiency of select Cement Industries during the year 2007-08 to 2010-11.

Name of the Company OPM ROTA A_TURN GEAR CR QAR CATA CL/TA

Kesoram Industries Ltd 10.04 0.17 1.09 0.88 1.59 1.59 0.45 0.29

NCL Industries Ltd 3.96 0.18 0.67 0.89 1.31 1.31 0.34 0.26

OCL India Ltd 4.26 0.21 0.88 1.05 1.72 1.72 0.46 0.28

J. K. Cement Limited 5.3 0.2 0.95 0.83 1.61 1.61 0.41 0.25

JK Lakshmi Cement Ltd 4.2 0.2 0.74 0.96 1.77 1.77 0.4 0.4

Mean 5.55 0.19 0.87 0.92 1.60 1.60 0.41 0.30


Interpretation:Operating profit marginFrom table 2: it is observed that the operating profit margin of

Kesoram Industries Ltd is high 10.4% because of the operating profit of the company increase year of after year. The Mean of operating profit margin is operating profit value more than the Mean value. So Kesoram Industries Ltd performance is good during the study period.

Return on Total assets:The Return on Total assets of Kesoram Industries Ltd is low when

compared to all the companies that is 0.17. There is fluctuation in the select companies the Mean of Return on Total assets is 0.19. It is more than the Return on Total assets of Kesoram Industries Ltd the Standard Deviation of Kesoram Industries Ltd is 0.02 it the low when compare to the Standard Deviation the Ocl India Ltd, J.K Cement Ltd, JK Lakshmi Cement Ltd maintain the more return on total assets compare to the Mean value the companies good in performance during the study period.

Table 3: Profitability Liquidity and operation efficiency of select Telecomm communication Industries during the year 2007-08 to 2010-11.


Hathway Bhawani Cabletel & Datacom Ltd

45.61 0.08 1.2 0.48 0.88 0.88 0.48 0.55

Delton Cables Ltd 13.29 0.12 1.54 0.6 2.19 2.19 0.88 0.4

Mahanagar Telephone Nigam Ltd

3.76 -0.01 0.18 0.49 1.08 1.08 0.6 0.58

Tulip Telecom Ltd 4.67 0.23 1.1 1.02 5.41 5.41 0.53 0.12

Hartron Communications Ltd 2.79 0.12 0.26 0.88 2.33 2.33 0.22 0.12

Mean 14.02 0.11 0.86 0.69 2.38 2.38 0.54 0.35


Interpretation: Operating profit margin:From table 3: it observed that the operating profit margin of Hathway

Bhawani Cabletel & Datcom Ltd is (45.16%) it is more when compared to others. Because of the increase operating profit margin the Mean operating profit margin is 14.02% and Standard Deviation is 18.15 the company Hathway Bhawani Cabletel & Datcom Ltd operating profit margin value is more than Mean value. So, Hathway Bhawani Cabletel & Datcom Ltd performance is good during the period of study.

Return on total assets:The Return on total assets of Tulip Telecom Ltd is high 0.23 when

compared to the other companies. The Mean Return on total assets is 0.11 with Standard Deviation of 0.09 % out of the five company’s only one company Tulip Telecom Ltd performance is good Return on total assets value is more than the Mean value. So, the Tulip Telecom Ltd performance is good.

Assets turnover ratio:The Assets turnover ratio of Delton Cables Ltd is high 1.54 because it is

increased year by year. The Mean of Assets turnover ratio is 0.86, with Standard Deviation of 0.60% out of the five company’s. Only one company Delton Cables Ltd Assets turnover ratio value is more than the Mean value. So, the Delton Cables Ltd performance is good.

Table 4: Profitability Liquidity and operation efficiency of select Chemical Industries during the year 2007-08 to 2010-11.


