Conceptual Analysis of Working Capital and its Impact on Profitability


Sanjay Kumar Sadana
B.Com (Hons.), M.Com, PGDBA, LL.B (Professional), MBA Finance,
PGDPM&IR, M.A.(PM & IR), M.Phil (Finance), PhD (Pursuing)
Guru Gram Business School
Faridabad & Gurgaon Campus

Keywords: working capital, rationale, working capital cycle cash nanagement, Baumol, Miller-Orr  Model, receivable, trade Credit, factoring, inventory, economic order quantity, JIT, review, literature, purpose, objectives, research, methodology, data, hypothesis, constraints, limitations, conclusions


This working capital paper is a conceptual analysis of working  capital and its impact on profitability of an organisation. Working capital is the most crucial asset. Working capital also gives investors an idea of the company's underlying operational efficiency. Comparison has been made between the private sector steel producers and the public sector major steel producers. The objective is to take selective firms representing private sector and public sector and make a comparison. The comparison is on the efficient management of the working capital and its components. We have taken two public sector steel majors and 8 private sector steel players.

The aim was to find out the working capital practices prevalent in public sector majors and private sector to make a comparison. To highlight the importance of working capital and its impact on profitability. Working capital is the single best method of determining the position of a company, or how well that company may be doing. Working capital management entails short term decisions - generally, relating to the next one year periods - which are "reversible".

Objectives of study and Research methodology helped in proving the research. Despite the constraints and limitations of the study, the Conclusions can help to over come these problems. Highlighted on best possible use of various components of W.C. This is possible if latest techniques of management and cost accounting are used to manage these components. 



Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business.

"Working Capital" typically means the firm's holdings of current or short-term assets such as cash, receivables, inventory and marketable securities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash.

The working capital ratio is calculated as:


Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations. 


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 short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Working capital is the single best method of determining the position of a company, or how well that company may be doing. When all is said and done, the company's working capital is what makes it profitable or not profitable. The more working capital a company has the better that company is doing, financially. Many potential investors and others in the public sphere will scrutinize a balance sheet to find the working capital calculation of a company.

According to many sources, the working capital calculation is the simplest to perform. Simply subtract the short-term liabilities of a company from the current assets. What you are left with is the working capital of the company. All short-term liabilities must be accounted for, as well as all current assets. This is not as simple as just counting the available cash on hand. The working capital of a company is a requires a vast working capital calculation to find the exact amount of working capital. That said why is a working capital calculation so important.

Knowing the amount of working capital a company has is vital to many aspects. The working capital calculation will tell the company, as well as the investors, exactly how well the company is doing. In addition, the company's working capital constitutes the amount used for purchasing new equipment, new stocks and much more. Working capital is the single most important aspect of a company, whether you are judging performance or speculating on expanding the company. Without the required working capital and knowledge of how to perform a working capital calculation, it may be impossible for a business to grow and prosper. Having the right amount of working capital is the only way in which a company can advance

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.


By definition, working capital management entails short term decisions - generally, relating to the next one year periods - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making.


The definition of working capital is fairly simple, it is the difference between an organisation's current assets and its current liabilities. Of more importance is its function which is primarily to support the day-to-day financial operations of an organisation, including the purchase of stock, the payment of salaries, wages and other business expenses, and the financing of credit sales.

As the cycle indicates, working capital comprises a number of different items and its management is difficult since these are often linked. Hence altering one item may impact adversely upon other areas of the business. For example, a reduction in the level of stock will see a fall in storage costs and reduce the danger of goods becoming obsolete. It will also reduce the level of resources that an organisation has tied up in stock. However, such an action may damage an organisation's relationship with its customers as they are forced to wait for new stock to be delivered, or worse still may result in lost sales as customers go elsewhere.

Extending the credit period might attract new customers and lead to an increase in turnover. However, in order to finance this new credit facility an organisation might require a bank overdraft. This might result in the profit arising from additional sales actually being less than the cost of the overdraft.

Management must ensure that a business has sufficient working capital. Too little will result in cash flow problems highlighted by an organisation exceeding its agreed overdraft limit, failing to pay suppliers on time, and being unable to claim discounts for prompt payment. In the long run, a business with insufficient working capital will be unable to meet its current obligations and will be forced to cease trading even if it remains profitable on paper.

