INTRODUCTION

COMPANY PROFILE:BHEL is the largest engineering and manufacturing enterprise in India in the energyrelated/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in
the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than
realized with a well-recognized track record of performance. The company has been earning
profits continuously since 1971-72 and paying dividends since 1976-77.
BHEL manufactures over 180 products under 30 major product groups and caters to core sectors
of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation,
Telecommunication, Renewable Energy, etc. The wide network of BHEL's 14 manufacturing
divisions, four Power Sector regional centers, over 100 project sites, eight service centres and 18
regional offices, enables the Company to promptly serve its customers and provide them with
suitable products, systems and services -- efficiently and at competitive prices. The high level of
quality & reliability of its products is due to the emphasis on design, engineering and
manufacturing to international standards by acquiring and adapting some of the best technologies
from leading companies in the world, together with technologies developed in its own R&D
centres.
BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental
Management Systems (ISO 14001) and Occupational Health & Safety Management Systems
(OHSAS 18001) and is also well on its journey towards Total Quality Management.
Installed equipment for over 90,000 MW of power generation-for Utilities, Captive and
Industrial users.
Supplied over 2,25,000 MVA transformer capacity and other equipment operating in
Transmission & Distribution network up to 400 kV (AC & DC).
Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals,
Refineries, Steel, Aluminum, Fertilizer, Cement,plants,etc.Supplied Traction electrics and
AC/DC locos to power over 12,000 kms Railway network.Supplied over one million Valves to
Power Plants and other Industries.

BHEL's operations are organised around three business sectors, namely Power, Industry including Transmission, Transportation, Telecommunication & Renewable Energy - and
Overseas Business. This enables BHEL to have a strong customer orientation, to be
sensitive to his needs and respond quickly to the changes in the market.
BHEL's vision is to become a world-class engineering enterprise, committed to enhancing
stakeholder value. The company is striving to give shape to its aspirations and fulfill the
expectations of the country to become a global player.
The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every
employee is given an equal opportunity to develop himself and grow in his career. Continuous
training and retraining, career planning, a positive work culture and participative style of
management all these have engendered development of a committed and motivated workforce
setting new benchmarks in terms of productivity, quality and responsiveness.
International Business:BHEL has, over the years, established its references in over 60 countries of the world. These
references encompass almost the entire range of BHEL products and services, covering Thermal,
Hydro and Gas based turnkey power projects, substation projects, and rehabilitation projects;
besides a wide variety of products like: Transformers, Compressors, Valves and Oil field
equipment, Electrostatic Precipitators, Insulators, Heat Exchangers, Switchgears, Castings and
Forgings etc. Some of the major successes achieved by BHEL have been in Gas-based power
projects in Oman, Libya, Malaysia, Saudi Arabia, Iraq, Bangladesh, Sri Lanka, China,
Kazakhstan; Thermal Power Projects in Cyprus, Malta, Libya, Egypt, Indonesia, Thailand,
Malaysia; Hydro power plants in New Zealand, Malaysia, Azerbaijan, Bhutan, Nepal, Taiwan
and Substation projects & equipment in various countries. Execution of these overseas projects
has also provided BHEL the experience of working with world-renowned Consulting
Organizations and Inspection Agencies. The Company has been successful in meeting
demanding requirements International markets, in terms of complexity of the works as well as
technological, quality and other requirements viz. HSE requirement, financing package,
associated O&M services to name a few. BHEL has proved its capability to undertake projects
on fast-track basis. BHEL has also established its versatility to successfully meet the other

varying needs of various sectors, be it captive power, utility power generation or for the oil
flexibility to exhibited adaptability by manufacturing and supplying intermediate products.

B.H.E.L. IN INDIA:# REGIONAL OFFICES (POWER SECTORS)

1. NEW DELHI (NORTHERN REGION)
2. CALCUTTA (EASTERN REGION)
3. NAGPUR (WESTERN REGION)
4. CHENNAI (SOUTHERN REGION)
# BUSSINESS OFFICES
1.

BANGLORE

2.

BARODA

3.

BHUBANESHWAR

4.

MUMBAI

5.

CALCUTTA

6.

CHANDIGARH

7.

GUWAHATI

8.

JABALPUR

9.

JAIPUR

10. LUCKNOW
11. CHENNAI
12. NEW DELHI
13. PATNA
14. RANCHI
15. SECUNDRABAD

# MANUFACTURING UNITS
1.

BANGALORE

2.

BHOPAL

3.

GOINDWAL

4.

HARDWAR

5.

HYDERABAD

6.

JAGDISHPUR

7.

JHANSI

8.

RUDRAPUR

9.

