View of A COMPARATIVE STUDY OF WORKING CAPITAL MANAGEMENT (A CASE STUDY)

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ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING

Peer Reviewed and Refereed Journal, ISSN NO. 2456-1037

Available Online: www.ajeee.co.in/index.php/AJEEE

Vol. 06, Special Issue 01, (IC-RCOVID19) April 2021 IMPACT FACTOR: 7.98 (INTERNATIONAL JOURNAL) 278 A COMPARATIVE STUDY OF WORKING CAPITAL MANAGEMENT (A CASE STUDY)

Prof. (Dr) Jayesh Shah

Dean, Research Department renaissance University-Indore

Abstract:- Accounting standards board‟s guidance which states working capital as “the funds available for conducting day to day operation of an enterprise. There are many software industries in India, but due to the limitation of the words only performance of two companies is possible to cover and these are “INFOSYS” and “WIPRO”. In the modern industrial world, the problem of efficient financial management has prime importance. The efficiency of an organization is measured in terms of certain parameters such as profit/

earnings, management of working capital and payments made to investors in the form of dividend etc., the giant structure of any Industry including IT sector industry can only be built on a sound financial base, which ultimately depends upon the availability of adequate finance in the form of working capital. For bright success of any enterprise the management of working capital and earnings is a significant function of finance manager because it affects the price of shares in the stock market and return (i.e., dividends) to the shareholders. This paper is focused on working capital management & its implication in it industry in India with challenges &suggestions.

Keyword: A/c, Cost, Capital, Fund Raising, IT & A/c.

1. INTRODUCTION: WORKING CAPITAL MANAGEMENT

Working Capital is the amount of capital that a business has available to meet the day to day cash requirements of its operations. It is concerned with the problem arise in attempting to manage the current assets, the current liabilities and the interrelation ship that exist between them. Working Capital is the difference between resources in cash or readily convertible in to cash and organizational commitments for which cash will soon be required or within one year without undergoing a diminution in value and without disrupting the operation of the firm. It also refers to the amount of current Assets that exceeds current Liabilities.

Working Capital refers to that part of the firm capital, which is required for financing Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories. Working Capital is also known as Revolving or Circulating Capital or Short Term Capital. Capital required for a business can be classifies under two main categories:

Fixed Capital, Working Capital: Every business needs funds for two purposes for its establishments and to carryout day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firm„s capital which is blocked on a permanent or fixed basis and is called fixed capital.

Funds are also needed for short term purposes for the purchasing of raw materials, payments of wages and other day to day expenses etc. These funds are known as working capital.

2. CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital: Balance Sheet concepts, Operating Cycle or circular flow concept.

2.1 Balance Sheet Concept

There are two interpretation of working capital under the balance sheet concept: Gross Working Capital, Net Working Capital. The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets. Example of current assets is: Constituents of Current Assets: Cash in hand and Bank balance, Bills Receivable, Sundry Debtors, Short term Loans and Advances, Inventories of Stock as: Raw Materials, Work in Process, Stores and Spaces, Finished Goods. Temporary Investments of Surplus Funds. Prepaid Expenses. Accrued Incomes. The term working capital refers to the networking capital. Net working capital is the excess of current assets over current liabilities or say:

Net Working Capital= Current Assets –Current Liabilities.

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ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING

Vol. 06, Special Issue 01, (IC-RCOVID19) April 2021 IMPACT FACTOR: 7.98 (INTERNATIONAL JOURNAL) 279 2.2 Networking Capital may be Negative or Positive

When the current assets exceed the current liabilities, the working capital is positive and the negative working capital results when the current liabilities are more than the current assets.

2.3 Constituents of Current Liabilities: Bills Payable. Sundry

Creditors or Account Payable. Accrued or Outstanding Expenses. Short term Loans, Advances and Deposits. Dividends Payable. Bank Overdraft. Provision for Taxation, If does not amount to appropriation of profits.

The gross working capital concept is financial or going concern concept where as networking capital is an accounting concept of working capital.

3. REVIEW OF LITERATURE

Every business needs funds for two purposes basically; they are for establishment and to carry day-to-day operations. Long term funds are required for establishment of the organization, it is required for production facility through purchase of fixed assets and it needs fixed capital and the funds which are needed for short term purposes for the purchase of raw materials, payment of wages, payment of day to day expenses etc, the funds required for these are known as Working capital.

3.1 According to Genestenberg

"Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables into cash."The working capital is needed for the following purposes:-

For the purchase of raw materials, components and spares. To pay wages and salaries. To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc. To met the selling costs as packing, advertising etc. To provide credit facility to customers. To maintain the inventories of raw material, work-in-progress, stores and spares and finished stock.

3.2 According to Eljelly, in 2004

Elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. First, it was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that there was great variation among industries with respect to the significant measure of liquidity.

3.3 According to Deloof, in 2003

Discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian firms.

