Summer Internship Project Report

On

Benchmarking- Working Capital of specific

Indian Industries.

Under the guidance of- Submitted by-

Prof. Ranjit Tiwari Shilpa kumari
Chandragupt Institute of Management Patna
 FINDINDS OF RESEARCH PAPERS ON BENCHMARKING
OF WORKING CAPITAL EFFICIENCY

1. The Impact of Working Capital Efficiencies on the Enterprise Value

Option: Empirical Analysis from the Energy Sector.
Aggregate cash conversion cycle, Moss and Stine (1993) found that a negative relationship
existed between the size of the firm and the length of the cycle.
Factor in assessing the success of the management of working capital is the use of the cash
conversion cycle (Gitman, 1974). Shin and Soenen (1998) found a strong negative
association between a firm’s net trade cycle (NTC) and its profitability.
Enterprise Value (EV) = Market Capitalization (MC) + Debt (D) + Non-controlling minority
interest (MI) + Preferred Shares (PS) – Excess Cash (EC)
The enterprise value represents an option on the assets of the firm where the value of the
claims on a firm’s excess cash flows act as the strike price. An investor infers either that the
enterprise value option is becoming expensive (out-of-the-money) or the enterprise value
option is becoming less expensive (in-the-money) and acts upon this through a short sale or
purchase.

2. A Comparative Analysis of Working Capital Management Among Top

5 NSE Listed Indian Steel Companies.

Important tool used to measure the working capital of these companies. Positive relationship
is found between two variables. The different analyses have identified efficiency of working
capital management practices and are expected to assist managers in identifying areas where
they might improve the financial performance of their operation. The companies have to
improve effective handling of inventory, accounts receivables, and accounts payables.
Because these are important factor to increasing the profitability of the companies.

3. A DEA(Data envelopment analysis ) Based Approach to Working

Capital
Management Efficiency.
To measure working capital management efficiency based on frontier analysis technique.
Two main models developed within the DEA technique are the CCR (Charnes, Cooper and
Rhodes) model and BCC (Banker, Charnes and Cooper) model. The CCR model was
developed by Charnes et al. (1978) and assumes a constant return to scale.
Used non decreasing return to scale input oriented super efficiency model. The paper shows
that the new model is able to overcome most of the short comings of traditional measures
(cash conversion cycle and net trade cycle) like mathematical flawed calculation and equal
weights to inputs/outputs. The paper presents superiority of the model over others due to its
property of unit invariance, ratio type data output, ability to carry out sensitivity analysis and
benchmarking. Further, the paper shows that the model can be extended to incorporate
different types of return to scale, put conditions on weights of inputs and outputs and to
include the effect of outside uncontrollable variables. Examines the working capital
management efficiency in an entirely new perspective and opens new direction of research in
effective working capital management.

4. Ways to optimise working capital, delivering sustainable

improvements in cash flows to fuel growth despite uncertainty.
“Large corporates are dealing with a number of competing priorities, with a focus on
protecting profits in the face of volatile exchange rates and market uncertainty. It is clear that
working capital has been pushed lower down the priority list.
Smaller businesses are feeling the pain. Limited access to liquidity has driven a sharp focus
on driving year-on-year improvements.”

1 .Make working capital a strategic priority, with the right level of focus and support from
senior management.
2. Understand what good looks like for your organisation, with consideration of your sector,
size and use of relevant benchmarks.
3. Embed simple processes and controls such as standard payment terms and exception
processes, and proactive collection procedures to provide improvements in working capital,
or at the very least, protection from deterioration.
4. Develop and embed operational level metrics and KPIs that allow regular tracking of
working capital performance,that can be understood by those in the business who have the
ability to influence performance day-to-day.
5. Push the boundaries of best practice, using enablers such as supply chain finance and
automated, data focused solutions that support inventory management.

5. Working Capital Management Efficiency: A Study on the Small

Medium Enterprise in Malaysia
Analyse the efficiency of working capital management in the selected small medium
enterprise companies as a beginning for future analysis. Since, many facets of WCM
efficiency is still unexpSlored particularly from Malaysian’s SME, research in this local
aspects is meaningful.
Report the descriptive analysis of selected small medium enterprise company for
Performance Index:
 Performance Index, PIWCM
 Utilization Index, UIWCM
  Efficiency Index, EIWCM

The results should be more than 1 to determine the performance, utilization and efficiency
level. Performance index of the company is not up to expectation due to the results of the
index is less than 1. However, the utilization index is very good during this study period.
Most of the company results greater than 1, and its show how well the companies utilize the
current assets. For the efficiency index, the results show that the selected SME companies are
less concern with their working capital management since the value is less than 1. Empirical
results revealed that the selected small medium enterprise companies are less efficient in
managing their working capital during this study period The improper management of
working capital will results on the inefficient asset utilization and the investment for the short
term will be decrease.

