Effect of Working Capital on

Profitability And
Concept of Zero Working Capital
(Analysis for Indian Markets)

Term Paper

(Concept taken from:

The Relationship between Working Capital Management

and Profitability: A Vietnam Case.
International Research Journal of Finance & Economics; 2010, Issue 49, p59-67, 9p )
Profitability, Working Capital
Management and Zero Working
Capital
INTRODUCTION
This paper investigates the relationship between the working capital
management and the firms’ profitability for a sample of top 30 Indian
companies listed on the Bombay Stock Exchange for the period of 6
years from 2005-2010. Management of working capital is an important
component of corporate financial management because it directly
affects the profitability of the firms. Management of working capital
refers to management of current assets and of current liabilities.

Assets in commercial firm consist of two kinds: fixed assets and current
assets. Fixed assets include land, building, plant, furniture, etc. Investment
in these assets represents that of part of firm’s capital, which is permanently
blocked on a permanent or fixed basis and is also called fixed capital that
generates productive capacity. The form of these assets does not change, in
the normal course. In the contrast, current assets consist of raw materials,
work-in-progress, finished goods, bills receivables, cash, bank balance, etc.
These assets are bought for the purpose of production and sales, like raw
material into semi-finished products, semi- finished products into finished
products, finished products into debtors and debtors turned over cash or
bills receivables. The fixed assets are used in increasing production of an
organization and the current assets are utilized in using the fixed assets for
day to day working. Therefore, the
current assets, called working capital, may be regarded as the lifeblood of a
business
enterprise. It refers to that part of the firm’s capital, which is required for
financing short term.

Researchers have approached working capital management in numerous

ways. While some studied the impact of proper or optimal inventory
management, others studied the management of accounts receivables
trying to postulate an optimal way policy that leads to profit maximization
(Lazaridis and Tryfonidis, 2006). According to Deloof (2003), the way that
working capital is managed has a significant impact on profitability of
firms. Such results indicate that there is a certain level of working capital
requirement, which potentially maximizes returns.

Working capital management plays an important role in a firm’s profitability

and risk as well as its value (Smith, 1980). There are a lot of reasons for the
importance of working capital management. For a typical manufacturing
firm, the current assets account for over half of its total assets. For a
distribution company, they account for even more. Excessive levels of
current assets can easily result in a firm’s realizing a substandard return on
investment. However, Van Horne and Wachowicz (2004) point out that
excessive level of current assets may have a negative effect of a firm’s
profitability, whereas a low level of current assets may lead to lowers of
liquidity and stock-outs, resulting in difficulties in maintaining smooth
operations.
Efficient management of working capital plays an important role of overall
corporate strategy in order to create shareholder value. Working capital is
regarded as the result of the time lag between the expenditure for the
purchase of raw material and the collection for the sale of the finished good.
The way of working capital management can have a significant impact on
both the liquidity and profitability of the company (Shin and Soenen, 1998).
The main purpose of any firm is maximum the profit. But, maintaining
liquidity of the firm also is an important objective. The problem is that
increasing profits at the cost of liquidity can bring serious problems to the
firm. Thus, strategy of firm must be a balance between these two objectives
of the firms. Because the importance of profit and liquidity are the same so,
one objective should not be at cost of the other. If we ignore about profit, we
cannot survive for a longer period. Conversely, if we do not care about
liquidity, we may face the problem of insolvency. For these reasons working
capital management should be given proper consideration and will
ultimately affect
the profitability of the firm.

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 the one hand and avoid excessive
investment in these assets on the other hand( Eljelly,2004). Lamberson
(1995) showed that working capital management has become one of the
most important issues in organization, where many financial managers are
finding it difficult to identify the important drivers of working capital and the
optimum level of working capital. As a result, companies can minimize risk
and improve their overall performance if they can understand the role and
determinants of working capital. A firm may choose an aggressive working
capital management policy with a low level of current assets as percentage
of total assets, or it may also be used for the financing decisions of the firm
in the form of high level of current liabilities as percentage of total liabilities
(Afza and Nazir, 2009).Keeping an optimal balance among each of the
working capital components is the main objective of working capital
management. Business success heavily depends on the ability of the
financial managers to effectively manage receivables, inventory, and
payables (Filbeck and Krueger, 2005). Firms can decrease their financing
costs and raise the funds available for expansion projects by
minimizing the amount of investment tied up in current assets. Lamberson
(1995) indicated
that most of the financial managers’ time and efforts are consumed in
identifying the non- optimal levels of current assets and liabilities and
bringing them to optimal levels. An optimal level of working capital is a
balance between risk and efficiency. It asks continuous monitoring to
maintain the optimum level of various components of working capital, such
as cash receivables, inventory and payables (Afza and Nazir, 2009). A
popular measure of working capital management is the cash conversion
cycle, which is defined as the sum of days of sales outstanding (average
collection period) and days of sales in inventory less days of payables
outstanding (Keown et al, 2003). The longer this time lag, the larger the
investment in working capital. A longer cash conversion cycle might
increase profitability because it leads to higher sales. However, corporate
profitability might also decrease with the cash conversion cycle, if the costs
of higher 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 (Deloof,
2003).
Lastly, working capital management plays an important role in managerial
enterprise, it may impact to success or failure of firm in business because
working capital management affect to the profitability of the firm. The thesis
is expected to contribute to better understanding of relationship between
working capital management and profitability in order to help managers
take a lot of solutions to create value for their shareholders, especially in
emerging markets like India.

LITERATURE REVIEW
The management of working capital is defined as the “management of
current assets and current liabilities, and financing these current
assets.” Working capital management is important for creating value
for shareholders according to Shin and Soenen (1998).
Management of working capital was found to have a significant impact on
both profitability and
liquidity in studies in different countries.

Long et al. developed a model of trade credit in which asymmetric

information leads good firms to extend trade credit so that buyers can verify
product quality before payment. Their sample contained all industrial (SIC
2000 through 3999) firms with data available from COMPUSTAT for the
three-year period ending in 1987 and used regression analysis. They defined
trade credit policy as the average time receivables are outstanding and
measured this variable by
computing each firm's days of sales outstanding (DSO), as accounts
receivable per dollar of daily sales. To reduce variability, they averaged
DSO and all other measures over a three year period. They found evidence
consistent with the model. The findings suggest that producers may
increase the implicit cost of extending trade credit by financing their
receivables through payables and short-term borrowing.