On the other hand, if an organisation ties up too much of its resources in working capital it will earn a lower than expected rate of return on capital employed. Again this is not a desirable situation.

The working capital cycle

The working capital cycle starts when stock is purchased on credit from suppliers and is sold for cash and credit. When cash is received from debtors it is used to pay suppliers, wages and any other expenses. In general a business will want to minimise the length of its working capital cycle thereby reducing its exposure to liquidity problems. Obviously, the longer that a business holds its stock, and the longer it takes for cash to be collected from credit sales, the greater cash flow difficulties an organisation will face.

In managing its working capital a business must therefore consider the following question. 'If goods are received into stock today, on average how long does it take before those goods are sold and the cash received and profit realised from that sale?

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.


Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.  A firm should hold an optimum balance of cash, and invest any temporary excess amount in short-term (marketable) securities. In choosing these securities, the firm must keep in mind safety, maturity and marketability of its investment. Management of Cash involves three things:

a) managing cash flows into and out of the firm

b) managing cash flows within the firm

c) financing deficit or investing surplus cash and thus, controlling cash balance at a point of time. It is an important function in practice because it is difficult to predict cash flows and there is hardly any synchronisation between inflows and outflows.

Firms prepare cash budget to plan for and control cash flows. Cash budget is generally prepared for short periods such as weekly, monthly, quarterly, half-yearly or yearly. Cash budget will serve its purpose only if the firm can accelerate its collections and postpone its payments within allowed limits. The main concerns in collections are: (a) to obtain payment from customers within the credit period, and (b) to minimise the lag between the time a customer pays the bill and the time cheques etc. are collected. The financial manager should be aware of the instruments of payments, and choose the most convenient and least costly mode of receiving payment. Disbursements or payments can be delayed to solve a firm's working capital problem. But this involves cost that, in the long run, may prove to be highly detrimental. Therefore, a firm should follow the norms of the business.

Receipts and Disbursements Method is employed to forecast for shorter periods. The individual items of receipts and payments are identified and analysed. Cash inflows could be categorised as: (i) operating, (ii) non-operating, and (iii) financial. Cash outflows could be categorised as: (i) operating, (ii) capital expenditure, (iii) contractual, and (iv) discretionary. Such categorisation helps in determining avoidable or postponable expenditures.

Adjusted Income Method uses proforma income statement (profit and loss statement) and balance sheet to work out cash flows (by deriving proforma cash flow statement). As cash flows are difficult to predict, a financial manager does not base his forecasts only on one set of assumptions. He or she considers possible scenarios and performs a sensitivity analysis. At least, forecasts under optimistic, most probable and pessimistic scenarios can be worked out.

Concentration Banking and Lock-Box System methods followed to expedite conversion of an instrument (e.g., cheque, draft, bills, etc.) into cash.

The excess amount of cash held by the firm to meet its variable cash requirements and future contingencies should be temporarily invested in marketable securities, which can be regarded as near moneys. A number of marketable securities may be available in the market.The financial manager must decide about the portfolio of marketable securities in which the firm's surplus cash should be invested.

One of the primary responsibilities of the financial manager is to maintain a sound liquidity position of the firm so that the dues are settled in time. A firm maintains operating cash balance for transaction purpose. The amount of cash balance is dependent on the risk-return trade-off. If a firm maintains small cash balance, its liquidity position weakens, but its profitability improves as the released fund can be invested in profitable opportunities. On the other hand, if the firm high cash balance, it will have a strong liquidity position but its profitability will be low. Thus to determine optimum cash balance two models are available. These are:

Baumol Model

Baumol Model of Cash Management considers cash management similar to an inventory management problem. The formula is

where C* is the optimum cash balance, c is the cost per transaction, T is the total cash needed during the year and k is the opportunity cost of holding cash balance. The optimum cash balance will increase with increase in the per transaction cost and total funds required and decrease with the opportunity cost.

Miller-Orr Model

Miller-Orr Model saysIf the firm's cash flows fluctuate randomly and hit the upper limit, then it  buys sufficient marketable securities to come back to a normal level of cash balance (the  return point). Similarly, when the firm's cash flows wander and hit the lower limit, it sells sufficient marketable securities to bring the cash balance back to the normal level (the return point). The formula for determining the distance between upper and lower control limits (called Z) is as follows:


Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa).