Balaji Amines Ltd 6.48 0.18 51.2 0.81 2.11 2.11 0.57 0.27

Aarti Industries Ltd 7.28 0.16 1.16 0.8 2.64 2.64 0.66 0.25

Aditya Birla Chemicals (India) Ltd

2.59 0.19 0.47 0.42 1.64 1.64 0.38 0.73

Aban Offshore Ltd 1.61 0.33 0.52 2.14 4.13 4.13 0.66 0.18

Lime Chemicals Ltd -5.08 -7.2 1.28 0.5 1.08 1.08 0.5 0.56

Mean 2.58 -1.27 10.93 0.93 2.32 2.32 0.55 0.40


Interpretation:Operating profit margin

From table 4: it is observed that the operating profit margin of Balaji Amines Ltd is 6.48, it is moderate when compared to other, because of the increase in operating profit the Mean operating profit margin is 2.58% and Standard Deviation 4.92. The company Balaji Amines Ltd operating profit margin value I s more than the value. So Balaji Amines Ltd performance is good during the study period Return on Total Assets:

The Return on Total Assets Aban offshare Ltd ids 0.33 high when compare to other companies. There is fluctuations in the select companies the Mean of the Return on Total Assets is negative that is (-1.27) with Standard Deviation of 3.32 out of the five companies only one Aban offshare Ltd maintain 0.33% ROTI performance . The Return on Total Assets Aban offshare Ltd ids 0.33 high when compare to other companies. There is fluctuations in the select companies the Mean of the Return on Total Assets is negative that is (-1.27) with Standard Deviation of 3.32

Table 5: Profitability Liquidity and operation efficiency of Two Wheelers Industries during the year 2007-08 to 2010-11.


Bajaj Auto Ltd 6.59 0.38 2.38 0.98 0.83 0.83 0.68 0.83

TVS Motor Company Ltd

34.01 0.08 2.19 0.86 1.1 1.1 0.51 0.46

Hero MotoCorp Ltd 7.21 0.59 4.28 1.16 0.42 0.42 0.44 3.02

Mahindra & Mahindra Ltd

8.33 0.26 2.07 1.22 1.1 1.1 0.7 0.65

Maruti Suzuki India Ltd

8.88 0.3 2.6 1.19 1.3 1.3 0.51 0.39

Mean 13.00 0.32 2.70 1.08 0.95 0.95 0.57 1.07


Interpretation:

Operating Profit MarginFrom the above table5: it is observed that the operating profit

margin of the Bajaj is 6.59, it is less value when compared to others because of the decrease in the operating profit. The main operating profit margin is 13.00 & standard deviation is 11.78 company Bajaj operating profit margin value is less than the Mean value. So, Bajaj ltd performance is poor during the study period.

Return on Total assets: The maruthi Suzuki and hero Moto corp ltd is high (0.59)

when compared to the other companies the return on total assets is 0.32 with the standard deviation of 0.19 present out of five companies only one company hero Moto corp. return on total assets value is more than Mean value. So, the hero Moto corp ltd performance is good during the study period.

Table6 : Five years Mean and Standard Deviations for the variables

INDUSTRIESVARIABLES ALL(N=25) AM(N=5) CM(N=5) TC(N=5) CH(N=5) TW(N=5)A_TURN 0.67

(0.04)

1.38

(0.13)

0.86

(0.12)

0.85

(0.17)

10.92

(0.15)

2.70

(0.48)SD

OPM 1.76

(1.41)

9.07

(1.27)

5.55

(2.86)

14.02

(16.85)

2.58

(9.03)

13

(5.48)SD

GEAR 0.18

(0.03)

0.88

(0.10)

0.92

(0.10)

0.69

(0.07)

0.93

(0.32)

1.08

(0.24)SD

CR 0.35:1

(0.18)

1.95:1

(0.29)

1.6:1

(0.3)

2.37:1

(1.21)

2.32:1

(2.69)

0.95:1

(0.15)SD

QAR 0.35

(0.18)

1.95

(0.29)

1.6

(0.3)

2.37

(1.21)

2.32

(2.69)

0.95

(0.15)SD

CA/TA 0.10

(0.06)

0.52

(0.04)

0.41

(0.05)

0.54

(0.12)

0.55

(1)

0.56

(0.29)SD

CL/TA 0.096

(0.05)

0.28

(0.04)

0.29

(0.05)

0.35

(0.05)

0.42

(0.12)

1.07

(1)SD

TD/CA 0.42

(0.18)

1.55

(0.41)

3.32

(2.67)

1.84

(0.47)

1.96

(0.71)

1.97

(0.47)SD

ROTA 0.023

(0.28)

0.17

(0.03)

0.19

(0.06)

0.09

(0.04)

1.26

(6.95)

0.32

(0.01)SD

CATA 0.096

(0.01)

0.52

(0.05)

0.41

(0.07)

0.38

(0.08)

0.55

(0.21)

0.56

(0.06)SD

NOTE:The variables are defined as in Appendix The Standard Deviations is given in parentheses. Table - 1:FIVE Year Means and Standard Deviations for the VariablesThe industries are Automobiles (AU); Cements (CM); Telecomm (TC); Chemicals (CS) and Two wheelers (TW).

