INTRODUCTIONOF WORKING CAPITAL

Working capital, also known as net working capital or NWC, is a financial

metric which represents operating liquidity available to a business. Along with fixed
assets such as plant and equipment, working capital is considered a part of operating
capital. It is calculated as current assets minus current liabilities. If current assets are less
than current liabilities, an entity has a working capital deficiency, also called a working
capital deficit.

Working Capital = Current Assets − Current Liabilities

A company can be endowed with assets and profitability but short of liquidity if its assets
cannot readily be converted into cash. Positive working capital is required to ensure that a
firm is able to continue its operations and that it has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses. The management of
working capital involves managing inventories, accounts receivable and payable and
cash.

Working Capital Management

Impact of Working Capital Management in the Profitability of Hindalco Industries
Limited
J P Singh* and Shishir Pandey**

For the successful working of any business organization, fixed and current assets play a
vital role. Management of working capital is essential as it has a direct impact on
profitability and liquidity. An attempt has been made in this paper to study the working
capital components and the impact of working capital management on profitability of
Hindalco Industries Limited. The paper also makes an attempt to study the correlation
between liquidity, profitability and Profit Before Tax (PBT) of Hindalco. The study is
based on secondary data collected from annual reports of Hindalco for the study period
1990 to 2007. The ratio analysis, percentage method and coefficient of correlation have
been used to analyze the data. Multiple regressions were used to check the significant
impact on the profitability of Hindalco.

Introduction
A successful commercial organization needs two types of assets, viz., fixed assets and
current assets. Fixed assets include—land, building, plant, machinery, furniture, etc.
These are not only purchased for the purpose of sale, but also for the purpose of earning
profit for many years. Current assets include, raw materials, work-in-progress, finished
goods, sundry debtors, bills receivables, cash, bank balance, etc. These are purchased 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
transferred into cash or bills receivables. The fixed assets are used in increasing
production of an organization and the current assets are used in using the fixed assets for
day to day working. The management of this working capital is known as working capital
management. The term working capital refers to the amount of capital which is readily
available to an organization. Management of working capital deals...

OBJECTIVES
• meet day-to-day cash flow needs;

• pay wages and salaries when they fall due;

• pay creditors to ensure continued supplies of goods and services;

• pay government taxation and providers of capital – dividends; and

• ensure the long term survival of the business entity

Nature and Scope of Working Capital

Working Capital Management is concerned with the problems that arise in attempting to
manage the Current Assets, the Current Liabilities and the inter-relationship that exists
between them. The term Current Assets refers to those Assets which in the ordinary
course of business can be, or will be, converted into Cash within one year without
undergoing a diminution in value and without disrupting the operations of the firm. The
Major Current Assets are Cash, Marketable Securities, Accounts Receivables and
Inventory.

Current Liabilities are those Liabilities, which are intended at their inception, to be paid
in the ordinary course of business, within a year out of the current assets or the earnings
of the concern .The basic Current Liabilities are Accounts Payable, Bills Payable, Bank
Overdraft and outstanding expense. The goal of Working Capital Management is to
manage the firm's Assets and Liabilities in such a way that a satisfactory level of working
capital is maintained. This is so because if the firm cannot maintain a satisfactory level of
working capital, it is likely to become insolvent and may even be forced into bankruptcy.

The Current Assets should be large enough to cover its current liabilities in order to
ensure a reasonable margin of safety. Each of the current assets must be managed
efficiently in order to maintain the liquidity of the firm while not keeping too high a level
of any one of them. Each of the short term sources of financing must be continuously
managed to ensure that they are obtained and used in the best possible way. The
interaction between current assets and current liabilities is, therefore, the main theme of
the theory of management of working capital.