Shin and Soenen(1998) researched the relationship between working capital

management and value creation for shareholders. The standard measure for
working capital management is the cash conversion cycle (CCC). Cash
conversion period reflects the time span between disbursement and
collection of cash. It is measured by estimating the inventory conversion
period and the receivable Conversion period, less the payables conversion
period. In their
study, Shin and Soenen(1998) used net-trade cycle (NTC) as a measure of
working capital management. NTC is basically equal to the cash conversion
cycle (CCC) where all three components are expressed as a percentage of
sales. NTC may be a proxy for additional working capital needs as a function
of the projected sales growth. They examined this relationship by using
correlation and regression analysis, by industry, and working capital
intensity. Using a COMPUSTAT sample of 58,985 firm years covering the
period 1975-1994, they found a strong negative relationship between the
length of the firm's net-trade cycle and its profitability. Based on the
findings, they suggest that one possible way to create
Shareholder value is to reduce firm’s NTC.
To test the relationship between working capital management and
corporate profitability, Deloof (2003) used a sample of 1,009 large Belgian
non-financial firms for the 1992-1996 periods. The result from analysis
showed that there was a negative between profitability that was measured
by gross operating income and cash conversion cycle as well number of
day’s
accounts receivable and inventories. He suggested that managers can
increase corporate profitability by reducing the number of day’s
accounts receivable and inventories. Less profitable firms waited
longer to pay their bills.

Ghosh and Maji (2003) attempted to examine the efficiency of working

capital management of Indian cement companies during 1992 - 93 to 2001 -
2002. They calculated three index values - performance index, utilization
index, and overall efficiency index to measure the efficiency of working
capital management, instead of using some common working capital
management ratios. By using regression analysis and industry norms as a
target efficiency level of individual firms, Ghosh and Maji (2003) tested the
speed of achieving that target level of efficiency by individual firms during
the period of study and found that some of the sample firms successfully
improved efficiency during these years.

Singh and Pandey (2008) had an attempt to study the working capital
components and the impact of working capital management on profitability
of Hindalco Industries Limited for period from 1990 to 2007. Results of the
study showed that current ratio, liquid ratio, receivables turnover ratio and
working capital to total assets ratio had statistically significant impact on the
profitability of Hindalco Industries Limited.

Lazaridis and Tryfonidis (2006) conducted a cross sectional study by using a

sample of 131 firms listed on the Athens Stock Exchange for the period of
2001 - 2004 and found statistically significant relationship between
profitability, measured through gross operating profit, and the cash
conversion cycle and its components (accounts receivables, accounts
payables, and inventory). Based on the results analysis of annual data by
using correlation and regression tests, they suggest that managers can
create profits for their companies by correctly handling the cash conversion
cycle and by keeping each component of the conversion cycle (accounts
receivables, accounts payables, and inventory) at an optimal level.

Raheman and Nasr (2007) have selected a sample of 94 Pakistani firms

listed on Karachi Stock Exchange for a period of 6 years from 1999-2004 to
study the effect of different variables of working capital management on
the net operating profitability. From result of study, they showed that there
was a negative relationship between variables of working capital
management including the average collection period, inventory turnover in
days, average collection period, cash conversion cycle and profitability.
Besides, they also indicated that size
of the firm, measured by natural logarithm of sales, and profitability had a
positive relationship.

Falope and Ajilore (2009) used a sample of 50 Nigerian quoted non-financial

firms for the period 1996 -2005. Their study utilized panel data
econometrics in a pooled regression, where time-series and cross-sectional
observations were combined and estimated. They found a significant
negative relationship between net operating profitability and the average
collection period, inventory turnover in days, average payment period and
cash conversion cycle for a sample of fifty Nigerian firms listed on the
Nigerian Stock Exchange. Furthermore, they found no significant variations
in the effects of working capital management between large and small
firms.
Finally, Afza and Nazir (2009) made an attempt in order to investigate the
traditional relationship between working capital management policies and
a firm’s profitability for a sample of 204 non-financial firms listed on
Karachi Stock Exchange (KSE) for the period 1998-
2005.The study found significant different among their working capital
requirements and financing policies across different industries. Moreover,
regression result found a negative relationship between the profitability of
firms and degree of aggressiveness of working capital investment and
financing policies. They suggested that managers could crease value if
they adopt a conservative approach towards working capital investment
and working capital financing policies.

METHODOLOGY

Data Collection
A database was built from a selection of approximately 30 financial-reports (for the
purpose of this
research, firms in financial sector, banking and finance, insurance, leasing,
business service, renting,and other service are excluded from the sample) of
Bombay Stock Exchange-30 for 6 years from 2005 to
2010. The selection was drawn from Bombay Stock Exchange
[http://www.bseindia.com/about/abindices/bse30.asp] on the basis of free float
market capitalization method. The balance sheets of the companies were taken from the ‘Capitaline’
[http://www.capitaline.com/new/index.asp].

For the purpose of this research out of top 30 BSE companies 25 were found apt for the study.
We used cross sectional yearly data in this study. Thus 25 companies yielded
150 observations for 6 years. The data analysis has been done in two steps
[Pre-Recession and Post- Recession].The post-recession period is taken from
2008 onwards. The objective of the research is to make a comparative study
amongst the top 30 companies in pre and post-recession. The analysis of
zero working capital has also been done in both the scenarios.

The selection of the companies is done on the free float market capitalization
method.Free-float market capitalization takes into consideration only those
shares issued by the company that are readily available for trading in the
market. It generally excludes promoters' holding,
government holding, strategic holding and other locked-in shares that will not
come to the
market for trading in the normal course. The major advantages of free- float
methodology is
that it reflects the market trends more rationally as it takes into
consideration only those shares that are available for trading in the market.
It makes the index more broad-based by reducing the concentration of top
few companies in Index and aids both active and passive investing styles.
Globally, the free-float Methodology of index construction is considered to be
an
industry best practice and all major index providers like MSCI, FTSE, S&P
and STOXX have adopted the same. The MSCI India Standard Index, which
is followed by Foreign Institutional Investors (FIIs) to track Indian equities,
is also based on the Free-float Methodology. NASDAQ-
100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ
is based on the
Free-float Methodology.