PANIPET

10. TIRUCHIRAPALLY
# SERVICE CENTRES
BANGLORE
BARODA
CALCUTTA
CHANDIGARH
SECUNDRABAD
NEW DELHI
NAGPUR
PATNA
VARANASI

COMPANY'S BUSINESS MISSION AND OBJECTIVES

BUSINESS MISSION

To maintain a leading position as suppliers of quality equipment, systems and services in the
field of conversion of energy, for application in the areas of electric power transportation, oil and
gas exploration and industries. Utilize company's capabilities and resources to expand business
into allied areas and other priority sectors of the economy like defence, telecommunications and
electronics.
BUSINESS OBJECTIVES
GROWTH: To ensure a steady growth by enhancing the competitive edge of BHEL defence,
telecommunication and electronics in existing business, new areas and international operations
so as to fulfill national expectations from BHEL.
PROFITABILITY: To provide a reasonable and adequate return on capital employed, primarily through
improvements in operational efficiency, capacity utilization, productivity and generate adequate
internal resources to finance the company's growth.
CUSTOMER FOCUS: To build a high degree of customer confidence by providing increased value for his money
through international standards of product quality, performance and superior services.
PEOPLE- ORIENTATION: To enable each employee to achieve his potential, improve his capabilities, perceive his role and
responsibilities and participate and contribute positively to the growth and success of the
company. To invest in human resources continuously and be alive to their needs.
TECHNOLOGY: Achieve technological excellence in operations by development of indigenous technologies and
efficient absorption and adaptations of imported technologies to suit business need and priorities
and provide the competitive advantage to the company.
IMAGE: To fulfill the expectations which stakeholders like government as owner, employees, customers
and the country at large have from BHEL.

CONTRIBUTION OF BHEL IN VARIOUS CORE SECTORS

BUSINESS SECTORS: BHEL's operations are organized around three business sectors, mainly power, industry and
international operations. This enables BHEL to have a strong customers orientation, to be
sensitive to his needs and respond quickly to the changes in the market.
POWER SECTORS: Power is the core sector of BHEL and comprises of thermal, nuclear gas, diesel and hydro
business. Today BHEL supplied sets, accounts for nearly 66 % of the total installed capacity in
the country as against nil till 1969-70.
BHEL manufactures boilers auxiliaries, TG sets and associate controls, piping and station C & I
up to 500 MW rating with technology and capability to go up to 1000 MW range. The auxiliary
products high value capital equipment like bowl and tube mills, pumps and heaters, electrostatic
precipitators, gravimetric feeders, fans, valves etc.
BHEL has contracted so far around 240 thermal sets of various ratings, which includes 14 power
plants set up on turnkey basis. Nearly 85 % of World Bank tenders for thermal sets floated in
India have been won by the company against international competition.
It has the capability to manufacture gas turbines up to 200 MW rating and custom built combined
cycle power plants. Nuclear steams generators, turbine generators, sets and related equipment of
235 MW rating have been supplied to most of the nuclear power plants in India. Production of
500 MW nuclear sets, for which orders have been received.
BHEL has developed expertise in renovation and maintenance of power plant equipment besides
specialized know how of residual life assessment, health diagnostic and life extensions of plants.
The four power sectors regional centers at New Delhi, Chennai, Kolkata and Nagpur will play a
major role in giving a thrust to this business and focus BHEL's efforts in this area.

BHEL HARIDWAR UNIT

The Heavy Electrical Equipment Plant (HEEP) located in Haridwar, is one of the major
manufacturing plants of BHEL. The core business of HEEP includes design and manufacture of
large steam and gas turbines, turbo generators, hydro turbines and generators, hydro turbines and
generators, large AC/DC motors and so on.
Heavy Electrical Equipment Plant, Hardwar of this Multi-unit corporation with 7467 strong
highly skilled technicians, engineers, specialists and professional experts is the symbol of Indo
Soviet and Indo German Collaboration. It is one of the four major manufacturing units of the
BHEL. With turnover of 164059 lacs and PBT of Rs.32489 lacs HEEP added 3000 MW of
power to the National grid during 2013-14.
HEEP is engaged in the manufacture of Thermal and Nuclear Sets up to 1000MW, Hydro Sets up
to HT Runner dia 6300mm, associated Apparatus Control gears, AC& DC Electrical machines
and large size Gas Turbine of 60-200 MW. HEEP Hardwar contributes about 44% of Indias total
installed capacity for power generation with total capacity of Thermal, Nuclear & Hydro Sets of
over 45000MW currently working at a Plant Load Factor of 76% and Operational Availability of
86%. Inspite of acute recession in economy, BHEL Hardwar received recent orders for Mejia5&6,Sipat, Bhatinda, Chandrapura, Bakreshwar, Santaldih, Bhilai, Dholpur.

