working capital mrp

CONTENT

1. Introduction…………………………………………………………………1-9

Manufacturing Sector

Working Capital Management

Format of Working Capital

Importance of Working Capital Management

Effect of Working Capital Management on profitability

2. Details of Companies...………………………………………………...…10-17

Indian Cement Industry

ACC Limited

Ultratech Cement

JK Cement

JP Cement

3. Literature Review………………………………………………………...18-22

4. Rationale of Study………………………………………………………..23-24

5. Objective of Study………………………………………………………..25-26

6. Methodology……………………………………………………………...27-41

The Study

The Sample

The Tools

Tools for Data Collection

Tools and techniques Data Analysis

Method

Correlation Analysis and Ratio Analysis

7. Findings…………………………………………………………………42-43

8. Recommendations………………………………………………………44-45

9. Conclusion………………………………………………………………46-47

10. References………………………………………………………………48-49

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INTRODUCTION

INTRODUCTION

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MANUFACTURING SECTOR

Witnessing a wave of growth, the Indian manufacturing sector is thought to be much more

promising in the future. The sector is poised to get more skill-intensive according to industry

leaders who foresee India map new heights of progress in every aspect. The country is

increasingly getting recognized for high value goods requiring a fair amount of engineering

precision and quality. The sector is diversifying due to conditions on the ground that global

players are using to their advantage.

India ranked second in terms of manufacturing competence, according to report '2010 Global

Manufacturing Competitiveness Index', by Deloitte Touche Tohmatsu and the US Council on

Competitiveness. The report states that the country's talent pool of scientists, researchers, and

engineers, together with its English-speaking workforce and democratic regime make it an

attractive destination for manufacturers.

Growth of the Indian manufacturing sector during the quarter ended March 31, 2011 was 5.1 per

cent, according to the report on "World Manufacturing Production Quarter I, 2011" by the

United Nations Industrial Development Organization (UNIDO). The manufacturing sector,

which accounts for almost 80 per cent of the index, saw its annual growth at 8.1 per cent in

2010-11.

Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term

may refer to a range of human activity, from handicraft to high tech, but is most commonly

applied to industrial production, in which raw materials are transformed into finished goods on a

large scale. Such finished goods may be used for manufacturing other, more complex products,

such as aircraft, household appliances or automobiles, or sold to wholesalers, who in turn sell

them to retailers, who then sell them to end users – the "consumers".

Manufacturing Sector is a sector which is involved in process of manufacturing. The

manufacturing sector is closely connected with engineering and industrial design. The growth

rate of manufacturing sector in a country truly reflects its economic potentiality. Both

Government as well as the private sectors has come forward for the development of the

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manufacturing sector of the country. More investments are being proposed in the sector

particularly in the growth rate of capital goods, consumer durables, and some non-durable goods.

WORKING CAPITAL MANAGEMENT

Assets in commercial firm consist of two kinds: fixed assets and current assets. Fixed assets

include land, building, plant, furniture, etc. Investment in these assets represents that of part of

firm’s capital, which is permanently blocked on a permanent or fixed basis and is also called

fixed capital that generates productive capacity. The form of these assets does not change, in the

normal course. In the contrast, current assets consist of raw materials, work-in-progress, finished

goods, bills receivables, cash, bank balance, etc. These assets are bought for the purpose of

production and sales, like raw material into semi-finished products, semi- finished products into

finished products, finished products into debtors and debtors turned over cash or bills

receivables.

The fixed assets are used in increasing production of an organization and the current assets are

utilized in using the fixed assets for day to day working. Therefore, the current assets, called

working capital, may be regarded as the lifeblood of a business enterprise. It refers to that part of

the firm’s capital, which is required for financing short-term.

The management of this working capital is known as working capital management. The basis

objective of working capital management is to manage firm’s current assets and current

liabilities, in such a way, that working capital are maintained, at a satisfactory level. The working

capital should be neither more nor less, but just adequate.

Working capital management plays an important role in a firm’s profitability and risk as well as

its value. There are a lot of reasons for the importance of working capital management. For a

typical manufacturing firm, the current assets account for over half of its total assets. For a

distribution company, they account for even more. Excessive levels of current assets can easily

result in a firm’s realizing a substandard return on investment.

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Efficient management of working capital plays an important role of overall corporate strategy in

order to create shareholder value. Working capital is regarded as the result of the time lag

between the expenditure for the purchase of raw material and the collection for the sale of the

finished good. The way of working capital management can have a significant impact on both

the liquidity and profitability of the company. The main purpose of any firm is maximum the

profit

Working capital management involves planning and controlling current assets and current

liabilities in a manner that eliminates the risk of inability to meet due short term obligations on

the one hand and avoid excessive investment in these assets on the other hand. Working capital

management has become one of the most important issues in organization, where many financial

managers are finding it difficult to identify the important drivers of working capital and the

optimum level of working capital. As a result, companies can minimize risk and improve their

overall performance if they can understand the role and determinants of working capital. A firm

may choose an aggressive working capital management policy with a low level of current assets

as percentage of total assets, or it may also be used for the financing decisions of the firm in the

form of high level of current liabilities as percentage of total liabilities. Keeping an optimal

balance among each of the working capital components is the main objective of working capital

management.

Working capital management is important because maintaining a balance of income to debt can

be difficult and owners must be diligent to assure that it is kept. Sometimes it takes a little

assistance to maintain levels of fluidity or make major purchases. If working capital dips too

low, a business risks running out of cash. Even very profitable businesses can run into trouble if

they lose the ability to meet their short-term obligations.

