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 firms 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 assetliability mismatch may occur which may increase firms profitability in the short run but at a risk of

 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 Ltd

2.Autoline Industries Ltd

3.Steel Strips Wheels Ltd 4.Kar Mobiles Ltd

5.Wheels India Ltd

 1.Hathway Bhawani Cabletel & Datacom Ltd

2. Delton Cables Ltd

3.Mahanagar Telephone Nigam Ltd 4.Tulip Telecom Ltd

5.Hartron Communications Ltd

 1.Balaji Amines Ltd

2.Aarti Industries Ltd

3.Aditya Birla Chemicals (India) Ltd 4.Aban Offshore Ltd

5. Lime Chemicals Ltd

 1.Bajaj Auto Ltd

2.TVS Motor Company Ltd

3.Hero MotoCorp Ltd. 4.Mahindra & Mahindra Ltd

5.Maruti Suzuki India Ltd

 1.Kesoram Industries Ltd

2.NCL Industries Ltd 3. OCL India Ltd

4.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 tools 2. Statistical tools

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

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

Operating Profit Margin =

Operating Profit Net Sales *100

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.
Return On Total Assets = Earning After tax Total Assets *100

ASSETS TURNOVER RATIO

A_TURN

CURRENT RATIO
Current 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 assets Current ratio = Current liabilities

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

Quick ratio =

Quick assets Current liabilities

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 profitability The optimum level of current assets that should be maintained in the firm by considering the both liquidity and profitability

Current Assets Current assets to Total assets ratio =

Total Assets

Trade debtors to current assets ratio

Trade Debtors Debtors Turnover Ratio = Current Assets

Statistical tools

REGRESSION ANALYSIS ROTA = + 1 sales + 2 gear + 3 cata + 4 clta + 5 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 Setco Automotive Ltd Steel Strips Wheels Ltd Autoline Industries Ltd Kar Mobiles Ltd Wheels India Ltd Mean Standard Deviation

OPM 45.16 13.92 3.76 4.67 2.79 14.06 17.95

ROTA A_TURN GEAR 0.28 0.14 0.14 0.14 0.13 0.17 0.06 1.63 1.14 0.87 1.59 1.7 1.39 0.36 1.04 1.13 0.9 0.66 0.7 0.89 0.21

CR 3.12 1.67 1.62 1.83 1.53 1.95 0.66

QAR 3.12 1.67 1.62 1.83 1.53 1.95 0.66

CATA 0.65 0.36 0.36 0.7 0.56 0.53 0.16

CL/TA 0.068 0.51 0.44 0.7 0.51 0.45 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 companys 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 NCL Industries Ltd OCL India Ltd J. K. Cement Limited JK Lakshmi Cement Ltd Mean Standard Deviation

10.04 3.96 4.26 5.3 4.2 5.55 2.56

0.17 0.18 0.21 0.2 0.2 0.19 0.02

1.09 0.67 0.88 0.95 0.74 0.87 0.17

0.88 0.89 1.05 0.83 0.96 0.92 0.09

1.59 1.31 1.72 1.61 1.77 1.60 0.18

1.59 1.31 1.72 1.61 1.77 1.60 0.18

0.45 0.34 0.46 0.41 0.4 0.41 0.05

0.29 0.26 0.28 0.25 0.4 0.30 0.06

Interpretation: Operating profit margin From 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.
Name of the Company Hathway Bhawani Cabletel & Datacom Ltd OPM ROTA A_TURN GEAR CR QAR CATA CL/TA

45.61

0.08

1.2

0.48

0.88

0.88

0.48

0.55

Delton Cables Ltd

Mahanagar Telephone Nigam Ltd Tulip Telecom Ltd Hartron Communications Ltd Mean Standard Deviation

13.29
3.76 4.67 2.79 14.02 18.15

0.12
-0.01 0.23 0.12 0.11 0.09

1.54
0.18 1.1 0.26 0.86 0.60

0.6
0.49 1.02 0.88 0.69 0.24

2.19
1.08 5.41 2.33 2.38 1.81

2.19
1.08 5.41 2.33 2.38 1.81

0.88
0.6 0.53 0.22 0.54 0.24

0.4
0.58 0.12 0.12 0.35 0.22

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 companys 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 companys. 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.
Name of the Company Balaji Amines Ltd Aarti Industries Ltd Aditya Birla Chemicals (India) Ltd OPM 6.48 7.28 2.59 ROTA 0.18 0.16 0.19 A_TURN GEAR 51.2 1.16 0.47 0.81 0.8 0.42 CR 2.11 2.64 1.64 QAR 2.11 2.64 1.64 CATA 0.57 0.66 0.38 CL/TA 0.27 0.25 0.73

Aban Offshore Ltd Lime Chemicals Ltd Mean Standard Deviation

1.61 -5.08 2.58 4.92

0.33 -7.2 -1.27 3.32

0.52 1.28 10.93 22.52

2.14 0.5 0.93 0.70

4.13 1.08 2.32 1.16

4.13 1.08 2.32 1.16

0.66 0.5 0.55 0.12

0.18 0.56 0.40 0.24

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.

