Working Capital Management, Firm’s Performance and Sustainable Growth of Firms in India A Simultaneous Equation Approach

Abstract : As a human body can't survive without blood, no firm can survive without working capital. Managing the working capital is very necessary for the smooth functioning of the organization. Working capital management is a way of accounting through which the organization utilizes its current assets and liabilities effectively and efficiently for the organization’s smooth functioning. Working capital management aims at increasing the organization's profit with optimum utilization of current assets and current liabilities. When an organization effectively manages its cash, account receivable, account payables, and inventories then that will automatically increase its profitability, and when the organization effectively manages its working capital that will not only help in meeting its financial obligations but also help in increasing its earnings, which helps the organizations to attain the sustainable growth. Sustainable growth relates to a firm’s ability to expand itself by relying on its internal source of finance without making external debt a major priority. This research aims to comprehend the connection between working capital management and a company’s performance with sustainable growth. The study is analysed using an accounting measure and a market measure of firm’s performance and thereby predicting the changes that may occur when both the measures are used. In order to assess the relationship between working capital management, firm performance, and sustainable growth in the firms listed in the S & P BSE 500 Index, the study takes into account a period of 10 years. A Simultaneous Equation Approachis used to analyse the data and thus, two models are used for the two measures of firm’s performance. According to the study, working capital management significantly impacts on the firm’s performance and also the sustainable growth of firms. The study shall help top management in understanding the importance of sustainable growth through effective management of working capital.