“Decisions relating to working capital and short term financing are referred to as working capital

management. These involve managing the relationship between a firm's short-term assets and its

short-term liabilities. The goal of working capital management is to ensure that the firm is able to

continue its operations and that it has sufficient cash flow to satisfy both maturing short-term

debt and upcoming operational expenses.”

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Lastly, working capital management plays an important role in managerial enterprise, it may

impact to success or failure of firm in business because working capital management affect to the

profitability of the firm. The thesis is expected to contribute to better understanding of

relationship between working capital management and profitability in order to help managers

take a lot of solutions to create value for their shareholders.

WORKING CAPITAL

Working capital may be regarded as the life blood of a business. It is closely related with day-to-

day operations of the business and so it is important for external as well as internal analysis.

Every business needs funds for two purposes. Long-term funds are required to create production

facilities through purchase of fixed assets e.g. plants, machinery, etc. Funds are also needed for

short-term purposes for the purpose of raw material, payment of wages and other day-to-day

expenses. These funds are also known as ‘working capital’. In other words, working capital

refers to that part of a firm’s capital which is required for financing short-term or current assets

e.g. cash, debtors, inventories, etc.

Working capital is absolutely vital for any business. Working capital is especially necessary for

those businesses with higher day-to-day expenditures and outflow of money. So what is Working

Capital? Simply we can say working capital is the money any business has on hand in order to

address everyday expenditures and future expansion that is vital to the growth of their business.

Working capital is the money most of the business use to pay things like additional new space,

advertising, & marketing, renovations, new equipment, paying bills and many more. Many

businesses have assets that they can generate cash for working capital. The assets that typically

are used to generate working capital are usually currently owned existing equipment. Business

like restaurants and hotels however can have a difficult time generating working capital from

these traditional sources. In addition to it they may require greater working capital than other

industries.

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Meaning of Working Capital

“Working capital is also known as current capital or circulating capital. One of the most difficult

problems faced is determination of the amount of working capital requirement at a particular

level of production. Hence, working capital management is an important function.”

The term ‘working capital’ is used in two different ways:

Gross Working Capital (or Total Working Capital) - The term refers to the firm’s

investment in all the current assets taken together. In other words the total investment in

all current assets is called gross working capital.

Current Assets are those which are required to meet day-to-day operations of the

organization and they are convertible into cash within a period of one year or within an

operation cycle. Current Assets includes cash, bank, debtor, B/R, stock and short-term

securities.

Net Working Capital - It refers to the difference between current assets and current

liabilities.

Current Liabilities are those claims which are expected to mature for payment within an

accounting year, like creditors, B/P, and outstanding expenses.

Definition of Working Capital

“Working Capital can be simply defined as difference between Current Assets & Current

Liability.”

Net working Capital= Current Assets − Current Liabilities

Equity Working Capital = Current Assets- Current Liabilities- Long term debt

Format of Computation of Working Capital

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Particulars Amount Amount A] CURRENT ASSETS.

1. Raw material. xxxx2. Work-in-progress. xxxx3. Finished Goods. xxxx4. Debtors. xxxx5. Cash. xxxx6.0ther current assets. xxxx

Total current assets xxxxB] CURRENT LIABILITIES.

1. Trade Creditors. xxxx2.0utsandings expenses. xxxx3. Other current liabilities. xxxx

Total current liabilities xxxxWORKING CAPITAL (A-B) xxxx

IMPORTANCE OF WORKING CAPITAL MANAGEMENT

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Every firm is required to maintain a sound working capital position. The investment in working

capital should be balanced. Therefore, it is necessary that the firm should manage working capital

properly. It is the responsibility of financial manager to determine the level and composition of

current assets.

Following are the important aspects of working capital management:

Working capital management requires much of the financial manager’s time.

Working capital represents a large portion of the total investment in assets.

Working capital management has greater significance for small firms.

The need for working capital is directly related to sales growth.

EFFECT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY

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Working capital management is important part in firm financial management decision. An

optimal working capital management is expected to contribute positively to the creation of firm

value. To reach optimal working capital management firm manager should control the trade off

between profitability and liquidity accurately. The purpose of this study is to investigate the

relationship between working capital management and firm profitability. Cash conversion cycle

is used as measure of working capital management. This reveals that reducing cash conversion

period results to profitability increase. Thus, in purpose to create shareholder value, firm

manager should concern on shorten of cash conversion cycle till accomplish optimal level.

The crucial part in managing working capital is required maintaining its liquidity in day-to-day

operation to ensure its smooth running and meets its obligation. Yet, this is not a simple task

since managers must make sure that business operation is running in efficient and profitable

manner. There are the possibilities of mismatch of current asset and current liability during this

process. If this happens and firm’s manager cannot manage it properly then it will affect firm’s

growth and profitability. This will further lead to financial distress and finally firms can go

bankrupt.

Dilemma in working capital management is to achieve desired tradeoff between liquidity and

profitability. Referring to theory of risk and return, investment with more risk will result to more

return. Thus, firms with high liquidity of working capital may have low risk then low

profitability. Conversely, firm that has low liquidity of working capital, facing high risk results

to high profitability. The issue here is in managing working capital, firm must take into

consideration all the items in both accounts and try to balance the risk and return.

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DETAILS OF THE COMPANIES

Here we are considering 5 Cement manufacturing companies for our study. These are ACC

Limited, JP Cements, JK Lakshmi Cements, Ultratech and Ambuja Cements.