Trade Credit arises when a firm sells its product or services on credit and does not receive cash immediately. It creates debtors (book debts) or accounts receivable. It is used as a marketing tool to maintain or expand the firm's sales. A firm's investment in accounts receivable depends on volume of credit sales and collection period.

Credit Policy The financial manager can influence volume of credit sales and collection period through credit policy. Credit policy includes credit standards, credit terms, and collection efforts. The incremental return that a firm may gain by changing its credit policy should be compared with the cost of funds invested in receivables. The firm's credit policy will be considered optimum at the point where incremental rate of return equals the cost of funds. The cost of funds is related to risk; it increases with risk. Thus, the goal of credit policy is to maximise the shareholders wealth; it is neither maximisation of sales nor minimisation of bad-debt losses.

Credit Standards are criteria to decide to whom credit sales can be made and how much. If the firm has soft standards and sells to almost all customers, its sales may increase but its costs in the form of bad-debt losses and credit administration will also increase. Therefore, the firm will have to consider the impact in terms of increase in profits and increase in costs of a change in credit standards or any other policy variable.

Credit Terms The conditions for extending credit sales are called credit terms and they include the credit period and cash discount.

Cash Discounts are given for receiving payments before than the normal credit period. All customers do not pay within the credit period. Therefore, a firm has to make efforts to collect payments from customers.

Collection Efforts of the firm aim at accelerating collections from slow-payers and reducing bad-debt losses. The firm should in fact thoroughly investigate each account before extending credit. It should gather information about each customer, analyse it and then determine the credit limit. Depending on the financial condition and past experience with a customer, the firm should decide about its collection tactics and procedures.

Average Collection Period and Aging Schedule are methods to monitor receivables. They are based on aggregate data for showing the payment patterns, and therefore, do not provide meaningful information for controlling receivables.

Collection Experience Matrix Receivables outstanding for a period are related to credit sales of the same period. This approach is better than the two traditional methods of monitoring receivables.

Factoring involves sale of receivables to specialised firms, called factors. Factors collect receivables and also advance cash against receivables to solve the client firms' liquidity problem. They charge commission for providing their services and interest on advance.


Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.

There are three basic reasons for keeping an inventory:

a. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time"

b. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.

c. Economies of scale - Ideal condition of "one unit at a time at a place where user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So Bulk buying, movement and storing brings in economies of scale, thus inventory.

Economic Order Quantity (EOQ)

One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. These problems are called order quantity problems, and the task is to determine the optimum or economic odder quantity (EOQ). Determining this EOQ involves two types of costs:

Ordering Costs is the cost incurred for requisition, placing of order, transportation, receiving, inspecting and storing and clerical and staff services. Ordering costs are fixed per order. Therefore, they decline as the order size increases.

Carrying Costs is the cost incurred for warehousing, handling, clerical and staff services, insurance and taxes. Carrying costs vary with inventory holding. As order size increases, average inventory holding increases and therefore, the carrying costs increase.

The firm should minimise the total cost (ordering plus carrying). The economic order quantity (EOQ) of inventory will occur at a point where the total cost is minimum. The following formula can be used to determine EOQ:

where A is the annual requirement, O is the per order cost, and c is the per unit carrying cost. The economic order level of inventory, Q*, represents maximum operating profit, but it is not optimum inventory policy.


Optimum Inventory Policy: The value of the firm will be maximised when the marginal rate of return of investment in inventory is equal to the marginal cost of funds. The marginal rate of return (r) is calculated by dividing the incremental operating profit by the incremental investment in inventories, and the cost of funds is the required rate of return of suppliers of funds.

Reorder Point: The inventory level at which the firm places order to replenish inventory is called the reorder point. It depends on (a) the lead time and (b) the usage rate. Under perfect certainty about the usage rate, and instantaneous delivery (i.e., zero lead time), the reorder point will be equal to:

Lead time x Usage rate.

Safety Stock: In practice, there is uncertainty about the lead time and/or usage rate. Therefore, firms maintain safety stock which serves as a buffer or cushion to meet contingencies. In that case, the reorder point will be equal to:

Lead time × Usage rate + Safety stock

The firm should strike a trade-off between the marginal rate of return and marginal cost of funds to determine the level of safety stock.

