Variables Affecting Working Capital Management of Indian Manufacturing Firms: Factor Analysis Approach

Abstract

Working Capital Management (WCM) is concerned with the problems that arise in attempting to manage current assets and current liabilities. This paper analyzes the variables affecting working capital management of Indian manufacturing firms using factor analysis. The analysis uses eleven variables as a combination of working capital ratios and cash flows. The authors apply principal component analysis to extract the maximum amount of variance accounted for a minimum number of factors. The study finds cash conversion cycle to be correlated with the other variables and eliminated. Net working capital to total assets ratio has a complex structure, so it is dropped from the analysis. The factor analysis classifies the nine variables into four factors. It was obvious from the classification that the factors pertained to assets, policy, convertibility and operational, which can give a direction to the decision makers.

Keywords: Working Capital Management, Factor Analysis, Principal Component Analysis

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