Working Capital Efficiency and Firm Profitability in Manufacturing Industry in India

Abstract

For any economic entity, working capital is regarded as a life-giving force. In fact, a business organization cannot sustain without optimal working capital, nor can it grow without efficient decisions vis-à-vis working capital management. Thus, efficient management of working capital is an important pre-condition for the success of an enterprise (Ghosh and Maji, 2004). It is in this backdrop that enormous literature on working capital management emerged following the seminal work of Smith (1980), who asserted that a firm must efficiently manage its working capital because it affects the profitability and consequently the value of the firm. newlineAlthough, previous literature indicates the criticality of the whole bunch of working capital management decisions as a predictor of firm profitability, yet the major part of the literature on the subject has largely remained focussed on analysing the impact of working capital management on firm profitability. Many other dimensions of working capital, the dynamics thereof and their bearing on the overall success of an organization have not been the popular agenda for researchers as there are still many unexplored areas having a great potential for research. For instance, recently, a study by Baños-Caballero et al (2016) suggested that the firm profitability is impacted by the way the firm finances its working capital. Interestingly, another study of Baños-Caballero et al (2014) concluded that the relationship between cash conversion cycle (CCC) and firm profitability is contingent upon the degree of the firm being financially constrained. Similarly, there are only a few studies that have attempted to investigate other interesting phenomena of working capital; like the determinants of CCC, the target CCC, if firms do have one, and the speed of adjustment towards that target. newlineTaking cue from this gap in the existing literature, the researcher, using the sample of 437 Indian manufacturing firms for a period of 10 years, attempted to contribute to the available treasure of literat