Assets Turnover Ratio:Chemical Industry Assets Turnover Ratio Mean value during the study period is high (10.92) with Standard Deviation of 0.15% followed by Two Wheeler, Automobile, Cement, Telecom communication. The Mean Assets Turnover Ratio of all companies is 0.67 with 0.04% standard deviation.Operating profit margin:Chemical Industry operating profit margin ratio Mean value during the study period is high (14.02) with Standard Deviation of 16.85% followed by Two Wheeler, Automobile, Cement, Chemicals. The mean Operating profit margin of all companies is 1.76 with 1.41% Standard Deviation.Gearing Ratio: Chemical Industry gearing ratio mean value during the study period is high (1.08) with standard deviation of 0.24% followed by Chemicals, Cement, Automobile, Telecom communication. The Mean Gearing Ratio of all companies is 0.18 with 0.03% Standard Deviation.

Table 7: Components of Current Assets and Liquidity Ratios

IndustryCR QAR TD/CA CA/TA CL/TA

2007 2011 2007 2011 2007 2011 2007 2011 2007 2011

AM 2.24:1 1.71:1 2.24 1.17 1.5 1.85 0.57 0.5 0.26 0.30

CM 1.76:1 1.50:1 1.76 1.5 2.05 2.61 0.44 0.33 0.30 0.23

CH 2.02:1 6.24:1 2.02 6.24 2.44 0.93 0.49 0.63 0.31 0.35

TL 2.54:1 1.99:1 2.54 1.99 13.7 2.25 0.57 0.47 0.32 0.33

TW 1.04:1 0.85:1 1.04 0.85 1.92 1.90 0.58 0.56 0.60 2.80

Current Ratio:The Mean Current Ratio of Automobile, Cement, Telecom, Two Wheeler is decreased during the study period. Only one Industry Chemicals mean Current Ratio is increased with 2.02:1 in the year 2007-08 to 6.24:1 in the year 2010-11.Quick Assets Ratio:The mean Quick Assets Ratio of Automobile, Cement, Telecomm, Two Wheeler is decreased during the study period. Only one Industry Chemicals Mean Current Ratio is increased with 2.02:1 in the year 2007-08 to 6.24:1 in the year 2010-11.Total Detors to Current Assets:The mean Total Detors to Current Assets of Automobile, Chemicals, Telecomm communication, Two Wheeler is decreased during the study period. Only one Industry Chemicals Mean Current Ratio is increased with 2.05:1 in the year 2007-08 to 2.61:1 in the year 2010-11.Current Assets to Total Assets:The Mean Current Assets to Total Assets of Automobile, Cement, Telecomm communication, Two Wheeler is decreased during the study period. Only one industry Chemicals Mean Current Ratio is increased with 0.49:1 in the year 2007-08 to 0.63:1 in the year 2010-11.

Table: 8 Coefficient Correlation Between VariablesReturn on total assets

Operating profit

margin

Assets turnover

Gearing Current assets total

assets

Stock current assets

Trade detors current assets

Current liabilities

total assets

Retun On TotalAssets

1 -.711 .997** .284 .335 .304 -.120 .042

Operating profit margin

1 -.662 -.220 .375 -.277 -.386 .423

Assets turnover

1 .260 .404 .324 -.193 .062

Gearing 1 .050 -.806 .162 .707

Currentassets total assets

1 .110 -.883* .493

Stock assets total assets

1 -.274 -.767

Trade detor current assets 1 -.171

Current liabilities total assets

1

* Indicate significant at 5% level** Indicate significant at 1% level

From table 8, it is observed that Return on Total Assets and Assets Turnover Ratio id s significant at both 5% and 1% of significance. Current Assets to total Assets and Trade Debtors to Current Assets is negatively correlated at 5% level of significance. Trade Debtors to Current Assets is nothing negative relationship with all select variables and the relationship is insignificant.