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INDIAN CEMENT INDUSTRY

India’s cement industry has witnessed tremendous growth on the back of continuously rising

demand from the housing sector, increased activity in infrastructure, and construction boom,

according to RNCOS’ latest research report titled, ‘Indian Cement Industry Forecast to 2012’.

The country’s cement production is projected to grow at a compound annual growth rate

(CAGR) of around 12 per cent during 2011-12 - 2013-14 to reach 303 million metric tonnes

(MMT), as per the RNCOS research report.

India is the second largest cement producing country with 137 large and 365 mini cement plants.

The large plants employ 120,000 people, according to a recent report on the Indian cement

industry published by Cement Manufacturers Association (CMA). Cement production in the

country is expected to increase to 315-320 million tonnes (MT) by end of this financial year from

the current 300 MT. The cement production touched 14.50 MT, while the cement dispatches

quantity was registered at 14.28 MT during April 2011, as per provisional data released by

Cement Manufacturer’s Association (CMA).

ACC LIMITED:

Company Profile

ACC Limited is India’s foremost cement manufacturer with a countrywide network of factories

and marketing offices. Established in 1936, ACC has been a pioneer and trend-setter in cement

and concrete technology. Among the first companies in India to include commitment to

environment protection as a corporate objective, ACC has won accolades for environment

friendly measures taken at its plants and mines, and has also been felicitated for its acts of good

corporate citizenship. ACC is the most preferred cement brand name in India.

ACC's operations are spread throughout the country with 16 modern cement factories, more than

40 Ready mix concrete plants, 21 sales offices, and several zonal offices. It has a workforce of

about 9,000 persons and a countrywide distribution network of over 9,000 dealers.

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Contribution

ACC has made significant contributions to the nation building process by way of quality

products, services and sharing expertise. Its commitment to sustainable development, its high

ethical standards in business dealings and its on-going efforts in community welfare programs

have won it acclaim as a responsible corporate citizen. ACC’s brand name is synonymous with

cement and enjoys a high level of equity in the Indian market. It is the only cement company that

figures in the list of Consumer Super Brands of India.

Vision

To be one of the most respected companies in India; recognized for challenging conventions and

delivering on our promises.

Products

ACC manufactures the following types of cement, in addition to which, it provides Bulk Cement

and Ready Mix Concrete.

I. Ordinary Portland Cements

43 Grade Cement(OPC 43 Grade)

53 Grade Cement

II. Blended Cements

Fly-ash Portland Pozzolana Cements

Portland Slag Cement

AMBUJA CEMENTS

Company Profile

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Ambuja Cements Ltd. (ACL) is one of the leading cement manufacturing companies in India.

The Company, initially called Gujarat Ambuja Cements Ltd., was founded by Narotam

Sekhsaria in 1983 with a partner, Suresh Neotia. Sekhsaria’s business acumen and leadership

skills put the company on a fast track to growth. The Company commenced cement production

in 1986. The global cement major Holcim acquired management control of ACL in 2006.

Holcim today holds little over 46% equity in ACL. The Company is currently known as Ambuja

Cements Ltd. ACL has grown dynamically over the past decade. Its current cement capacity is

about 25 million tonnes. The Company has five integrated cement manufacturing plants and

eight cement grinding units across the country.

ACL has always met tough challenges and seized the opportunities that have come its way. It has

nurtured the same spirit of enterprise and search for cutting-edge technology with which it

started. It thus continues to be the driving force and in many ways a benchmark for the cement

industry in India.

Contribution

ACL enjoys a reputation of being one of the most efficient cement manufacturers in the world.

Its environment protection measures are on par with the finest in the country. It is one of the

most profitable and innovative cement companies in India. ACL is the first Indian cement

manufacturers to build a captive port with three terminals along the country’s western coastline

to facilitate timely, cost effective and environmentally cleaner shipments of bulk cement to its

customers. The Company has its own fleet of ships. ACL has also pioneered the development of

the multiple bio-mass co-fired technology for generating greener power in its captive plants.

Mission

Delighted Customers

Inspired Employees

Enlightened partners

Energised Society

Cleaner Environment- Pollution control

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Cleaner Environment – natural resources

Safety

Products

Ordinary Portland Cement

Portland Pozzalana Cement

ULTRATECH CEMENT

Company Detail

UltraTech is India's largest exporter of cement clinker. The company's production facilities are

spread across eleven integrated plants, one white cement plant, one clinkerisation plant in UAE,

fifteen grinding units, and five terminals — four in India and one in Sri Lanka. Most of the plants

have ISO 9001, ISO 14001 and OHSAS 18001 certification. In addition, two plants have

received ISO 27001 certification and four have received SA 8000 certification. The process is

currently underway for the remaining plants. The company exports over 2.5 million tonnes per

annum, which is about 30 per cent of the country's total exports. The export market comprises of

countries around the Indian Ocean, Africa, Europe and the Middle East. Export is a thrust area in

the company's strategy for growth.

UltraTech Cement is the country’s largest exporter of cement clinker. The export markets span

countries around the Indian Ocean, Africa, Europe and the Middle East.

UltraTech's subsidiaries are Dakshin Cements Limited, Harish Cements Limited, UltraTech

Ceylinco (P) Limited and UltraTech Cement Middle East Investments Limited. UltraTech

Cement Limited has an annual capacity of 52 million tonnes.

Products

Ordinary Portland cement.

