Financial Management Focus on Working Capital Utilization in the Indian Cotton Textile Industry : Methodological Analysis

What the paper says

IntroductionWorking capital (WC) is regarded as the lifeblood of a business. It plays a pivotal role in keeping the wheels of a business enterprise running. Every organization whether profit oriented or not; big or small; rnanufacturing or processing needs requisite amount of WC. The efficient management of WC is crucial as it decides the survival, liquidity, solvency and profitability of the concerned business organization. The objective of management of WC is to maintain the optimum balance of each of the WC components. Business liquidity relies on the effective management of receivables, inventory and payables. Firms are able to reduce financing cost and/or increase the funds availability for expansion by 'minimizing the amount of funds tied up in CA (CAs). Much managerial effort is required to maintain optimum levels from non-optimum levels of CAs and current liabilities (CLs). This optimum level is achieved by balancing between the risk and efficiency1 . Efficient management of WC is an integral component of the overall corporate strategy to create shareholder's value. WC is the resultant need of time lag between the expenditure for the purchase of raw material and collection for the sale of the finished product. The continuing flow of cash starting from suppliers of inventory to accounts receivable and back into cash is referred to as the cash conversion cycle (CCC). Focusing entirely on liquidity increase will tend to reduce the chances of profitability of the firm2.Significance of Textile Industry in IndiaAccording to the CMIE, the textile industry has a significant presence in the economic life of India. It plays a pivotal role through its contribution to industrial output, employment generation and export earnings of the country. It contributes towards 14% of the industrial production, 4% to the GDP, 17 per cent to the country's exports and provides employment to 35 million people (both sexes). The Indian textile industry is extremely varied with major sectors such as the hand spun and hand woven sector, the capital incentive, sophisticated mill sector, and the decentralized Power looms / hosiery and knitting sector. The major sub-sectors that comprise the textile sector include the organized cotton / fibre textile mill industry, the man-made fibre / yam industry, the wool and woolen textile industry, the sericulture and silk textiles Industry, the Handlooms, handicrafts, and the jute and jute textile industry3.WC Management EfficiencyEfficient management of WC refers to management of various components of WC in such a way that an adequate amount of WC is maintained for smooth running of a firm and for fulfilment of twin objectives of liquidity and profitability. While inadequate amount of WC impairs the firm's liquidity, holding of excess WC results in the reduction of the profitability. Inefficient management of WC is one of the important factors causing industrial sickness4.Modern financial management aims at reducing the levels of CAs without ignoring the risk of stock outs. Efficient management of WC is an important indicator of sound health of an organization that requires reduction of unnecessary blocking of capital in order to bring down the cost of financing. There are several techniques to estimate the requirements of CAs, which include percentage approach, operating cycle approach, projected balance sheet approach, regression analysis approach etc. The most important aspect of determined and adequate CAs results in uninterrupted flow of production5.Importance of the StudyManagement of WC is very important task for every manufacturing concern. A study of management of WC of textile firms is more important and appropriate for internal and external analysis. Moreover, one of the serious problems faced by the cotton textile industry in India is the incidence of sickness. There are many reasons for sickness of cotton textile industry; one of the reasons is improper management of WC. …