HISTORICAL PROFILE:The construction of heavy electrical equipment Plant commenced in Oct.1963after indosoviet technical co-operation agreement in Sept.1959The first product to roll out from the
plant was an electric motor in January 1967.This was followed by first 100 MW Steam Turbine
in Dec.1969and first 100MW Turbo Generator in August 1971.The plants break even was
achieved in March 1974.BHEL went in for technical collaboration with M/s Siemens, Germany
to undertake design and manufacture to large size thermal sets upto a unit rating of 1000 MW in
the year 1976.First 200 MWTG set was commissioned at Obra in 1977.The continuum of
technological advancement subsequently saw the commissioning of 500 MW TG Set in 1984
.The technical cooperation of Gas Turbine manufacture was also signed with M/s Siemens
Germany.First 150 MW ISO rating gas Turbine was exported to Germany in Feb1995.Our 250

MW thermal set up at Dahanu Plant of BSES made a history by continuous operation for over
150 days and notching up a record plant load factor greater than 100%.
KEY COMPETITORS:Power Sector Giant of the World viz. Siemens Germany, ABB, General electric of USA etc. are
the major competitors of HEEP. All these are the MNCs and enjoy huge financial and R&D
backup.
CORPORATE CITIZEN:HEEP Hardwars Strategic plans and its policy & strategy are commensurate

with BHEL

Corporate / strategic Plan . As first PSU to adopt Corporate Planning as a process . Board
meetings for long range development , BHEL has always guided other PSUs in their Corporate
planning process .Board meeting , monthly Management Committee meetings, Annual Revenue
Budget exercise , Mid term reviews , Apex TQ council reviews, Personnel Heads Meet, Quality
Heads Meet , Technology Meets , Product committees meetings, Inter-Unit Quality Circle Meets
etc. are the some of crore strengths of BHEL Corporations vast network.
KEY CUSTOMERS AND SUPPLIERS :HEEPs customer profile ranges from State Electricity Boards,Government Power utilities like
NTPC, NPC, NHPC to IPPs like Reliance Energy. HEEP has also supplied Gas Turbine sets to
overseas customers in Libya & Iraq. Power Sector Regions of BHEL are its key internal
customers. In view of expected market scenario,BHEL has strategically decided that HEEP will
concentrate on coal based Higher Rating Thermal Sets for domestic market to fulfil the countrys
vision of adding 107,000 MW capacity to achieve Power on Demand by 2012. Our key
customer, NTPC has drawn up plan for capacity addition of 20,000MW by 2012. HEEP has
planned for execution of 34,619MW by 2012.
FAVOURABLE BUSINESS ENVIRONMENT:Power Sector has to grow over 10% annually to reach the 7% GDP level. Thus, the demand for
thermal sets will remain high. Central Electricity Authority (CEA) is the guiding authority for
Power Sector strategies in our country. BHEL representatives, along with representatives from

various domestic customers, are an integral part of various committees formed by CEA. This
enables us to guide and understand the market requirements and future challenges. To meet the
11th Five Year Plan target of adding 61,000MW, CEA has planned addition of 23 nos.
standardized 500MW sets for faster project execution and cost reduction. BHEL, including
HEEP, is a part of this process. CEA has standardized for the next capacity of 800MW sets and
has asked BHEL to prepare itself for manufacturing and supply in the 11th Five Year Plan.
BHEL has tied up with Siemens for upgradation of technology. Further CEAs stress on R&M of
ageing Power Plants is also providing business opportunity to unit.
MAJOR CHALLENGES:The favorable business scenario has given the unit a major challenge of establishing Power
Infrastructure of the country in close co-ordination with its key customers. HEEP has committed
itself to meet the countrys requirements. To cater to the needs of higher rating sets of 800MW,
HEEP has collaboration with Siemens.
STRATEGIC CHALLENGES: Key Business
Cycle time reduction
State of the art technology
Cost reduction
Operational
Timely delivery
Material cost reduction
Productivity improvement
Effective utilization of machines
Human Resource
Motivation of employees
Skill & Knowledge management

INDUSTRY SECTORS:BHEL is a major producer of large size thruster devices. The products include centrifugal
compressors, high speed industrial drive turbines, industrial boilers and auxiliaries, waste heat
recovery boilers, gas turbines, electric motors, drives, and control equipments, high voltage
transformers, switch gears and heavy castings and forgings.
Company in India with the capability to make simulators for power plants, defence industrial
process plants and other applications. An entry has been made in aviation industry for which
BHEL has set up facilities and is now producing two seater aircraft.
TRANSMISSION:A wide range of transmission products and systems are produced by BHEL to meet the needs of
power transmission and distribution sector. These include:

Dry Type Transformers

SF6 Switch Gears

400 KW Transmission Equipment

High Voltage Direct Current System

Series and Shunt Compensation Systems

In anticipation of the need for improved substations, a 33 KV gas insulated sub station with
micro processors base control and protection system has been done.
TRANSPORTATION:65 % of trains in Indian Railways are equipped with BHEL's traction and traction control
equipment. These include:

