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Dr. E. Muthukumar and S. Sakeerthi, “Working Capital Management Based on The Study at Sakthi

Sugars, Tamilnadu” - (ICAM 2016)

WORKING CAPITAL MANAGEMENT BASED ON THE STUDY AT

SAKTHI SUGARS, TAMILNADU

Dr. E. Muthukumar

Associate Professor in MBA, Nehru College of Management, Coimbatore.

S. Sakeerthi

Ph. D Research Scholar, Nehru College of Management, Coimbatore

ABSTRACT

Working capital is a very important concept in finance. Any firm, irrespective of its area

of operations, requires working capital to carry out its day-to-day activities. The effective and

efficient use of working capital is a major concern for any organisation as excess of working

capital means the firm is unnecessarily keeping its liquid fund in an idle investment, which

does not earn any return. But at the same time, a lower level of working capital may at time

seven hinder the daily operations of the firm. Hence, the topic of “Working Capital

Management “is of vital importance. The study has been conducted to understand the

importance of working capital management and measures to do it with special reference to

Sakthi Sugars based in Tamil Nadu. Working capital analysis and ratio analysis tools have

been used for the study. The study helps in finding out how a firm can do effective

management of its working capital.

Key words: Working Capital, Liquidity ratio, Activity turnover ratio, Profitability ratio,

Overall profitability ratio.

Cite this Article: Dr. E. Muthukumar and S. Sakeerthi. Working Capital Management Based

on The Study at Sakthi Sugars, Tamilnadu. International Journal of Management, 7(2), 2016,

pp. 536-547.

http://www.iaeme.com/IJM/index.asp

INTRODUCTION

Working capital is defined as the capital required for meeting the operational needs of a business

enterprise. It is the instrument for utilising the capacity created by fixed capital. Working capital refers

to the cash a business requires for day to day operations or more specifically, for financing the

conversion of raw materials into finished goods, which company sells for payment. Working capital

constituent’s levels of inventory account receivable and account payable. Analysts look at these items

for signs of a company’s efficiency and financial strength.

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CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital. They are:

Gross working capital

Net working capital

Gross working capital is the total of all current assets i.e. cash, marketable securities, account

receivables, inventory and other current assets. Net working capital refers to the excess of current

assets over current liabilities.

WORKING CAPITAL MANAGEMENT

The basic goal of working capital management is to manage the current assets and current liabilities of

a firm in such a way that a satisfactory level of working capital is maintained, i.e., it is neither

inadequate nor excessive. Working capital management policies of a firm have a great effect on its

profitability, liquidity and structural health of the organisation.

IMPORTANCE /NEED FOR WORKING CAPITAL

The working capital is needed for the following purposes:

For the purchase of raw materials, components and spares.

To pay wages and salaries.

To incur day-to-day expense and overhead costs such as fuel, power and office expense etc.

To meet selling costs as packing, advertising etc

To provide credit facilities to the customers.

To maintain the inventories of raw materials, work in progress, stores and spares and finished

stock.

ABOUT SAKTHI SUGARS

Sakthi Sugars are into the business of Sugar, industrial alcohol and soya products. The company was

incorporated in 1961. It is being spearheaded by Mr.M.Manickam, Vice Chairman and Managing

Director who is son of Dr. N.Mahalingam, the Chairman of Sakthi Sugars. Sakthi Sugars Limited is

one of the important members of the Sakthi Group contributing a large share of revenue to the group's

turnover.

Sakthi Sugars Limited’s first unit, set up in 1964 by the riverside of Bhavani, has out beated many

records in performance like the 17 lakh tonnes of cane crushed in 2001-02. The unit also bagged the

most prestigious National Efficiency Award consecutively for several years. The capacity of the unit is

9000 tonnes of sugarcane crushed per day. Today it has in its fold four Sugar plants with three of them

in Tamil Nadu located at Sakthinagar, Sivaganga and Modakurichi and one plant in Orissa at

Dhenkanal. With the aggregate capacity of 19,000 Tonnes of cane crush per Day (TCD). Sakthi Sugars

produces High Quality plantation white sugar and refined sugar using superior technology and its time

tested process. The sugar produced is at par with International Standards with very low NSR (Non

Soluble Residue) value of less than 20 ppm.

REVIEW OF LITERATURE

Vijayakumar, A. and Venkatachalam (1995) have made "An Empirical Analysis on Working Capital

and Profitability of Sugar Industry in Tamilnadu" covering a period from 1982-83 to 1991-92.

Correlation and regression analysis have been applied to measure the impact of working capital ratios

on profitability. The study had revealed that liquid ratio, cash turnover ratio and receivable turnover

ratio had positively influenced the profitability.

