TRENDS IN LIQUIDITY MANAGEMENT OF COMMERCIAL VEHICLE INDUSTRY IN INDIA

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

TRENDS IN LIQUIDITY MANAGEMENT OF COMMERCIAL VEHICLE INDUSTRY IN INDIA

S. Suguna,

Asst.Professor in Commerce,

PGP College of Arts & Science, Namakkal.

Dr. C. Thilakam,

Professor & Head in Commerce

Manonmaniam Sundharanar University, Thirunelveli.

ABSTRACT

This paper makes an attempt to assess the trends in liquidity

management commercial vehicle industry in india for a period of 14

years (i. e. from 1999-2000 to 2012-13). An attempt has been

undertaken to observe the trend values of liquidity position of the

company and to study the correlation between liquidity and

profitability. The study is based on secondary data collected from

published annual reports of selected commercial vehicle industry.

The available data have been analyzed by using some important

managerial and statistical tools. Various statistical tools such as

trend , correlation and multiple regressiont have been applied. On the

basis of overall analysis, it is therefore important to state that the

selected company always tries to maintain adequate amount of net

working capital in relation to current liabilities so as to keep a good

amount of liquidity throughout the study period.

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

INTRODUCTION

For a successful business enterprise two types of assets are very

important i.e. fixed assets and current assets. Fixed assets viz., land &

building, plant & machinery, furniture etc. are not purchased for the

purpose of sale but for the purpose of earning profit for a long period

in the future. On the other hand, current assets viz., stock, debtors,

bills receivable, cash and bank balance etc. are purchased for the

production of goods and sales of those goods through the process of

working capital cycle i.e. conversion of raw material into

work-in-progress, work-in-progress into finished goods, finished goods into

debtors and debtors are converted into cash or bills receivable. The

fixed assets are used in order to increase the production of an

organization and the current assets use the more fixed assets in day to

day working. The management of this working capital is known as

working capital management (Pandey & Jaisal, 2011). Working

capital plays an important role in firm's growth and profitability and

is tightly interlinked with the concept of liquidity. This

liquidity-profitability relationship is associated with the maintenance of the

proper level of working capital. Liquidity and profitability are the two

important and vital aspects of corporate business life. No firm can

survive without liquidity. Without making any profit a firm may be

considered as sick but one having no liquidity may soon meet its

downfall and ultimately die. As a matter of fact, liquidity is a

pre-requisite for the survival of a business firm. Thus, the liquidity

management has become a basic and broad aspect of judging the

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

EXISTING LITERATURE SURVEY

The term 'Liquidity' refers to the ability of a firm to meet its

short-term maturing obligations within one year. The Liquidity resources of

a firm may be kept in various forms: cash in hand and cash at bank in

current assets, reserve drawing power under a cash credit or overdraft

arrangement and short term deposits. Cash balances in current

account provide the highest degree of liquidity. The term liquidity

may be defined as a firm can maintain liquidity if it holds assets that

could be shifted or sold quickly with minimum transaction cost and

loss in value. The test of liquidity is the ability of the firm to meet its

cash obligations when they are due and to exploit sudden

opportunities in the market. Whenever one speaks of a firm's

liquidity, one tries to measure firm's ability to meet expected and

unexpected cash requirements, expand its assets, reduce its liabilities

or cover any operating losses. Few research studies have been

undertaken on the areas of liquidity management in India. Some of

the significant studies are highlighted below.

Mukhopadhyay (2004) conducted a study on working capital

management in heavy engineering firms to investigate into the

effectiveness of working capital management of an organization with

particular reference to its short term liquidity and solvency and its

impact on commercial operations of that organization.

Eljelly (2004) examines the relationship between profitability and

liquidity, as measured by current ratio and cash gap (cash conversion

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

study found significant negative relationship between the firm's

profitability and its liquidity level, as measured by the current ratio.

Singh and Pandey (2008) suggested that, for the successful working

of any business organization, fixed and current assets play a vital role,

and that the management of working capital is essential as it has a

direct impact on profitability and liquidity. They studied the working

capital components and found a significant impact of working capital

management on profitability for Hindalco Industries Limited.

