WORKING CAPITAL MANAGEMENT A STUDY WITH REFERENCE TO SELECT INDIAN PHARMACEUTICAL COMPANIES

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1 WORKING CAPITAL MANAGEMENT A STUDY WITH REFERENCE TO SELECT INDIAN PHARMACEUTICAL COMPANIES Mrs. CHITRAKALA, Research Scholar,Post Graduate and Research Department of Commerce, Government Arts College, Udumalpet Tiruppur District Dr. R. SUNDAR, Assistant Professor and Research Supervisor,Post Graduate and Research Department of Commerce, Government Arts College, Udumalpet Tiruppur District ABSTRACT Working capital management is one of the most important areas while making the liquidity and profitability comparisons among firms involving the decision of the amount and composition of current assets and the financing of these assets. The greater the relative proportion of liquid assets, the lesser is the risk of running out of cash, all other things being equal. Objectives of the study, To analysis the working capital operating cycle of the firms and to determine the relationship between working capital and profitability of the firms.methodology of the study, Analytical research design has been used in this study.secondary data has been used in this study. The study adopted the diagnostic research design. Diagnostic research tries to determine the association of the subject matter with something else (Kothari, 2004). Descriptives statistics and t test has been in this study.suggested in this study, Operational efficiency should be increased by reducing cost and wastage and improving operating and management performance. Supply of working capital should be adequate. This study confined the analysis of data of only ten firms of pharmaceuticals industry in India.Conclude in this study, Operations and sales differs from company to company. The present study attempt to analyze the effect of working capital management efficiency on the firms profitability of selected pharmaceuticals firms in India. On the basis of our found result we can conclude that our study shows there is a significant relationship between these variables. Key words: Working capital, liquidity, profitability etc., Introduction Working Capital management in a business is very essential for the sustained progress. Working capital is like a blood circulating in the human body. If the working capital circulation gets clotted then the whole business will get paralyzed, and most of the time it leads to the end of the life of the business. There are histories stating that improper working capital management has collapsed very many businesses. Uses of funds of a business entity can be divided into long-term funds and short-term funds. Long Term funds are used for the investment in long-term assets and investments. Where-as the short-term funds are the one that is used for the day-to-day operations of the business, and which has to be planned very carefully and invested securely, that would be helpful for the day-today operations without hindrance. Guthmann, defined working capital as the portion of firm s current assets which are financed from long-term funds. Working Capital management is concerned with short term financial decisions. It is one of the most significant ingredients of the business. Working Capital management if carried out efficiently, effectively and consistently, will result in a healthy and robust organisation. Adequacy of working capital determines the survival of the company. Efficient working capital management is mandatory to maintain a balance of liquidity and profitability of any business enterprises. 301

