180 | Page FINANCING OF WORKING CAPITAL IN SELECT CEMENT COMPANIES- A POLICY PERSPECTIVE Dr. K. Bhagyalakshmi 1 , Dr. P. Krishnama Chary 2 1 Lecturer, Dept. of Commerce and Business Management, University College for Women, Kakatiya University, Warangal, Telangana. (India) 2 Professor, University College of Commerce and Business Management and Director IQAC, Kakatiya University, Warangal, Telangana, (India) ABSTRACT Working Capital is very important for any manufacturing organisation such as cement, textiles etc. The way in which the working capital is financed to a company influences its profitability and the firm’s ability of using fixed assets possessed by it. The cost of capital used to finance the current assets also very highly impacting the profitability and the future course of actions of the companies. Cement is vital to the construction sector and all infrastructural projects. The construction sector alone constitutes 7 per cent of the country's gross domestic product (GDP). Since the cement sector notably plays a critical role in the economic growth of the country, the present paper focuses on the analysis of various policies followed by the six selected cement companies viz., Ultra Tech, The India, J.K, ACC, Ambuja and Madras Cements Ltd. in financing working capital by using the Statistical techniques like Percentages, Ratios, Averages, Standard Deviation (S.D),coefficient of variation (C.V) etc. The paper concludes that, the trade payables formed a predominant source of short-term funds in Ultra tech and The India; other current liabilities played a major role in J.K. and Madras and the short term provisions occupied a major proportion of short sources in the case of the remaining two companies viz., ACC and Ambuja in financing working capital. Keywords: Aggressive, Conservative, Hedging, Working Capital Approach I. INTRODUCTION Working Capital is very important for any manufacturing organisation. The way in which the working capital is financed to a company influences its profitability and the firm’s abilit y of using fixed assets possessed by it. The cost of capital used to finance the current assets also very highly impacting the profitability and the future course of actions of the companies. According to walker “ the type of capital used to finance working capital directly affects the amount of risk that a firm assumes as well as the opportunity for gain or loss and cost of capital”. II. POLICIES FOR FINANCING CURRENT ASSETS A firm can adopt different financing policies to invest on current assets. Three types of financing may be distinguished as:
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FINANCING OF WORKING CAPITAL IN SELECT
CEMENT COMPANIES- A POLICY PERSPECTIVE
Dr. K. Bhagyalakshmi1, Dr. P. Krishnama Chary
2
1Lecturer, Dept. of Commerce and Business Management, University College for Women,
Kakatiya University, Warangal, Telangana. (India)
2Professor, University College of Commerce and Business Management and Director IQAC,
Kakatiya University, Warangal, Telangana, (India)
ABSTRACT
Working Capital is very important for any manufacturing organisation such as cement, textiles etc. The way in
which the working capital is financed to a company influences its profitability and the firm’s ability of using
fixed assets possessed by it. The cost of capital used to finance the current assets also very highly impacting the
profitability and the future course of actions of the companies. Cement is vital to the construction sector and all
infrastructural projects. The construction sector alone constitutes 7 per cent of the country's gross domestic
product (GDP). Since the cement sector notably plays a critical role in the economic growth of the country, the
present paper focuses on the analysis of various policies followed by the six selected cement companies viz.,
Ultra Tech, The India, J.K, ACC, Ambuja and Madras Cements Ltd. in financing working capital by using the
Statistical techniques like Percentages, Ratios, Averages, Standard Deviation (S.D),coefficient of variation
(C.V) etc. The paper concludes that, the trade payables formed a predominant source of short-term funds in
Ultra tech and The India; other current liabilities played a major role in J.K. and Madras and the short term
provisions occupied a major proportion of short sources in the case of the remaining two companies viz., ACC
and Ambuja in financing working capital.
Keywords: Aggressive, Conservative, Hedging, Working Capital Approach
I. INTRODUCTION
Working Capital is very important for any manufacturing organisation. The way in which the working capital is
financed to a company influences its profitability and the firm’s ability of using fixed assets possessed by it. The
cost of capital used to finance the current assets also very highly impacting the profitability and the future
course of actions of the companies. According to walker “ the type of capital used to finance working capital
directly affects the amount of risk that a firm assumes as well as the opportunity for gain or loss and cost of
capital”.
II. POLICIES FOR FINANCING CURRENT ASSETS
A firm can adopt different financing policies to invest on current assets. Three types of financing may be
distinguished as:
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2.1. Long term financing: The sources of long-term financing include ordinary share capital, preference share
capital, debentures, long-term borrowings from financial institutions and reserves and surplus (retained
earnings).
2.2. Short-term financing: The short-term financing is obtained for a period less than one year. Short-term
finances include working capital funds from banks, public deposits, commercial paper, factoring or receivables
etc.
2.3. Spontaneous financing: Spontaneous financing refers to the automatic sources of short-term funds arising
in the normal course of a business. Trade (supplier’s) credit and outstanding expenses are examples of
spontaneous financing.
The company has to decide, the mix of short and long –term sources in financing current assets. Depending on
the mix of short and long-term financing, the approach followed by a company may be of 3 categories.
2.4. Matching Approach (Hedging Approach): The firm can adopt a financial plan which matches the
expected life of assets with the expected life of the source of funds raised to finance assets. The justification for
the exact matching is that, since the purpose of financing is to pay for assets. The source of financing and the
asset should be relinquished simultaneously. When the firm follows a matching approach, long-term financing
will be used to finance fixed assets and permanent current assets and short-term financing to finance temporary
or variable current assets. Under a matching plan, no short-term financing will be used if the firm has a fixed
current assets need only.
