Abstract
It is unanimously accepted that liquidity management is a very important facet of financial management in any kind of business. An overall control over liquidity of the firm can only ensure a smooth running of its business wheel. Like other manufacturing sectors in India, the Indian tyre industry has been facing fierce challenges due to intensified competition in the marketplace as a result of Liberalization, Privatization, and Globalization (LPG). In this backdrop, an attempt has been made to study the efficiency of working capital in maintaining liquidity of Indian tyre industry during the period 1998-99 to 2007-08. The data for the period from 1998-99 to 2007-08 used in this chapter have been collected from the Capitaline Corporate Database, the official of Capital Market Publishers (India) Ltd., Mumbai. While carrying out this study, suitable measures relating to financial statement analysis as well as relevant statistical tools and techniques have been applied at appropriate places. The overall findings of the study indicate that there was no proper trade-off between liquidity and profitability in the selected tyre companies during the study period.
Top2. Literature Survey
Generally, survey of existing literature, while conducting a study, helps in finding out the gaps in the studies so far made in the concerned study area and locating the avenues for the study in the same area. The following paragraphs examine the recent studies relating to the liquidity management of Indian manufacturing industries carried out so far for identifying the research gaps.
A compressive study on working capital management which was conducted by Reserve Bank of India was published in the RBI Bulletin in July, 1976. While conducting this study, 1,650 medium and large, non-financial, non- governmental public limited companies having a paid up capital of at least Rs.5 lakhs each were taken into consideration. This study was made on the basis of the annual accounts relating to the year 1974-75. The study revealed that none of the industry group was able to reach the conventional standard current ratio of 2:1. A similar study of major industry groups in a family of 167 Government companies covering their operations for 1974-75 was published in the RBI Bulletin of April-May 1977. Both the studies concluded that poor liquidity was maintained by Indian corporate.
Banerjee (1982) carried out a study to examine the interrelationship between liquidity and profitability. More precisely, he investigated the relationship between liquidity and profitability by testing Gentry’s hypothesis in the context of Indian corporate sector. The study accepted the hypothesis and concluded that profitability of Indian corporate was highly influenced by liquidity.
Khandelwal (I985) conducted a study on small scale industries in Jodhpur industrial estate for the period 1975-76 to 1979-80 to highlight their working capital management practices. In this study, 40 multi group units were selected on the basis of purposive sampling from 162 S.S.I units working in Jodhpur Industrial Estate at the end of 1974. The relevant data were collected from the secondary sources. The study revealed that the immediate liquidity position of the selected units was not at all satisfactory during the period under study. Furthermore, this study showed that the liquidity of inventory and also the quality of the receivables were also not at all satisfactory. The Industry-wise study disclosed that only textile industry was solvent. The study called for better inventory management.
Key Terms in this Chapter
Current Ratio (CR): It expresses the relation of the amount of current assets to the amount of current liabilities. It is a traditional measure used in ascertaining the ability of a firm to meet its short-term obligations.
Inventory Turnover Ratio (ITR): This ratio measures the efficiency of inventory management of a firm. If the inventory is efficiently managed, it will help in enhancing the liquidity of the firm. A high ITR indicates a high level of efficiency in inventory management and it is good from the liquidity point of view whereas a low ratio implies excessive inventory levels than warranted by volume of operation.
Cash Turnover Ratio (CTR): This ratio indicates the number of times the cash amount is turned over during the accounting period. It measures the efficiency of cash management. The higher CTR, the higher the efficiency of cash management and vice-versa. It is difficult to develop any standard ratio in this respect.
Debtors Turnover Ratio (DTR): Debtors turnover ratio highlights credit and collection policy pursued by a firm. The quality of debtors influences the liquidity of a firm. It tests the speed with which debtors are converted into cash.
Current Assets to Total Assets Ratio (CATA): It indicates the extent of total funds invested for the purpose of working capital and throws light on the importance of current assets of a firm. It should be worthwhile to observe that how much of that portion of total assets is occupied by the current assets, as current assets are essentially involved in forming working capital and also take an active part in increasing liquidity.
Quick Ratio (QR): A more rigorous measure of liquidity as compared to the current ratio. It is a refinement of CR as it excludes non-liquid current assets such as inventories, prepaid expenses etc.