2 Review of Literature Horne & Wachowitz, (2000) has stated that working capital management efficiency is vital for manufacturing and construction firms, where a major part of assets is composed of current assets. (Eljelly, 2004) Working capital management is one of the most important areas while making the liquidity and profitability comparisons among firms involving the decision of the amount and composition of current assets and the financing of these assets. The greater the relative proportion of liquid assets, the lesser is the risk of running out of cash, all other things being equal. All individual components of working capital including cash, marketable securities, account receivables and inventory management play a vital role in the performance of any firm. Gul, Khan, Rehman, Khan, Khan and Khan (2013) investigated the influence of working capital management (WCM) on performance of small medium enterprises (SMEs) in Pakistan. The dependent variable of the study was Return on Assets (ROA) which was used as a proxy for profitability. Independent variables were Number of Days Account Receivable (ACP), Number of Day s Inventory (INV), Cash Conversion Cycle (CCC) and Number of Days Account Payable (APP). In addition to these variables some other variables were used which included Firm Size (SIZE), Debit Ratio (DR) and Growth (GROWTH). Regression analysis was used to determine the relationship between WCM and performance of SMEs in Pakistan. Results suggested that APP, GROWTH and SIZE have positive association with Profitability whereas ACP, INV, CCC and DR have inverse relation with profitability. Akoto, Awunyo-Vitor and Angmor (2013) analyzed the relationship between working capital management practices and profitability of listed manufacturing firms in Ghana. The study found a significant negative relationship between Profitability and Accounts Receivable Days. However, the firms Cash Conversion Cycle, Current Asset Ratio, Size, and Current Asset Turnover significantly positively influence profitability. The study suggests that managers can create value for their shareholders by creating incentives to reduce their accounts receivable to 30 days. It is further recommended that, enactments of local laws that protect indigenous firms and restrict the activities of importers are eminent to promote increase demand for locally manufactured goods both in the short and long runs in Ghana. Omesa, Maniagi, Musiega and Makori (2013) examined the relationships between Working Capital Management and Corporate Performance of manufacturing firms listed on the Nairobi securities exchange. For the purpose the researchers has used Principal components analysis (PCA) due to its simplicity and its capacity of extracting relevant information from confusing data sets. From the results using PAC and multiple regression, working capital proxies Cash Conversion Cycle (CCC), Average Collection Period (ACP) and control variables Current Liabilities (CLTA), Net Working Capital Turnover Ratio (NSCA) and Fixed Financial Ratio (FATA) were significant at 95% confidence (p values are < 0.05) to performance as measured by Return on Equity (ROE). Further, ACP was found to be negatively related to ROE while CCC, CLATA, NSCA and FATA. Objectives of the Study The main objective of the study is to examine the relationship between working capital management and profitability of Pharmaceutical Companies with market capitalization listed in National Stock Exchange of India. The specific objectives are: To analysis the working capital operating cycle of the firms. To determine the relationship between working capital and profitability of the firms. To evaluate the firms profitability through return on assets. To scrutinize the Turnover ratios. Methodology of the study Analytical research design has been used in this study.secondary data has been used in this study. The study adopted the diagnostic research design. Diagnostic research tries to determine the association of the subject matter with something else (Kothari, 2004). Descriptives statistics and t test has been in this study. To investigate the effect of working capital management on the profitability of the two pharmaceuticals company in Bangladesh. The methodology of this study is to find out the dependency of profitability ratios over many other working capital components and liquidity positions i.e. on various ratios and conversion cycles. To cover the liquidity, profitability, and activity position, few ratios and conversion periods relating liquidity of the firm have been considered. And for the purpose of the analysis, t test about Pearson s coefficient of correlation between working capital and profitability has been conducted. We have calculated some of important liquidity and profitability ratios to reveal the liquidity and profitability position of our ten selected firms., Period of ten years. ( ). Data was collected from CMIE (Centre for Monitering Indian Economy). Top ten listed market capitalization pharmaceutical companies were selected from the National Stock Exchange of India. Name of the top 10 Market Capitalising Companies, Aurobindo,Cadila,Davis,Pirmal,Torrent,Glenmark,Cipla,Dr. Reddy s,sun Pharma and Lipin,. 302

3 TABLE NO.1 TREND ANALYSIS - TOTAL CURRENT ASSETS C1 C2 C3 C4 C5 C6 C7 C8 C9 C selected companies have been growing marginally. The trend movement for the period , shows the total current assets will be the highest in Dr.reddys followed by Ciplal with the trend value of and The total current assets will be the lowest in Torrent with the trend value of TABLE NO.2 CURRENT LIABILITIES SHORT TERM BORROWINGS C1 C2 C3 C4 C5 C6 C7 C8 C9 C selected companies have been growing marginally. The trend movement for the period , shows the short term borrowings will be the highest in Aurobinda followed by Dr.Reddys with the trend value of and The total short term borrowings assets will be the lowest in Divis with the trend value of

4 TABLE NO.3 OTHER CURRENT LIABILITIES year C1 C2 C3 C4 C5 C6 C7 C8 C9 C selected companies have been growing marginally. The trend movement for the period , shows the other current liabilities will be the highest in Dr.reddys followed by Dr.Reddys with the trend value of and The other current liabilities will be the lowest in Cadila with the trend value of TABLE NO.4 WORKING CAPITAL C1 C2 C3 C4 C5 C6 C7 C8 C9 C selected companies have been growing marginally. The trend movement for the period , shows the Working capital will be the highest in Sunpharma followed by Dr.Reddys and Cipla with the trend value of and The Working capital will be the lowest in Cadila with the trend value of