Broad Gauge 3900 HP AC / DC locomotives

Diesel Shunting Locomotives up to 2600 HP

5000 HP AC Loco with thyristor control

Battery Powered Road Vehicles and Locomotives

RESEARCH AND DEVELOPMENT:-

BHEL has a corporate R & D center supported by R & D groups at each of the manufacturing
divisions. The dedicated effort of BHEL's R & D engineers have produced several new products
like automated storage retrieval system automated guide vehicles for material transportation etc.
Establishment of Asia's largest fuel evaluation test facility at Tiruchy was high light of the year.
This facility will enable evaluation of combustion, heat transfer and pollution parameters in
boilers.
Major R & D achievement include:

Design manufacture and supply of countries first 17.2 MW industrial steam turbines.

Development of 4700 HP AC / DC loco for Indian Railways.

Development of largest capacitor voltage transformers of 8800 PF 400 KV rating.

Development and application low cost ROBOTS for job loading/unloading.

According to ex- CMD Mr. R.K.D. Shah, "BHEL is spending Rs. 60 Crores on Research and
Development. Earning from product which has been commercialized has gone up 26 % to Rs.
760 Crores."
Human Resource Development Institute:BHEL has envisioned becoming "A World Class Engineering Enterprise committed to enhancing
stakeholder value". Force behind realization of this vision and the source of our competitive
advantage is the energy and ideas of our 44,000 strong highly skilled and motivated people.
The Human Resource Development Institute situated in NOIDA, a corner-stone of BHEL
learning infrastructure, along with Advanced Technical Education Center (ATEC) in
Hyderabad and the Human Resource Development Center at the manufacturing Units,
through various organizational developmental efforts ensure that the prime resource of the
organization the Human Capital is Always in a state of Readiness, to meet the dynamic
challenges posed by a fast changing environment. It is their constant endeavor to take the
HRD activities to the strategic level of becoming active partner to the (organizational)
pursuits of achieving the organizational goals.

REVIEW OF LITERATURE
Jafar and Sur (2006) studied the efficiency of the working capital management in the National
Thermal Power Corporation (NTPC), and showed that the company achieved a higher level of
efficiency in managing its working capital during the post-liberalization era by adapting itself to
the new environment which had emanated from liberalization, globalization and competitiveness.
They pointed out that, while many of the public enterprises are learning to survive and grow by
adapting themselves to the new situation, a large group of public sector undertakings, significant
both in number and investment, have been beset with serious problems like slow growth, low
productivity, inadequate emphasis on research and development, inefficient working capital
management, and so on. Rafuse (1996) argued that attempts to improve working capital by
delaying payment to creditors are counter-productive, and that altering debtor and creditor levels
for individual tiers within a value system will rarely produce any net benefit. He proposed that
stock reduction generates system-wide financial improvements and other important benefits, and
suggested that, to achieve this, companies should focus on stock management strategies based on
lean supplychain techniques.
In intention to discover the relationship between efficient working capital management and
firms profitability(Shin & Soenen, 1998) used net-trade cycle (NTC) as a measure of working
capital management. NTC is basically equal to the CCC whereby all three components are
expressed as a percentage of sales. The reason by using NTC because it can be an easy device to
estimate for additional financing needs with regard to working capital expressed as a function of
the projected sales growth. This relationship is examined using correlation and regression
analysis, by industry and working capital intensity. Using a Compustat sample of Hindalco years
covering the period 1999-2009, in all cases, they found, a strong negative relation between the
length of the firm's net-trade cycle and its profitability. In addition, shorter NTC are associated
with higher risk-adjusted stock returns. In other word, (Shin & Soenen, 1998) suggest that one
possible way the firm to create shareholder value is by reducing firms NTC.

Ghosh and Maji, 2003 in this paper made an attempt to examine the efficiency of working
capital management of the Indian cement companies during 1992 1993 to 2001 2002. For
measuring the efficiency of working capital management, performance, utilization, and overall
efficiency indices were calculated instead of using some common working capital management
ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also
tested the speed of achieving that target level of efficiency by an individual firm during the
period of study. Findings of the study indicated that the Indian Cement Industry as a whole did
not perform remarkably well during this period. (Shin and Soenen, 1998) highlighted that
efficient Working Capital Management (WCM) was very important for creating value for the
shareholders. The way working capital was managed had a significant impact on both
profitability and liquidity. The relationship between the length of Net Trading Cycle, corporate
profitability and risk adjusted stock return was examined using correlation and regression
analysis, by industry and capital intensity. They found a strong negative relationship between
lengths of the firms nettrading Cycle and its profitability. In addition, shorter net trade cycles
were associated with higher risk adjusted stock returns.
Chakraborty and Bandopadhyay (2007) studied strategic working capital management, and its
role in corporate strategy development, ultimately ensuring the survival of the firm. They also
highlight how strategic current asset decisions and strategic current liabilities decisions had multi
dimensional impact on the performance of a company. Singh (2008) found that the size of
inventory directly affects working capital and its management. He suggested that inventory was
the major component of working capital, and needed to be carefully controlled. 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 an significant impact of working capital management on profitability for Hindalco
Industries Limited.
Agarwal (1988) formulated the working capital decision as a goal programming problem, giving
primary importance to liquidity, by targeting the current ratio and quick ratio. The model

