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Liquidity management is the functional area of finance that covers all the current accounts
of the firm (Agarwal, 1983). It is concerned with the management of the level of
individual current assets as well as the management of total working capital. Liquidity means a
firm's capacity to meet its obligations when they fall due (Van Horne, 2002). In other words,
the firm can pay all its bills on due date and have sufficient cash to meet emergencies
(Ravi, 2001). If a firm has sufficient net working capital, it is deemed to have
sufficient liquidity, while a deficit of working capital implies negative liquidity and the company is
not likely to be able to pay off even its current liabilities, and hence, may considerably damage
its reputation (Bardia, 1988). Thus, weak liquidity position is perceived as a threat to the
solvency of the company. The present study is based on net working capital concept. Excessive
working capital results in unnecessary accumulation of inventories and idle funds which earn no
return (George, 1990). On the other hand, inadequate working capital also suffers from
operating inefficiencies and loss of reputation when the business is not able to honor its
commitments (Varshney, 2001). Therefore, it is very important to determine the appropriate amount
of working capital in order to maintain adequate liquidity position of the company
(Parashar, 1996).
The current study has been carried out by taking a sample of two leading
pharmaceutical companies of India, viz., Torrent Pharmaceuticals Limited and Cipla Limited. The
relevant data was mainly gathered from the published annual reports and accounts of the
selected pharmaceutical companies. The other sources which have been consulted are technical
and trade journals, newspapers and other published information. |