Variables
The variables used in this study based on previous researches about the
relationship between working capital management and profitability.
Gross operating profitability that is a measure of profitability of firm is used
as dependent variable. It is defined as sales minus cost of goods sold, and
divided by total assets minus financial assets. For a number of firms in the
sample, financial assets, which are chiefly shares in affiliated firms, are a
significant part of total assets. When the financial assets are main part of
total assets, its operating activities will contribute little to overall return on
assets. Hence, that
is the reason why return on assets is not considered as a measure of
profitability. Number of days accounts receivable used as proxy for the
collection policy is an independent variable. It is calculated as (accounts
receivable x 365)/sales. Number of days inventories used as proxy for the
inventory policy is an independent variable. It is calculated as (inventories x
365)/ cost of goods sold. Number of days accounts payable used as proxy
for the payment policy is an independent variable. It is calculated as
(accounts payable x 365)/ cost of goods sold.
The cash conversion cycle used as a comprehensive measure of working
capital management is another independent variable. It is calculated as
(number of days accounts receivable + number of days inventory – number
of days accounts payable).
Various studies have utilized the control variables along with the main
variables of working capital in order to have an opposite analysis of working
capital management on the firm’s profitability (Deloof, 2003; Lazaridis and
Tryfonidis, 2006). The logarithm of sales used to measure size of firm is a
control variable. In addition, debt ratio used as proxy for leverage,
calculated by dividing total debt by total assets, and ratio of fixed financial
assets to total assets are also control variable in the regressions. According
to Deloof (2003) fixed financial assets are mainly shares in affiliated firms,
intended to contribute to the activities of the firm that holds them, by
establishing a lasting and specific relation and loans that were granted with
the same purpose.
• Number of days accounts receivable (AR)= Average of accounts
receivable / Sales* 365
• Number of days accounts payable (AP)= Average of accounts
payable / Cost of goods sold *365
• Number of days inventory (INV) = Average of inventory / Cost of goods
sold * 365
• Cash conversion cycle (CCC) = AR+ INV- AP
• Natural Logarithm of sales (LOS) = ln(sale)
• Debt ratio (DR)= Total debt/ Total assets
• Fixed financial assets to total assets (FFAR) = Secured Loans
+Unsecured Loans / Total
assets
• Gross operating profitability (GROSSPR) = ( Sales – Cost of goods sold)/
(Total assets –
Financial assets)
Data Analysis- Post Recession (2008-2010)
Descriptive Statistics

GROSSPR LOS CCC DR FFAR AR AP INV

Me a n 0.7070686 10.152 7.6900 0.3649 0.3793 53.727 198 .70 116 .29
Standard 14
0.7724356 97
0.8911 29
227 .96 5
0.2407 76
0.2748 9
44.943 8 .20
121 49
216 .74
dein
M vi m
atu
iomn 24
- 5
8.4856 93
- 11 0 29 0 32
9.5159 27
36.933 34 0
Maximum 0.819647
3.5303519 58
12.044 502
780 .9
.87 0.7735 1.1297 15
211 .26 39
535 .74 1080 .0
87 57 49 68 56 27 28 13

Correlation Analysis- Post recession (2008-2010)

GROSSPR LOS CCC DR FFAR AR AP IN V
GROSS 1 0.2008 - 0.1754 - - - -
PR
LOS 0.200820 1 - 0.0497 - - - -
CCC -69 - 0.14241 86
0.0673 0.1687
0.1920 0.2504
0.2397 0.1131
- 0.3195
0.7383
DR 0.141554
0.175410 0.1424
0.0497 0.0673 49 1 17
0.7824 22
- 0.2223
0.2536 08
0.1155
FF AR -76 86
- 49
0.1920 0.7824 23 1 0.2244
0.0133 36
0.2569 7
0.2258
AR -0.235425 0.1687
- 17
0.2397 23
- 0.0133 97 1 72
- 9
0.1153
AP 0.314645
- 0.2504
- 22
- 0.2244
0.2536 97
0.2569 - 0.00481 48
0.3658
INV - 0.020843 0.1131
- 0.2223
0.7383 36
0.1155 72 0.0048
0.2258 0.1153 0.3658 28 1
0.217469 0.3195 08 7 9 48 28

Multiple Regression Analysis (2008-2010)

Model 1
GROSSPR is used a dependent variable.Cash Conversion Cycle is used
as an independent variable while Debt Ratio (DR) , Natural Logarithm
of sales (LOS), Fixed Financial Assets Ratio(FFAR) are used as control
variables.

The cash conversion cycle is used popular to measure efficiency of working

capital management. From result of regression running indicates that there
is a negative relationship between cash conversion cycle and operating
profitability. The coefficient is -8.3E-05 with p- value 0.000. It is highly
significant at α= 0.01. This implies that the increase or decrease in the cash
conversion cycle does not significantly affect profitability of the firm with
such a low coefficient. The adjusted R-squaredis 27% showing significant fitting
of the model in post-recession scenario.
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.626
R Square 0.392 Goodness of Fit < 0.80
Adjusted R Square 0.270
Standard Error 0.674
Observations 25

ANOV
A df SS MS F P-value
Regression 4 5.842577 1.460644 3.219461 0.034
Residual 20 9.073843 0.45369 2
Total 24 14.91642 Confidence Level
0.95 0.99
Coefficien Standard t Stat P-value Lower 95%Upper 95%Lower 99%Upper 99%
Intercept 1.103556 1.656703 0.666116 0.513
-2.35227 4.559379 -3.61033 5.8174 4
LOS -0.04523 0.161065 -0.28085 0.782
-0.38121 0.290741 -0.50352 0.4130 5
CCC -8.3E-05 0.00061 -0.13641 0.893 -0.00135 0.001188 -0.00182
0.00165 1
DR 3.037306 0.946388 3.209368 0.004
1.063176 5.011436 0.344512 5.730 1
FFAR -2.75464 0.850236 -3.23985 0.004 -4.5282 -0.98108
-5.17385 -0.3354 3

GROSSPR = 1.104 -0.045*LOS-(8.3E-05)*CCC +3.037*DR -2.755 *FFAR

Model 2
GROSSPR is used a dependent variable. Number of days accounts
receivable (AR) is used as an independent variable while Debt Ratio (DR) ,
Natural Logarithm of sales (LOS), Fixed Financial Assets Ratio(FFAR) are
used as control variables.
The result of this regression indicates that the coefficient ofaccount receivable is
negative with -
0.002 and p-value is 0.001. It shows highly significant at α = 0.01.This
implies that the increase or decrease in accounts receivable will significantly
affect profitability of firm. Debt ratio is used as a proxy for leverage, from
analysis of regression shows that there is a positive relationship with
dependent variable. The coefficient is 2.845 and has significant at α=
0.01.This means that if there is an increase in debt ratio it will lead to
increase in profitability of firm. The result also indicates that there is a
negative relationship among logarithm of sale, fixed financial assetsto total
assets and profitability. The coefficients are -0.145 and -0.633 respectively.
Both of them aresignificant at α = 0.01. It implies that the size of firm has
effect on profitability of firm. The larger size leads to more profitable. The
adjusted Rsquared, also called the coefficient of multiple determinations, is the
percent of the variance in the dependent explained uniquely or jointly by the
independent variables and is 28.4% showing predicted model is highly
accurate.
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.635
R Square 0.403 Goodness of Fit < 0.80
Adjusted R Square 0.284
Standard Error 0.667
Observations 25