included three liquidity goals/constraints, two profitability goals/constraints, and, at a lower

priority level, four current asset sub goals and a current liability sub-goal (for each component of
working capital). In particular, the profitability constraints were designed to capture the
opportunity cost of excess liquidity (in terms of reduced profitability). The literature of goal
programming in operational/financial decisions is quite extensive, though only a few studies
have directly focused on working capital decisions. Agarwals (1988) study was a step forward,
but no further refinements to his model have been proposed. This paper proposes certain
modifications in Agarwals (1988) model.
This discussion of the importance of working capital management, its different components and
its effects on profitability leads us to the problem statement which we will be analyzing for a
sample of Hindalco.
The main objectives are:
To establish a relationship between Working Capital Management and Profitability over a
period of eleven years.
To find out the effects of different components of working capital management on
profitability
To establish a relationship between the two objectives of liquidity and profitability of the
Hindalco industries.
To find out the relationship between profitability and size of Hindalco
To find out the relationship between debt used by Hindalco and its profitability
To draw conclusion about relationship of working capital management and profitability
of Hindalco.
The study of (Shishir Pandey) consistent with later study on the same objective that done by
(Deloof, 2003) for the period of 1992-1996. However, (Deloof, 2003) used trade credit policy
and inventory policy are measured by number of days accounts receivable, accounts payable and
inventories, and the cash conversion cycle as a comprehensive measure of working capital
management. He founds a significant negative relation between gross operating income and the
number of days accounts receivable, inventories and accounts payable. Thus, he suggests that
managers can create value for their shareholders by reducing the number of days accounts

receivable and inventories to a reasonable minimum. He also suggests that less profitable firms
wait longer to pay their bills.
Most previous study focus on develop market (Peel & Wilson, 1996; Shin & Soenon, 1998 and
Deloof, 2003). Thus investigating this issue could provide additional insights and perhaps
different evidence on the working capital management in emerging capital market. This will
surely enrich the finance literature on this issue. Additionally, the results of this study would
provide firm managers better insights on how to create efficient working capital management
that have ability to maximize firms value. As a result, it will build up confidence in investor to
invest in that firm. Further, the confidence of investors to invest in Malaysia will influence the
growth of economic. The results of this study would also assist policy-makers to implement new
sets of policies regarding the working capital market in Malaysia to ensure continuous economic
growth.
The literature of finance traditionally focused on long term financial decisions. There has been a
concerted effort by theoretical economists to analyze financial decisions of business firms within
the context of the equilibrium models of financial markets. While these models have been
employed to analyze the long term corporate investment and financial decisions, virtually no
research has been conducted in an attempt to apply them to working capital decisions (Cohn and
Pringle, 1975).
The literature of finance has neglected the short term financial decisions, which is working
capital management. Shortage of funds for working capital as well as the uncontrolled overexpansion of working capital has caused many businesses to fail and in less severe cases has
stunted their growth (Grass, 1972). Especially, in small firms, working capital management may
be the factor that decides success or failure; in larger firms, efficient working capital
management can significantly affect the firm risk, return and share (Gitman, 1982). Researchers
have particularly offered studies analyzing investments, capital structure, dividends and company
valuation. However, the investment that firms make in current assets and the resources used with
maturities one year represent the main share of items on a firm's balance sheet which appears to
have been relatively neglected in research.
(Blinder and Manccini, 1991) Granting trade credit favors the firms sales in various ways. Trade
credit can act as an effective price cut (Brennan et al., 1988; and Petersen and Rajan, 1997) and
an incentive to customers to acquire merchandise at times of low demand (Emery, 1987).

