ANALYSIS OF WORKING ....

ANALYSIS OF WORKING CAPITAL COMPONENTS AND ITS

RELATIONSHIP WITH LIQUIDITYAND PROFITABILITY IN
POULTRY INUDSTRY - A STUDY OF SELECTED UNITS
MOHD MUJAHED ALI
Asst Professor of Finance and Accounting
Alluri Institute of Management Sciences
Hunter Road, Hanamkonda
Warangal - 506001
Mob: 09849891687, 0870 - 2540517
E - Mail: mubarak_mujahed@yahoo.co.in

ABSTRACT

The relationship of various components of working capital with profitability plays a pivotal role.
It is essential to study the effects of investing in current assets on liquidity and profitability. It is
also needed to gauge the usage of working capital, the study on efficiency of over all working
capital and working capital elements, liquidity of working capital elements and structure of
working capital is imperative. A modest attempt has been made to exhibit the same aspects
through the analysis of data by selecting two units of poultry industry i.e. Venky's India limited
(VIL) and Srinivasa Hatcheries limited (SHL).
Keywords: Current Assets, Working Capital, Profitability, Liquidity, Current Liabilities.

1. INTRODUCTION

Working Capital Management is concerned with all aspects of managing current assets and current
liabilities. Current assets are those assets, which in the ordinary course of business can be converted into
cash within a period of one year without diminution in the value of assets and disrupting the operations of
the firm. The components of Working Capital include cash and bank balances, accounts receivables,
stock of raw materials, work in progress and finished goods, short term investments, prepaid expenses
and incomes outstanding. Current liabilities are those liabilities, which in the ordinary course of business
are expected to be paid within a period of one year. They include accounts payable, short term loans
taken, outstanding expenses and incomes received in advance. In accounting terminology, working capital
is the excess of current assets over the current liabilities. It is the difference between the inflow and
outflow of funds. The goal of the Working Capital Management is to manage the firm’s current assets
and current liabilities at a satisfactory level.

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1. IMPORTANCE
In the Modern money oriented economy “finance” is one of the basic foundations of all kinds of
economic activities. The success of a company to a great extent depends upon its financial
performance. In spite of many developments in the theory of finance, unfortunately, developments
have not been uniform across all areas of financial decision making within and between business
organizations. Working capital appears to have been relatively neglected in spite of the fact that a
high proportion of the business failures is due to poor decisions concerning the working capital of
the firms (Smith 1980a). In a perfect world, working capital assets and liabilities would not be
necessary because there would be no uncertainty, no transaction costs, and no scheduling costs of
production or constraints of technology. The unit costs of producing goods will not change with the
amount produced. Firms would borrow and lend at the same interest rate. Capital, labour and
product markets would reflect all available information and would be perfectly competitive.
However, problems of working capital exist because there is a no scope for the perfect world and
the ideal assumptions are never realistic and therefore working capital levels make a significant
part of a firm’s investment in assets and these assets have to be financed implying that investments
may have benefits as well as costs.
2. OBJECTIVES
i. To analyze the techniques adopted for assessment of working capital requirements in the selected
poultry units.
ii. To examine significance of estimated working capital and actual working capital in the selected
units.
iii. To know the relationship between working capital and profitability in selected units.
iv. To analyze the impact of working capital on liquidity in selected units.

3. RESEARCH METHODLOGY
The study is purely based on Secondary data which is collected from the Annual Reports of
selected units and data available in Government bulletins. Informal discussions are also held with
employees of selected units to solicit their views on inventory management, cash management,
Accounts Receivables and Payment policies of selected units.
4.1 Techniques of Data analysis
While analyzing the quantitative data, statistical techniques like averages, diagrams, graphs, trend
analysis, correlation, regression, Chi – Square test t-test etc., are used. For analyzing opinions,
scaling techniques are also used.
The Regression Equation in estimating the Working Capital Requirements is Y = a + bX
Y = Required Working capital
a = Minimum working capital at no sales

