Page 1 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 04
April 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 153
Working Capital Management : Sources
& Its Effects On Profitability
Meenu Jangra
H. No. 212, V& PO Harewali, Delhi
meenujangra115@gmail.com
ABSTRACT
“ Working capital is the life – blood and controlling nerve centre of a business.”
Without proper working management a firm can’t achieve its pre determined objectives and it
is not possible to maintain its financial soundness. The amounts which a firm invests in
working capital are often high in proportion to the total assets employed so it is necessary to
use these amounts in efficient and effective way. Therefore, the aim of working capital
management is to maintain a balance between liquidity and profitability while conducting the
day to day operations of business concern. Working capital management plays a significant
role in the improved profitability of a firm. With the help of this, firms are capable of gaining
sustainable competitive advantage by means of effective and efficient utilization of the amounts
of the organisation. In doing so, the profitability of the firm is expected to increase. An efficient
working capital management is very important to create and increase value for shareholders.
The main purpose of any firm is to maximize profit but to maintain liquidity is also an
important objective. In a firm, there should be proper balance between profitability while
conducting its day to day operations. Because inadequacy of working capital may lead to
insolvency of a firm and excessive funds implies idle funds which earn no profits.The way the
working capital has managed is great impact on both profitability and liquidity. The
management can take the help of various techniques like comparative statements, cash flows
statements, cost – volume – profit analysis, ratio analysis etc. to evaluate its financial
performance. The aim of this paper is to analyze the effect of working capital management on
firm’s profitability.
KEYWORDS: - Working Capital, Profitability, Firm, Cash, Management
INTRODUCTION
In present time, availability of fund
is necessary for every business. Every firm,
whether large or small, needs funds for
short term as well as for long term. Long
term funds are required to purchase fixed
assets. After purchasing these assets,
investments in these assets blocked on
permanent basis. Funds are also needed for
short term purposes like payment of daily
expenses, purchase of raw material etc.
Funds for short term purposes are known as
working capital. All individual components
of working capital like cash, marketable
securities, account receivables, inventory
management etc. play a vital role in the
performance of any firm. In short, working
capital refers to that part of capital which is
required for financing short term purposes.
In general practice,
Working Capital = Current Assets -
Current Liability
Therefore, it is the responsibility of
every management to manage it properly.
Thus, working capital management is
related with the problems that arise in
Page 2 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 04
April 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 154
managing the current assets, current
liabilities and the inter relationship that
exists between them. The main objective of
it is to manage these in such a way that a
satisfactory level of working capital is
maintained and it provides the firm with
maximum return on its assets and
minimizes payments for its liabilities. The
working capital should neither inadequate
nor excessive. Working capital
management have a great effect on the
profitability of a firm. The efficiency of
management is necessary for
manufacturing and construction firms
because in these firms a major part of assets
is compossed of current assets. It directly
effects the profitability of firm. The main
purpose of any firm is to maximize profit
but to maintain liquidity is also an
important objective. In a firm, there should
be proper balance between profitability
while conducting its day to day operations.
Because inadequacy of working capital
may lead to insolvency of a firm and
excessive funds implies idle funds which
earn no profits. It is a difficult task for the
management to estimate the proper
working capital because the amount of
working capital varies from firm to firm
over the periods. The requirements of a
firm depend upon a large number of
factors. Some of them are following:
Nature and size of business
Production, dividend and credit
policy
Length of production cycle
Rate of stock turnover
Business policy
Earning capacity
Price level changes
REVIEW OF LITERATURE
Ghosh and Maji (2003) said that an
attempt is made to examine the efficiency
and effectiveness of working capital
management of the Indian Cement
Company during 1992 – 1993 to 2001-
2002. During the period of study, it is also
tested the speed of achieving the target
level of efficiency by an individual firm.
Shin and Soenen (1998) highlighted that
an efficient working capital management is
very important to create and increase value
for shareholders. This paper found a
negative relationship between lengths of the
firm’s net trading cycle and its profitability.