However, firms that invest heavily in inventory and account receivable can suffer low profit.
Thus, greater the investment in current assets, lower is the risk, and profitability obtained.
Similarly, trade credit is a spontaneous source of financing that reduces the amount required to
finance the sums tied up in the inventory and account receivables. The trade credit can have a
very high implicit if early payment discounts are available. In fact, the opportunity cost may
exceed 20 percentage depending on the discount percentage and the discount period granted (Ng
et al., 1999; and Wilner, 2000). Profitability and liquidity comprise the salient and all too often
conflicting goals of working capital management. The conflict arises because the maximization
of the firm's returns could seriously threaten liquidity, and on the other hand, the pursuit of
liquidity has a tendency to dilute returns. Over the years, analysts have employed traditional ratio
analysis as a primary instrument in the measurement of corporate liquidity in the firm, of well
established ratios such as the current and quick ratios (Smith, 1997).
More recently, a popular measure of working capital management is the cash conversion cycle,
i.e., the time lag between the expenditure for the purchase of raw materials and the collection of
sales of finished goods. As the time passes, the need for working capital increases. The corporate
profitability increases with longer cash conversion cycle and might also decrease if the cost of
investment in working capital is higher and rises faster than the benefits of holding more
inventories and granting more inventories and trade credit to customers.
Chakraborty (2008) evaluated the relationship between working capital and profitability of
Indian pharmaceutical companies. He pointed out 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 according to the other
school of thought, 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.

3 Studies in Other Countries

Eljelly, 2004 elucidated that efficient liquidity management involves planning and controlling
current assets and current liabilities in such a manner that eliminates the risk of inability to meet
due short-term obligations and avoids excessive investment in these assets. The relation between
profitability and liquidity was examined, as measured by current ratio and cash gap (cash
conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and
regression analysis. The study found that the cash conversion cycle was of more importance as a
measure of liquidity than the current ratio that affects profitability. The size variable was found to
have significant effect on profitability at the industry level. The results were stable and had
important implications for liquidity management in various Saudi companies. First, it was clear
that there was a negative relationship between profitability and liquidity indicators such as
current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that
there was great variation among industries with respect to the significant measure of liquidity.
Deloof, 2003 discussed that most firms had a large amount of cash invested in working capital. It
can therefore be expected that the way in which working capital is managed will have a
significant impact on profitability of those firms. Using correlation and regression tests he found
a significant negative relationship between gross operating income and the number of days
accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results
he suggested that managers could create value for their shareholders by reducing the number of
days accounts receivable and inventories to a reasonable minimum. The negative relationship
between accounts payable and profitability is consistent with the view that less profitable firms
wait longer to pay their bills.
Smith and Begemann 1997 emphasized that those who promoted working capital theory shared
that profitability and liquidity comprised the salient goals of working capital management. The
problem arose because the maximization of the firm's returns could seriously threaten its
liquidity, and the pursuit of liquidity had a tendency to dilute returns. This article evaluated the
association between traditional and alternative working capital measures and return on
investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange
(JSE). The problem under investigation was to establish whether the more recently developed

alternative working capital concepts showed improved association with return on investment to
that of traditional working capital ratios or not. Results indicated that there were no significant
differences amongst the years with respect to the independent variables. The results of their
stepwise regression corroborated that total current liabilities divided by funds flow accounted for
most of the variability in Return on Investment (ROI). The statistical test results showed that a
traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the
greatest associations with return on investment. Well-known liquidity concepts such as the
current and quick ratios registered insignificant associations whilst only one of the newer
working capital concepts, the comprehensive liquidity index, indicated significant associations
with return on investment. All the above studies provide us a solid base and give us idea
regarding working capital management and its components. They also give us the results and
conclusions of those researches already conducted on the same area for different countries and
environment from different aspects. On basis of these researches done in different countries, we
have developed our own methodology for research Working Capital Management has its effect
on liquidity as well on profitability of the firm.A sample of 94 Pakistani firms listed on Karachi
Stock Exchange for a period of 6 years from 1999 2004 is selected they studied the effect of
different variables of working capital management including the Average collection period,
Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on
the Net operating profitability of Pakistani firms. Debt ratio, size of the firm (measured in terms
of natural logarithm of sales) and financial assets to total assets ratio have been used as control
variables. Pearsons correlation, and regression analysis (Pooled least square and general least
square with cross section weight models) are used for analysis. The results show that there is a
strong negative relationship between variables of the working capital management and
profitability of the firm. It means that as the cash conversion cycle increases it will lead to
decreasing profitability of the firm, and managers can create a positive value for the shareholders
by reducing the cash conversion cycle to a possible minimum level. We find that there is a
significant negative relationship between liquidity and profitability. We also find that there is a
positive relationship between size of the firm and its profitability. There is also a significant
negative relationship between debt used by the firm and its profitability.
Lyroudi & Lazaridis, 2000) use food industry Greek to examined the cash conversion cycle
(CCC) as a liquidity indicator of the firms and tries to determine its relationship with the current