Chakraborty (2008) studied the relationship between working capital

and profitability of Indian pharmaceutical companies. His study

suggested that there were two distinct schools of thought on this

issue: according to one school of thought, working capital is not a

factor of improving profitability and there may be a negative

relationship between them, while the other school of thought argues

that investment in working capital plays a vital role to improve

corporate profitability, and unless there is a minimum level of

investment of working capital, output and sales cannot be maintained

-- in fact, the inadequacy of working capital would keep fixed asset

inoperative.

Bhunia and Brahma (2011) conducted a study to examine and

evaluate the importance of liquidity management on profitability as a

factor accountable for poor financial performance in the private sector

steel Industry in India.

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The main objective of the study is to examine and evaluate the overall

efficiency of the management of working capital in terms of liquidity

trends of the selected company.

DATA COLLECTION AND METHOD OF THE STUDY

This study is based on secondary data. The data required for this

study have been collected from the published annual reports of

selected commercial vehicle industry. The study covered a period of

fourteen years starting from 1999–2000 to 2012– 2013. This study

covers mainly the following aspects of the Liquidity Management (i)

Components of Working Capital, (ii) Trends of Working Capital, (iii)

Trends of Current Assets (CA) and Current Liabilities (CL) with their

indices, In order to assess the relationship between liquidity and

profitability the ratios which have been applied for highlighting the

efficiency of liquidity management are Current Ratio (CR), Quick

Ratio (QR), Working Capital Turnover Ratio (WCTR), Inventory

Turnover Ratio (ITR), Debtors Turnover Ratio (DTR), Cash Turnover

Ratio (CTR), Working Capital to Total Assets Ratio (WCTAR) &

Debt-Equity Ratio (DER) . For the purpose of establishing definite

relationships between selected ratios relating to liquidity management

and profitability ratio, some statistical techniques like, Arithmetic

Mean, Trend Analysis, have been applied. All statistical computations

have been done through SPSS 10.2 version.

FINDINGS OF THE STUDY

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

Working Capital trend is one of the important techniques for

measuring the profitability of the enterprises. As a measuring rod of

efficiency or otherwise of the trend analysis of liquidity, the analysis

of working capital trend is highly relevant as it presents the composite

indication of the trend values of current assets and current liabilities.

The direction of change in working capital position throughout the

study period is a sign of the effectiveness or ineffectiveness of the

working capital management.

TATA Motors

The amount of net working capital, their indices and trend values of

net working capital of the TATA Motors are shown in Table-1.1.

Table-1.1 depicts that as amount of net working capital registered a

decreasing trend with negative balance throughout the study period

excepting few years in which there is a positive growth rate of

466.83per cent in 2005-06 (shown in Table-4.1) as compared to the

year 2004-05, its indices also recorded a decreasing trend from 100

(taking base year as 1999-2000) to -602.74 in 2012-13.From the trend

line equation (i.e. Y = -1354.88 +(-460.07 X) of net working capital c

fitted by least square method we can easily see estimated values of

working capital in the future periods. From the above equation it is

seen that the net working capital decreases 460.07 crores in each year.

Therefore, the estimated values of net working capital were negative

with a downward trend during the whole of the study period. The

difference between actual working capital and the estimated values of

working capital were positive from the years 2004-05 to 2008-09 and

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

positive deviations were significant due to an increase in current

assets and also a simultaneous decrease in current liabilities.

SML ISUZU Motors

net working capital of the SML ISUZU Motors are shown in

Table-1.2. Table-1.2 shows that as amount of net working capital registered

an increasing trend with Positive balance throughout the study period

excepting few years in which there is a negative growth rate of

year 2001-02, its indices also recorded a increasing trend from 100

(taking base year as 1999-2000) to 922.29 in 2012-13. From the trend

line equation (i.e. Y = 125.61 + 17.83X) of net working capital c

seen that the net working capital increases 17.83 crores in each year.

Therefore, the estimated values of net working capital were positive

with an upward trend during the whole of the study period. The

difference between actual working capital and the estimated values of

working capital were negative from the years 2002-03 to 2004-05,

2009-10 to 2011-2012 and 2007-08 while they were positive in the

remaining years. The negative deviations were significant due to a

decrease in current assets and also a simultaneous increase in current

liabilities.

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

net working capital of the Force Motors are shown in Table-1.3.

Table-1.3 shows that as amount of net working capital registered a

fluctuated trend with Positive and Negative balances throughout the

study period in which there is a negative growth rate of 54.52per cent

in 2005-06 (shown in Table-1.2) as compared to the year 2004-05, its

indices also recorded an increasing trend from 100 (taking base year

as 1999-2000) to 788.63 in 2012-13.From the trend line equation (i.e.

Y = 202.48 + 33.18X) of net working capital c fitted by least square

method we can easily see estimated values of working capital in the

future periods. From the above equation it is seen that the net working

capital increases 33.18 crores in each year. Therefore, the estimated

values of net working capital were positive with an upward trend

during the whole of the study period. The difference between actual

working capital and the estimated values of working capital were

negative from the years 2004-05 to 2010-11 while they were positive

in the remaining years. The negative deviations were significant due

to a decrease in current assets and also a simultaneous increase in

current liabilities.

EICHER Motors

net working capital of the EICHER Motors are shown in Table-1.4.

Table-1.4 shows that as amount of net working capital registered a

decreasing trend with negative balance throughout the study period

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

year 2004-05 its indices also recorded a decreasing trend from 100

(taking base year as 1999-2000) to -686.60 in 2012-13. From the

trend line equation (i.e. Y = 37.86 + 5.96X) of net working capital c

with a downward trend during the study period. The difference

between actual working capital and the estimated values of working

capital were positive from the years 2005-06 to 2009-10 while they

were negative in the remaining years. The positive deviations were

significant due to an increase in current assets and also a

simultaneous decrease in current liabilities.

ASHOK LEYLAND Motors

net working capital of the ASHOK LELAND Motors are shown in

Table-1.5. Table-1.5 shows that as amount of net working capital

registered a decreasing trend with negative balance throughout the

study period excepting few years in which there is a positive growth

rate of 157.17per cent in 2004-05 (shown in Table-1.5) as compared

to the year 2003-04 its indices also recorded a decreasing trend from

100 (taking base year as 1999-2000) to -33.74 in 2012-13. From the

trend line equation (i.e. Y = 674.79 + 71.18X) of net working capital

c fitted by least square method we can easily see estimated values of

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

with a downward trend during the study period. The difference

between actual working capital and the estimated values of working

capital were positive from the years 2004-05 to 2006-07 and from

2008-09 to 2010-11 while they were negative in the remaining years.

The positive deviations were significant due to an increase in current

[image:10.454.54.401.291.637.2]

assets and also a simultaneous decrease in current liabilities.

Table 1.1

Analysis of trend values of working capital of Tata Motors for the period from 1999-2000 to 2012-2013

Rs in Crores Year Current

Assets (Rs) (1)

Current

Liabilities(Rs.) (2) Net Working Capital (Rs) (Y) (3) = (1 -

2)

Indices (4)

Trend Values (Yc) (5)

Difference (Y - Yc) (6) = (3 - 5)

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[image:11.454.54.402.229.622.2]

2009-10 11668.3 17372.59 -5704.29 -725.45 -2735.08 -2969.21 2010-11 14090.61 16255.24 -2164.63 -275.29 -3195.15 1030.52 2011-12 14969.54 21881.64 -6912.1 -879.06 -3655.22 -3256.88 2012-13 12041.84 16781.24 -4739.4 -602.74 -4115.29 -624.11

Table 1.2

Analysis of trend values of working capital of SML ISUZU for the period from 1999-2000 to 2012-2013

Assets (Rs) (1)

Current Liabilities(Rs.) (2)

Net Working Capital (Rs) (Y) (3) = (1 - 2)

Indices (4)

Difference (Y - Yc) (6) = (3 - 5)

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

Table 1.3

Analysis of trend values of working capital of FORCE Motors for the period from 1999-2000 to 2012-2013

Assets (Rs) (1)

Current

Liabilities(Rs.) (2) Net Working Capital (Rs) (Y) (3) = (1 -

2)

Indices (4)

Difference (Y - Yc) (6) = (3 - 5)

