WORKING CAPITAL MANAGEMENT:CORRELATION BETWEEN LIQUIDITY AND PROFITABILITY OF

BHARATI AIRTEL

working capital performance of Bharti Airtel during the period 2018to 2014.An attempt has been made to
measure the working capital performance with the help of ratio analysis. Statistical as well as econometric
techniques are employed in order to assess the behavior of the selected ratios. Current ratio, inventory
turnover ratio, Debtors turnover ratio, gross profit ratio, operating profit ratio showed satisfactory
performance and current ratio, of the company were not found to be satisfactoryIntroduction:

Liquidity - Having enough money in form of cash,to meet your financial obligations.Alternatively,the
ease with assets can be converted in to cash.

Profitability – A measure of the amount by which a company`s revenue exceeds its relevant
expenses.

Liquidity Vs Profitability-Liquidity and profitability are the two corners of a straight line. If you are on
the line and move towards one,you automatically move away from the other.In other words, there is
a trade – off between liquidity and profitability.

The liquidity is the ability of a firm to pay its short term obligation for the continuous
operation. A firm is considered normally financially solid and low risky which has huge cash.
The liquidity is not only measured by the cash balance but also by all kind of assets which
can be converted to cash within one year without losing their value. It has primary
importance for the survival of a firm both in short term and long term whereas the
profitability has secondary important. The profitability measures the economic success of the
firm irrespective to cash flow in the firm. It is often observed that a firm is very profitable in
its books but it does not have sufficient cash and cash equivalent to pay its daily bills and due
obligations. That is an illustration of classical poor liquidity management. The empirical
studies have proved it that a large number of the firms are bankrupt not because they are not
profitable but they do not have sufficient liquidity.

The liquidity of a firm is measured primarily by current ratio and net working capital
whereas the profitability is measured by return on assets and return on equity. The liquidity
focuses on short term assets which generate low profit and contain low risk. The current ratio
is considered acceptable if current assets to current liabilities are equal to 1. The current
assets of a firm should be at least at the level which covers the current liability with some
extra margin of safety of current assets. The negative working capital generally is a sign of
short term financing requirement which is normally expensive and considered an extra
burden to reduce the profit. It is an important determinant for corporate loan business to
evaluate the working capital, current assets and current liability of borrower firm before
providing any credit facility. The liquidity measures also include the quality of current assets.
The assets which can be converted in cash within a year without losing their value are
considered qualitative current assets.

The profitability of a firm is measured by the ROE (return on equity) and ROA (return on
assets). The profitability and the survival of a firm is positively correlated but not perfectly
correlated. It illustrates that the firm can survive without profit for some years but the long
term survival is not possible without profit. The return on equity is estimated on accrual basis
of accounting irrespective to the actual cash flow.
Bharti Airtel

Bharti Airtel Limited also known as Airtel is an Indian global telecommunications services
company based in Delhi, India. It operates in 20 countries across South Asia and Africa. Airtel
provides GSM, 3G, 4G LTE mobile services, fixed line broadband and voice services depending
upon the country of operation. Airtel had also rolled out its VoLTE technology across all Indian
telecom circles except Jammu and Kashmir and Andaman and is likely to launch in these circles
soon.[8] It is the second largest mobile network operator in India and the third largest mobile
network operator in the world with over 438.04 million subscribers.Airtel was named India's
second most valuable brand in the first ever Brandz ranking by Millward Brown and WPP plc.
Airtel is credited with pioneering the business strategy of outsourcing all of its business
operations except marketing, sales and finance and building the 'minutes factory' model of low
cost and high volumes. The strategy has since been adopted by several operators.Airtel's
equipment is provided and maintained by Ericsson, Huawei, and Nokia Networks whereas IT
support is provided by IBM.The transmission towers are maintained by subsidiaries and joint
venture companies of Bharti including Bharti Infratel and Indus Towersin India. Ericsson agreed
for the first time to be paid by the minute for installation and maintenance of their equipment
rather than being paid up front, which allowed Airtel to provide low call rates
of ₹1 (1.4¢ US)/minute.

