Working Capital Management

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing shortterm debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

A Study of Working Capital Management Efficiency of India Cements Ltd

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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