1999-00 272.06 169.29 102.77 100.00 -29.77 132.54 2000-01 267.72 159.46 108.26 105.34 3.41 104.85 2001-02 233.97 153.78 80.19 78.03 36.59 43.60 2002-03 282.36 177.38 104.98 102.15 69.77 35.21 2003-04 331.88 213.06 118.82 115.62 102.95 15.87 2004-05 335.7 226.85 108.85 105.92 136.13 -27.28 2005-06 459.58 340.3 119.28 116.06 169.31 -50.03 2006-07 411.76 361.49 50.27 48.92 202.48 -152.21 2007-08 459.71 397.33 62.38 60.70 235.66 -173.28 2008-09 406.59 350.89 55.7 54.20 268.84 -213.14 2009-10 434.45 347.78 86.67 84.33 302.02 -215.35 2010-11 584.09 448.15 135.94 132.28 335.20 -199.26 2011-12 1119.33 461.38 657.95 640.22 368.38 289.57 2012-13 1294.27 483.8 810.47 788.63 401.56 408.91

Table 1.4

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GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH VOLUME -2, ISSUE -10 (October 2014) IF-3.142 ISSN: (2321-1709)

Assets (Rs) (1) Current Liabilities(Rs.) (2) Net Working Capital (Rs) (Y) (3) = (1 - 2)

Indices (4) Trend Values (Yc) (5) Difference (Y - Yc) (6) = (3 - 5)

1999-00 92.27 63.38 28.89 100.00 79.63 -50.74 2000-01 89.25 66.07 23.18 80.24 73.66 -50.48 2001-02 106.29 94.89 11.4 39.46 67.70 -56.30 2002-03 115.75 109 6.75 23.36 61.73 -54.98 2003-04 415.73 342.36 73.37 253.96 55.76 17.61 2004-05 505.08 455.95 49.13 170.06 49.80 -0.67 2005-06 484.44 391.64 92.8 321.22 43.83 48.97 2006-07 613.11 534.31 78.8 272.76 37.86 40.94 2007-08 513.36 423.66 89.7 310.49 31.90 57.80 2008-09 524.55 108.89 415.66 1438.77 25.93 389.73 2009-10 185.95 134.51 51.44 178.05 19.96 31.48 2010-11 96.11 158.53 -62.42 -216.06 14.00 -76.42 2011-12 140.47 228.94 -88.47 -306.23 8.03 -96.50 2012-13 176.82 375.18 -198.36 -686.60 2.07 -200.43

Table 1.5

Analysis of trend values of working capital of ASHOK LEYLAND for the period from 1999-2000 to 2012-2013

Assets (Rs) (1) Current Liabilities(Rs.) (2) Net Working Capital (Rs) (Y) (3) = (1 -

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2)

1999-00 1464.24 431.29 1032.95 100.00 1173.06 -140.11 2000-01 1563.4 541.11 1022.29 98.97 1101.88 -79.59 2001-02 1555.18 573.17 982.01 95.07 1030.70 -48.69 2002-03 1340.47 592.38 748.09 72.42 959.52 -211.43 2003-04 1463.67 832.7 630.97 61.08 888.33 -257.36 2004-05 2157.27 1165.67 991.6 96.00 817.15 174.45 2005-06 2232.41 1408.52 823.89 79.76 745.97 77.92 2006-07 2697.71 1755.85 941.86 91.18 674.79 267.07 2007-08 2875.26 2271.94 603.32 58.41 603.61 -0.29 2008-09 3165.61 2140.79 1024.82 99.21 532.43 492.39 2009-10 4152.13 2960.75 1191.38 115.34 461.25 730.13 2010-11 4367.24 3528.26 838.98 81.22 390.06 448.92 2011-12 4796.04 5334.35 -538.31 -52.11 318.88 -857.19 2012-13 4788.26 5136.78 -348.52 -33.74 247.70 -596.22

CONCLUSION

The estimated values of net working capital of TATA

MOTORS, EICHER MOTORS and ASHOK LEYLAND MOTORS

were negative with a downward trend during the whole of the study

period. The estimated values of net working capital of SML ISUZU

MOTORS and FORCE MOTORS were positive with an upward

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