Working Capital Management Determines Company's Profitability

The main focus of reading conducted, towards find out how components of the working capital are influencing the profitability of manufacturing industry. It is towards the reason that over the last few years many Indian companies and businesses have failed to free the cash due to lack of proper management of working capital.

When a company is able free up the cash flow, it could be invested in other potential business opportunities. For the maximisation of the cash flow & working capital, a certain company needs to make the budgeting system. These would enable the companies to create a perfect system to effectively use working capital components. In order to ensure the quality of the budgeting, managers need to make sure that the forecasting of short term cash flow is accurate. By reducing the amount of tax paid & identification of the areas where cash outflow are major would help to retain more cash for investment. Identifying the areas where tax relief can be made is one possible option. However it could be also due to the nature of business that some companies find it difficult to optimise working capital, hence best strategy that could be implemented in order to enhance performance is by identification of the key drivers of WCM.

It is expected that there is a negative relationship between the profitability of the firms & working capital components. However based on the findings of our research there is no significant relationship between working capital components receivable days, payable days, inventory days, cash conversion cycle & profitability of the firm. These results suggest that the manager needs to focus on core business principle to maximise shareholders wealth, for example advanced products.

In the same way we reject our hypothesis H1 (there is a negative relationship between the inventory days & profitability), H2 (there is a negative relationship between the payable days & profitability), H3 (there is a negative relationship between the cash conversion cycle & profitability), H4 (there is a positive relationship between the sales & profitability of the firm), indicating that there is no significant relationship between working capital components & profitability. However there is a negative relationship between the gearing & profitability in the telecommunication firms, but for construction firms & manufacturing firms there is no significant relationship.

Further the profitability of the firm is mainly determined by how it is able to add value to its customer through its innovative idea. The more innovative a company is higher its profit margin. So it is very important for companies to add value through its value chain. This focus would enable the companies to increase the profit margin & enhance shareholders wealth.

Whatever the circumstances it can be concluded that working capital management is very important for each & every company as it can be used as a source of finance. The issue here is, to what extent the important should be given to working capital management is a big question. Focusing on core business is very important as it will determine how much price customers are will to pay for the goods & services. 

29 April 2022
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