Working Capital Management Efficiency and Firm Profitability: A Study of Indian Retail Industry

By Goel, Sandeep | South Asian Journal of Management, July-September 2013 | Go to article overview

Working Capital Management Efficiency and Firm Profitability: A Study of Indian Retail Industry


Goel, Sandeep, South Asian Journal of Management


Working capital management is an important part in firm financial management decision. Inefficient management of working capital suffers firms, so an optimum level of working capital and its efficient utilization is the key to a smooth inflow of profit. In this paper, we analyze the working capital management in the Indian retail industry not only in totality but also in segmental performance as far as possible. The present study evaluates the various components of working capital; appraise the utilization of current assets and finds out the relationship between working capital efficiency and profitability in the units under study. The results of our research showed that proper working capital management helps in efficient utilization of resources, as evident by regression analysis results also.

INTRODUCTION

INDIAN RETAIL INDUSTRY

The Indian Retail Industry is one of the largest among the industries, contributing 13% to India's GDP and 8% of the employment, and growing at 46.6% pa compounded over last three years, fastest in Indian Economy. The Indian retail industry is divided into organized and unorganized sectors. More than 90% of the Indian retail industry lies in the unorganized sector, which lacks standardized supply chains and accounting practices. But the traditional markets are making a way for new formats such as departmental stores, hypermarkets, supermarkets and speciality stores. Western-style malls have begun appearing in metros and second-rung cities alike, introducing the Indian consumer to an unparalleled shopping experience. The scope for growth of the organized retail sector is huge.

According to A T Kearney, India is the third-most attractive retail market for global retailers among the 30 largest emerging markets and the organized retail sector is expected to double to 10% by 2013. BMI expects the hypermarket sector in India to grow by 354.1% and reach INR452.6 bn by 2015.

Modern retailing has entered into the retail market in India as observed in the form of bustling shopping centers, multi-storied malls and the huge complexes that offer shopping, entertainment and food all under one roof. The growth pattern in organized retailing and in the consumption made by the Indian population will follow a rising graph helping the new businessmen to enter the Indian Retail Industry. Indian retail is expected to grow 25% annually. Modern retail in India could be worth US$175200 bn by 2016.

This graph below shows how the retail sector is growing at an even faster rate than the growth in the food industry in India. Thus, it makes sense to enter this sector for retailers.

The Indian retail sector is divided mainly in the following segments:

* Food

* Book and Music

* Fashion

* Entertainment

* Phone

* Fashion Accessories

* Consumer durables

* Furniture

* Health and Beauty

WORKING CAPITAL MANAGEMENT

Working capital is an important tool for growth and profitability for corporations. An inadequate level of working capital could lead to shortages and problems in day-today operations (Horne and Wachowicz, 2000). Working capital is defined as current assets less current liabilities (Hillier et al, 2010).

Working capital management is an integral part of the financial management of an undertaking. There have been instances when major giants have fallen down like a pack of cards due to an inefficient short-term management. The working capital management should aim at having balanced; optimal proportions of the working capital management components to achieve maximum profit and cash flow. While an excessive working capital leads to an inefficient use of fund; inadequate working capital interrupts the smooth flow of business activity and in result profitability. Thus, the need to have an adequate amount of working capital in a firm cannot be ignored in any respect. Its efficient utilization is equally important, as the level of utilization is the key to profitability in the longer run. …

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