and the quick ratios, with its component variables, and investigates the implications of the CCC
in terms of profitability, indebtness and firm size. The results of their study indicate that there is a
significant positive relationship between the cash conversion cycle and the traditional liquidity
measures of current and quick ratios. The cash conversion cycle also positively related to the
return on assets and the net profit margin but had no linear relationship with the leverage ratios.
Conversely, the current and quick ratios had negative relationship with the debt to equity ratio,
and a positive one with the times interest earned ratio. Finally, there is no difference between the
liquidity ratios of large and small firms.
Working capital management is a very important component of corporate finance since it affects
the profitability and liquidity of a company. It deals with current assets and current liabilities.
Working capital management is recognized as an important concern of the financial manager due
to many reasons. For one thing, a typical manufacturing firm's current assets account for over
half of its total assets. For a distribution company, they account for even more. The maintenance
of excessive levels of current assets can easily result in a substandard return on a firm's
investment. However, firms with inadequate levels of current assets may incur shortages and
have difficulties in smoothly maintaining day-to-day operations (Horne and Wachowicz, 2000).
Efficient working capital management involves planning and controlling current assets and
current liabilities in a manner that eliminates the risk of inability to meet due short term
obligations on one hand and avoids excessive investment in these assets on the other hand
(Eljelly, 2004). Many exiting research papers have found that managers spend a considerable
time on day-today working of capital decisions since current assets are short-lived investments
that are continually being converted into other asset types (Rao, 1989). In the case of current
liabilities, the firm is responsible for paying obligations mentioned under current liabilities on a
timely basis. Liquidity for the on-going firm is reliant, rather, on the operating cash flows
generated by the firm's assets (Soenen, 1993). As a result, working capital management of a
company is a very sensitive area in the field of financial management (Joshi, 1994). It involves
the decisions about the amount and composition of current assets and the financing of these
assets.
The decision-making process on the level of different working capital components has become
frequent, repetitive, and time-consuming. Corporations are looking for new ways to stimulate
growth, improve financial performance, and reduce risk in today's challenging economic climate.

Funds tied up in working capital can be seen as hidden reserves that can be used to fund growth
strategies, such as capital expansion. Cash flows locked in stock and receivables can be freed up
by understanding the determinants of working capital. Many organizations that have earned
profits over the years have shown the efficient management of working capital (WCM). The
successful management of working capital is essential for short-run corporate solvency or the
survival of any organization. Especially, efficient WCM will lead a firm to react quickly and
appropriately to unanticipated changes in market variables, such as interest rates and raw
material prices, and gain competitive advantages over its rivals. Too often, however, this is an
area that many organizations have ignored. The way of managing working capital efficiently
varies from firm to firm since it depends on industry, the nature of the business, business policy,
strategy, etc. Thus, it is very important for an organization to understand the way to manage
working capital efficiently. Most researchers have attempted to understand the factors that
determine the working capital of an organization.
Horrigan (1965), Luo (1984), Liu (1985), Zhou (1995), and Su (2001) also did the same
analysis of impact of working capital management in profitability in China found that growth of
the firm, size, and leverage etc. affect the working capital of a company. Broadly, industry
characteristics, firm-specific characteristics, and the financial environment are recognized as
determining factors of working capital. However, still, there are firms that are struggling to
manage working capital since they don't have a sufficient understanding of the determining
factors of working capital. In addition to the growth, leverage, and the size of a company, type,
and size of expenditures, such as finance and operating and capital expenditures, have different
impacts on working capital.
This paper proposes a goal programming model for working capital management. Goal
programming is necessary to model the working capital decision, as a balance has to be achieved
between the conflicting objectives of liquidity and profitability. The model determines, for given
working capital turnover and fixed assets turnover ratios, how funds should be maintained
between working capital/current assets and fixed assets to achieve targeted levels of liquidity and
profitability, whilst minimizing the opportunity cost/loss of excess liquidity. Proper planning is
necessary for the efficient working of any organization. This can be in terms of marketing,
production/operations, human resource, and financial plans. There should be proper flow of
funds for running any business. This fund is called working capital. If at any point of time the

organization does not have sufficient funds to meet its short-term debts such as creditors and
salaries as well as day-to-day expenses it may become technically insolvent. On the other hand,
if it is very conservative it will have a surplus of working capital, which will adversely affect
profits. The trade-off between profitability and risk is the key to working capital management.
Too little working capital increases profit but reduces liquidity, as current assets are more
expensive than fixed assets. For instance if a management feels that worker training is a cost they
will apportion less funds for it. If on the other hand a management sees it as an investment in
manpower, the funds allocated would increase substantially. It is applicable in any case either for
procurement, inventory, storage, processing, distribution and human capital and other investment
decisions. Businesses must continuously innovate and transform themselves to stay ahead of
competition in this fast growing world. An efficient working capital management system has to
be designed to run the business and make profits in the long run. As costs are ever-increasing,
companies have to make efficient use of funds in managing the procurement, inventory,
processing and distribution of finished product to the existing customers, and it is common in
many business decision-making situations that certain goals or objectives of the firm can only be
met at the expense of other goals. If it is not possible to quantify the exact cost-benefit trade-offs
among these goals, it may be necessary for decision makers to rank order the various goals so
that the less important goals are pursued only after the more important goals are achieved or
when no further progress toward goal achievement is possible. This paper formulates the
working capital decision as a goal programming model, balancing the conflicting objectives of
liquidity and profitability. The model determines, for given working capital turnover and fixed
assets turnover ratios, how funds should be maintained between working capital/current assets
and fixed assets to achieve targeted levels of liquidity and profitability, whilst minimizing the
opportunity cost/loss of excess liquidity.
Goal programming techniques have been widely used in many diverse fields, including
operations, marketing, human resources, and finance.
Aksoy (1990) presented a bibliography of multiple objective decision-making models applied in
various disciplines. He proposed that there was a trend towards utilizing interactive techniques
for solving the multiple objective decision making problem, allowing the involvement of the
decision-maker throughout the decision process. A variety of goal programming models have