Ramachandran and Gopinathan (2012) analysed the relationship between, "Working Capital

Management and Profitability of Sugar Industry in India". There was a significant positive co-efficient

between current ratio and Return On Investment (5.263), Inventory Turnover Ratio and Return On

Investment (1.110) at 5% level. Also there was a significant negative co-efficient between Quick ratio

and Return On Investment (-10.582), Working Capital Turnover Ratio and Return On Investment (-

0.036) at 5% level. Debtors Turnover Ratio recorded highly significant negative co-efficient (-0.020) at

1% level with Return On Investment. Creditors Turnover Ratio registered insignificant positive co-


6510(Online), Volume 7, Issue 2, February (2016), pp. 536-547 © IAEME Publishing

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efficient 0.014 with profitability. The overall regression model fit, which was represented by R2 was

above 50% (0.51) which indicated that the sugar industry in India was poised to reap a rich harvest in

the season beginning Oct 2010. The Sugar Corporate firm were over burdened with surplus inventories

that most of them do not have adequate storage facilities, capacities and cash flow which have led them

to resort to distress sale of sugar which only brought down the prices.

Jose at al. (2003) tested the corporate returns and cash conversion cycle of 2,718 firms for the

Period 1974-1993 by using multiple regression analysis. In their research, an aggressive liquidity

Management (lower CCC) is associated with higher profitability for several industries, including

natural resources, manufacturing, service, Retail/wholesale, and professional services. 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 duration of the study

was seven years from 2006 to 2012. The data used in this study was taken from SMEDA, Karachi

Stock Exchange, tax offices, company itself and Bloom burgee business week. 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.

Sharma and Kumar (2011) examined the effect of working capital on profitability of Indian firms.

They collected data about a sample of 263 non-financial BSE 500 firms listed at the Bombay Stock

(BSE) from 2000 to 2008 and evaluated the data using OLS multiple regression. The results revealed

that working capital management and profitability is positively correlated in Indian companies. The

study further reveals that inventory of number of days and numbers of day’s accounts payable are

negatively correlated with a firm’s profitability, whereas number of days accounts receivables and cash

conversion period exhibit a positive relationship with corporate profitability.

OBJECTIVES OF THE STUDY

To study Working Capital Management and to analyse the utilisation of working capital funds

in SAKTHI SUGARS LTD.,

To analyse the effect of working capital on the profitability of the organisation.

To find out the relationship between working capital and liquidity position of the concern.

To determine the structure and effective utilisation of working capital.

To analyse the various factors followed by the company with respect to the management of

inventory, receivables and cash

RESEARCH METHODOLOGY

SOURCE OF DATA

The data utilised for the study is secondary in nature. The data has been collected from the annual

reports provided by the company. Personal discussion was made with the officials concerned.

PERIOD OF THE STUDY

The study covered for a period of five years from 2009-10 to 2012-13.

TOOLS USED FOR ANALYSIS

WORKING CAPITAL ANALYSIS

The working capital analysis is prepared to show the changes in the working capital between the two

balance sheet dates. This statement is prepared with the help of current assets and current liabilities

desired from the two balance sheets.



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Formula

Working capital = Current Assets- Current Liabilities

Interpretation of working capital

An increase in current assets increases working capital

Decrease in current assets decrease working capital

An increase in current liabilities decrease working capital

Decrease in current liabilities increase working capital

LIMITATIONS OF THE STUDY

The data is mainly secondary in nature and any bias in this may reflect over the analysis and

conclusion.

Duration of study was too short for an in depth analysis.

The study does not take into account the other areas of financial management such as capital

budgeting, dividend policy etc.,

DISCUSSIONS

WORKING CAPITAL ANALYSIS

Table 1.1 Schedule of working capital changes for the year 2009-10

OBSERVATION

From the above table it is indicated that the current assets such as cash, sundry debtors, other current

assets and loans & advances are in an increasing trend. The current liabilities decreases by Rs. 2708.55

in 2006 compared to last year i.e. 2005 which shows a increasing trend to working capital. Thus it can

be concluded that net increase in working capital i.e. Rs. 49232.145. Therefore, utilisation the working

capital is more and it is due to diversification of plant size or due to increase in production.



540




OBSERVATION

It can be concluded that the net decrease in working capital i.e. Rs.18603.855. Therefore, utilisation of

working capital in the company is satisfactory.




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OBSERVATION

It can be concluded that there is net decrease in working capital i.e. Rs.34653.75. Therefore the

utilisation of working capital in the company is satisfactory.


OBSERVATION

It can be concluded that there is a net increase in working capital. Therefore utilisation of working

capital is more and it is due to diversification of plant size or due to increase in production.

Table 1.5 Net working capital

Year Current Assets

(in lakhs)

Current Liabilities

(in lakhs)

Net working capital

(in lakhs)

2009-10 108322.9 16015.92 92307.03

2010-11 93350.91 19647.735 73703.175

2011-12 86111.565 47062.14 39049.425

2012-13 123610.155 50015.91 73594.245



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INTERPRETATION

Net working capital is very important for an ongoing concern. Net working capital of the company

shows decreasing trend in the year 2010-11 and 2011-12. But in the next consecutive year the working

capital of the company have started increasing.