3.4 Rationale of the Study

A study on management of working capital in selected it companies in India.

3.5 Objectives

 The broad objective of this study is to measure CASH management of selected units.

Other objectives of the study are mentioned asunder.

 To analyze the Working Capital Position of both company. To examine the liquidity position the both company by some important parameter of cash and liquidity management such as: Current ratio, Liquid ratio, Cash ratio, Debtorratio.

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ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING

Vol. 06, Special Issue 01, (IC-RCOVID19) April 2021 IMPACT FACTOR: 7.98 (INTERNATIONAL JOURNAL) 280 4.RESEARCH METHODOLOGY

A. Research Design: The study designed is exploratory and in nature.

B. Data Collection: Secondary Data: Journal„s, Magazines, News papers, Conference proceedings, Books, Internet etc.

C. Sampling Technique: For the purpose of analysis of data various ratio relating to cash position and cash management is calculate, moreover, the simple technique such as standard deviations, average, and T test also applied to analyze the consistency.

D. Statistical Tools: Non-Parametric Test: T-test is applied.

5. DATA ANALYSIS

Descriptive Statistics Descriptive Statistics (N=10) Accounts

Receivable Minimum

11.00 Maximum

136.00 Mean

66.7000 Std. Deviation 42.68242 Accounts

Payable 08.00 119.00 55.4000 35.47205

Inventory

Period 14.00 71.00 44.7000 19.75432

Cash Conversion Cycle

06.00 143.00 56.0000 42.40283

Profit 10.00 26.70 17.5740 5.32292

Below analysis reveals that the credit period granted by companies to their clients ranged at 66.70 days while they paid their creditors in 55.40 days on average. Inventory took on an average 44.70 days to be sold. Overall, the average cash conversion cycle ranged at 56.00 days.

5.1 Regression Analysis

In order to test which element of working capital contributes most in predicting profitability, a linear regression was performed.

With the purpose of measuring the multi-co-linearity effect among independent variables with reference to dependent variable VIF (Variance Inflation factors) statistics was calculated. The value of VIF statistics 10 or less than 10 is found to be satisfied pertaining to multi-co-linearity and it was found that the value of VIF statistics was 3.671, 4.749, 5.763 and 4.129 incase accounts receivable, accounts payable, inventory period and cash conversion cycle respectively.

DATA ANALYSIS

Descriptive Statistics Descriptive Statistics (N=10)

Variables Profitability

βa bb Sig

Accounts 0.438 0.524 0.000*

Receivable

Accounts Payable 0.301 0.311 0.027*

Inventory Period 0.171 0.193 0.068

Cash Conversion 0.061 0.068 0.190

Cycle

R2 0.620

AdjustedR2 0.317

F 2.042*

Note: a Standardized coefficients; b Un-standardized coefficients,*Significantat0.001level In above table, it was found that out off our variables; only two were significant i.e. ‗accounts receivables„ and ‗accounts payable„, when they are used as proxy for working capital; as the coefficient of the variables is positive and significant (0.438 & 0.301 resp.), while variable ‗cash conversion cycle„ is not significant in explaining profitability (0.061). As

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ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING

Vol. 06, Special Issue 01, (IC-RCOVID19) April 2021 IMPACT FACTOR: 7.98 (INTERNATIONAL JOURNAL) 281 faras inventory conversion period concern, is found to be least significant in predicting profitability compare to accounts receivables and accounts payables. In order to know which variable influence most in predicting profitability, their respective regression weights (β values) were considered. As depicted in the table, Bills Receivable (β=0.438) contributed higher compared to Bills Payable (β=0.301).

6. FINDING & RESULTS

Collected data were investigated using SPSS software package. Correlation was first applied to profitability to assess relationship among dependent and independent variable. After that multiple regressions was employed to test the density of relationships. Regression results shows that density of variables were highest among accounts receivable and accounts payable. It was found that accounts receivable and accounts payable were significant in explaining profitability. As is evident here, the working capital dimension of accounts receivable and accounts payable drives the profitability of sample population, whereas the other components remain insignificant.

6.1 Limitations

This study is limited to the sample of IT. Index Indian firms. The finding of this study can only be generalized to IT Sectors similar to those that were included in research. Future research should investigate generalization of the findings beyond the Indian IT sector.

Further research may extend to the working capital components including cash, marketable securities etc.

7. CONCLUSION

This paper observed a negative relationship between accounts receivables and corporate profitability and a positive relationship between accounts payable and profitability.

Consequently, it appears that profitability dictates how managers act in terms of managing accounts receivables. Thus, the findings of this paper suggest that managers can create value for their shareholders by reducing the number of days for accounts receivables.

We may further conclude that these results can be further strengthened if the firms manage their working capital in more efficient ways. If these firms properly manage their cash, accounts receivables, accounts payable and inventories in proper way, this will ultimately increase profit ability of these companies.

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