Inventory Control System

A firm needs an inventory control system to effectively manage its inventory. There are several inventory control systems in practice. They range from simple systems to very complicated systems. The nature of the business & the size dictates the choice of an inventory control system. Some of these systems are:

A-B-C Analysis

A-B-C Analysis A firm, which carries a number of items in inventory that differ in value, can follow a selective control system. A selective control system, such as the A-B-C analysis, classifies inventories into three categories according to the value of items: A-category consists of highest value items, B-category consists of high value items and C-category consists of lowest value items. More categories of inventories can also be created. Tight control may be applied for high-value items and relatively loose control for low value items.

Just-In–Time (JIT) System

Japanese firms popularized the Just-In-Time (JIT) system. In a JIT system materials or manufactured components & parts arrive to the manufacturing sites or stores just few hours before put to use. The delivery of material is synchronized with the manufacturing cycle & speed. JIT system eliminates the necessity if carrying large inventory and thus saves carrying 7 other related costs. The system requires perfect understanding & coordination between manufacturer & supplier in terms of timing of delivery & quality of material.


"Working Capital" typically means the firm's holdings of current or short-term assets such as cash, receivables, inventory and marketable securities. Much academic literature is directed towards gross working capital i.e. total current or circulating assets. These items are referred to as "circulating assets" because of their cyclical nature. In retail establishment, cash is initially employed to purchase inventory, which in turn sold on credit and results in accounts receivables. Once the receivables are collected, they become cash – part of which is reinvested in additional inventory and part (i.e., the amount above cost) goes to profit or cash throw-off.

Financial managers devote a considerable amount of attention to the management of working capital. Net working capital (current assets minus current liabilities) provides an accurate assessment of the liquidity position of the firm. With the liquidity-profitability dilemma solidly authenticated in the financial scheme of management, concentrated efforts are made to ensure the ability of the firm to meet those obligations, which mature within a twelve months period. Management must always ensure the solvency and visibility of the firm.

An examination of the components of working capital is helpful because of the preoccupation of management with the proper combination of assets and acquired funds. Short-term or current liabilities constitute the portion of funds, which have been planned for and raised. Since management must be concerned with proper financial structure, these and other funds must be raised judiciously. Short-term or current assets constitute a part of the asset-investment decision and require diligent review by the firm's executives.


Though a considerable amount of work has already been done on the above mentioned subject. Efficient working capital management still holds the key to profitability in organizations. Scientific working capital management and efficacy in managing the components of working capital can give an impetus to the profits of an organization.

Much research has still to be done as this is a very important area of financial management. It is an inter disciplinary area and practically can be implemented in consultation with various kinds of professional from diverse fields like finance, materials, production, etc. In our present study we have made a attempt to gauge the impact of efficient working capital management in the context of Steel Industry. We have also tried to make a comparison between working capital management of public sector and private sector Steel organizations and their impact on the earning capacity (Profitability ) of the organization.

Purpose/ Objectives of Study

* To gain familiarity with the various components of working capital in Steel Industry.

* To make a comparative study in the efficacy of working capital management  between private sector units like: TISCO, Jindal Steel, Essar Steel, Ispat, MUSCO, Sunflag etc., and public sector undertaking SAIL (Steel Authority of India Limited) and its various units.

* To judge the success of the management in carrying on the daily transactions of the Industry.

* To gain an in-depth knowledge of the tricks of managing the daily financial activities of the Steel Industry.

* To find out the difference between the theoretical and practical aspect of working capital management.

* To study and come out with any solution for improvement of working capital management at Steel Industry.

Detailed Objectives of the Study

The main objective of the present work is to make a study on the efficiency in the

management of short-term liquidity in selected public and private sector Iron and Steel enterprises in India. More specifically, the objectives of the present study in general are:-

1. To assess the management of working capital.
To study the optimum level of current assets and current liabilities of the
2. company.
3. To Study the Operating Cycle of the Company.
4. To examine the Influence of determinants of working capital.
5. Estimation of working capital requirements.
6. To know how the working capital needs are fulfilled?
7. To study the way and means of working capital finance
8. To examine the adequacy or otherwise of the working capital;
9. To analyze working capital management from different analysis on the basis of historical data.
10. To observe the liquidity position and areas of weakness, if any
11. To give suggestions for removal of the weaknesses.
12. To study the following components/aspects that includes in the working capital
      * Cash management
      * Receivable management
      * Inventory management


"Research methodology is a way to systematically solve the research problem"

"It is a procedure, which is followed step by step to solve a particular research problem."