Name of the Company Bajaj Auto Ltd TVS Motor Company Ltd

OPM 6.59 34.01

ROTA 0.38 0.08

A_TURN 2.38 2.19

GEAR 0.98 0.86

CR 0.83 1.1

QAR 0.83 1.1

CATA 0.68 0.51

CL/TA 0.83 0.46

Hero MotoCorp Ltd Mahindra & Mahindra Ltd

Maruti Suzuki India Ltd Mean Standard Deviation

7.21

0.59

4.28

1.16

0.42

0.42

0.44

3.02

8.33

0.26

2.07

1.22

1.1

1.1

0.7

0.65

8.88 13.00 11.78

0.3 0.32 0.19

2.6 2.70 0.90

1.19 1.08 0.16

1.3 0.95 0.34

1.3 0.95 0.34

0.51 0.57 0.12

0.39 1.07 1.10

Interpretation:

Operating Profit Margin From 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
VARIABLES A_TURN SD OPM SD GEAR SD CR SD QAR SD CA/TA SD CL/TA SD TD/CA SD ROTA SD CATA SD ALL(N=25) 0.67 (0.04) 1.76 (1.41) 0.18 (0.03) 0.35:1 (0.18) 0.35 (0.18) 0.10 (0.06) 0.096 (0.05) 0.42 (0.18) 0.023 AM(N=5) 1.38 (0.13) 9.07 (1.27) 0.88 (0.10) 1.95:1 (0.29) 1.95 (0.29) 0.52 (0.04) 0.28 (0.04) 1.55 (0.41) 0.17

INDUSTRIES CM(N=5) TC(N=5) 0.86 0.85

(0.12) 5.55 (2.86) 0.92 (0.10) 1.6:1 (0.3) 1.6 (0.3) 0.41 (0.05) 0.29 (0.05) 3.32 (2.67) 0.19 (0.17) 14.02 (16.85) 0.69 (0.07) 2.37:1 (1.21) 2.37 (1.21) 0.54 (0.12) 0.35 (0.05) 1.84 (0.47) 0.09

CH(N=5) 10.92 (0.15) 2.58 (9.03) 0.93 (0.32) 2.32:1 (2.69) 2.32 (2.69) 0.55 (1) 0.42 (0.12) 1.96 (0.71) 1.26

TW(N=5) 2.70 (0.48) 13 (5.48) 1.08 (0.24) 0.95:1 (0.15) 0.95 (0.15) 0.56 (0.29) 1.07 (1) 1.97 (0.47) 0.32

(0.28) 0.096
(0.01)

(0.03) 0.52
(0.05)

(0.06) 0.41
(0.07)

(0.04) 0.38
(0.08)

(6.95) 0.55
(0.21)

(0.01) 0.56
(0.06)

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 Variables The 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

CR Industry 2007 2011 2007 2011 2007 2011 2007 2011 2007 2011 QAR TD/CA CA/TA CL/TA

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 Variables

Return on total assets Retun On TotalAssets Operating profit margin Assets turnover Gearing Currentassets total assets Stock assets total assets Trade detor current assets Current liabilities total assets Operating profit margin Assets turnover Gearing Current assets total assets Stock current assets Trade detors current assets Current liabilities total assets

-.711
1

.997**
-.662 1

.284
-.220 .260 1

.335
.375 .404 .050 1

.304
-.277 .324 -.806 .110 1

-.120
-.386 -.193 .162 -.883* -.274 1

.042
.423 .062 .707 .493 -.767 -.171

* 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 Operating profit margin Assets turnover Gearing Current assets total assets Stock current assets Trade detors current assets Current liabilities total assets F value N R value

ROA .439 .029 .063 -.057 .049 .023 .018 3.893* 25 .435

5.190* .348 .713 -.593 .551 .239 .214

 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.