5 Null Hypothesis: There is no significant difference in the working capital in Indian Pharmaceutical Industry. TABLE NO.5 t test OF WORKING CAPITAL OF INDIAN PHARMACECUTICAL INDUSTRY One-Sample Test Test Value = 10 95% Confidence Interval of the Difference t df Sig. (2- tailed) Mean Difference Lower Upper AUROBINDA ** CADILA DIVIS ** PIRMAL TORRENT ** GLENMARK * CIPLA ** DR.REDDYS ** SUNPHARMA LUPIN ** ** - Significant at 1% level * Significant at 5% level S-Significant It has been divulged from the t test that the p-value (.000) has been less than 0.01 and 0.05 the result has significance at 1 per cent level and 5 per cent level. Hence, the null hypothesis (H 0 ) has been rejected and the alternative hypothesis (H 1 ) has been accepted. From the analysis it has been concluded that there is a relationship between total working capital and selected pharmacecutical companies in India.. Aurobinda, Divis, Torrent, Glenmark, Cipla, Dr.Reddys and Lupin companies has significant relationship to working capital. Null Hypothesis: There is no significant difference in the groups of working capital in Indian Pharmaceutical Industry. TABLE NO.6 ANALYSIS OF VARIANCE OF WORKING CAPITAL OF INDIAN PHARMACECUTICAL INDUSTRY ANOVA Source of Variation SS df MS F P-value s/ns Between Groups s Within Groups Total Critical F Value1.98 at 5 per cent level of Significance The analysis showed the significant result. It can be seen from the table, that the calculated value of F was found 5.77 while the table value of F was 1.98, at 5 per cent level of significance. The calculated value of F, being more than the table value of F, the null hypothesis rejected the 5 per cent level of significance. So it proves that the differences among the average of this group were significant and the working capital of the groups of the Indian Pharmaceutical Industries does differ much. Null Hypothesis: There is no significant difference in the working capital in Indian Pharmaceutical Industry. 305

6 TABLE NO.7 t test OF WORKING CAPITAL OF INDIAN PHARMACECUTICAL INDUSTRY - One-Sample Test Test Value = 10 Mean t df Sig. (2-tailed) Difference 95% Confidence Interval of the Difference Lower Upper AUROBINDA ** CADILA DIVIS ** PIRMAL TORRENT ** GLENMARK * CIPLA ** DR.REDDYS ** SUNPHARMA LUPIN ** ** - Significant at 1% level * Significant at 5% level S-Significant It has been divulged from the t test that the p-value (.000) has been less than 0.01 and 0.05 the result has significance at 1 per cent level and 5 per cent level. Hence, the null hypothesis (H 0 ) has been rejected and the alternative hypothesis (H 1 ) has been accepted. From the analysis it has been concluded that there is a relationship between total working capital and selected pharmacecutical companies in India.. Aurobinda, Divis, Torrent, Glenmark, Cipla, Dr.Reddys and Lupin companies has significant relationship to working capital. SUGGESTIONS OF THE STUDY The followings are the recommendations from the International Journal of Economics, Finance and Management Sciences 2017; 5(2): researchers based on the findings of the study that can be taken into the consideration by managers to improve the performance of the pharmaceuticals firms. 1.The financial management department of BPL specially purchase, sales and inventory management have to be motivated, so that they act all the tasks cordially, efficiently and honestly. 2. The Pharmaceuticals firms should regularly make use of ratio analysis and measure should be taken to improve undesirable ratios at least as to the point of industry s average. 3. Qualified, trained and experienced management personnel should be appointed. 4. Government regulations should be flexible and policy should be realistic. 5. Operational efficiency should be increased by reducing cost and wastage and improving operating and management performance. Supply of working capital should be adequate. This study confined the analysis of data of only ten firms of pharmaceuticals industry in India. CONCLUSION Managing working capital is very much essential for any business concern. Working capital requirements varies according to the operation of the company However, at present the companies under study have been performing in better manner. Operations and sales differs from company to company. The present study attempt to analyze the effect of working capital management efficiency on the firms profitability of selected pharmaceuticals firms in India. On the basis of our found result we can conclude that our study shows there is a significant relationship between these variables. The study also reveals that the financial position and operational performance of the among Pharmaceuticals Limited companies various conversion period in production cycle in our ten-year study period. 306

7 REFERENCE 1.Padachi, K., Howorth, C., Narasimhan, M. S., & Durbarry, R. (2010). Working capital structure and financing pattern of Mauritian SMEs. Oxford Business & Economics Conference Program, June 28-29, 2010, St. Hugh s College, Oxford University, Oxford, UK. [2] Van Horne, J. C. and Wachowicz, J. M. (2004). Fundamentals of Financial Management, 12th Edition, Prentice Hall Publishers, New York. [3] Aktas, N., Croci, E., & Petmezas, D. (2015). Is working capital management value-enhancing? Evidence from firm performance and investments. Journal of Corporate Finance, 30, [4] Rafuse, M. E. (1996). Working capital management: an urgent need to refocus. Management Decision, 34 (2), [5] Kasiran, F. W., Mohamad, N. A., & Chin, O. (2016). Working Capital Management Efficiency: A Study on the Small Medium Enterprise in Malaysia. Procedia Economics and Finance, 35,