Table 9 : Regression Analysis of Performance Measures and working capital

Variables ROAOperating profit margin .439 5.190*Assets turnover .029 .348Gearing .063 .713Current assets total assets -.057 -.593Stock current assets .049 .551Trade detors current assets .023 .239

Current liabilities total assets .018 .214

F – value 3.893*N 25R – value .435

From table 9: It is observed that F-value is significant at 5% level of significance. So, the model is good fit. In all the select performance measures of working capital, only one variable (Operating Profit Margin) is significantly affecting the performance of Return on Total Asset.

In Automobile sector it is found that only one company Setco Automobiles performance with reference to Operating Profit Margin, Return On Total Assets, Current Ratio, And Quick Asset Ratio is good. Kar mobiles and Setco Automobiles performance is good to Asset turnover ratio and Steel strips performance is good under Gearing Ratio. Under Current Assets to Total Assets both Setco Automobiles Ltd and Wheels India Ltd Performance is good.

In Cement Sector it is found that only one company Kesoram Industries Ltd performance with reference to Operating Profit Margin, Asset Turnover Ratio ,and Current Assets To Total Assets, is good. OCL India Ltd Return On Total Assets, Gearing Ratio performance is good, J.K cement ltd Asset Turnover Ratio and J.K.Lakshmi performance is good under Gearing Ratio, Current Ratio, Quick Asset Turn Ratio.

In Telecomm Communication Sector it is found that only one company Hathway Bhawani Cabletel and Datacom ltd performance with reference to Operating Profit Margin, Liabilities and Total Assets, is good. Tulip telecom ltd performance is Good Asset Turnover Ratio, Gearing Ratio, Current Asset Ratio And Quick Asset Ratio and Delton cables ltd performance is good under Asset Turnover Ratio, Return On Total Assets And Current Assets To Total Assets. Under Current Assets To Total Assets And Current Liabilities To Total Assets Mahanagar Telephone Nigam ltd performance is good.

In Chemical industries it is found that only one company Aarti Industries Ltd. performance with reference to Operating Profit Margin, Current Asset Ratio, And Quick Asset Ratio And Current Assets to Total Assets is good. Balaji Amines Operating Profit Margin, Asset Turnover Ratio And Current Assets To Total Assets Performance Is Good To Operating Profit Margin, Return On Total Assets And Current Liabilities To Total Assets performance is good in Aditya Birla Chemical India Ltd.

In Two Wheelers Industry sector it is found that only one company TVS Motors company performance with reference To Operating Profit Margin, Current Ratio, And Quick Asset Ratio is good. Hero motocrop ltd performance is good to Return on Total Asset and Current Assets to Total Assets and Bajaj auto ltd performance is good under Return On Total Asset, Asset Turnover Ratio, Gearing Ratio, Current Liabilities To Total Assets And Current Assets To Total Assets. Under gearing ratio Mahindra & Mahindra ltd performance is good.

Steel strips wheels ltd and wheels India ltd both companies performance is very low with reference to Return On Total Assets And Current Assets To Total Assets. Therefore the company should concentrate on PBIT and Current Assets, So that their Return on Total Assets and Current Assets to Total Assets would increase.

NCL industries ltd and J.K.cement ltd both companies performance is very low with reference to Assets Turnover Ratio and Gearing Ratio. Therefore the company should concentrate on Assets Turnover Ratio and Gearing Ratio, so that their Assets Turnover Ratio and Gearing Ratio performance would increase.

Mahanagar Telephone Nigam ltd and Tulip telecom ltd both companies is very low with reference to Return On Total Assets And Current Liabilities To Total Assets. Therefore the company should concentrate on PBIT and Current Liabilities So that Their Return on Total Assets and Current Assets to Total Assets would increase.

Lime chemicals ltd and Aban Offshore ltd both companies is very low with reference to Gearing Ratio and Current Assets To Total Assets. Therefore the company should concentrate on Total Debt and Current Assets so that their Gearing Ratio and Current Assets to Total Assets would increase.

Bajajauto Ltd and Heromotocrop ltd both companies is very low with reference to Operating Profit Margin And Return on Total Assets. Therefore the company should concentrate on PBIT and Return on Total Assets so, that their PBIT and Return On Total Assets would increase.

This study has shown that the Chemical and Two Wheeler industry has been able to achieve high scores on the various components of working capital and this has positively impact on its profitability. On this premise this industry may be referred as the ‘hidden champions’ and could thus be used as best practice among the select manufacturing companies.

WORKING CAPITAL MANAGEMENT PPT

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