Effect of Working Capital Management on Profitability of Hcl Infosystems Limited

Working capital, in general practice, refers to the excess of current assets over current liabilities Working Capital Management therefore, is concerned with the problems that arises in attempting to manage the current assets, the liabilities and inter-relationship that exists between them. The term current assets refers to those assets which is in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets includes cash, marketable securities, accounts receivable and inventory, current liabilities are those liabilities which are intended at their inception, to be paid in the ordinary course of business, within a year, out of current assets or earnings of the concern. The basic current liabilities are accounts /bills payables, bank overdraft and outstanding expenses. Thus, it may be concluded that working capital management is the process of planning and controlling the level of mix of the current assets of the firm as well as financing there assets.

Several studies were available in analyzing working capital management and profitability, but in India it was comparatively low. Some of the studies both in India and foreign are presented are below:- Kesseven Padachi (2006) in his study found that high investment in inventory and receivables was associated with low profitability. It was also found that a strong significant relationship existed between working capital management and profitability of Mauritian small manufacturing firms. Vishnani and Shah (2007) from their study on Indian consumer electronic industry discovered that profitability for the overall industry had no recognized relationship with liquidity, but majority of the companies belonging to this industry showed a positive association for profitability and liquidity. F. Samiloglu and K. Demirgunes (2008) in their study analyzed the effect of working capital management on firm profitability. In accordance with this aim, to consider statistically significant relationship between firm profitability and the components of cash conversion cycle at length, a sample consisting of Istanbul Stock Exchange (ISE) listed manufacturing firms for the periods of 1998-2007 has been analyzed under a multiple regression model empirical findings of the study show that the accounts receivables periods, inventory period and leverage affect firm profitability negatively while growth (in sales) affects firms profitability positively. Uyar (2009) analyzed a sample of 166 Turkish companies to predict the nature of relationship of profitability and size of the firms with Cash Conversion cycle. The result demonstrated that profitability and size of the firms both are negatively related with Cash Conversion Cycle. Hasan Agan Karadumam et.al. (2010) in the study found that the return on asset was increased by the efficient management of receivable. It also found positive effect of companies’ size on profitability and negative effect of debt ratio on profitability of select companies in Istanbul Stock Exchange. Melita Stephnou Charitou et al. (2010) found that the cash conversion cycle and all its major components of working capital of firms listed in Cyprus Stock Exchange were positively associated with profitability. Amalendu Bhunia and Islam Uddin khan (2011) found lower degree of association between working capital management and profitability of Indian steel industry. The present study analyzed the major aspects of working capital, current assets and current liabilities of HCL Infosystems. There are two binary concepts relating to working capital: 'gross' and 'net' used in measuring profitability and liquidity respectively. In the present study net concept of working capital is used to study the working capital aspect of the company. The study is confined to a period of 5 financial years ranging from (2008-2012).

1. To measure the liquidity position of the each company under consideration. 2. To find the current assets portion those have been financed out of long-term funds. 3. To know the fixed assets productivity through the adequate utilization of working capital. 4. To measure the relationship between bank credit and working capital to know managerial efficiency of working capital.

Ho1: Working Capital reduces the bank credit requirement of the firm

In the course of analysis, the study used various accounting and statistical techniques. Accounting tools include Assets Turnover, Current Ratio, Quick Ratio Analysis and while among statistical techniques the averageX, standard deviation, Pearson's correlation r and test of significance ttest have been applied. The use of all these techniques at different places has been made in the light of nature and suitability of data available and requirements of analysis. All these tools are described in brief in the following paragraphs

current ratio of 2:1 is considered by financial analysis to be satisfactory. It is indicator of over or under investment in current assets at a particular point of time.

2. Quick Ratio:- Quick ratio provides a more sound measure of liquidity. It is sometimes designated as liquidity ratio or acid test ratio also. Those current assets which are readily convertible into cash are known as liquid assets, Quick ratio of 1:1 is considered to be a satisfactory ratio. It represents the real liquid position. Thus, these ratios are created more reliable. Liquid Quick Assets= Current Assets–Stock–Prepaid Expenses Or Liquid Assets = Cash +Bank Balance+ Bills Receivable + Short term Marketable Securities + Sundry Debtors (Excluding bad and doubtful debts) 3. Net Working Capital: - Net working capital is commonly defined as the difference between current assets and current liabilities. Efficient working capital management of firm requires that firm should operate with adequate amount of net working capital to carry out its operation efficiently, effectively and smoothly. 4. Assets Turnover Ratio (ATO):- It measures the efficient use of fixed assets. It is based on relationship of net sales and fixed assets. Net fixed assets = Total fixed assets – Depreciation. It measures the profit earning capacity of the business. Higher the ratio indicates full utilization of fixed assets and a lower ratio shows underutilization of fixed assets.

