Profitability of Indian Retail Firms affected by Working Capital Management : A Study

A study titled “Effect of Working Capital Management on Firm’s Profitability : Evidence from Selected Indian Retail Firms” co-authored by Mr. Muralidhara and Prof. M. R. Shollapur from Siddaganga Institute of Technology, Tumkur, published in the latest issue of one of the leading international journal – Finance India published by Indian Institute of Finance show a significant relation between working capital management and profitability of the selected Indian retail firms.

Retailing in India contributes 14 to 15 % of the GDP. The success of a retail firm is largely dependent on the its ability of promoters to raise funds, access to real estate, operating synergies between different departments (sourcing, logistics and distribution) and ability to ensure consumers’ loyalty. The study investigated the relationship between various elements of working capital and profitability of selected Indian retail firms. A sample of 51 firms in the retail sector. A panel data for 6 years (2006-07 to 2011-12) are analysed.

The results of the study show a significant relation between working capital management and profitability of the selected Indian retail firms. Firstly, the average collection period is found positively associated with the profitability. This indicates that Indian retail firms are increasing their profitability by offering extended credit to woo the customers. Secondly, the average payment period is found negatively related with profitability. This could be substantiated by the tendency of Indian retail firms to avail discounts for payments. The reduction in payment period is rewarded through discount which in turn tends to positively impact on profits of the retail firms. Thirdly, the average inventory holding period is positively related with profitability. This could be reasoned to the nature of retail as a business where the availability of right product at right place becomes essential in satisfying the customer needs. Finally, cash conversion cycle is positively related with profitability. This contradicts the findings of many studies conducted in the international markets.

Thus an increased profitability can be achieved by the Indian retail firms if they manage their working capital in an efficient manner. Offering extended credit, customizing credit policies and credit structure based on the loyalty of customer segments, availing of greater discounts for quicker payments to suppliers, luring customers to make a purchase through merchandizing, etc are recommended for increasing the revenues and profits. According to the study reduction in payment period is rewarded through discounts which in turn tends to positively impact on profits of the retail firms.

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