Dutta and Sukamal (1995) They evaluated
the working capital crisis and working
capital management requirements of
selected paper mills of West Bengal during
the period 1983 – 1984 to 1985 – 86. The
study concluded that the overall financial
conditions of 40% of the firms were
assumed to be precarious.
Mohan and Reddy P. (1991) In Andhra
Pradesh, from 1977 to 1986, they examined
the various aspects relating to working
capital management among six selected
large scale private companies. This study
showed that the investment in current assets
in the companies were more than that of
fixed assets.
Eljelly (2004) According to him, the
working capital management requires
planning and controlling current assets and
current liabilities in such a way that it
eradicatesg the threat of inability to meet
the short term liabilities and evade
excessive investment in these assets.
OBJECTIVES OF THIS STUDY
1) To understand the concept of
Working Capital Management.
2) To study the various sources of
working capital.
3) To study the effect of working
capital management on firm’s profitability.
4) To know the different ways to
manage the different components of
working capital.
Page 3 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 04
April 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 155
RESEARCH METHODOLOGY
This research is totally based on the
secondary data. The available magazines,
articles, books, journals, research paper and
the information and data available on
different websites are extensively used for
this research study.
SOURCES OF WORKING CAPITAL
The main sources of working capital are
as follows:
Commercial Banks: These banks
are the most important source of short term
capital. In the total capital of a firm, major
portion are provided by these banks. They
provide the loans to meet the requirements
of a firm in the form of overdrafts, cash
credit etc.
Advances: During a transaction,
many firms get advances from their
customers. It is a cheap and easy way for a
firm for financing. Some firms, especially
the manufacturing firms having long
production cycle, to minimize their
investment in working capital give
preference to take advance from their
customers.
Instalment method: It is a method
through which the assets are purchased on
instalment basis. In this method, the
possesion of asset is taken immediately but
the payment is made in instalments over a
period of time.
Trade credit: At present,
commerce is built upon credit. The facility
of trade credit is based upon the credit- worthiness of a firm and the relationship
between the firm and its suppliers. In this,
the suppliers of goods extend the credit
during the normal course of business.
Sometimes, the trade credit also take the
form of bills payable.
Accrued expenses: The expenses
which have been incurred but not yet due
are known as accrued expenses like wages
& salary, interest, taxes etc. These expenses
represent the liability that a firm has to pay
for the services already received by it. As
the period of payment increase, the amount
of funds available with the firm increases.
Thus all accrued expenses can be a greater
source of finance for a firm.
EFFECT OF WORKING CAPITAL
MANAGEMENT ON FIRM’S
PROFITABILITY
As we shortens the cash conversion cycle,
cash becomes free for another purposes.
We can invest this cash on equipment,
infrastructure, innovating manufacturing
and selling process or lowering the total
investments in current assets. As a result,
the operating profitability of a firm will
increase. In contrast, when we lengthens
the cash conversion cycle, cash tide up in
the firm’s operation activities. Then there
will be little chance for other investments
of this cashflow. Firm’s profitability is
decreased as a result. After the above
description, we can say that cash
conversion cycle is said to have a negative
relationship with firm’s profitability.
On the other hand, cash conversion cycle
can also have positive influence on firm’s
profitability. It could be interpreted with the
help of inventory period and account
receivable period. The longer the inventory
period, the lower the cost involved in
procrastinating of goods. In the mean time,
the longer the accounts receivable period,
the higher credit sales earned. The higher
reputation can be earned for borrowing
opportunities by lowering the accounts
payable period. Converge the three effects
into one place, we can expain for an
increase in company profitability due to the
long cash conversion cycle. In contrast,
shortenig the cash conversion cycle could
harm the company profitability. The
company could face inventory shortages as
reducing inventory conversion period, lose
good credit customers as reducing accounts
receivable period and hamper its credit
reputation as lengthning the accounts