2.5. Conservative Approach: A firm in practice may adopt a conservative approach in financing its current and
fixed assets. The financing policy of the firm is said to be conservative when it depends more on long-term
funds for financing needs. Under a conservative plan, the firm finances its permanent assets and also a part of
temporary current assets with long-term financing. The conservative plan relies heavily on long-term financing
and, therefore, the firm has less risk of facing the problem of shortage of funds.
2.6. Aggressive Approach: A firm may be aggressive in financing its assets. An aggressive policy is said to be
followed by the firm when it uses more short-term financing than warranted by the matching plan. Under an
aggressive policy, the firm finances a part of its permanent current assets with short-term financing. Some
extremely aggressive firms may even finance a part of their fixed assets with short-term financing. The
relatively large use of short-term financing makes the firm more risky.
III. RISK-RETURN TRADE-OFF
Thus, there is a conflict between long-term and short-term financing. Short-term financing is less expensive than
long-term financing, but, at the same time, short-term financing involves greater risk than long-term financing.
The choice between long-term and short-term financing involves a trade-off between risk and return.
If the firms follow a policy of financing current assets through short term sources, funds are borrowed only
when needed. As a result, profitability will be higher but the risk of non-availability of funds may also be
greater. Alternatively, if the firms follow a policy of financing current assets through long-term sources, the risk
of non-availability of funds is significantly reduced but it may reduce the profitability of the firms on account of
idle funds in times of seasonal droughts. Therefore, in order to maximise the overall rate of return on investment
and minimise risk, firms have to employ and optimal mix of financing policies.
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IV. NEED FOR THE STUDY
The cement sector notably plays a critical role in the economic growth of the country and its journey towards
conclusive growth. Cement is vital to the construction sector and all infrastructural projects. The construction
sector alone constitutes 7 per cent of the country's gross domestic product (GDP). The industry occupies an
important place in the Indian economy because of its strong linkages to other sectors such as construction,
transportation, coal and power. India is the second largest producer of quality cement in the world. The cement
industry in India comprises 183 large cement plants and over 365 mini cement plants. Currently there are 40
players in the industry across the country. Since the type of capital used to finance working capital directly
affects the amount of risk that a firm assumes as well as the opportunity for gain or loss and cost of capital, the
need is felt to undertake a study on the financing policies of working capital of the select cement companies.
V. OBJECTIVES
The following are the objectives of the study.
1) To present the conceptual framework of different policies in financing the working capital.
2) To examine the proportion of long-term sources and short-term sources in financing the working capital of
select cement companies.
3) To analyse the proportion of each component of short-term sources with a view to identify their approaches
towards financing the working capital.
VI. SOURCES OF DATA AND METHODOLOGY
6.1. Sources of Data: The present study is based on secondary data. The sources of secondary data consists of
Annual Reports, circulars, research periodicals, Text Books, news papers like Economic Times, websites and
other published sources. The data collected from the above sources for the period of 5 years from 2008-09 to
2012-13.
6.2. Methodology: The following methodology is adopted for conducting the study.
Aggregate financial variables relating to financing of working capital of selected cement companies are
processed, tabulated, analyzed and interpreted for a period of 5 years i.e. from 2008-09 to 2012-13 with the help
of statistical techniques like Percentages, Ratios, Averages, Standard Deviation (S.D), and Coefficient of
Variation (C.V). Finally conclusions have been drawn based on the facts revealed by the study.
VII. SELECTION OF SAMPLE
For the purpose of the present study, six cement companies have been selected as sample namely, 1.Ultra-tech
Cement Ltd., 2. The India Cements Ltd., 3.J.K Cement Ltd., 4. ACC Ltd., 5. Ambuja Cements Ltd. and 6.
Madras Cements ltd.
The collected data of selected companies have been analysed as under.
VIII. CURRENT LIABILITIES AS A PERCENTAGE OF TOTAL CURRENT ASSETS
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TABLE 1 shows the proportion of current liabilities in the total current assets of the selected cement companies.
The data reveals that all the selected samples used the current liabilities as a source of financing the working
capital above the 50% of the current assets except in J.K during 2008-09, during the period from 2008-09 to
Table-1 Current Liabilities as a Percentage of Total Current Assets
(Source: Annual Reports)
2012-13. The proportion is highest with 187.01% in 2010-11 in The India Cements and lowest in J.K cements
with 34.56% in 2008-09 among the selected cement companies. The two companies, The India and ACC have
the proportion i.e. more than 100% in three years of the study period. This indicates that the companies had used
the remaining short-term sources for financing the fixed assets. The other four companies have their proportions
below the 100% of working capital namely Ultra-tech, J.K, Ambuja and Madras Cements Ltd. The highest
average proportion is registered as 123.44% and the S.D is 69.13 with the C.V as 56.00% in The India Cements
Ltd. The least average is stood as 62.62% in J.K. and the S.D is 20.01 with the C.V as 31.96%.
After having analysed the current liabilities as a percentage of current assets, it is now proposed to examine that,
the proportion of each source of short-term finance, prominent source which has given highest proportion of
short-term finance and the approach which has been followed by the selected cement companies in financing
their working capital needs during the period of 5 years i.e. from 2008-09 to 2012-13. There are four important
components of current liabilities are identified such as Trade Payables , Short term Borrowings, Other Current
Liabilities and Short Term Provisions in the selected cement companies in financing working capital and
anlysed as under.
IX. ULTRA-TECH CEMENT LIMITED
It is observed from the TABLE 2 that, the trade payables including sundry creditors and bills payable formed a
predominant source of short term funds in financing the current assets. The percentage of trade payables is
Table-2 Financing of Working Capital in Ultra tech Cement Limited