1. Average (Arithmetic Mean):- Average or arithmetic mean gives a single value to describe the whole data. Simple arithmetic mean of each data series of different tables have been obtained by adding the values of all observation and dividing it by the number of observations, symbolically: Where jX is used to denote the sum of all thejX's from 1j tojn, and N is the number of observation. 2. Standard Deviation:- Standard Deviation is the most satisfactory scientific method of dispersion used in statistical analysis. The standard deviation measures the absolute variability. The greater the amount of variability the greater will be the standard deviation. A small standard deviation means a high degree of uniformity of the observation as well as homogeneity of a series. Here  = Standard deviation, sum total of the square of deviation, X= mean value, XX = deviations from mean value N = number of items 3. Correlation:- The correlation analysis refers to the techniques used in measuring the closeness of the relationship between the variables. For example, there exists some relationship between bank credit and net working capital of HCL Info systems. 4. 't' test:- The t-test is used when sample size is 30 or less. To test the hypothesis that the correlation coefficient of the population is zero i.e. the variables in Here t is based on (2n) degree of freedom. If the calculated value of t exceeds t0.05 for (2n), df, we say that the value of r is significant at 5% level of significance.

Hindustan Computers Limited, also known as HCL Enterprise, is one of India's largest electronics, computing and information Technology Company. Based in Noida, near Delhi, the company comprises two public listed Indian companies, HCL Technologies and HCL Infosystems. HCL was founded in 1976 by Shiv Nadar, Ajay Chowdhry and four other members. HCL focuses on addressing the IT hardware market in India for the first two decades of its existence with some sporadic activity in the global market. HCL Infosystems specializes in IT hardware (PC's and servers, as well as networking, imaging and communications products), and system integration services serving the domestic Indian market. In addition to its consumer products, the company provides commercial IT products, facilities management, network services, and IT security services for clients in such industries as government, financial services, and education. HCL Corporation owns significant stakes in HCL Infosystems (about 44%) and sister company HCL Technologies.

ANALYSIS AND PRESENTATION OF DATA

The study under consideration judges the working capital management of HCL Infosystems for achieving the above said objectives of the study, the published data has been employed. Data collected from various secondary sources have been presented in the form of one or more tables. Each table is accompanied by appropriate analyses and explanation. Besides, adequate use has been made of bar diagrams to illustrate and highlights the data presented in the tabular form.

The current ratio of HCL Info systems Ltd as shown by table-1 shows increasing trend from 2009to2011. However, it started declining after 2011.In HCL Info system Ltd. the trend of current ratio shows lower than the standard ratio i.e.2:1.But it is sufficient to meet out company financial needs. So the company is having good financial position from liquidity point of view.

From the above table it is observed that the current assets and current liabilities of five years (2008-2012) are showing improving trend. During the period of study the current assets are excess of current liabilities. Therefore, the short-term financial position of the company is considered sound and the short-term obligations of the said company could be paid from current assets.

Table – 5 shows the correlation analysis among Net Working Capital (NWC) and Bank Credit (BC). NWC, BC denoted by X, Y respectively for finding the coefficient of correlation among the variable. The coefficient correlation between NWC & BC is 0.965 and is significant at 0.05 level of significance. The positive coefficient of correlation means that both NWC & BC increase continuously in the period under consideration.

As design by the study that the working capital management reduces the bank credit of the company is testing by t-statistics here. Rxy= 0.63 at 0.05 level of significance Ha= Alternative Hypothesis: Working capital does not reduce the bank credit requirement of the firm. Student t-distribution: t=5.93 at 0.05 level of significance Table value= 3.182

The computed value of t (5.938) is more than the critical value of t (3.182). Hence, the null hypothesis is rejected. The relationship between working capital and bank credit is shown by the above table. The relationship between two variables is represented as the correlation coefficient being 0.96 and a positive high degree correlation. The t-test proves that the correlation coefficient between net working capital and bank credit is statistically significant because critical value is less than the actual calculated value i.e., 5.938>3.182. It is therefore, concluded that the working capital and bank credit of the company move in the same direction and influece one another to a greater degree.

After analyzing the data it has arrived at these results and findings area under: 1. In general the current ratio 2:1 indicate the sound liquidity position of the company. In the HCL infosystem Ltd. it is less than the standard but it is showing increasing trend and the company is financially sound. The standard ratio of the liquid ratio is 1:1 whereas the liquid ratio of this company is increasing gradually especially it is higher in the year 2011 as compared to the previous year. 2. The net working capital of this company is in a healty trend in the study of periods from 2008-12 and especially in the year 2012 it is high. Here in all the years the working capital required was keep on increasing.In other sence showing increasing trend. Therefore, the firm was financially sound in its position. 3. Productivity performance analysis of the company was observed in downward trend. The assets utilized in said company was found in fluctuating trend. Hence, it is considered underutilization of fixed assets to increase the sales of the company. 4. The correlation analysis of HCL Info systems Ltd. indicated that the Net working capital and Bank credit were associated with high degree positive correlation. The coefficient of correlation found significant at 5% level of risk. It means the HCL Info systems Ltd. took bank credit from the market for raising the NWC.

SUGGESTIONS

All these findings state that overall working capital management is good in HCL Info systems Ltd, but there is some weakness also and there is scope for improvement in working capital positive of the company to bring it at more effective path of progress. The present study is humble attempt to focus on the current practices of working capital management being followed in the selected company i.e. HCL Info systems Ltd. Hence some suggestions have been given as under The liquidity position of HCL Info systems Ltd. was showed the downward liquidity position of the company because the actual current ratio is less than the standard ratio. In such a situation the company may be forced to forego the possible profit because of non-availability of current assets. Hence the company should examine its liquidity position. The above observations lead to the conclusion that there is definite scope for improvement in working capital management of computer companies in India. This is particularly true about HCL Infosystems Ltd which was failed to keep the liquidity position as compared to the norms. This will enhance both profitability and liquidity of the company.

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