ANOV
A df SS MS F P-value
Regression 4 6.014731 1.503683 3.378421 0.029
Residual 20 8.901689 0.44508 4
Total 24 14.91642 Confidence Level
0.95 0.99
Coefficient Standard t Stat P-value Lower 95%Upper 95%Lower
99%Upper 99% Intercept 1.3880644 1.703477 0.814842
0.425 -2.16533 4.941455 -3.45891 6.235035 ln(sale) -0.059769
0.161078 -0.37106 0.714 -0.39577 0.276233 -0.51809
0.39855 2
DR 2.8454771 0.986304 2.88499 0.009 0.788083 4.902871
0.039107 5.65184 7
FFAR -2.639849 0.854454 -3.08951 0.006 -4.42221 -0.85749
-5.07106 -0.2086 4
AR -0.002068 0.003247 -0.63699 0.531
-0.00884 0.004705 -0.01131 0.0071 7

GROSSPR = 1.388 -0.06*LOS +2.845*DR -2.64*FFAR -0.002 *AR

Model 3
The dependent variable gross operating profit and the control variables are
the same as the previous models. The only difference is number of days
accounts receivable variable replaced by number of days accounts payable
variable.
Looking at coefficients, we see that there is a negative relationship between
number of days accounts payable and profitability of firm. The coefficient is
0.001. It implies that the increase or decrease in the average payment
period significantly affects profitability of the firm. The negative relationship
between the average payment period and profitability indicates that the
more profitable firms wait shorter to pay their bill.The adjusted R2 is
27.0%showing significant fitting of the model in post-recession scenario.
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.626
R Square 0.391 Goodness of Fit < 0.80
Adjusted 0.270
Standard 0.674
Observati 25

AN OV
A df SS MS F P-value
Regressio 4 5.837249 1.459312 3.214638 0.034
Residual 20 9.07917 0.45395 9
Total 24 14.91642 Confidence Level
0.95 0.99
Coefficien Standa rd t Stat P-value Lower
95%Upper 95%Lower 99%Upper 99% Intercept 1.117254 1.688986 0.661494
0.516 -2.40591 4.640417 -3.68848 5.922993 ln(sale) -
0.04492 0.161503 -0.27813 0.784 -0.38181 0.291969 -0.50445
0.4146 1
DR 3.060157 0.947418 3.229997 0.004 1.083878 5.036436 0.364431
5.75588 3
FFAR -2.77247 0.836692 -3.31361 0.003
-4.51778 -1.02716 -5.15314 -0.391 8
Ap -9.6E-05 0.001161 -0.08284 0.935 -0.00252
0.002326 -0.0034 0.00320 8

GROSSPR = 1.117 -0.045*LOS +3.06*DR -2.772*FFAR -(9.6E-05)*Ap

Model 4
This model is run using the number of days inventories as an independent
variable as substitute of average payment period. The other variables are
same as they have been in first and second model.
The result of regression indicates that the relationship between number of
days inventories and profitability is negative. The coefficient of this
relationship is -0.00049and significant at α =
0.01.This means that if the inventory takes less time to sell, it will
adversely affect profitability.The adjusted R2 is 28.9% demonstrating the
desirable superposition of predicted and actual values.
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.639
R Square 0.408 Goodness of Fit < 0.80
Adjusted R Square 0.289
Standard Error 0.665
Observations 25

ANOV
A df SS MS F P-value
Regression 4 6.082874 1.520718 3.443053 0.027
Residual 20 8.833546 0.44167 7
Total 24 14.91642 Confidence Level
0.95 0.99
Coefficien Standard t Stat P-value Lower 95%Upper 95%Lower
99%Upper 99% Intercept 1.469101 1.70804 0.86011 0.400 -2.09381
5.032009 -3.39085 6.329054 ln(sale) -0.0778 0.164889 -0.47185 0.642
-0.42175 0.26615 -0.54697 0.39136 2
DR 3.040488 0.92848 3.274695 0.004 1.103713 4.977262 0.398648
5.68232 7
FFAR -2.69985 0.830232 -3.25192 0.004 -4.43169 -0.96802 -5.06214
-0.3375 6
INV PERIOD) -0.00049 0.000659 -0.75045 0.462
-0.00187 0.000879 -0.00237 0.0013 8

GROSSPR= 1.469 -0.078*ln(sale) +3.04*DR -2.7*FFAR 0*INV PERIOD)

Data Analysis- Pre Recession (2005-2007)

Descriptive Statistics

GROSSPR LOS CCC DR FFAR AR AP IN V

m e an 0.7882285 56.128 198 .23 121 .53 - 0.3399 9.433 0.3415
maximum 44
2.5929022 15
177 .38 44
636 .41 34
1168 .6 20.572
1188 .6 25
0.7384 1
11.461 95
1.0890
Standard 49
0.5075722 41
43.310 38 .34
140 58 .42
236 69 .80
300 32
0.2412 91
0.9596 9
0.2686
Deviation
V a r i a n ce 69
0.2576296 43 .7
1875 18
19695 . 02
55894 . 36
90482 . 64
0.0582 18
0.9208 32
0.0721
08 94 82 51 83 08 67 63
Correlation Analysis- Pre recession (2005-2007)
GROSSPR LOS CCC DR FFAR AR AP IN V
GROSS 1 - 0.1218 - - - 0.1988 -
PR
AR - 1 0.0747 0.5535 0.5441 0.2173 - 0.3050
AP 0.434675
0.121836 0.0747 51 1 03
- 39
- 13
0.3055 -0.6760 06
0.2648
INV 96- 51
0.5535 - 0.03901 0.4864
0.8838 06
0.4153 0.0753
- 46
0.3941
CCC - 0.05941 03
0.5441 -0.0390 0.8838 68 1 02
0.2151 -0.5086 23
0.2301
DR 0.166125
- 39
0.2173 0.4864
0.3055 68
0.4153 0.2151 65 1 0.4619
- 16
0.8292
LOS 0.189145
0.198846 13
- 06
- 02
- 65
- - 0.30871 85
-
FF AR 24
- 0.6760
0.3050 0.0753
0.2648 0.5086
0.3941 0.4619
0.2301 0.3087
0.8292 - 0.42621
0.282712 06 46 23 16 85 0.4262

Multiple Regression Analysis (2005-2007)