RATIO ANALYSIS

Liquidity ratio

Current Ratio

Table 2.1.1

Year Current Ratio

2008-09 3.30

2009-10 6.76

2010-11 4.75

2011-12 1.83

2012-13 2.47

OBSERVATION

From the above table, it is indicated that the current ratio has been high for all the years. It is witnessed

as good sign as assets are greater than liabilities.

QUICK RATIO

Table 2.1.2

Year Liquid Ratio

2008-09 2.63

2009-10 6.31

2010-11 4.11

2011-12 1.69

2012-13 1.87

OBSERVATION

From the above table, it is understood that the quick ratio has been very high during the years 2009 and

2010 (6.31 and 4.11 respectively). This is mainly due to high value of loans and advances and poor

credit management in terms of overextended accounts receivables. However during the years 2008 and

2009 the quick ratio is reduced to 1.69 and 1.87 respectively. Thus indicating the firm is following a

good management practise with a satisfied liquidity position.



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Activity Turnover Ratio

Working Capital Turnover Ratio

Table 2.2.1

Year Working Capital Turnover Ratio (in times)

2008-09 2.23

2009-10 8.39

2010-11 1.56

2011-12 4.57

2012-13 2.86

OBSERVATION

From the above table, it is observed that the working capital turnover ratio is been fluctuating for all the

five years. Thus it can be inferred that the company should concentrate in the utilisation of working

capital funds.

Debtors Turnover Ratio

Table 2.2.2

Year Debtors Turnover Ratio (in times)

2008-09 21.70

2009-10 13.79

2010-11 30.55

2011-12 43.10

2012-13 23.50

OBSERVATION

From the above table, it is understood that the debtor’s turnover ratio has been fluctuating through all

the years.

CREDITORS TURNOVER RATIO

Table 2.2.4

Year Creditors Turnover Ratio (in times)

2008-09 3.32

2009-10 4.88

2010-11 3.51

2011-12 2.36

2012-13 4.15



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OBSERVATION

From the above table, it is indicated that the highest creditor turnover ratio was 4.88 times during

the year 2009-10. Then it declined, but then there was a steep increase in the ratio which indicates that

the company’s liquidity position is not able to meet up its obligation.

Profitability Ratio

Gross profit ratio

Table 2.3.1

Year Gross profit ratio (in %)

2008-09 13.92

2009-10 21.46

2010-11 18.62

2011-12 14.40

2012-13 14.32

OBSERVATION

From the table, it is observed that the gross profit ratio has been fluctuating. It indicates an increase in

the expense or other liabilities.

Net profit Ratio

Table 2.3.2

Year Net Profit Ratio (In %)

2008-09 4.23

2009-10 10.63

2010-11 3.93

2011-12 -6.69

2012-13 7.37

OBSERVATION

From the above table, it indicates that the net profit of the company is not stable and fluctuates

throughout the years. But on an average, the company is moving in a profitable position.



545



Overall Profitability Ratio

Return on Shareholder Investment

Table 2.4.1

Year Shareholder’s Investment (In %)

2008-09 7.54

2009-10 23.52

2010-11 7.46

2011-12 -12.11

2012-13 12.84

OBSERVATION

Net worth ratio analysis is another effective measure of the profitability of the business. In the table it

is understood that the highest ratio is 23.52% which indicates good sign to the company. But during the

year 2011-12 the ratio showed a negative ratio of 12.11% which indicates the net loss for the business.

The next year 2012-13 the ratio increased to 12.84% a positive growth. Thus it can be inferred that the

earnings of the shareholders get increased due to rise in net profits.

SUGGESTIONS

The overall working capital management is satisfactory. But through efficient management of

working capital, working capital must be reduced for the coming years.

The absolute liquid ratio should be higher in future years, so that company can improve the

short term financial position.

The company should take care in collecting of debts from its customers by following efficient

collection policy.

The company must take care in managing of investment into the inventories to protect the

company from loss.

The company has shown a greater increase in return on shareholder investment which in turn

will attract the investors. This increase must be continued throughout the future years.

At unit level employees of all grades from general manager to supervisor should be aware of

the importance of working capital management. This will help the company for an efficient

utilisation and management of working capital funds.

CONCLUSION

The study entitled to “The study of working capital management” with special reference to Sakthi

Sugars Limited, the research work was undertaken to know the performance of working capital in the

company, to know the working capital approach adopted by the company and also to know the various

components.

The better a company manages its working capital, the less the company needs to borrow. Even

companies with cash surpluses need to manage working capital to ensure that those surpluses are

invested in ways that will generate suitable returns for the investors.

An absolute figure does not convey anything unless it is related with the other relevant figures.

Magnitude of current liabilities of a company does not tell anything about solvency position of the

company. The management of working capital in Sakthi Sugars Limited was satisfactory during the

period of study.



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