Portland Blast Furnace Slag Cement.

Portland Pozzalana Cement.

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Ready Mix Concrete (RMC).

JK LAKSHMI CEMENT

Company Profile

JK Lakshmi Cement manufacturing facility has been rated amongst Greenest Cement Plant of

India by CSE GRP 2005 thus highlighting our commitment to the environment even while

ensuring the highest standards of quality for our products. We have also won the Productivity

Excellence Award 2007-08, Energy Conservation Award 2008, NCB award 2007, Building

Leadership Award 2007, National Award for Environmental Excellence & Energy Management

2007, Golden Peacock Award for Corporate Social Responsibility 2007, ICWAI National Award

2007 for Excellence in Cost Management, The Pinnacle Cement 2006 award by Mitch Zee TV,

Green Tech Safety Award and a place of pride amongst the top ten companies in India in HR

practices.

Its wide network of 70 cement dumps and over 2200 dealers spread across the states of

Rajasthan, Gujarat, Delhi, Haryana, U.P., Uttaranchal, Punjab, J&K, Mumbai & Pune and the

vast pool of highly trained & dedicated marketing and technical service team helps the Company

to service its customers at their doorstep.

Contribution

The First Cement Manufacturer in Northern India to introduce coloured bags, JK Lakshmi

Cement’s Technical Service Cell provides construction solutions to its customers & carries out

regular & innovative contact programmes with Individual House Builders, Masons and Business

Associates to keep in tune with their needs and requirements.

An integral part of major projects like IGNP, Sardar Sarovar Dam, Golden Quadrilateral and

major corporations like L&T, Reliance, NTPC, Essar and Airport Authority of India, JK

Lakshmi Cement has become the preferred choice among the customers because of its

consistency, high level of quality and impeccable customer service.

Mission

To be recognized as an Efficient Competitive & Premium Cement Brand.

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Products

Ready Mix Concrete (RMC) - JK Lakshmi Power Mix.

Plaster of Paris (POP) - JK Lakshmiplast.

JP CEMENTS

Company Profile

Jaypee group is the 3rd largest cement producer in the country. The groups cement facilities are

located in the Satna Cluster (U.P), which has one of the highest cement production growth rates

in India.

The group produces special blend of Portland Pozzolana Cement under the brand name ‘Jaypee

Cement’ (PPC). Its cement division currently operates modern, computerized process control

cement plants with an aggregate installed capacity of 26.20 MnTPA. The company is in the

midst of capacity expansion of its cement business in Northern, Southern, Central, Eastern and

Western parts of the country and is slated to be a 35.90 MnTPA by FY12 (expected) with

Captive Thermal Power plants totaling 672 MW.

Keeping pace with the advancements in the IT industry, all the 260 cement dumps are networked

using TDM/TDMA VSATs along with a dedicated hub to provide 24/7 connectivity between the

plants and all the 120 points of cement distribution in order to ensure “track – the – truck”

initiative and provide seamless integration. This initiative is the first of its kind in the cement

industry in India. In the near future, the group plans to expand its cement capacities via

acquisition and greenfield additions to maximize economies of scale and build on vision to focus

on large size plants from inception. The Group is committed towards the safety and health of

employees and the public.

Mission

‘Work For Safe, Healthy, Clean & Green Environment '.

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Products

Portland Pozzalana Cement.

Ordinary Portland cement.

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LITERATURE REVIEW

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LITERATURE REVIEW

Shin & Soenen, 1998:-In intention to discover the relationship between efficient working capital

management and firm’s profitability used net-trade cycle (NTC) as a measure of working capital

management. NTC is basically equal to the CCC whereby all three components are expressed as

a percentage of sales. The reason by using NTC because it can be an easy device to estimate for

additional financing needs with regard to working capital expressed as a function of the projected

sales growth. This relationship is examined using correlation and regression analysis, by industry

and working capital intensity. Using a Compustat sample of 58,985 firm years covering the

period 1975-1994, in all cases, they found, a strong negative relation between the length of the

firm's net-trade cycle and its profitability. In addition, shorter NTC are associated with higher

risk-adjusted stock returns. In other word, (Shin & Soenen, 1998) suggest that one possible way

the firm to create shareholder value is by reducing firm’s NTC.

Lyroudi & Lazaridis, 2000:- Use food industry Greek to examine the cash conversion cycle

(CCC) as a liquidity indicator of the firms and tries to determine its relationship with the current

and the quick ratios, with its component variables, and investigates the implications of the CCC

in terms of profitability, indebtness and firm size. The results of their study indicate that there is

a significant positive relationship between the cash conversion cycle and the traditional liquidity

measures of current and quick ratios. The cash conversion cycle also positively related to the

return on assets and the net profit margin but had no linear relationship with the leverage ratios.

Conversely, the current and quick ratios had negative relationship with the debt to equity ratio,

and a positive one with the times interest earned ratio. Finally, there is no difference between the

liquidity ratios of large and small firms.

Nazir and Afza (2008):- Used external and internal factors to explore the determinants of

working capital requirements of a firm. Internal factors were operating cycle, operating cash

flows, leverage, size, ROA, Tobin's q and growth while industry dummy and level of economic

activity as external macroeconomic factors. They found that operating cycle, leverage, ROA and

q had an influence on the working capital requirements significantly. The study further revealed

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that working capital management practices are also related to industry and different industries

are following different working capital requirements.

