FINANCING OF WORKING CAPITAL IN SELECT
CEMENT COMPANIES- A POLICY PERSPECTIVE
Dr. K. Bhagyalakshmi1, Dr. P. Krishnama Chary2
1
Lecturer, Dept. of Commerce and Business Management, University College for Women,
Kakatiya University, Warangal, Telangana. (India)
2
Professor, University College of Commerce and Business Management and Director IQAC,
Kakatiya University, Warangal, Telangana, (India)
ABSTRACT
Working Capital is very important for any manufacturing organisation such as cement, textiles etc. The way in
which the working capital is financed to a company influences its profitability and the firm’s ability of using
fixed assets possessed by it. The cost of capital used to finance the current assets also very highly impacting the
profitability and the future course of actions of the companies. Cement is vital to the construction sector and all
infrastructural projects. The construction sector alone constitutes 7 per cent of the country's gross domestic
product (GDP). Since the cement sector notably plays a critical role in the economic growth of the country, the
present paper focuses on the analysis of various policies followed by the six selected cement companies viz.,
Ultra Tech, The India, J.K, ACC, Ambuja and Madras Cements Ltd. in financing working capital by using the
Statistical techniques like Percentages, Ratios, Averages, Standard Deviation (S.D),coefficient of variation
(C.V) etc. The paper concludes that, the trade payables formed a predominant source of short-term funds in
Ultra tech and The India; other current liabilities played a major role in J.K. and Madras and the short term
provisions occupied a major proportion of short sources in the case of the remaining two companies viz., ACC
and Ambuja in financing working capital.
Keywords: Aggressive, Conservative, Hedging, Working Capital Approach
I. INTRODUCTION
Working Capital is very important for any manufacturing organisation. The way in which the working capital is
financed to a company influences its profitability and the firm’s ability of using fixed assets possessed by it. The
cost of capital used to finance the current assets also very highly impacting the profitability and the future
course of actions of the companies. According to walker “ the type of capital used to finance working capital
directly affects the amount of risk that a firm assumes as well as the opportunity for gain or loss and cost of
capital”.
II. POLICIES FOR FINANCING CURRENT ASSETS
A firm can adopt different financing policies to invest on current assets. Three types of financing may be
distinguished as:
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2.1. Long term financing: The sources of long-term financing include ordinary share capital, preference share
capital, debentures, long-term borrowings from financial institutions and reserves and surplus (retained
earnings).
2.2. Short-term financing: The short-term financing is obtained for a period less than one year. Short-term
finances include working capital funds from banks, public deposits, commercial paper, factoring or receivables
etc.
2.3. Spontaneous financing: Spontaneous financing refers to the automatic sources of short-term funds arising
in the normal course of a business. Trade (supplier’s) credit and outstanding expenses are examples of
spontaneous financing.
The company has to decide, the mix of short and long –term sources in financing current assets. Depending on
the mix of short and long-term financing, the approach followed by a company may be of 3 categories.
2.4. Matching Approach (Hedging Approach): The firm can adopt a financial plan which matches the
expected life of assets with the expected life of the source of funds raised to finance assets. The justification for
the exact matching is that, since the purpose of financing is to pay for assets. The source of financing and the
asset should be relinquished simultaneously. When the firm follows a matching approach, long-term financing
will be used to finance fixed assets and permanent current assets and short-term financing to finance temporary
or variable current assets. Under a matching plan, no short-term financing will be used if the firm has a fixed
current assets need only.
2.5. Conservative Approach: A firm in practice may adopt a conservative approach in financing its current and
fixed assets. The financing policy of the firm is said to be conservative when it depends more on long-term
funds for financing needs. Under a conservative plan, the firm finances its permanent assets and also a part of
temporary current assets with long-term financing. The conservative plan relies heavily on long-term financing
and, therefore, the firm has less risk of facing the problem of shortage of funds.
2.6. Aggressive Approach: A firm may be aggressive in financing its assets. An aggressive policy is said to be
followed by the firm when it uses more short-term financing than warranted by the matching plan. Under an
aggressive policy, the firm finances a part of its permanent current assets with short-term financing. Some
extremely aggressive firms may even finance a part of their fixed assets with short-term financing. The
relatively large use of short-term financing makes the firm more risky.
III. RISK-RETURN TRADE-OFF
Thus, there is a conflict between long-term and short-term financing. Short-term financing is less expensive than
long-term financing, but, at the same time, short-term financing involves greater risk than long-term financing.
The choice between long-term and short-term financing involves a trade-off between risk and return.