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b = Slope
Regression equation in case of VIL is Yc = 1147 + 0.21 x
Regression equation in case of SHL is Yc = 1998 + 0.05 x
Note: Abbreviations Inventory – INV, Sundry Debtors – SDB, Cash & Bank Balance – CBL, Advances
– ADV, Deposits – DEP, others – OTH, Gross Working Capital – GWC, Total Assets – TA.
4. LIMITATIONS
Though the study is very comprehensive in nature it is subjected to the following limitations.
1. The opinions expressed by respondents and inferences drawn may not be generalized for whole
population.
2. The study covers only pertinent problems of Inventory, Cash and Accounts Receivables and
Payables of selected poultry units.or whole population.erences drawn may not be generalised

5. DATA ANALYSIS
To know the proportionate of the component of working capital and the relevance of the components
and its impact on profitability and liquidity of Venky’s India Limited (VIL) and Srinivasa Hatcheries
limited (SHL) the present analysis is made in the form of following tables.
6.1 Analysis of Components of Gross Working Capital
The analysis of components of Gross Working Capital of select units is presented in the tables 1 to 3
Table 1 shows the component-wise analysis of working capital of Venkateshwara Hatcheries
Group VENKI’S (INDIA) LIMITED. (VIL) from 2000-01 to 2011-12. It is to be noted that
inventory (INV) was the major constituent of the working capital of VIL it was 49 per cent in the
year 2000-01 and it has moved to 44 per cent in the year 2011- 12 and the average inventory was
43 per cent. The second major constituent of working capital of VIL was sundry debtors (SDB)
which was 32 per cent in the year 2000-01 and it has moved to 14 per cent in the year 2011-12
which reveals the efficiency of receivables management and effective credit policy of the VIL
which made to decline the debtors from 32 per cent to 14 per cent and the average debtors was
26 per cent. The third major constituent of working capital is deposits/investments. It was 5 per
cent in the year 2000-01 and went to 34 per cent in the year 2009-10 and 10 per cent in the 2011-
12 and the average was 19 per cent. The cash balances, advances and others were recorded as
6 per cent, 4 per cent and 4 per cent respectively in the year 2000-01. And moved to 28 per cent,
3 per cent and 1 per cent respectively in the year 2011-12 and the average was 7 per cent, 3 per
cent and 2 per cent respectively.
Hence, it is found that inventory, sundry debtors and deposits were the major constituents of
working capital of VIL and it has changed due to the changes in the sales. The total current assets
to total assets were constituted as 48 per cent in the year 2000-01 and moved to 58 per cent in the
year 2011-12. The average was 57 per cent. Thus 57 per cent of the total assets are in the form
of working capital of VIL. Current assets have to be judiciously managed so as to reap higher
returns.

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In working Capital Analysis, the direction of changes over a period is very important. It becomes
a base for judging whether the practice and prevailing policy of the management about working capital
is good enough or an improvement is to be made in managing the working capital funds. Table 3 is an
attempt to estimate the requirements of working capital of VIL and SHL and compare with actual
working capital of VIL and SHL. In case of VIL the fluctuation between actual working capital and
estimated working capital is very high. Out of 12 years of analysis it is found that there are negative
fluctuations for six years and positive fluctuations for the remaining years. The highest negative fluctuation
is recorded in the year 2011-12 as Rs -5797 lakhs and then followed by Rs -1695, Rs -1352, Rs -
1329, Rs -814 and Rs -805 in the year 2002-03, 2000-01, 2001-02, 2003-04 and 2004-05
respectively. The highest Positive Fluctuations is Rs 3588 lakhs in the year 2003-04 and then followed
by Rs 2776, Rs 1954, Rs 1691, Rs 1186 and Rs 597 lakhs in the years 2006-07, 2007-08, 2009-10,
2005-06 and 2000-09 respectively.
In case of SHL the fluctuations between actual working capital maintained and the estimated
working capital requirement reveals that there are less fluctuations when compared to VIL. out of 12
years of Analysis the negative fluctuation stood for six years and the remaining years with positive
fluctuations. The highest negative fluctuation was found in the year 2008-09 with Rs 993 lakhs and
followed by Rs -368, Rs -307, Rs -154, Rs -127 and Rs -20 in the years 2007-08, 2009-10, 2003-
04, 2006-07 and 2001-02 respectively. The highest positive fluctuation is recorded as Rs 865 lakhs in
the year 2002-03 and then followed by Rs 440, Rs 436, Rs 120, Rs 58 and Rs 49 lakhs in the year
2010-11, 2011-12, 2000-01, 2005-06 and 2004-05 respectively.
The behaviour of the working capital is tested through chi-square test at 5 % level of significance in case
VIL and SHL with the help of hypothesis and is presented in table 3.8 and 3.9 respectively.
Null Hypothesis (H10): There is no significant relation between actual working capital and estimated
working capital of VIL
Null Hypothesis (H20): There is no significant relation between actual working capital and estimated
working capital of SHL
TABLE - 4
Significance Test through Chi-square between Actual and Estimated Working Capital of VIL & SHL