While Rehman (2006):- Studied the impact of the different variables of working capital

management including Average Collection Period, Inventory Turnover in Days, Average

Payment Period and Cash Conversion Cycle on the Net Operating Profitability of firms and

concluded that there was a strong negative relationship between above working capital ratios and

profitability of firms. Furthermore the study stated that managers can create a positive value for

the shareholders by reducing the cash conversion cycle up to an optimal level.

Ramachandran and Janakiraman (2009):- Found negative relationship between EBIT and the

cash conversion cycle (CCC). The study revealed that operational EBIT dictates how to manage

the working capital of the firm. Further, it was found that lower gross EBIT was associated with

an increase in the accounts payable days. Thus the study concluded that less profitable firms wait

longer to pay their bills, taking advantage of credit period granted by their suppliers. While the

positive relationship between average receivable days and firms EBIT suggested that less

profitable firms will pursue a decrease of their accounts receivable days in an attempt to reduce

their cash gap in the CCC.

Ganesan (2007):- He depicted that the working capital management efficiency was negatively

associated to the profitability and liquidity. The study revealed that when the working capital

management efficiency was improved by decreasing days of working capital, there was

improvement in profitability of the firms in telecommunication firms in terms of profit margin.

Padachi (2006): Examined the trend in working capital needs and profitability of firms to

identify the causes for any significant differences between the industries. The results showed that

high investment in inventories and receivables was associated with lower profitability. The

findings also revealed that an increasing trend in the short-term component of trend in the short-

term component of working capital financing. In the study of Raheman and Nasr (2007) they

studied the effect of Working Capital Management on liquidity as well on profitability of the

firm. The results showed that there was a negative relationship between variables of the working

capital management and profitability of the firm. Further the study also found that there was a

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negative relationship between liquidity and profitability and a positive relationship between size

of the firm and its profitability and negative relationship between debt used by the firm and its

profitability.

Afza and Nazir (2007a):- Found the negative relationship between working capital policies and

profitability. In line with the study Afza and Nazir (2007b) further investigated the relationship

between the aggressive/conservative working capital policies profitability as well as risk of

public limited companies. They found a negative relationship between the profitability measures

of firms and degree of aggressiveness of working capital investment and financing policies. The

firms yield negative returns if they follow an aggressive working capital policy.

Deloof (2003):- Investigated the relationship between working capital management and

corporate profitability for a sample of 1,009 large Belgian non-financial firms for the 1992-1996

periods. The result from analysis showed that there was a negative between profitability that was

measured by gross operating income and cash conversion cycle as well number of day’s accounts

receivable and inventories. He suggested that managers can increase corporate profitability by

reducing the number of day’s accounts receivable and inventories. Less profitable firms waited

longer to pay their bills.

Singh and Pandey (2008):- Had an attempt to study the working capital components and the

impact of working capital management on profitability of Hindalco Industries Limited for period

from1990 to 2007. Results of the study showed that current ratio, liquid ratio, receivables

turnover ratio and working capital to total assets ratio had statistically significant impact on the

profitability of Hindalco Industries Limited.

Lazaridis and Tryfonidis (2006):- Have investigated relationship between working capital

management and corporate profitability of listed company in the Athens Stock Exchange. A

sample of 131 listed companies for period of 2001-2004 was used to examine this relationship.

The result from regression analysis indicated that there was a statistical significance between

profitability, measured through gross operating profit, and the cash conversion cycle. From those

results, they claimed that the managers could create value for shareholders by handling correctly

the cash conversion cycle and keeping each different component to an optimum level.

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Raheman and Nasr (2007):- Have selected a sample of 94 Pakistani firms listed on Karachi Stock

Exchange for a period of 6 years from 1999-2004 to study the effect of different variables of

working capital management on the net operating profitability. From result of study, they

showed that there was a negative relationship between variables of working capital management

including the average collection period, inventory turnover in days, average collection period,

cash conversion cycle and profitability. Besides, they also indicated that size of the firm,

measured by natural logarithm of sales, and profitability had a positive relationship.

Filbeck and Krueger (2005):- Highlighted the importance of efficient working capital

management by analyzing the working capital management policies of 32 non-financial

industries in the US. According to their findings, significant differences exist among industries in

working capital practices overtime. Moreover, these working capital practices, themselves,

change significantly within industries overtime. Similar studies were conducted by Gombola and

Ketz (1983), Soenen (1993) and Maxwell et al. (1998).

Weinraub and Visscher (1998):- Discussed the issue of aggressive and conservative working

capital management policies by using quarterly data for the period 1984-93 of the US firms.

Their study considered 10 diverse industry groups to examine the relative relationship between

their aggressive/conservative working capital policies. Their study concluded that the industries

had distinctive and significantly different working capital management policies. Moreover, the

relative nature of the working capital management policies exhibited remarkable stability over

the 10-year study period. The study also showed a high and significant negative correlation

between industry asset and liability policies and found that when relatively aggressive working

capital asset policies are followed, they are balanced by relatively conservative working capital

financial policies.

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RATIONALE OF STUDY

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RATIONALE OF STUDY

The purpose of this study is hopefully to contribute towards a crucial element in financial

management which working capital management. Working capital management and its effects

on profitability is focused in this study. Specific objectives are to examine a relationship between

working capital management and profitability, to establish a relationship between the two

objectives of liquidity and profitability of the firms and to investigate the relationship between

debt used by the a firm and its profitability

Thus investigating this issue could provide additional insights and perhaps different evidence on

the working capital management in emerging capital market. Additionally, the results of this

study would provide firm managers better insights on how to create efficient working capital

management that have ability to maximize firm’s value. As a result, it will build up confidence in

investor to invest in that firm.