been applied in the operations contexts, usually interlinking operations, marketing, human
resource, and financial decisions.
Reeset al (1984) analyzed the multi-period, multi-commodity network flow problem. They
contended that cost minimization is not the sole or even the most important objective of the firm;
other objectives often exist related to preferred customer demand, inventory conditions, and
shipping arrangements end contracts, necessitating a goal programming approach. Several
commodities are distributed through a network of distribution points (i.e., stores, outlets,
terminals, etc.) in order to meet supply end demand constraints at these distribution points at the
minimum shipping cost, and the model is further complicated by the fact that shipments occur
over several periods.
Tabucanon and Estraza (1989) developed a goal programming model based on several
conflicting objectives of companies, including minimization of lead time/delay, maximization of
revenue, minimization of production cost, and minimization of overtime. Their model was
applied to real data from a company, and sensitivity analysis was performed to give insights to
the decision-makers regarding trade-offs between the conflicting objectives.
Kim and Schniederjans (1993) formulated a linear goal programming model for JIT production
systems. They showed how the post optimality analysis of the goal programming model enables
a decision maker to examine the effects of production scheduling in a JIT mixedmodel
production environment.
Khorram et al (1994) proposed a unique solution to resource allocation problems by combining
goal programming with a qualitative forecasting model (e.g. the Delphi method) and a
quantitative forecasting technique (e.g. the Poisson gravity model). In their model, the Delphi
method is used initially to elicit the experts' talents to derive the objectives to be considered in
resource allocation, and subsequently a quantitative forecasting technique is used to predict the
future values for these objectives. This information is then was used to construct a goal
programming model. Rifai (1996) discussed the limitations of linear programming in decisionmaking, and suggested the use of goal to handle problems with multiple objectives. He
advocated caution in using the goal programming, since an improper structure of a goal
programming model can induce misleading results.

Schniederjans and Hoffman (1999) proposed a goal programming model for downsizing in order
to cut operation costs, based on a thorough analysis of the firms prioritized opportunities and
their limited economic resources to achieve them. They provided a new methodological approach
that can be used to determine previously hidden goals in a manufacturing linear programming
model of the downsizing problem. Their model illustrated how an optimal allocation of
production resources can be achieved while providing useful information in which to ensure
other prioritized goals and their economic tradeoffs.
Coskun et al (2008) studied integrative methods for improving business processes. Their
approach involved determining and analyzing the weak points and reducing the weakness
degrees. They suggested a four-phase business process improvement framework: start-up, self
analysis, defining improvement strategy for making changes, feedback, and continuous
improvement. They found that decision problems in process improvement could be structured to
provide input data suitable for multi-criteria decision making techniques. Lee and Kang (2008)
developed a model for inventory management for multiple periods, considering not only the
usual parameters, but also price/ quantity discounts, and storage and batch size constraints. The
model is formulated as a mixed binary integer programming problem minimizing the total cost of
materials in the system, and the optimal solution determines an appropriate inventory level for
each period and the optimal purchase amount in each period. Several studies have addressed the
problem of working capital, and have developed a variety of models to assess the efficiency of
working capital management.
Coteet al (1999) explored the limitations of the traditional measures of working capital
management and presented alternative measures based on earlier work in the finance literature.
They also proposed a new ratio, the merchandising ratio, which measured the net effect of an
firm's working capital management strategy.

Garcia-Teruel and Martinez-Solano (2007) studied the effects of working capital

management on the profitability of a sample of small and medium-sized Spanish

firms. They found that managers can create value by reducing their inventories and the number
of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle
also improves the firm's profitability.
Filbeck and Krueger (2005) suggested that firms should be able to reduce financing costs and/or
increase the funds available for expansion by minimizing the amount of funds tied up in current
assets. They found significant differences in working capital measures between industries across
time, and significant changes in these working capital measures within industries across time.