WORKING CAPITAL FINANCING APPROACHES:

APPROACHES

HEDGING or
AGGRESSIVE CONSERVATIVE
MATCHING

A) Matching or hedging approach:

This approach matches assets and liabilities to maturities. Basically, a company uses long
term sources to finance fixed assets and permanent current assets and short term financing to
finance temporary current assets.
Example: A fixed asset which is expected to provide cash flow for 5 years should be
financed by approx 5 years long-term debts. Assuming the company needs to have additional
inventories for 2 months, it will then seek short term 2 months bank credit to match it.

B) Conservative approach:
It is conservative because the company prefers to have more cash on hand. That is why, fixed
and part of current assets are financed by long-term or permanent funds. As permanent or
long-term sources are more expensive, this leads to “lower risk lower return”.

C) Aggressive approach:
The Company wants to take high risk where short term funds are used to a very high degree
to finance current and even fixed assets.
RESEARCH QUESTION
Is it better to be aggressive or conservative in managing working capital?

OBJECTIVE OF THE STUDY

The objective of this study is to carry out empirical investigation whether it is better to be
Aggressive or Conservative in formulating strategies for working capital management.

LITERATURE REVIEW
This section is devoted to the review of the researches that had been carried out by other
researchers on this topic

Filbeck and Krueger (2005) on Understanding the Working Capital... highlighted the
importance of efficient of working capital management by carrying out analysis of working
capital management policies of 32 non-financial industries in United States of America. The
result revealed that significant differences exist between industries in working capital practice
overtime.

Weinraub and Visscher (1998) have discussed the issue of aggressive and conservative
working capital management. The authors concluded that the industries had distinctive and
significantly different working capital management policies. The study also showed a high
and significant negative correlation between industry assets and liabilities policies and found
that when relatively aggressive working capital asset policies are followed, they are balanced
by relatively conservative working capital financial policies.

Deloof (2003) analyzed a sample of large Belgian firms during the period1992-1996 and the
result confirmed that Belgian firms can improve their profitability by reducing the number of
days accounts receivable are outstanding and reducing inventories.

Teruel and Solano(2005) suggested that managers can create value by reducing their firms’
number of days account receivables and inventories. Similarly, shortening the cash
conversion cycle also improves the firm’s profitability.
Rehman (2006) investigated the impact of working capital management on the profitability of
94 Pakistani firms listed at Islamabad Stock Exchange(ISE) for a period of 1999-2004.. He
concluded that there is a strong negative relationship between above working capital ratios
and profitability of firms. Furthermore, managers can create a positive value for the
shareholders by reducing the cash conversion cycle up to an optimal level.

Falope and Jailor (2009) conducted investigation using a sample of 50 Nigerian quoted non-
financial firms for the period1996-2005. They found a significant negative relationship
between net operating profit and the average collection period, inventory turnover in days,
average payment period and cash conversion cycle.

Luo et al. (2009) stated that if the value of the firm enhances the cash cycle will decrease.

Gill et al. (2010) found that if the firm is maintaining it accounts receivable, accounts payable
and inventories at optimum level the firm will generate maximum profit.

Dong & Su (2010) observed significant association of cash conversion cycle with the return
on investments of the companies.

Sharma & Kumar (2010) found that in Indian firm length of cash cycle and profitability have
positive relationship between them.

VARIABLES
The variables used in this study about working capital management as a financial strategy are
as follows:

❖ Current ratio and cash conversion cycle as measurement of aggressiveness of working

capital are independent variables.
❖ Operating profitability that is, a measure of profitability of a firm and return on capital
employed are used as dependable variable.
❖ Number of days accounts receivable used as proxy for the collection policy is an
independent variable. It is calculated as (average debtors x365)/sales.
❖ Number of days accounts payable used as proxy for the payment policy is an
independent variable. It is calculated as (average creditors x365)/Net Purchases.
❖ The cash conversion cycle used as a comprehensive measure of working capital
management is another independent variable. It is calculated as (number of day’s
accounts receivable + number of day’s inventory used- number of days accounts
payable).
Conclusion

I conclude the article with a general perception that liquidity is required for the short term
survival of the firm and profitability stand for long term survival. I agree with the general
statement to some extent. However; the profitability does not sure the liquidity in short term
but without the profitability long term liquidity cannot be sustained. On the other side of the
coin; Long term profitability cannot be achieved without short as well as long term liquidity.
It proves that both are important for the survival of a firm in long and in short run. Despite of
the fact that both are important, the cash is still king which can generate the profit and keep
the firm floats if two three bad years hit.