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OBJECTIVE OF STUDY

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OBJECTIVE OF STUDY

To study the impact of Working Capital Management on profitability in manufacturing

sector.

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METHODOLOGY

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METHODOLOGY

Research methodology is a way to systematically solve the research problems it may be

understood as a science of studying how research is done scientifically. In it, the various steps

which are generally adopted by a research in studying this research problem along with the logic

behind them are studied.

The need is therefore for those concerned with research to pay due attention designing adhering

to the appropriate methodology throughout for improving the quality of research. The

methodology may differ from problem to problem yet the basic approach towards research

remains the same.

THE STUDY

This is an Exploratory Research is done to gain familiarity with a phenomenon or to achieve

insight into it. The research is to explore the effect of working capital management on profit and

the trend of manufacturing companies’ working capital management practices. The results will

show that there might be a positive or negative linear relationship between working capital and

profitability.

THE SAMPLE UNITS

In the research impact of union budget is bounded to Cement Manufacturing Sector only in last 5

years.

Companies undertaken in analysis are:-

1. ACC Limited

2. Ambuja Cements

3. Ultratech Cements

4. JK Lakshmi

5. JP Cements

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Sources and Method of Data Collection:

Collection of data is a very important activity and utmost care must be taken while collecting the

data because it constitutes the foundation on which the decisions are taken. Hence if the data is

inaccurate and inadequate the whole analysis and the decisions taken based on the inaccurate

data may be wrong. Therefore to avoid this, data must be collected accurately. While deciding

about the method of data collection to be used for the study, the researcher should keep in mind

the following two types of data.

a) Secondary data: Secondary data means data that is already available, i.e., already been

collected and analyzed by someone else. When the researcher utilizes secondary data, then he

has to look into various sources from where he can obtain them. In this case he is certainly not

confronted with the problems that bare usually associated with the collection of original data.

Secondary data may either be published data or unpublished data.

Researcher must be very careful in using secondary data. He must make a minute scrutiny

because it is just possible that the secondary data may be unsuitable in the context of the problem

which the researcher wants to study.

The researcher before using the secondary data must check the reliability of the data and also the

suitability of the data. The data that is suitable for one enquiry may not be suitable in other.

Therefore the already available data should be used by the researcher only when he finds them

reliable, suitable and adequate. The different methods for secondary data collection are

bibliography database, abstract database, full text database, online database, unpublished

database.

Advantages:-

Secondary data can be very effectively used for the comparison of two statistics and then

drawing inferences based on these comparisons.

Secondary data is the best method of getting information regarding a particular area

where the direct collection of data is impossible.

30

Secondary data is the most easily accessible data and saves the researcher the trouble of

going through the tiresome process of collecting data personally.

Secondary data is readily available at cheap rates and is usually quite inexpensive.

Collecting secondary data and analyzing it saves time and effort.

TOOLS FOR DATA COLLECTION

This project is related to the impact of working capital management on profitability in

manufacturing sector. Correlation analysis and Ratio analysis is used to analyse the study. The

elements in these statements are properly studied to make proper interpretations.

Secondary data

The study undertaken is based on secondary data. The data used in the study has been collected

from various sources like-

Websites of companies.

Books.

Journals.

TOOLS AND TECHNIQUES FOR DATA ANALYSIS

- Balance Sheet, Trading and Profit & Loss A/c of manufacturing sector.

- Ratio and Correlation Analysis.

31

METHOD:

Correlation Analysis

The method used to find out correlation coefficient in this study is Karl Pearson’s Deviation of

Actual Mean Method. Here, correlation is calculated between working capital and net profit.

Steps of Calculation-

Calculate the mean of the two given series, i.e., X’ and Y’.

Take deviations of the two series from their respective mean, it is denoted as ‘dx’ for x

series and ‘dy’ for y series.

Get the product of the deviations and obtain the sum of the respective squares of

deviations, i.e., Σdx2dy2.

Get the product of deviations, and sum-up them i.e., Σdxdy

Substitute the respective in the formula of correlation coefficient.

Ratio Analysis

Ratios are calculated by using fixed formulae of Current Ratio, Net Profit Ratio, Gross Profit

Ratio and Operating Profit Ratio.

Finally, interpreting the results of correlation and ratio analysis.

32

CORRELATION ANALYSIS AND RATIO ANALYSIS

1. ACC LIMITED:

Year

Crores

Working Capital(X)Profit(Y)

dx=(x-x') (dx)2

dy=(y-y') (dy)2 dxdy

2003 99 200 220.8 48752.6 -767.4 588902.7-

169441.922004 138 378 259.8 67496 -589.4 34792.4 -222793.22007 18 1439 139.8 19544 471.6 222406.6 65929.72008 -6 1213 115.8 13409.6 245.6 60319.4 28440.52009 -858 1607 -736.2 514990 639.6 409088 -470873.5

Sum -609 4837

664192.2

1315509.1

-768738.42

Number of Years 5 Averages(X')(Y') -121.8 967.4 Standard Deviation 815 1147 Correlation Coefficient -0.822

Table 1.1AVERAGE:

A = average (or arithmetic mean)

N = the number of terms (e.g., the number of items or numbers being averaged)

S = the sum of the numbers in the set of interest (e.g., the sum of the numbers being averaged)