Model 1
GROSSPR is used a dependent variable.Cash Conversion Cycle is used
as an independent variable while Debt Ratio (DR) , Natural Logarithm
of sales (LOS), Fixed Financial Assets Ratio(FFAR) are used as control
variables.
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.315
R Square 0.100 Goodness of Fit < 0.80
Adjusted -0.101
Standard 0.532
Observati 23

ANOV
A df SS MS F P-value
Regressio 4 0.564121 0.14103 0.49739 0.738
Residual 18 5.10373 0.28354 1
Total 22 5.667851 Confidence Level
0.95 0.99
Coefficien Standard t Stat P-value Lower 95%Upper 95%Lower
99%Upper 99%
Intercept 0.682018 1.425708 0.478371 0.638 -2.31328 3.67732
-3.4218 4.78583 4
CCC -0.00016 0.000428 -0.36515 0.719 -0.00105 0.000742 -0.00139
0.00107 5
DR 0.306326 0.848756 0.360911 0.722 -1.47684 2.089495 -2.13677
2.74941 8
LOS 0.024669 0.144624 0.170572 0.866
-0.27917 0.328513 -0.39162 0.4409 6
FFAR -0.68453 0.799201 -0.85652 0.403
-2.36359 0.994526 -2.98498 1.6159 2

GROSSPR = 0.682-0.000156151*CCC +0.306*DR +0.025*ln(sale) -0.685 *FFAR

The cash conversion cycle is used popular to measure efficiency of working

capital management. From result of regression running indicates that there
is a negative relationship between cash conversion cycle and operating
profitability. The coefficient is -0.000156151 with p-value 0.000. It is highly
significant at α= 0.01. This implies that the increase or decrease in the cash
conversion cycle does not significantly affects profitability of the firm with
such a low coefficient. The adjusted R-squaredis -10.1% showing significant
non-fitting of the model in pre- recession scenario.
Model 2
GROSSPR is used a dependent variable. Accounts Receivable Periodis used
as an independent variable while Debt Ratio (DR), Natural Logarithm of
sales (LOS), Fixed Financial Assets Ratio(FFAR) are used as control
variables.
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.504
R Square 0.254 Goodness of Fit < 0.80
Adjusted 0.088
Standard 0.485
Observati 23

ANOV
A df SS MS F P-value
Regressio 4 1.437961 0.35949 1.529785 0.236
Residual 18 4.22989 0.23499 4
Total 22 5.667851 Confidence Level
0.95 0.99
Coefficien Standard t Stat P-value Lower 95%Upper 95%Lower
99%Upper 99%
Intercept 2.643511 1.624431 1.627346 0.121 -0.76929 6.056313 -2.03232
7.31933 8
AR -0.00638 0.00324 -1.96963 0.064 -0.01319 0.000425 -0.01571
0.00294 4
DR 0.257103 0.769654 0.33405 0.742 -1.35988
1.874085 -1.9583 2.47250 5
LOS -0.14506 0.154195 -0.94076 0.359 -0.46901
0.178892 -0.5889 0.29878 2
FFAR -0.63273 0.726966 -0.87037 0.396 -2.16003 0.894568 -2.72526
1.45979 7

GROSSPR = 2.644 -0.006*AR +0.257*DR -0.145*LOS -0.633 *FFAR

The result of this regression indicates that the coefficient ofaccount

receivable is negative with -
0.006 and p-value is 0.001. It shows highly significant at α = 0.01.This
implies that the increase or decrease in accounts receivable will significantly
affect profitability of firm. Debt ratio is used as a proxy for leverage, from
analysis of regression shows that there is apositive relationship with
dependent variable. The coefficient is 0.257 and has significant at α=
0.01.This means that if there is an increase in debt ratio it will lead to
increase in profitability of firm. The result also indicates that there is a
negative relationship among logarithm of sale, fixed financial assetsto total
assets and profitability. The coefficients are -0.145 and -0.633 respectively.
Both of them aresignificant at α = 0.01. It implies that the size of firm has
effect on profitability of firm. The larger size leads to more profitable. The
adjusted Rsquared, also called the coefficient of multiple determinations, is the
percent of thevariance in the dependent explained uniquely or jointly by the
independent variables and is 8.8% showing significant non-fitting of the
model in pre- recession scenario.
Model 3
The dependent variable gross operating profit and the control variables are
the same as the previous models. The only difference is number of days
accountsreceivable variable replaced by number of days accounts payable
variable.

Regression Statistics
Multiple R 0.360
R Square 0.129 Goodness of Fit < 0.80
Adjusted -0.064
Standard 0.524
Observati 23

ANOV
A df SS MS F P-value
Regressio 4 0.733709 0.183427 0.669151 0.622
Residual 18 4.934143 0.27411 9
Total 22 5.667851 Confidence Level
0.95 0.99
Coefficien Standard t Stat P-value Lower 95%Upper 95%Lower
99%Upper 99%
Intercept 0.413807 1.295302 0.319467 0.753 -2.30752 3.135135 -3.31464
4.14225 6
AP 0.000727 0.000836 0.869819 0.396 -0.00103 0.002483 -0.00168
0.00313 3
DR 0.164132 0.841521 0.195042 0.848 -1.60384 1.932101 -2.25814
2.58639 9
LOS 0.043513 0.129147 0.33693 0.740 -0.22781 0.314841
-0.32823 0.41525 5
FFAR -0.69077 0.785234 -0.8797 0.391 -2.34049 0.958946
-2.95102 1.56948 1

GROSSPR= 0.414 +0.001*AP +0.164*DR +0.044*LOS -0.691 *FFAR

Looking at coefficients, we see that there is a positive relationship between

number of days accounts payable and profitability of firm. The coefficient is
0.001. It implies that the increase or decrease in the average payment
period significantly affects profitability of the firm. The positive relationship
between the average paymentperiod and profitability indicates that the
more profitable firms wait longer to pay their bill.The adjusted R2 is
-6.4%showing
significant non-fitting of the model in pre-recession scenario.