Companies Particulars Calculated Chi-square Value Table Value

Result
VIL Significance between Actual and Estimated Working Capital 4746
19.68 Null Hypothesis Rejected
SHL Significance between Actual and Estimated working capital 1003
19.68 Null Hypothesis Rejected

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Table 4 analyses the calculated chi-square value as 4746 which is greater than the table value at 5 %
level of significance 19.68. Hence, the null hypothesis is rejected, which means that there is significant
relation between actual working capital and estimated working capital of VIL. In case of SHL also the
null hypothesis is rejected. Thus there is a difference between the estimated and actual working capital
and it is fluctuating very high.
6.4 Descriptive Analysis Of VIL & SHL
Descriptive analysis shows that the average, standard deviation, minimum and maximum value of variables
included in the study. This descriptive analysis helps to get some picture of working capital adequacy
level of firms.
Table-5

Companies
Particulars VIL SHL
Min Max Mean Std. Dev Min Max Mean
Std. Dev
ITR 3.91 5.96 4.59 .62 4.28 7.78 5.81 .89
DTR 9.11 18.84 11.47 2.88 129 897 286 211
CTR 3.19 7.12 5.20 1.12 1.42 3.32 2.59 .57
CR 1.81 4.02 3.00 .64 1.76 3.55 2.33 .52
QR 1.02 2.44 1.74 .50 1.08 2.84 1.71 .49
CSHR .27 1.42 .80 .42 .42 1.93 1.02 .37
WCR 3.29 6.11 4.41 .80 1.57 5.90 3.34 1.4
CAR 1.64 2.21 1.94 .17 .98 2.40 1.60 .45
PTR 3.10 12.52 6.79 2.82 1.83 19.95 10.69 6.44

Table 5 depicts the descriptive analysis of various components of Working capital in terms of their
minimum, maximum, mean and standard deviation values. The minimum inventory turnover ratio (ITR)
in case if VIL is 3.91, the maximum is 5.96, mean is 4.59 and standard deviation is .62. In SHL the
minimum ITR is 4.28, max is 7.78, mean is 5.81 and standard deviation is .89. Mean of CTR in case of
VIL is 5.20 and 2.59 in SHL. The mean current ratio in case of VIL is 3.00 and 2.33 in SHL. If shows
high liquidity in the organisation. The mean acid test ratio and liquid ratio is 1.74 and .80, 1.71 and1.02
in VIL and SHL respectively.

6.5 Impact of Working Capital on Profitability

To analyse the impact of working capital on profitability coefficient of correlation has been calculated
between working capital and Profit of VIL and SHL and which is portrayed in table 6