STANDARD DEVIATION:

S.D = √Σ(X−X ’ )2n−1

CORRELATION (r) :Σdxdyσxσy

33

YearRATIOS

CR NPR (%) GPR (%) OPR (%)2003 1.11 6.09 7.7 152004 1.13 9.7 11.4 182007 0.99 20.6 27.6 292008 1 16.7 23.9 262009 0.72 20.02 28.6 33

Table 1.2

Current Ratio = Current Assets/ Current LiabilitiesNet Profit Ratio (NPR) = Net Profit/ Net Sales* 100Gross Profit Ratio (GPR) = Gross Profit/ Net Sales* 100Operating Profit Ratio (OPR) = Operating Profit/ Net Sales* 100

Interpretation:

From Table 1.1 As Correlation Coefficient lies between (-.75 to -1) so there exist high degree of negative

correlation.

From Table 1.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003 and

2004 this means all the assets do not have same liquidity, hence in a worst situation some

of the current asset can be converted into cash to meet its obligations.

But ratio is gradually decreasing from 2007- 2009 which shows that the liquidity

position of the company is not good.

As NPR is increasing every year it shows firms sound profitability and also good capacity

to face adverse condition such as competition and low demand.

Continuous increasing GPR indicates better producing capacity and profitability of

company.

34

2. AMBUJA CEMENTS:

Year

Crores

Working Capital(X) Profit(Y) dx=(x-x') (dx)2 dy=(y-y') (dy)2 dxdy

2003 144 362 -228 51984 -692 47886415777

62004 192 518 -180 32400 -536 287296 964802007 418 1769 46 2116 715 511225 32890

2008 866 1402 49424403

6 348 12110417191

22009 238 1218 -134 17956 164 26896 -21976

Sum 1858 5269

348492 1425385

437082

Number of Years 5 Averages(X')(Y') 372 1054 Standard Deviation 590 1194 Correlation Coefficient 0.62

Table 2.1

AVERAGE:




STANDARD DEVIATION:

S.D = √Σ(X−X’ )2n−1


35

Year

RATIOSCR NPR (%) GPR (%) OPR (%)

2003 3.4 15 26 29.42004 1.5 18 27 302007 1.4 31 53 39.252008 1.6 22.5 36 31.342009 1.14 17.2 30 30

Table 2.2

Current Ratio = Current Assets/ Current Liabilities Net Profit Ratio (NPR) = Net Profit/ Net Sales* 100 Gross Profit Ratio (GPR) = Gross Profit/ Net Sales* 100 Operating Profit Ratio (OPR) = Operating Profit/ Net Sales* 100

Interpretation:

From Table 2.1 As Correlation Coefficient lies between (0.25 to 0.75) so there exist moderate degree of

positive correlation.

From Table 2.2 As the current ratio of the company is more than ideal current ratio (i.e. 2:1) in 2003 it

indicates ideal assets which are not properly utilized.

But ratio is gradually decreasing from 2004-2009 which are near to ideal ratio (2:1)

which shows that all assets do not have same liquidity, hence in a worst situation some of

the current asset can be converted into cash to meet its obligations.




company.

36

3. ULTRATECH CEMENTS:

Year

Crores

Working Capital(X) Profit(Y)dx=(x-x')

(dx)2

dy=(y-y') (dy)2 dxdy

2003 355 39 141 19881 -585 342225 -82485

2004 398 3 184 33856 -621 385641-

1142642007 25 1008 -189 35721 384 147456 -725762008 119 977 -95 9025 353 124609 -335352009 173 1093 -41 1681 469 219961 -19229

Sum 1070 3120 100164 1219892

-322089

Number of Years 5 Averages(X')(Y') 214 624 Standard Deviation 316.5 1104.5 Correlation Coefficient -0.92

Table 3.1

AVERAGE:




STANDARD DEVIATION:

S.D = √Σ(X−X’ )2n−1


37

Table 3.2


Interpretation:

From Table 3.1 As Correlation Coefficient lies between (-.75 to -1) so there exist high degree of negative

correlation.

From Table 3.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003 and

2004 this means all the assets do not have same liquidity, hence in a worst situation some

of the current asset can be converted into cash to meet its obligations.




company.

38

Year

RATIOSCR NPR (%) GPR (%) OPR (%)

2003 1.92 1.7 11.7 16.82004 1.9 0.12 9.9 10.112007 1.27 16 28.3 302008 1.02 18.3 32 33.22009 1.1 15.3 26.4 28.4

4. JK LAKSHMI CEMENTS:

Year

CroresWorking Capital(X) Profit(Y) dx=(x-x') (dx)2 dy=(y-y') (dy)2 dxdy

2003 45 -32 -192 36864 -160 25600 313602004 50 26 -187 34969 -102 10404 190742007 413 224 176 30976 96 9216 168962008 370 179 133 17689 51 2601 67832009 309 241 72 5184 113 12769 8136

Sum 1187 638 125682 60590 82249 Number of Years 5 Averages(X')(Y') 237 128 Standard Deviation 354.5 246.2 Correlation Coefficient 0.94

Table 4.1

AVERAGE:




STANDARD DEVIATION:

S.D = √Σ(X−X’ )2n−1


39

YearRATIOS

CR NPR (%) GPR (%) OPR (%)2003 1.7 -5.7 4.3 112004 1.9 5.3 15 162007 3.33 20 30 32.32008 2.4 14.6 24.2 262009 1.9 16.2 28 29

Table 4.2


Interpretation:

From Table 4.1 As Correlation Coefficient lies between (0.75 to 1) so there exists high degree of positive

correlation.