It is important for research to know not only the research method but also know methodology. "The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology." Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem.

Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without proper data available for analysis you cannot do the research work accurately.

Methodology of the Study

Companies Covered

We select for our study two out of nine Central Public Sector Iron and Steel Enterprises operating in India. These two public sector enterprises are:-

1. Steel Authority of India Limited (SAIL, consolidation of all steel plants including subsidiary company, IISCO and MEL, which are again considered as separate units),

2. Indian Iron and Steel Company Ltd. (IISCO, which is a wholly-owned subsidiary of SAIL).

The private sector enterprises covered in the analyses are:-

TISCO, Jindal Steel, Essar Steel, ISPAT, MUSCO, Sunflag, Surya Roshni (Surya Global Ltd.)

Period of the Study

The study covers a period of 7 years from 2003 to 2009 (both years inclusive). The reasons for confining the study to this period are: (1) liberalisation policy was adopted in India on 21st July, 1991, and (2) the availability of the latest audited data in the government publications.

Nature of data used

The study is based on the secondary data obtained from the audited balance sheets and profit & loss accounts and also the annual reports of the Public Enterprises Survey, Ministry of Heavy Industries & Public Enterprises, New Delhi.

Besides, the facts, figures and findings advanced in similar earlier studies and the government publications are also used to supplement the secondary data.

The data which I have collected for making this Thesis is combination of both primary and secondary data.


This data had been collected through meetings and interviews with various managers and employees of the finance department of various private and public sector Steel Units. At the same time I had visited various departments for collection of data. The departments that had been visited are as follows:-

  • Main Cash Department
  • Billing and Operation Department
  • Budget Department
  • Pay Section
  • Excise Department.
  • Welfare & Miscellaneous Bill Section
  • Sales Department
  • Project Management Department


Apart from the primary data certain secondary data were required for this project. Following are the sources of secondary data:-

  • Annual Reports
  • Cost & Budget Reports
  • Cash Report
  • Raw Materials Report
  • Production Reports
  • Creditors Reports
  • Debtors Reports
  • Inventory Reports
  • Sales Reports

The Paper titled "Impact of Working Capital Management on Profitability with Special reference to Steel Industry" required a comparative analysis of working capital patterns followed in various steel plants of Private & Public Sector Organizations.

Personal visits to private sector steel organizations viz, Jindal Steel, TISCO, Essar Steel, ISPAT, MUSCO, Sunflag, Surya Roshni etc. was made to collect the relevant data / annual reports for the purpose of analysis of working capital.

The following integrated steel plants of SAIL have been considered for comparative analysis of their working capital:-

  • Durgapur Steel Plant(DSP)
  • Bhilai Steel Plant(BSP)
  • Rourkela Steel Plant(RSP)
  • Bokaro Steel Plant(BSL)

This study will assist to evaluate the efficiency of working capital management practices in these plants and also analyze the working capital practices followed by Private sector steel producers and Public sector steel producers.

This in-depth analysis will help the management of the companies to reduce the unnecessary blockage of funds and make the best possible use of the available funds. Here in this study, working capitals of the plants both in public sector as well as private sector have been calculated sequentially and an effort has been made to indentify the trend of working capital in the past seven years by analyzing the components of working capital. In addition to this, certain ratios have been derived to give a better picture of the efficiency of the management in dealing with working capital in these plants. The analysis of plants is based only on financial data provided in the balance sheet. But working capital analysis also needs some non-financial details. Data of seven consecutive years starting from the year 2002-03 of the above steel plants have been included for comparative study. Financial figures of the last year have not been taken for study because it is under audit and not available for use.


Basically there are four types of research:

1. Exploratory Research
2. Descriptive Research
3. Diagnostic Research
4.  Hypothesis Testing Research


To gain familiarity with a phenomenon or to achieve insight into it.


To portray accurately the characteristics of an individual, situation or a group.


To determine the frequency with which something, occurs or with which it is   associated with something else.


To test a hypothesis of casual relationship between variables.

The present project report is descriptive in nature. It is done to portly accurately the characteristics of a particular individual Situation.