If the firms follow a policy of financing current assets through short term sources, funds are borrowed only
when needed. As a result, profitability will be higher but the risk of non-availability of funds may also be
greater. Alternatively, if the firms follow a policy of financing current assets through long-term sources, the risk
of non-availability of funds is significantly reduced but it may reduce the profitability of the firms on account of
idle funds in times of seasonal droughts. Therefore, in order to maximise the overall rate of return on investment
and minimise risk, firms have to employ and optimal mix of financing policies.
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IV. NEED FOR THE STUDY
The cement sector notably plays a critical role in the economic growth of the country and its journey towards
conclusive growth. Cement is vital to the construction sector and all infrastructural projects. The construction
sector alone constitutes 7 per cent of the country's gross domestic product (GDP). The industry occupies an
important place in the Indian economy because of its strong linkages to other sectors such as construction,
transportation, coal and power. India is the second largest producer of quality cement in the world. The cement
industry in India comprises 183 large cement plants and over 365 mini cement plants. Currently there are 40
players in the industry across the country. Since the type of capital used to finance working capital directly
affects the amount of risk that a firm assumes as well as the opportunity for gain or loss and cost of capital, the
need is felt to undertake a study on the financing policies of working capital of the select cement companies.
V. OBJECTIVES
The following are the objectives of the study.
1) To present the conceptual framework of different policies in financing the working capital.
2) To examine the proportion of long-term sources and short-term sources in financing the working capital of
select cement companies.
3) To analyse the proportion of each component of short-term sources with a view to identify their approaches
towards financing the working capital.
VI. SOURCES OF DATA AND METHODOLOGY
6.1. Sources of Data: The present study is based on secondary data. The sources of secondary data consists of
Annual Reports, circulars, research periodicals, Text Books, news papers like Economic Times, websites and
other published sources. The data collected from the above sources for the period of 5 years from 2008-09 to
2012-13.
6.2. Methodology: The following methodology is adopted for conducting the study.
Aggregate financial variables relating to financing of working capital of selected
cement companies are
processed, tabulated, analyzed and interpreted for a period of 5 years i.e. from 2008-09 to 2012-13 with the help
of statistical techniques like Percentages, Ratios, Averages, Standard Deviation (S.D), and Coefficient of
Variation (C.V). Finally conclusions have been drawn based on the facts revealed by the study.
VII. SELECTION OF SAMPLE
For the purpose of the present study, six cement companies have been selected as sample namely, 1.Ultra-tech
Cement Ltd., 2. The India Cements Ltd., 3.J.K Cement Ltd., 4. ACC Ltd., 5. Ambuja Cements Ltd. and
6.
Madras Cements ltd.
The collected data of selected companies have been analysed as under.
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VIII. CURRENT LIABILITIES AS A PERCENTAGE OF TOTAL CURRENT ASSETS
TABLE 1 shows the proportion of current liabilities in the total current assets of the selected cement companies.
The data reveals that all the selected samples used the current liabilities as a source of financing the working
capital above the 50% of the current assets except in J.K during 2008-09, during the period from 2008-09 to
Table-1 Current Liabilities as a Percentage of Total Current Assets
Year/Company
2008-09
2009-10
2010-11
2011-12
2012-13
Avg.
S.D
C.V
91.27
88.23
91.89
67.26
79.81
83.69
10.37
12.39
53.80
44.29
187.01
178.87
153.21
123.44
69.13
56.00
J.K. Cement Ltd.
34.56
52.23
71.00
68.01
87.27
62.62
20.01
31.96
ACC Ltd.
135.71
136.07
101.28
71.86
73.91
103.77
31.54
30.40
87.96
76.36
63.18
54.97
51.35
66.76
15.26
22.85
39.72
48.10
53.69
145.28
128.80
83.12
49.82
59.93
Ultra-tech Cement
Ltd.
The India Cements
Ltd
Ambuja Cements
Ltd.
Madras Cements
Ltd.
(Source: Annual Reports)
2012-13. The proportion is highest with 187.01% in 2010-11 in The India Cements and lowest in J.K cements
with 34.56% in 2008-09 among the selected cement companies. The two companies, The India and ACC have
the proportion i.e. more than 100% in three years of the study period. This indicates that the companies had used
the remaining short-term sources for financing the fixed assets. The other four companies have their proportions
below the 100% of working capital namely Ultra-tech, J.K, Ambuja and Madras Cements Ltd. The highest
average proportion is registered as 123.44% and the S.D is 69.13 with the C.V as 56.00% in The India Cements
Ltd. The least average is stood as 62.62% in J.K. and the S.D is 20.01 with the C.V as 31.96%.
After having analysed the current liabilities as a percentage of current assets, it is now proposed to examine that,
the proportion of each source of short-term finance, prominent source which has given highest proportion of
short-term finance and the approach which has been followed by the selected cement companies in financing
their working capital needs during the period of 5 years i.e. from 2008-09 to 2012-13. There are four important
components of current liabilities are identified such as Trade Payables , Short term Borrowings, Other Current
Liabilities and Short Term Provisions in the selected cement companies in financing working capital and
anlysed as under.
IX. ULTRA-TECH CEMENT LIMITED
It is observed from the TABLE 2 that, the trade payables including sundry creditors and bills payable formed a
predominant source of short term funds in financing the current assets. The percentage of trade payables is
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Table-2 Financing of Working Capital in Ultra tech Cement Limited
(Each Source as a Percentage to Total Current Liabilities)
Component
2008-09
2009-10
2010-11
2011-12
2012-13
Avg.
S.D
C.V
Trade Payables
54.30
46.29
45.19
29.97
28.06
40.76
10.11
24.80
21.56
20.64
8.52
2.38
7.28
12.07
7.65
63.38
6.46
10.37
71.54
24.61
32.51
29.10
23.22
79.80
9.71
10.94
12.27
10.29
11.96
11.03
0.97
8.80
91.27
88.23
91.89
67.26
79.81
83.69
9.28
11.08
Sources
8.73
11.77
8.11
32.74
20.19
16.31
9.28
56.89
Total
100.00
100.00
100.00
100.00
100.00
100.00
Short-term
Borrowings
Other Current
Liabilities
Short-term
Provisions
Short Term
Sources
Long Term
(Source: Annual Reports)
varied between 28% and 54% during the period. The highest proportion of short-term finance is contributed by
trade payables with 54.30% in 2008-09 and the lowest percentage belongs to short-term borrowings with 2.38%
in 2011-12. The average proportion is also highest in trade payables with 40.76% and the S.D is 10.11 with the
C.V as 24.80%. The average proportion of total short-term sources is 83.69% and the proportion of long-term
sources is 16.31% in financing working capital. It is thus clear that around 90% of the current assets has been
financed by the short-term sources and remaining proportion by the long-term sources. This indicates that the
Ultra Tech has been following the “Hedging Approach” in financing current assets.
X. THE INDIA CEMENTS LIMITED
It is noted from the data given in TABLE 3 that, the major source of short term financing of current assets
include trade payables and short term borrowings. The proportion of trade payables is varied between 25.36%
and 52.63% and the proportion of short term borrowings are varied between 12.20% and 55.38% during the
period. The highest contribution towards short term sources is observed with the average of 42.82% in trade
payables and the
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Table-3 Financing of Working Capital in The India Cements Limited
(Each Source as a Percentage to Total Current Liabilities)
Component
2008-09
2009-10
2010-11
2011-12
2012-13
Avg.
S.D
C.V
Trade Payables
34.73
25.36
48.93
52.44
52.63
42.82
12.21
28.51
12.20
12.23
52.47
64.52
55.38
39.36
25.18
63.97
2.89
2.88
78.79
55.93
40.08
36.11
33.31
92.23
3.98
3.82
6.83
5.98
5.11
5.15
1.29
25.03
53.80
44.29
187.02
178.87
153.21
123.44
69.13
56.00
46.20
55.71
-87.02
-78.87
-53.21
-23.44
69.13
294.93
100.00
100.00
100.00
100.00
100.00
100.00
Short-term
Borrowings
Other Current
Liabilities
Short-term
Provisions
Short Term
Sources
Long Term
Sources
Total
(Source: Annual Reports)
S.D is 12.21 with the C.V as 28.51%. The company has been mobilising the finance through the short term
sources which is more than enough to finance the working capital by the end of the period. The proportion of
short-term sources used to finance long-term assets is 23.44%, which is a significant proportion. Obviously it
can be said that The India Cements has been following an “Aggressive Approach” in financing working capital
by the year 2012-13.
XI. J.K. CEMENT LIMITED
The data of TABLE 4 clearly reveal that other current liabilities have constituted a significant source of short
term financing during the period from 2008-09 to 2012-13. The percentage of other current liabilities to total
current assets has been moving around 16% and 44%. It has been showing a consistent increasing trend by the
year 2012-13. The highest average proportion also lies in other current liabilities with 33.16% and the S.D is
12.10 with
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Table-4 Financing of Working Capital in J.K. Cement Limited
(Each Source as a Percentage to Total Current Liabilities)
Component
2008-09
2009-10
2010-11
2011-12
2012-13
Avg.
S.D
C.V
Trade Payables
16.54
20.95
18.75
16.28
19.03
18.31
1.93
10.56
0.18
0.53
6.41
7.64
18.27
6.60
7.34
111.11
16.29
24.50
42.08
39.32
43.60
33.16
12.10
36.51
4.91
4.29
3.67
4.78
6.29
4.79
0.97
20.32
37.91
50.27
70.91
68.01
87.20
62.86
19.14
30.44
62.06
47.73
28.99
31.99
12.73
36.70
18.85
51.35
100.00
100.00
100.00
100.00
100.00
100.00
Short-term
Borrowings
Other Current
Liabilities
Short-term
Provisions
Short Term
Sources
Long Term
Sources
Total
(Source: Annual Reports)
C.V as 36.51%, it is followed by trade payables with 18.31% for the 5 years study period. Since the proportion
of long term sources in financing working capital is found with 36.70% for the period, which gives an
understanding that, the J.K. Cement has been following “Hedging Approach” in financing working capital.
XII. ACC LIMITED
The information in TABLE 5 exhibits that, the percentage of short-term provisions has been playing a major
source of short term financing followed by trade payables during the period. ACC ltd. mobilised the finance
through the short term sources, which is more than the investment in current assets during 2008-09 and 2010-11
and later the policy has been changed and using long term sources in financing working capital. The highest
average proportion of short term sources is also observed in short term provisions with 38.08%.The S.D is 15.98
and the C.V as 41.97%. The average proportion of total short term sources is more than 100% of financing the
working capital, which denotes that the ACC Ltd has been following the “Aggressive Approach” in financing
the working capital for the study period.
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Table-5 Financing of Working Capital in ACC Limited
(Each Source as a Percentage to Total Current Liabilities)
Component
Trade
Payables
Short-term
Borrowings
2008-09
2009-10
2010-11
2011-12
2012-13
Avg.
S.D
C.V
61.47
53.08
19.63
13.69
14.47
32.47
22.95
70.70
-
-
-
-
-
-
-
-
24.13
22.97
41.93
31.41
34.99
31.08
7.86
25.29
50.12
60.02
29.02
26.76
24.46
38.08
15.98
41.97
135.71
136.07
101.28
71.86
73.91
103.77
31.54
30.40
-35.71
-36.07
-1.28
28.14
26.09
-3.77
31.54
837.46
100.00
100.00
100.00
100.00
100.00
100.00
Other
Current
Liabilities
Short-term
Provisions
Short
Term
Sources
Long Term
Sources
Total
(Source: Annual Reports)
XIII. AMBUJA CEMENTS LIMITED
The data presented in TABLE 6 shows that the proportion of trade payables and short term provisions have been
showing declining trend and other current liabilities has shown an increase by the year 2012-13. The highest
source of short term financing is registered with 46.60% in trade payables in 2008-09, while the lowest
proportion of short term source is found as other current liabilities with 6.10% in 2009-10. There are no funds
mobilised through short term borrowing during the period. The average proportion of short term provisions
found to be highest among the sources of short term finance with 28.16% and the S.D is 6.50 and the C.V as
23.07%. The average proportion of long term sources used for financing working capital is 27.90% in Ambuja
cements ltd. for the period, which leads to understanding that, the Ambuja cements ltd. has been following
“Hedging Approach” in financing working capital by the end of the study period.
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Table-6 Financing of Working Capital in Ambuja Cements Limited
(Each Source as a Percentage to Total Current Liabilities)
Component
2008-09
2009-10
2010-11
2011-12
2012-13
Avg.
S.D
C.V
Trade Payables
46.60
35.28
22.31
17.72
17.60
27.90
12.70
45.52
-
-
-
-
-
-
-
-
7.31
6.10
14.11
12.43
14.31
10.85
3.88
35.73
34.05
34.97
27.52
24.81
19.44
28.16
6.50
23.07
87.96
76.36
63.93
54.97
51.35
66.91
15.22
22.74
46.60
35.28
22.31
17.72
17.60
27.90
12.70
45.52
100.00
100.00
100.00
100.00
100.00
100.00
Short-term
Borrowings
Other Current
Liabilities
Short-term
Provisions
Short Term
Sources
Long Term
Sources
Total
(Source: Annual Reports)
XIV. MADRAS CEMENTS LIMITED
The analysis of TABLE 7 reveals that the major portion among the short term sources is observed in other
current liabilities with 76.40% in 2010-11 and lowest is found as 1.61% in 2009-10. The average proportion of
other current liabilities is also highest with 40.67% among the sources of short term finance. The S.D is 36.13
and the C.V as 88.84% for the period of 5 years. The company has mobilised 83.12% of current assets through
the short term sources and remaining proportion through the long term sources. Hence it can be understood that,
the Madras Cements Ltd. has been following ”Hedging Approach” in financing working capital by the end of
year 2013.
