Working-Capital Management and Profitability of the Construction Sector in Bangalore

Abstract

Working-capital management is an important decision in financial management, playing a key role in a firm’s financial performance. For construction companies, working capital is all the more important due to the long project cycles they face. The present study examines the impact of working capital on profitability in the construction sector in Bangalore, India. The data for the study were collected from a sample of five major builders based in Bangalore, and pertains to a study period during 2006-11. The study contributes to the literature by using fixed-effects-panel-regression analysis rather than pooled regression, as the fixed-effects panel regression allows control for company-specific differences in profitability as well as for year-to-year differences in profitability for the industry as a whole. The results of the study suggest that construction companies should focus on two working-capital variables to maximize their profitability, viz. average collection period and accounts payable, both of which were found to have significant positive impact on profitability.

Keywords: Working-Capital Management, Construction Industry, Project Cycle, Average Collection Period, Accounts Payable

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