Effect of Working Capital Management Practices on Working Capital Efficiency-A Case from Agribusiness Sector

Abstract

Working capital is an important part in firm's financial management decision. Inefficient management of working capital suffers firms, so an optimum level of working capital and its efficient utilization is the key to a smooth inflow of profit. In the present study, the various components of working capital which includes cash management, receivables management, and inventory management were analyzed and the relationship between Working Capital Efficiency Index (WCEI) and working capital management practices. The study sample consisted of 40 coconut oil mills in Western Tamil Nadu and the data collected for the five-year period from 200910 to 2013–14. The overall working capital efficiency index indicated that the oil mills inefficient category had efficiently managed their working capital and generated sales. The multiple regression analysis revealed that 31.3 per cent of the variations in working capital efficiency was explained by the independent variables included in the model. Among the three independent variables, the effect of Working Capital Cash Management (WIM) practices was the highest on working capital efficiency. Effective cash management reduces the length of the cash conversion cycle which improves the financial performance of coconut oil mills.