Working capital management and its effect on profitability
Sugar Industry
Abstract
Working capital management plays important role in better performance of firms in sugar industry. 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. Each and every business needs short run financial resources to meet daily operation. This study examines the impact of working capital management on firm’s profitability in sugar industry of Pakistan. The study investigates the relationship of working capital management and profitably using a sample of sugar firms listed
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The firms need working capital to meet its day-to-day operations. A liquid company has more cash to pay its obligation on time to reduce the financial cost and ability to invest in profitable opportunities. The study examines the relationship between working capital and profitability of sugar industry in Pakistan.
The performance of the firms depends on working capital management effectively, if firm failed to manage working capital effectively its lead to financial crises. Working capital is needed for day-to-day operations of a firm. Net working capital is the difference of current assets and current liabilities. (M.Charitou, 2010). Current assets are converted into cash within one year of time while current liabilities are current obligation which is settled in one year of time period. The company can reduce its working capital by shortening the collection period, deferring payment and keeping minimum inventory. The management of current assets and current liabilities is important in creating value for shareholders. (T.Afza, 2009) The Working capital management is the planning and controlling of current assets and current liabilities to minimize the risk of liquidity and avoid too much investment in assets. The liquid company has also the ability to invest quickly in profitable
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However the sugar sector is also play important role in the Pakistan economy. Sugarcane is the most valuable cash crops of Pakistan. It is the second largest agro based industry in Pakistan after textile and contributed 2% to over all GDP. Pakistan is an important cane producing country and its ranked 5th in world can acreage and 15th in sugar production. According to Pakistan Annual Sugar Report Sugarcane is cultivating on over a million hectares and it provides the raw material for Pakistan’s 84 sugar mills. Sugar sector engaged more than 100,000/ labor work force and nine million people earn their living form sugar industry. Presently the sugar mills have capacity to produce sugar for country requirement for next three
Sugar was first grown in New Guinea around 9000 years ago, which New guinea traders trade cane stalks to different parts of the world. In the New world christopher columbus introduced cane sugar to caribbean islands. At first sugar was unknown in Europe but was changed when sugar trade first began. Sugar trade was driven by the factors of production land which provided all natural resources labor what provided human resources for work and capital which includes all the factories and the money that’s used to buy land. Consumer demand was why sugar trade continued to increase.
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
Jenkins, G.H. 1966. Introduction to cane sugar technology. Elsevier Publishing Co., New York. 478 pp.
Initially, all people think of sugar in foods as a sweetener, but what they do not recognize is that it is used to preserve food. Such as: jams and canned fruits. Also sugar thickens the texture that makes liquid much better. Sugar is used around the world for bakery products and soft drinks. Furthermore, sugar is used in pharmaceutical industries, it is a common knowledge that sugar is a medicine that treats people with low blood sugar, also for diabetics with insulin intake; to balance sugar levels. In addition, sugar is a rehydration source that prevents dehydration. Additionally, sugar is used in the production of fabrics. In summary, sugar without a doubt is an important commodity because of these uses and because of its
Sugarcane is an important industrial crop for the tropical and subtropical region of the world. It is produced in more than 100 countries, with global production of 174 million tonnes sugar. It accounts for about 80 percent and sugarbeet for about 20 percent of total sugar produced (FAOSTAT, 2008). In 2010, 1,682 million metric tonnes (MT) of sugarcane were produced worldwide in a total area of 23.8 million hectares (ha). Brazil is the largest sugarcane producer, contributing with 40% of the world production (719 MT) followed by India (278 MT), China (111 MT), Thailand (68 MT), Pakistan (50 MT), Colombia (38.5 MT), Australia (31 MT), Argentina (30 MT), United States (27.5 MT), Indonesia (26.5 MT) and the Philippines (23 MT) (FAOSTAT, 2011). India rank second among the sugarcane growing countries of the world in both area and production. Globally it is cultivated over an area of 20.1 million hectare, with annual production of 1381.1 million tonnes and productivity of 65.5 tonnes per ha. In India sugarcane is cultivated over an area of 4.36 million ha, with an annual production of 281.8 million tonnes and productivity 64.6 tonnes per ha. Uttar Pradesh, Maharashtra, Karnataka, Tamilnadu and Andhra Pradesh are the important sugarcane
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
Financial statements are a vital factor of any business organization; they show where a company’s money came from, where it went, and where it is now, according to Securities and Exchange Commission website (2008). In addition, four main financial statements consist of the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity. These four financial statements will be evaluated from Nike Inc. and more in depth information will be included from information on the previous paper which will be link to the working capital strategies. Furthermore, a detail working capital recommendation to senior management will be included and the impact of Nike Inc. revenue increase of their working capital.
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
Sugar industry in India is a well-developed industry and one of the largest after textiles. It
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer.
Cash is known as the king in business world. Thus king (cash) should be managed well to be in the business and also to grow financially. Cash management is key to run the business efficiently that will also avoid the bankruptcy. Cash management is all about collecting, managing, investing and disbursement of the cash. A very important and key factor for the company 's stability. Cash management are generally taken care by treasurers of the company or the business managers.
Managing an organization’s financial operation requires a good understanding of the economy and ways to maximize revenue. For an organization to operate on a daily basis, adequate cash flow is required. Poor cash management within an organization might make it hard for the organization to function because there may be shortage of cash in case of inconsistences in the market. In most companies, management is interested in the company 's cash inflows and outflows because these determines the availability of cash necessary to pay its financial obligations. Management also uses this information to determine problems with company’s liquidity, a project’s rate of return or value and the timeliness of cash flows into and out of projects (used as inputs
If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal.