A study of working capital management efficiency of india cements ltd

INTRODUCTION Working Capital Management is the management of short-term funds and used for day-to-day operations of an enterprise. Working capital refers to that part of firms capital which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Optimization of working capital balance means minimizing the working capital requirements and realizing maximum possible revenues. The efficient working capital management is the most crucial factor in maintaining survival, liquidity, solvency and profitability of the concerned business organization. A business organization should determine the exact requirement of working capital and maintain the same evenly through out the operating cycle. The effective working capital necessitates careful handling of current assets to ensure short-term liquidity of the business. Even though firms traditionally are focused on long term capital budgeting and capital structure, the recent trend is that much company across different industries focus on working capital management efficiency. Cement industry is one of the key industries among various old economy industries with the general economic trend in the past. An infrastructure sector has increased a significant demand of cement in India. Hence, it is characterized by high intensive working capital requirements, which make the working capital management crucial to bring attractive earnings to shareholders. This study proposes that there are measurable linkages among working capital management, profitability and liquidity. This study spell out the key proposals related to several aspects of working capital management of India Cements Ltd. and analyse the financial data for the 5 years period from 1st April 2005 to 31st March 2010. Further this study is to examine the relationship among measures such as working capital management, profitability and liquidity and to discuss their impact on the company working capital efficiency. ABOUT THE COMPANY The India Cements Ltd (ICL) is the first plant setup at Sankarnagar established in 1946. Since it has grown to seven plants spread over with three in Tamilnadu and four Andhra Pradesh. This company is the largest producer of cement in south India and it has the market leader with a market share of 28% in the south. In the near future it aims to achieve a 35% market share. The company was well established brands namely, Sankar Super Power, Coromandel Super Power and Raasi Super power. MEASURES OF WORKING CAPITAL MANAGEMENT EFFICIENCY The amount of working capital management varies over the operating cycle. Operating cycle is to be hard to get the amounts of the components used in operations. Thus, the efficiency of working capital management is measured in terms of the Days of Working Capital (DWC). DWC value is based on receivable, inventory and payable accounts. DWC represents the time period between purchases of materials from suppliers until the sale of finished product to the customers, the collection of receivables and payment receipts. Thus, it reflects the companies ability to finance its core operations with vendor credit. The profitability of the company is measured by operating income to total assets (IA). This indicates the earning power of the company assets. Another profitability measure is used by operating income to sales (IS). This indicates the profit margin on sales. In order to measure the liquidity of the company the cash conversion efficiency (CCE) and current ratio (CR) are used, the CCE is the cash flow generated from operating activities related to the sales. Table 1 gives the formula for calculating these values. DEFINITIONS OF WORKING CAPITAL MANAGEMENT COMPONENTS

Days Sales Outstanding (DSO) = Receivables/(sales/365) Days Inventories Outstanding (DIO) = Inventories/(sales/365) Days Payable Outstanding (DPO) = Payables/(sales/365) Days Working Capital (DWC) = DSO + DIO DPO Current Ratio (CR) = Current Assets/Current liability Cash Conversion Efficiency (CCE) =Cash flow from operations/Sales Income to Total Assets (IA)= Operating income/Total assets Income to Sales (IS) = Operating income/Sales OBJECTIVES The main objective of this research article is to examine the working capital management efficiency of India Cements Ltd. over a period of 5 years from 2005-06 to 2009-2010. In order to achieve the main objective, the following further objectives can supplement:

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To analyse the relationship between working capital management, profitability and liquidity. To assess the impact of working capital management efficiency on profitability and liquidity.

HYPOTHESIS The study is based on the following null hypotheses (H0): H01: H02: There is no significant relationship between working capital management, profitability and liquidity. There in no impact on working capital management efficiency by profitability and liquidity.

METHODOLOGY The study is based on secondary data of India cements ltd. To accomplish the aforesaid research objectives, the data for this study was gathered from the financial statement of the company website (www.indiacements.co.in). The annual data for the five years period from 1st April 2005 to 31st March 2010 were used for calculating the key ratios in order to examine the working capital management efficiency of the company. Working capital management efficiency is the independent variable, and measured by DWC, DSO, DIO, and DPO. The dependent variables of this study are the following:

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The profitability measured by IA and IS. The liquidity measured by CCE and CR.

Therefore, ratio analysis, correlations, regression analysis were applied to examine the relationship and the impact of independent variables on the dependent variables. Correlation coefficient is used to investigate correlation between the paper variables at 5% level of confidence according to the SPSS software package. RESULTS AND DISCUSSION The descriptive statistics for the components of working capital management efficiency of India cements ltd. The standard deviation of 16.80 days and median of 91 days for DWC indicates the company has higher days of working capital. DIO have higher standard deviation of 20.76 days and it median of 66 days indicates that the company has higher days of inventory. The other components of working capital DSO and DPO have moderate standard deviation of 6.54 days and 6.20 days respectively. However, the DSO median 37 days and DPO median 11 days of the company surveyed for working capital management. IA have lowest standard deviation of 0.07 and it median of 0.14 indicates that the company has heavy fixed assets requirement reduced to the effect of working capital management on income related to fixed assets. Hence, it is observed that working capital management indicates that the company have not managed inventory well and this is the contributor for the increased median of the DWC. CORRELATION ANALYSIS The correlation analysis is done to analyse the relationship between the efficiency of working capital management (DSO, DIO, DPO and DWC) and profitability (IA and IS) and liquidity (CR and CCE) of the company. Pearson correlation coefficients are used to examine the association among these variables. working capital management efficiency is expected to improve a company profitability and liquidity. The statistical evidence indicated that the profitability (IA and IS) and liquidity (CCE and CR) are negatively correlated to working capital management efficiency (DSO, DIO, DPO and DWC). Hence, we conclude that there is a significant relationship between working capital management, profitability and liquidity. Therefore, the first hypothesis was rejected. ANALYSIS OF VARIANCE (ANOVA) Independent variables (DSO, DIO and DPO) impact on working capital management efficiency measured by profitability (IA and IS) and liquidity (CCE). ANOVA are used to asses the impact among these variables. The results of the ANOVA is to accept null hypothesis (H0) if the calculated F.sig is greater than 0.05 and vice versa. Therefore that the values of F.sig 0.128, 0.119 and 0.141 indicates there is no impact of independent variables (DSO, DIO and DPO) of working capital management of India cements ltd. measured by dependent variables (CCE, IA and IS). Hence, the second hypothesis was accepted. CONCLUSION Analysis of working capital management efficiency was done on a sample of India cements ltd. The analysis was done to find statistical evidence to support the hypotheses. It is found that the working capital management efficiency is negatively associated to the profitability and liquidity. It is also observed that there is no impact among working capital management efficiency measured by profitability and liquidity. From the statistical evidences it is observed that higher average of DWC of the company and the working capital management components DSO and DIO are in line with their averages. This indicated that the inventory management of the company may not be efficient due to the heavy fixed assets requirements reduced to the effect of working capital management efficiency in the company. There is also evidence that there is poor management of accounts receivable and accounts payable. Overall there is evidence that there is working capital management efficiency in the company is poor. It is suggested that the company should improve working capital management efficiency by concentrating on reducing inventory and improving DPO by getting more credits from suppliers.

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