A close look at the average composition of current liabilities discloses that, the trade payables formed a
predominant source of short-term funds in financing working capital requirements in respect of Ultra Tech and
The India Cements from 2008-09 to 2012-13. While the other current liabilities played a major role in J.K. and
Madras Cements. Other current liabilities include Unpaid Dividends, Liability for Capital Goods, Advances
from Customers, etc. The short term provisions occupied a major proportion of short term source in the
remaining two companies viz., ACC and Ambuja.
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Table-7 Financing of Working Capital in Madras Cements Limited
(Each Source as a Percentage to Total Current Liabilities)
Component
2008-09
2009-10
2010-11
2011-12
2012-13
Avg.
S.D
C.V
Trade Payables
14.85
14.51
12.70
9.07
11.43
12.51
2.37
18.98
12.96
21.43
30.79
59.18
46.98
34.27
18.80
54.85
1.81
1.61
76.40
64.85
58.66
40.67
36.13
88.84
10.11
10.55
11.03
12.18
11.73
11.12
0.85
7.62
39.72
48.10
53.70
145.28
128.80
83.12
49.81
59.93
60.28
51.90
46.30
-45.28
-28.80
16.88
49.81
295.13
100.00
100.00
100.00
100.00
100.00
100.00
Short-term
Borrowings
Other Current
Liabilities
Short-term
Provisions
Short Term
Sources
Long Term
Sources
Total
(Source: Annual Reports)
XV. CONCLUSIONS
1) All the selected companies used the short-term liabilities as a source of financing the working capital and
varied between 34.56% and 187.01% during the period.
2)
The proportion of current liabilities to current assets is comparatively higher in The India and ACC ltd.
among the selected samples. The highest average proportion of current liabilities to current assets is
registered as 123.44% in The India Cements.
3)
The trade payables including sundry creditors and bills payable formed a predominant source of short term
funds in financing the current assets in Ultra Tech. The percentage of trade payables is varied between 28%
and 54%.
4)
Since around 90% of the current assets has been financed by the short-term sources and remaining
proportion by the long-term sources in Ultra Tech, it can be said that the Ultra tech Cement Ltd. has been
following the “Hedging Approach” in financing current assets.
5)
In the case of The India Cements Ltd., the major source of short term financing of current assets include
trade payables (varied between 25.36% and 52.63%) and short term borrowings (12.20% and 55.38%)
during the period.
6)
The India Cements Ltd. has been mobilising the finance through the short term sources which is more than
enough to finance the working capital with the average proportion of 123.44%. Obviously it can be said that
the company has been following an “Aggressive Approach” in financing working capital by the end 201213.
7) Other current liabilities have constituted a significant source of short term financing in J.K., which is
moving around 16% and 44% of short term sources during the period.
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8)
Since the proportion of long term sources in financing working capital is found with 36.70% in J.K for the
period, which gives an understanding that, the company has been following “Hedging Approach” in
financing working capital.
9)
The percentage of short-term provisions has been playing a major source with 38.08% in ACC ltd.
followed by trade payables during the 5 years period from 2008-09 to 2012-13.
10) The average proportion of total short term sources is more than 100% of financing the current assets in
ACC ltd., which denotes that the ACC Ltd has been following an “Aggressive Approach” in financing the
working capital for the study period.
11) In respect of Ambuja Cements Ltd., the highest source of short term financing is registered with 46.60% in
trade payables during 2008-09.
12) Since 66.91% of current assets are financed by short term sources and the remaining portion of working
capital i.e. 27.90% is financed by long term sources in Ambuja Cements, which leads to understanding that,
the Ambuja has been following the “Hedging Approach” in financing the working capital by the end of the
study period.
13) In the case of Madras Cements Ltd., the major portion among the short term sources is observed in other
current liabilities with 76.40% of total short term funds.
14) The Madras Cements Ltd. has mobilised 83.12% of working capital through the short term sources and the
remaining proportion through the long term sources. Hence it can be understood that, the Madras Cements
Ltd. has been following the ”Hedging Approach” in financing working capital by the end of year 2013.
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