Impact of Negative Working Capital on Liquidity and Profitability : A Case Study of ACC Limited

Theoretically, the ultimate objective of an effective working capital management policy is to enable a firm to strike a balance between the two core objectives of the firm, i.e. profitability and liquidity. But increasing profitability would tend to reduce firms' liquidity and too much attention on liquidity would tend to affect the profitability. No doubt, every firm tries to maximize the profitability so as to maximise the shareholder's wealth but increasing profits at the cost of liquidity might cause serious trouble to the firm and this problem might lead to financial insolvency as well. However excessive liquidity on one hand indicates the accumulation of idle funds that don't fetch any profits for the firm and on the contrary, insufficient liquidity might damage the firm's goodwill, deteriorate firm's credit ratings and that might lead the firm towards bankruptcy. A company unable to make profits might be termed as a sick company but, a company having no liquidity might cease to exist. This clearly indicates that every firm must maintain sufficient amount of working capital to preserve its liquidity. But when a company like Wal-Mart, is able to generate a good amount of profit and also able to maintain its liquidity and public image without any working capital in hand i.e. in a condition of negative working capital, can we say that the company is in the verge of bankruptcy or is it a sign of managerial efficiency? Same is the case with ACC Limited, which is the company of our study. In this paper an attempt is made to study the association between liquidity, profitability and risk of bankruptcy of ACC Ltd. for the period 2000-01 to 2009-10. We found that though the company was able to maintain the profitability because of its aggressive working capital policy, but its solvency was ultimately at a stake