Model 4
This model is run using the number of days inventories as an independent
variable as substitute of average payment period. The other variables are
same as they have been in first andsecond model.
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.317
R Square 0.100 Goodness of Fit < 0.80
Adjusted R Square -0.100
Standard Error 0.532
Observations 23

ANOV
A df SS MS F P-value
Regression 4 0.56857 0.142143 0.50175 0.735
Residual 18 5.099281 0.28329 3
Total 22 5.667851 Confidence Level
0.95 0.99
Coefficien Standard t Stat P-value Lower 95%Upper 95%Lower 99%Upper 99%
Intercept 0.244345 1.450171 0.168494 0.868 -2.80235 3.291041 -3.92989
4.41857 5
INV 0.000227 0.000588 0.386211 0.704
-0.00101 0.001463 -0.00147 0.0019 2
DR 0.20162 0.868131 0.232246 0.819 -1.62226 2.025495 -2.29724
2.70048 3
LOS 0.071176 0.145603 0.488833 0.631 -0.23473 0.377076 -0.34793
0.49028 6
FFAR -0.65478 0.798929 -0.81957 0.423 -2.33326 1.023712 -2.95445
1.64489 4

GROSSPR = 0.244 +0*INV +0.202*DR +0.071*LOS -0.655 *FFAR

The result of regression indicates that the relationship between number of
days inventories and profitability is positive. The coefficient of this
relationship is 0.000227and significant at α =
0.01.This means that if the inventory takes more time to sell, it will adversely
affect profitability.The adjusted R2 is -10.0% demonstrating the poor
mismatch of predicted and actual values.
FINDINGS

1).Comparison of Models in Pre and Post-Recession Scenario and their

accuracy
Po s t-Re ce s s i o n (2008 -10) Pre -Re ce s s i o n (2005 -2007 )
y = 1.104 -(8.3E-05)*CCC +3.037 *DR-0.045 *LOS y = 0.682-0.000156151*CCC +0.306*DR +0.025 *LOS
-2.755 *FFAR -0.685 *FFAR
y = 1.388-0.002*AR+2.845*DR -0.06*LOS y = 2.644 -0.006*AR +0.257*DR -0.145*LOS
-2.64*FFAR -0.633 *FFAR
y = 1.117-(9.6E-05)*AP +3.06*DR-0.045 *LOS y= 0.414 +0.001*AP +0.164*DR +0.044*LOS
-2.772 *FFAR -0.691 *FFAR
y= 1.469-0.00049*I NV+3.04*DR-0.078*LOS y = 0.244 +0.000227*I NV +0.202*DR +0.071 *LOS
-2.7*FFAR -0.655 *FFAR

y=GROSS PR y=GROSS PR

Post-Recession Post-Recession Pre-Recession Pre-

Recession
R squared Adjusted R squared R squared Adjusted R
squ ared 0.392 0.27 0.1 -0.101
0.403 0.284 0.254 0.088
0.391 0.27 0.129 -0.064
0.408 0.289 0.1 -0.1
2). Zero Working Capital
Post-recession Pre-
Name of ZWC/SA L (DEBT+INV)/CR Recession
ZWC/SA LE (DEBT+INV)/CR
Company
Bajaj Auto ES
- 0.3050069 S
NA NA
Limited
Bharat Heavy 0.147609
0.426320 17
2.0050562 NA NA
Electrica
Bharti Airtel Ltd. -56 74
0.140115 - 0.3500606
Cipla Ltd. 0.530570
0.320911 67
2.1123578 0.5137171
0.3949767 73
3.2807831
DLF Ltd. 960.86281 62
3.4769302 49
1.7335767 86
9.9292475
Hindalco Industries 0.17331721 92
2.849266 58 01
0.0393879 1.1257642
Lt
Hindustan Unilever - 81 96
0.3560953 -42 98
0.4142901
Lt
Infosys 0.213743
0.113092 24
2.9473239 0.2269087 02
0.1000523 2.3229437
Techno
ITC Ltd. logies - 41 44
0.8763246 -83 23
0.8836526
Jaiprakash 0.032085
0.320737 45
1.8183434 0.0301000 06
0.1994755 1.7934723
Associates
Jindal Steel & Power -83 88
0.5594265 -22 69
0.5391121
L
Larsen & Toubro -0.143028 55
0.7549104 0.2311948
- 19
0.9524625
Limit
Mahindra & -0.153198 87
0.7785426 0.0231568
- 84
0.7903023
Mahindra
Maruti Suzuki 0.071700
- 77
0.413843 0.0717391
0.0058800 73
1.0660126
India Lt
NTPC Ltd. -0.101136 91
0.7859148 -34 86
0.6468809
ONGC Ltd. 0.050245
- 43
0.6263341 0.0679835
- 58
0.7772935
Reliance 0.084075
- 21
0.3509209 0.0377326
- 28
0.2604185
Comm unicat
Reliance Industries - 0.306896 62
0.4958074 0.3516837
- 19
0.4880997
Lt
Reliance 0.188485
- 58
0.6047159 0.1557077
- 74
0.7509579
Infrastructur
Sterlite Industries -0.132435 84
0.8910836 0.1225913 86
0.0695886 1.5484280
(In
Tata Consultancy 0.019139
0.038708 29
1.2170315 81
0.0897161 41
1.6207521
Serv Motors Ltd.
Tata -22 77
0.4171848 -64 45
0.567671
Tata Power 0.263781
- 41
0.9953894 0.1054384 43
0.022609 1.0701311
Company
Tata Steel Ltd. - 0.001784 68
0.7851781 - 14 98
0.5947731
Wipro Ltd. 0.075231
0.084041 78
1.6000272 0.1358147 88
0.1104059 2.0385829
32 93 43 34
Mean - 1.1265253 0.0300826 1.470091
Standard 0.007008
0.275679 34
0.912532 27
0.4151372 04
1.9823598
deviation
Maximum 01
1.725624 53
6.9538605 23
1.7335767 62
9.9292475
Minimum -19 84
0.140115 -58 01
0.2604185
Range 0.530570
2.256194 67
6.8137449 0.5137171
2.2472938 19
9.6688289
35 14 99 82
3).Comparison and differences of variables in Pre & Post Recession
Scenario

(Note- the data in red corresponds to post recession, data in green is for pre
recession and blue is their respective differences)

Name g ro ssp r g ro ssp r DIFF DR DR DIFF AP AP DIFF AR AR DIFF INV INV DIFF CC C CCC DIFF

B hart i A irt el 0 .6 4 2 3 0 .8 8 1 -0 .2 4 0 .2 58 0 .3 8 8 -0 .13 53 5.7 6 3 6 .4 -10 1 3 0 .6 7 9 9 .0 8 -6 8 .4 2 .117 4 .2 2 2 -2 .11 -50 3 -53 3 3 0 .15

Cip la Lt d . 0 .9 0 3 9 0 .3 9 2 0 .512 0 .0 9 6 0 .0 3 7 0 .0 59 16 2 .2 9 8 .56 6 3 .6 9 12 1.2 10 6 .3 14 .9 1 156 157.6 -1.6 4 114 .9 16 5.4 -50 .4