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Table – 6
Co efficient of Co-relation between NWC &GWC with Profitability
Co-efficient of correlation VIL SHL
PROFIT PROFIT
NWC .89 .59
GWC .78 .86
Table 6 represents the coefficient of correlation between net working capital (NWC) and profits and
gross working capital (GWC) with profits. In case of VIL there is a high degree positive relationship
between NWC and profits as 0.89. And the coefficient of correlation between GWC and profits is
0.78 which is also highly positively correlated.
In case of SHL the coefficient of correlation between NWC and profits is 0.59 which is high positive
relation and the coefficient of correlation between GWC and profits is 0.86 which is high positive
correlation.
6.6 Analysis of significance of correlation between net working capital and profits by T-test
To analyse the significance of coefficient of correlation between Net Working capital and profit t-
test is applied for both companies.
Null Hypothesis (H30): There is no significant relation between net working capital and
profitability of VIL
Null Hypothesis (H40): There is no significant relation between net working capital and
profitability of SHL
Null Hypothesis (H50): There is no significant relation between Gross Working Capital and
Profitability of VIL
Null Hypothesis (H60): There is no significant relation between Gross Working Capital and
Profitability of SHL

Companies Particulars Calculated Table Value Result

t-test Value
VIL Significance between Null Hypothesis
NWC and Profitability 6.11 2.20 rejected

SHL Significance between Null Hypothesis

NWC and Profitability 2.31 2.20 rejected

VIL Significance between Null Hypothesis

GWC and Profit 3.93 2.20 rejected

SHL Significance between Null Hypothesis

GWC and Profit 5.33 2.20 rejected

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6.7 Impact of working capital on liquidity

To analyse the impact of working capital on Liquidity, coefficient of correlation has been calculated
between working capital and Liquidity ratio Viz Current Ratio (CR), Acid test ratio (ATR) and Cash
Ratio or Absolute Liquid ratio (ALR) of VIL and SHL and which is portrayed in table 3.20
TABLE – 7
Analysis Coefficient of Correlation between Working Capital and Liquidity Ratios

Companies
Years VIL SHL
CR ATR ALR NWC GWC CR ATR ALR NWC GWC
2000-01 2.59 1.31 0.29 4.98 2.21 3.01 2.28 1.32 1.8 1.04
2001-02 2.51 1.24 .32 4.92 1.98 2.24 1.81 0.97 2.12 0.98
2002-03 2.46 1.20 .27 5.21 2.12 3.55 2.84 1.93 1.57 1.09
2003-04 2.63 1.44 .41 4.53 1.87 2.51 1.86 1.26 2.2 1.33
2004-05 2.81 1.62 .68 4.55 1.85 2.34 1.76 1.19 2.46 1.31
2005-06 3.29 1.99 1.01 3.69 1.74 2.43 1.95 1.04 2.9 1.55
2006-07 3.43 2.09 1.01 3.29 1.64 2.38 1.69 0.88 2.93 1.76
2007-08 3.47 2.07 1.07 3.72 1.84 2.09 1.42 0.82 4.12 2.03
2008-09 3.27 2.10 1.03 4.16 2.12 1.76 1.08 0.72 5.9 2.4
2009-10 3.81 2.44 1.42 4.00 2.05 1.8 1.21 0.93 5.36 2.06
2010-11 4.02 2.40 1.4 3.77 1.89 1.94 1.39 0.85 4.55 1.78
2011-12 1.81 1.02 0.69 6.11 1.95 1.93 1.28 0.42 4.23 1.86
( r)with NWC -.68 -.87 -.90 -.84 -.88 -.71
( r)with GWC -.29 -.32 -.35 -.76 -.83 -69

Table 7 calculates the coefficient of correlation between Net working Capital and Liquidity ratios and
Gross working capital with liquidity ratios to analyse the impact of working capital on liquidity of VIL and
SHL. In case VIL the coefficient of correlation between net working capital and liquidity ratios is -0.68,
-0.87, -0.90. Whereas in case of SHL it is -0.84, -0.88 and -0.71 this clearly indicates that there is a high
negative correlation existing between working capital and liquidity of VIL and SHL.

7. CONCLUSION
It is found that inventory, sundry debtors and deposits were the major constituents of working capital of
VIL and SHL and it has changed due to the changes in the sales. Thus 50 per cent of the total assets are
in the form of working capital. Current assets have to be judiciously managed so as to reap higher returns.
Analysis has depicted high degree of positive relationship between NWC and GWC with profits. There is
a negative correlation between net working capital and liquidity of the firms. This directs that they have
more idle funds in the organization which leads for low profitability.

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