6. EFFICIENCY OF WORKING CAPITAL MANAGEMENT AND

PROFITABILITY OF UAE CONSTRUCTION COMPANIES: SIZE
AND CRISIS EFFECTS.
Efficient management of working capital is critical for a construction firm’s ability to cope
with weak financial conditions and increased economic uncertainty, especially during crises
periods
(1) To investigate the impact of the efficacy of working capital management measured using
the Net Trade Cycle (NTC) on construction firms’ profitability measured by the Return on
Assets (ROA)
(2) To measure the length of NTC for all, large and small construction firms and to test the
impact of the length of the NTC on firms profitability for all size levels
(3) To examine the impact of the efficacy of working capital management measured using
the Net Trade Cycle (NTC) on construction firms’ profitability measured by the Return on
Assets.
The results also show that UAE construction firms are more efficient in managing their
working capital during crises periods as the average length of the net trade cycle is 700.47
days comparing with 884.05 days during the non-crisis period.
The length of the Cash Conversion Cycle (and the Net Trade Cycle) is varying across
industries, manufacturing firms have longer CCC and NTC comparing with retails firms. The
reason is that manufacturing firms spend more time in manufacturing and processing
inventories comparing with retail firms.
The results also show that the coefficient of crises periods is significant and negative while
the coefficient of the non-crisis period is significant and positive.
During non-crises period, the results indicate that longer net trade cycle is associated with
higher performance during non-crises periods.
 7. The Impact of Working Capital Management on Corporate
Performance: A Study of Firms in Cement, Chemical and Engineering
Sectors of Pakistan.
The purpose of the study was to examine the effect of working capital management on firm’s
performance and explore those factors that affect the profitability of nonfinancial firms listed
on KSE in Pakistan.
Data from financial statements of non-financial firms listed on KSE is used for analysis.
Pooled Ordinary least square technique is used to estimate the relationship between
profitability and key explanatory variables such as average collection period, found a positive
and insignificant relationship of average collection period and profitability indicating that
greater the average collection period, greater will be the profitability while a negative and
insignificant relationship is found between profitability and average age of inventory showing
that greater the average age of inventory, lower will be the profits of the firm. Also
relationship between the average payment period and profitability is negative and significant
showing that more profitable firms pay their bills earlier as compared to less profitable firms.
Moreover operating cycle is having positively insignificant while cash conversion cycle is
having positively significant relationship with profitability.

8. Working Capital Strategies to Drive Shareholder Value.

The role of working capital as a driver of capital efficiency is often overlooked in terms of
asset pricing and how the asset base is used.
Although the global financial crisis prompted a renewed interest in working capital when
market liquidity was more constrained, many companies quickly became complacent and
many companies boosted their balance sheet in response to the global economic crisis to
create a cash buffer.
1. Treasury needs to be sensitive to the culture of the organisation, including the
business units’ or departments’ autonomy, and their identity as a business function.
The more integrated and less isolated treasury can become, the better able it is to add
value to process efficiency and return on capital.
2. senior management support is essential to avoid organisational roadblocks and ensure
that working capital participants are similarly incentivised to focus on group-wide
objectives rather than individual metrics.
Corporations that take the time to explore, identify and prioritise opportunities for
improvement, and leverage the solutions and expertise that are available, are likely to derive
significant operational and advantage, and develop confidence amongst shareholders,
analysts and credit rating agencies. HSBC has placed working capital at the heart of our
customer strategy, with expertise and solutions that have been built over many years with the
world’s most highly respected companies.

9. The Impact of Firms’ Capital Expenditure on Working Capital

Management: An Empirical Study across Industries in Thailand.
 To investigate the impact of capital expenditure on the working capital measured in terms
of net liquidity balance (NLB) and working capital requirement (WCR).
 Investigate whether there is a relationship between capital expenditure and the
firm’s working capital.
 Describe the relationship between the nature of expenditure and the working
capital. To investigate the impact of different factors affecting the working capital
on net liquidity balance and working capital requirement.
 Investigate the relationship between corporate performance and working capital
management
Working capital management attracts less attention from management than capital budget and
capital structure in financial management in the ordinary course of business.
Existing literature has paid little attention to many factors that determine the working capital..
This finding will help a company’s management manage working capital efficiently.
Especially, the findings can be used as a benchmark for managing working capital and
evaluating performance. Through this research, I was able to find out that operating cash
flow has a significant impact on a company’s working capital management, consistent with
conclusions in previous research.
It can be concluded that the listed companies in Thailand change their working capital
management policies based on many factors, such as capital expenditure, operating cash
flow, sales growth, etc. Especially, the findings suggest that companies manage working
capital efficiently when companies have growth opportunities so that they can meet required
capital expenditure to expand their business.

10.Affiliation between Working Capital Management and Profitability

Working capital management is of crucial importance in corporate financial management
decision. The optimal of working capital management is could be achieve by company that
manage the trade-off between profitability and working capital management. The rationale of
this study is to explore the working capital management efficiency and profitability
association. A descriptive statistics divulges that liquidity and solvency position in terms of
debt is very satisfactory and reasonably efficient working capital management is found but
liquidity position has no impact on profitability. The study furthermore illustrates there is no
association between debt financing and profitability. The study moreover illustrates a stumpy
relationship between WCM including working capital cycle and profitability but WCM and
working capital cycle has no impact on profitability. Multiple regression tests confirm a
lower degree of association between the working capital management and profitability.

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