DLF Lt d . 0 .2 73 8 0 .52 -0 .2 5 0 .3 9 8 0 .73 8 -0 .3 4 3 6 5.1 157.4 2 0 7.7 6 5.9 4 177.4 -111 10 8 0 116 9 -8 8 .6 78 0 .9 118 9 -4 0 8

Hind alco Ind 0 .6 3 6 1.18 2 -0 .55 0 .58 8 0 .6 4 -0 .0 5 4 2 .6 5 16 1.7 -119 3 8 .2 1 3 0 .2 8 7.9 3 3 73 .8 7 13 9 .2 -6 5.4 6 9 .4 4 7.778 6 1.6 6

Hind ust an U 3 .53 0 4 2 .59 3 0 .9 3 7 0 .6 4 2 0 .0 4 7 0 .59 4 2 0 3 .8 2 3 6 .7 -3 2 .9 11.3 3 13 .6 8 -2 .3 6 53 .51 75.15 -2 1.6 -13 9 -14 8 8
.9 15

Inf o sys Tec 0 .3 8 71 0 .576 -0 .19 0 0 0 3 6 .9 3 4 9 .77 -12 .8 6 2 .4 8 6 4 .12 -1.6 5 0 0 0 2 5.54 14 .3 5 11.19

ITC Lt d . 1.178 6 1.2 4 2 -0 .0 6 0 .0 13 0 .0 2 1 -0 .0 1 2 72 .6 3 0 0 .6 -2 7.9 13 .4 4 14 .55 -1.1 2 0 0 .2 2 19 .3 -19 .1 -59 -6 6 .7 7.75

Jaip rakash A -0 .8 2 0 .718 -1.54 0 .74 7 0 .72 1 0 .0 2 6 3 3 3 .4 18 3 .7 14 9 .7 6 5.6 6 6 1.6 5 4 .0 1 4 53 .2 206 2 4 7.1 18 5.5 8 3 .9 9 10 1.5

Jind al St eel 0 .8 2 0 5 0 .8 3 2 -0 .0 1 0 .52 5 0 .6 6 3 -0 .14 2 9 4 .8 4 0 3 .9 -10 9 2 0 .8 5 3 3 .3 9 -12 .5 113 14 4 .1 -3 1 -16 1 -2 2 6 6 5.4 9

Larsen & To 0 .54 1 0 .6 6 8 -0 .13 0 .54 0 .4 55 0 .0 8 5 2 9 6 .6 2 2 3 .5 73 .0 3 10 2 .7 10 9 .4 -6 .72 9 0 .4 75.3 5 15.0 5 -10 3 -3

8 .8 -6 4 .7

M ahind ra & 0 .74 9 9 0 .8 8 7 -0 .14 0 .54 2 0 .56 -0 .0 2 16 5.8 178 .5 -12 .7 4 7.4 1 50 .74 -3 .3 3 6 2 .56 6 8 .55 -5.9 9 -55.8 -59 .2 3 .4 19

M arut i Suzu 0 .719 2 0 .9 0 9 -0 .19 0 .0 79 0 .0 8 9 -0 .0 1 8 7.8 8 4 9 .2 2 3 8 .6 6 10 .9 3 16 .4 7 -5.55 2 1.12 2 7.53 -6 .4 1 -55.8 -5.2 2 -50 .6

NTPC Lt d . 0 .2 0 3 2 0 .19 5 0 .0 0 9 0 .3 9 5 0 .3 3 0 .0 6 6 117.8 10 1.7 16 .0 6 3 9 .73 16 .3 2 3 .4 3 3 7.9 4 4 2 .2 -4 .2 6 -4 0 .1 -4 3 .2 3 .10 5

ONGC Lt d . 0 .6 74 0 .8 4 8 -0 .17 0 .18 2 0 .2 0 2 -0 .0 2 19 8 .3 18 3 .7 14 .56 2 4 .57 2 2 .8 6 1.711 6 4 .8 6 74 .8 9 -10 -10 9 -8 6 -2 2 .9

Reliance Co 0 .6 16 4 0 .4 74 0 .14 3 0 .58 1 0 .4 3 2 0 .14 9 4 4 1.3 4 14 .6 2 6 .75 52 .6 9 3 5.78 16 .9 1 2 0 .13 2 2 .5 -2 .3 7 -3 6 9 -3 56 -12 .2

Reliance Ind 0 .2 8 3 7 0 .50 2 -0 .2 2 0 .3 52 0 .3 16 0 .0 3 6 16 9 .7 156 .2 13 .52 15.0 1 15.51 -0 .4 9 6 5.4 7 54 .4 2 11.0 5 -8 9 .2 -8 6 .3 -2 .9 6

Reliance Inf r 0 .10 3 1 0 .2 11 -0 .11 0 .3 12 0 .4 11 -0 .1 14 5.2 3 13 .2 -16 8 59 .9 6 10 5.4 -4 5.4 16 .6 1 51.56 -3 5 -6 8 .6 -156 8 7.71

St erlit e Ind u 0 .2 6 0 2 0 .73 8 -0 .4 8 0 .16 8 0 .3 59 -0 .19 10 1.1 78 .4 5 2 2 .6 8 14 .59 2 8 .0 4 -13 .4 6 7.1 73 .9 8 -6 .8 8 153 .6 2 3 .57 13 0 .1

Tat a Co nsul 0 .6 3 0 4 0 .8 4 1 -0 .2 1 0 .0 2 3 0 .0 4 2 -0 .0 2 10 3 .4 8 4 .9 3 18 .51 78 .79 8 4 .15 -5.3 6 0 .6 9 8 2 .172 -1.4 7 2 5.3 6 1.3 8 7 2 3 .9 7

Tat a M o t o r 2 .0 774 1.3 14 0 .76 3 0 .774 0 .4 17 0 .3 57 2 16 .5 12 4 .5 9 2 .0 5 2 4 .4 4 18 .15 6 .2 9 9 58 .2 9 4 5.2 8 13 2 50 .4 -6 1 3 11.4

Tat a Po wer -0 .0 9 0 .0 9 1 -0 .18 0 .558 0 .4 3 7 0 .12 2 12 9 .2 13 1.3 -2 .11 110 .3 9 4 .2 2 16 .11 2 7.72 3 5.3 8 -7.6 6 4 6 .59 -1.71 4 8 .3

Tat a St eel L 1.0 8 7 0 .9 59 0 .12 8 0 .6 56 0 .4 9 0 .16 6 16 9 .2 231 -6 1.8 4 0 .75 23 17.75 78 .9 1 9 3 .9 6 -15 2 0 7.4 -114 3 2 1.4