From Table 4.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003, 2004

and 2009 this means all the assets do not have same liquidity, hence in a worst situation

some of the current asset can be converted into cash to meet its obligations.

As the current ratio of the company is more than ideal current ratio (i.e. 2:1) in 2007 and

2008 it indicates ideal assets which are not properly utilized.

As NPR is negative which indicates weak profitability in 2003 but from 2004 it is

increasing every year it shows firms sound profitability and also good capacity to face

adverse condition such as competition and low demand.

Continuous increasing GPR indicates better producing capacity and profitability of company but in 2009 it reduces a bit which indicates down fall in producing capacity of company.

5. JP CEMENTS:

40

Year

Crores

Working Capital(X) Profit(Y)dx=(x-x')

(dx)2

dy=(y-y')

(dy)2

dxdy

2003 0.5 0.17 -2.6 6.8 -0.63 0.4 1.642004 1.3 0.21 -1.8 3.24 -0.59 0.35 1.0622007 2.31 0.61 -0.79 0.624 -0.19 0.04 0.152008 4.125 0.9 1.03 1.061 0.1 0.01 0.1032009 7.25 1.9 4.15 17.22 1.1 1.21 4.57

Sum 15.485 3.79 28.945 2.01 7.525 Number of Years 5 Averages(X')(Y') 3.1 0.8 Standard Deviation 5.4 1.42 Correlation Coefficient 0.98

Table 5.1

AVERAGE:




STANDARD DEVIATION:

S.D = √Σ(X−X’ )2n−1


41

YearRATIOS

CR NPR (%) GPR (%) OPR (%)2003 1.4 6.6 15.4 10.42004 2.04 7.02 15.6 11.112007 1.6 14.3 24.5 202008 1.8 14.6 25.4 33.62009 2.24 14.6 24.3 33.4

Table 5.2


Interpretation:

From Table 5.1 As Correlation Coefficient lies between (0.75 to 1) so there exists high degree of positive

correlation.

From Table 5.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003, 2007

and 2008 this means all the assets do not have same liquidity, hence in a worst situation

some of the current asset can be converted into cash to meet its obligations.

As the current ratio of the company is more than ideal current ratio (i.e. 2:1) in 2004 and

2009 it indicates ideal assets which are not properly utilized.

As NPR increasing every year at a stable rate it shows firms sound profitability, stability

and also good capacity to face adverse condition such as competition and low demand.


company but in 2009 it reduces a bit which indicates down fall in producing capacity of

company.

42

FINDINGS

FINDINGS

43

From the above study, it has been found that

I. Correlation Coefficient value for companies

ACC limited is -0.822 < 1(High degree of Negative Correlation)

Ambuja Cements is 0.62 < 1(Moderate degree of Positive Correlation)

Ultratech Cements is -0.92 < 1(High Degree of Negative Correlation)

JK Lakshmi Cements is 0.94 < 1(High Degree of Positive Correlation)

JP Cements is 0.98 < 1(High Degree of Positive Correlation)

II. So, correlation said to be negative, if an increase (decrease) in value of one variable is

accompanied by a decrease (increase) in value of other.

III. And also the correlation is said to be positive correlation when increase (decrease) in

value of two variables go simultaneously.

IV. It is also found that high the GPR, NPR percent more the company’s profitability.

44

RECOMMENDATIONS

RECOMMENDATIONS

45

As the current ratio of a company measures its ability to meet short-term obligations. So,

there should be proper balance between both current assets and current liabilities at an

ideal ratio of 2:1.

Companies should continue to maintain high percent of NPR, GPR.

Companies should regularly identify correlation between working capital and profit, as it

shows dependency of one variable on other.

46

CONCLUSION

CONCLUSION

47

By observation, it is pointed out that there require a huge need for management of working

capital to get maximum advantage. Profitability and liquidity are the two aims of working capital

management. Companies should maintain the level of current assets twice the level of current

liabilities to avoid adverse impacts on profitability. If they maintain high level of investment in

current assets. It will be difficult to make payment to creditors and the investment will remain

idle. There will not be proper use of investment and so the profitability will suffer.

Thus, all precaution should be taken for effective and efficient management of working capital.

The financial manager should pay particular attention to the level of current assets and its

financing.

48

REFERENCE

REFERENCE

49

BOOK REFERENCES

- Khan & Jain, Financial Management (4th Edition), Tata McGraw Hill Publishing Co., New Delhi.

- Prasanna Chandra, Financial Management (6th Edition), Tata Mc Graw Hill

Publishing Co., New Delhi.

WEB REFERENCES

- (Title: Effect of working capital management on profitability, Author: M.A.,

Zariyawati, Department of Accounting and

Finance)list.academic-journal.org/submissions/isfa2009_submission_13.doc

- (Title: Trends in Working Capital Management and its Impact on Firms’ Performance, Author: K. Padachi) http://www.bizresearchpapers.com/Kesseven.pdf

- http://www.ibef.org/economy/manufacturing.aspx

- www.acclimited.com

- www.jklakshmi.com

- www.ambujacements.com

- www.ultratech.com

- www.jalindia.com

JOURNAL

- (Title: Conceptual analysis of working capital and its impact on profitability Author:

Sanjay Kumar Sadana)

http://www.indianmba.com/Faculty_Column/FC1228/fc1228.html

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working capital mrp

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