1. A Null Hypothesis Ho a setup. This is a conservative statement about the population parameter, and it is term because it almost invariably states that the given samples is derived from a population which is better or no worse than some standard population or that no change has occurred.

2. On the assumption that the Null Hypothesis is correct the probability of a given samples statistics is calculated.

3. If the probability P in (2) is more than the chosen level of tolerable risk  for type one error, the Null Hypothesis is accepted stating that there is insufficient evidence to reject the null hypothesis at a given level of significance. This means that it is not reasonable to obtain such a representative sample from the null population at a given level of significance.

4. If the probability P in (2) above is less than the chosen level of significance, the Null Hypothesis is rejected saying that it has been shown beyond reasonable doubt that such a sample is not expected of the null population at a given level of significance. Hence, the Alternate Hypothesis is accepted.


The hypothesis to be tested by various analytical tools:-

1. That efficient working capital management and efficacy in the use of various components of working capital have a determining effect on the profitability of any organization. In the present case our study has been restricted to the steel industry in specific.

2. Our study has been based on a few public sector steel organizations and a few private sector steel organizations.

3. a comparison has been tried to be made between the working capital management of public sector steel organizations and private sector steel organization.

The alternate hypothesis is that efficient working capital management and efficacy in the use of various components have no effect on the profitability of the organization in particular steel organizations.

Scope of the study

The scope of the study is identified after and during the study is conducted. Appropriate Financial / Statistical tools have been used wherever possible for the purpose of analysis. The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on previous 7 years Annual Reports of the Public sector and Private sector steel organizations.


  • Availability of data ( financial Data) is major constraint
  • Availability of primary data is another constraint
  • Reliance has been given to secondary data available from various credible sources like: government publications, ministry of commerce and industry etc.
  • Attempt has been made to visit offices of steel companies and collect information / interact with officials wherever possible.  It was seen that the private steel players were not very keen to divulge details / information pertaining to sensitive matters like: current assets, current liabilities especially cash, loans & inventory.
  • A very important and current topic.
  • Efficient management of working capital becomes all the more important under inflationary conditions. We have to use the latest and best techniques to manage the various components of working capital be it
  • a) Inventory Management
    b) Receivables Management
    c) Cash Management

  • It is subjective and controversial topics which is very current in the modern management.
  • The subject of the thesis is not amenable to statistical hypothesis testing. Though and honest attempt has been made to be as analytical as possible and make use of the analytical tools.

Following Conclusions can help to over come these problems.

  • Cash management should not be fully centralized.
  • A proportion of profit should be there with the units as Reserve & Surplus.
  • In Inventory management the units should use advance techniques as much as possible.
  • Ordering cost is fixed. Thus the unit should fix the amount of delivery at a point that minimizes total transportation cost & carrying cost.
  • There should be proper shed to keep all raw materials. Otherwise these materials can be damaged in rain & heat of sun.

More detailed study of operations is required to understand problems with inventory conversion period & inventory turnover. Highlighted on best possible use of various components of W.C.This is possible if latest techniques of management and cost accounting are used to manage these components.  


1. Anand, M. 2001. "Working Capital performance of corporate India: An empirical survey", Management & Accounting Research, Vol. 4(4), pp. 35-65

2. Shin, H.H and Soenen, L. 1998. "Efficiency of working capital and corporate profitability", Financial Practice and Education, Vol 8 No 2, pp. 37-45

3. Gupta, Manak C. and Ronald J. Huefner, "A Cluster Analysis Study Of Financial Ratios and Industry Characteristics," Journal of Accounting Research 10 (1), 1972, pp. 77-95.

4. Johnson, Craig G., "Ratio Analysis And The Prediction Of Firm Failure: Comment," Journal of Finance 25 (5), 1970, pp.1166-1168.

5. Gupta, Manak C, "The Effect of Size, Growth, and Industry On The Financial Structure Of Manufacturing Companies," Journal of Finance 24 (3), 1969, pp. 517-529.

Sanjay Kumar Sadana
B.Com (Hons.), M.Com, PGDBA, LL.B (Professional), MBA Finance,
PGDPM&IR, M.A.(PM & IR), M.Phil (Finance), PhD (Pursuing)
Guru Gram Business School
Faridabad & Gurgaon Campus

Source: E-mail November 4, 2010


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