Wip ro Lt d . 0 .53 2 0 .557 -0 .0 2 0 .2 73 0 .0 2 4 0 .2 5 74 .8 5 59 .8 7 14 .9 8 70 .75 70 .56 0 .18 6 16 .18 13 .17 3 .0 0 6 2 0 .2 9 2 3 .8 7 -3

.58

M ean 0 .69 0 .79 -0.1 0 .38 0 .34 0 .04 203 19 8 4 .55 48 .8 56 .1 -7.3 12 0 12 2 - 1. 5 5.55 -21 2 6.1
Conclusions-
Let us first of all try to compare the models derived using multiple
regressions and check their verifications-

1).The first model is

GROSSPRit= B0 + B1 (CCCit) + B2 (DRit) + B3 (LOSit) + B4 (FFARit)

in pre & post - recession scenario. The coefficient of LOS( log of sales )
changes its sign from -
0.045 in post – recession to +0.025 in pre-recession model. Also, there is
dramatic change in the coefficient of CCC from a very low negative value in
post-recession to a higher absolute value in pre-recession model. This clearly
demonstrates the impact on sales after recession and cash conversion cycle.
Ideally speaking, the coefficient of LOS should have been positive and
GROSSPR must increase with increase of sales (LOS). This is truly
encountered before 2008 as the coefficient is positive. But after recession
the coefficient of LOS is negative clearly demonstrating abrupt changes in
market due to unexplained forcing factors in times of recession. Our finding
shows that there is a strong negative relationship between profitability,
measured through gross operating profit, and the cash conversion cycle.
This means that as the cash conversion cycle increases, it will lead to
declining of profitability of firm. Therefore, the managers can create a
positive value for the shareholders by handling the adequate cash
conversion cycle and keeping each different component to an optimum level.
The most striking comparison is yielded by the R-squared values and
adjusted R-squared values. The R-squared value changes from 0.392 to 0.1
and adjusted R-squared from 0.27 to -0.101. From the exceptionally low
values of R-squared and adjusted R-squared for the pre-recession scenario
we conclude that the same model is no longer applicable for the pre-
recession
scenario which is expected in the wake of extreme fluctuations in two data
sets.

2).The second model is

GROSSPRit= B0 + B1 (ARit) + B2 (DRit) + B3 (LOSit) + B4 (FFARit)

in pre & post - recession scenario. The intercept is now about twice in pre-
scenario as that of post and simultaneously the gross profitability now
decreases almost 4 times rapidly in post- recession as compared to pre-
recession scenario. The sign of coefficient of LOS is inversed to ideal
behavior that is, negative. The coefficient of AR is ideal negative and is 3
times in pre- recession than post-recession. This means as accounts
receivables period increases the gross profitability decreases three times
faster before recession as compared to post-period. The most striking
comparison is yielded by the R-squared values and adjusted R-squared
values.
The R-squared value changes from 0.403 to 0.254 and adjusted R-squared
from 0.284 to 0.088. From the exceptionally low values of R-squared and
adjusted R-squared for the pre-recession scenario we conclude that the
same model is no longer applicable for the pre-recession scenario which is
expected in the wake of extreme fluctuations in two data sets.
3).The third model is

GROSSPRit= B0 + B1 (APit) + B2 (DRit) + B3 (LOSit) + B4 (FFARit)

The coefficient of LOS (log of sales) abruptly changes its sign from -0.045 in
post–recession to
+0.044 in pre-recession model. At the same time the GROSSPR is increasing
ideally at the positive rate of 0.001 per unit increase of Accounts Payable
Period. On the other hand, the same decreases after recession with AP as
opposed to ideal expected behavior. This clearly demonstrates the impact
on sales and accounts payable cycle after recession. The rate of decrease of
GROSSPR with FFAR has almost quadrupled after recession as expected in
terms of exponential increase in secured and unsecured loans. The most
striking comparison is yielded by the R-squared values and adjusted R-
squared values. The R-squared value changes from
0.391 to 0.129 and adjusted R-squared from 0.270 to -0.064. From the
exceptionally low values
of R-squared and adjusted R-squared for the pre-recession scenario we
conclude that the same model is no longer applicable for the pre-recession
scenario which is expected in the wake of extreme fluctuations in two data
sets.

4).The fourth model is

GROSSPRit= B0 + B1 (INVit) + B2 (DRit) + B3 (LOSit) + B4 (FFARit)

in pre & post - recession scenario. The coefficient of LOS( log of sales )
changes its sign from non-ideal negative 0.078 in post – recession to
+0.071 in pre-recession model. Also, there is dramatic change in the
coefficient of INV from a negative value in post-recession to a higher
positive in pre-recession model. This clearly demonstrates the impact on
sales after recession and inventory period. Ideally speaking, the coefficient
of LOS should have been positive and GROSSPR must increase with
increase of sales (LOS). This is truly encountered before 2008 as the
coefficient is positive. But after recession the coefficient of LOS is negative
clearly demonstrating abrupt changes in market due to unexplained forcing
factors in times of recession. Our finding shows that there is a strong
negative relationship between profitability,
measured through gross operating profit, and the Inventory turnover period.
This means that as
the Inventory turnover period increases, it will lead to increase or decrease
in the profitability of firm. The most striking comparison is yielded by the
R-squared values and adjusted R- squared values. The R-squared value
changes from 0.392 to 0.1 and adjusted R-squared from
0.27 to -0.101. From the exceptionally low values of R-squared and
adjusted R-squared for the pre-recession scenario we conclude that the
same model is no longer applicable for the pre- recession scenario which is
expected in the wake of extreme fluctuations in two data sets.
5).For perfect zero working capital ZWC/sales should be 0 and (Debtors +
Inventories)/creditors should be 1. A close look at the values mentioned in
the table above yield some useful trends in the shift of the concept of Zero
Working Capital in Indian Markets.
The mean value of ZWC/sales is reduced to about one-fourth in post-
recession scenario as that of pre-recession scenario. Also the values deviate
about its mean values about 41.5% in pre- recession while the window of
fluctuations is narrowed down to 27.5% in post-recession scenario. The
range of variation of values is still very much the same. Similar trends are
depicted for (Debtors + Inventories)/Creditors. Mean value plums to 1.12
from 1.47 after recession, deviating from mean position about 198% before
recession and about 91% after recession. The range of variation has also
been reduced by one-third.

This concludes that firms have become more critical of their operating
cycle costs. Due to the exponential fall in debtors and simultaneously
accelerated increase in creditors has forced the firms to manage their
operating cycle more efficiently. They are more inclined to covering
creditors from debtors and inventories alone and are more inclined to
reduce their cash conversion cycle in the wake of low liquidity.

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