1. INTRODUCTION:

Liquidity implies conversion of current assets into cash during the normal course of business and to have regular uninterrupted flow of cash to meet outside current liabilities as and when due and payable. It also ensures availability of money for day-to-day business operations. A study of liquidity is of major importance to both the internal and the external analysts because of its close relationship with day-to-day operations of a business Dilemma in liquidity management is to achieve desired trade-off between liquidity and profitability.

Liquidity management is the most essential component of financial management. It plays most dominant role in the successful functioning of an enterprise, liquid assets may be defined as the money and assets that are readily convertible into money. Money itself, by definition, the most liquid of assets, other assets have varying degrees of liquidity, depending on the most liquid of they can be turned into cash. Liquidity management involves determining the total amount of the two types of assets the company will hold. The day-to-day problem of liquidity management consists of the highly important task of finding sufficient cash to meet current obligations.

A firm should ensure that it does not suffer from lack of liquidity and also that it is not too highly liquid. The failure of the company to meet its obligations due to lack of sufficient liquidity will result in bad credit image, loss of creditor's confidence or even in lawsuits resulting in the closure of the company.

2. REVIEW OF LITERATURE:

Saleem Quasim and Rehman Ur Ramiz (2011) in their study aims to reveal the relationship between liquidity and profitability so that every firm has to maintain this relationship while in conducting day to day operations. Profitability ratios also play an important role in the financial positions of enterprises. Thus, a company needs to maintain adequate liquidity so that liquidity greatly affects profits of which some portion that will be divided to shareholders. Liquidity and profitability are closely related because one increases the other decreases.

Eljelly (2004) examined the relation between profitability and liquidity measured by current ratio and cash gap (Cash Conversion Cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. They found a negative relationship between profitability and liquidity indicators, and it was found that CCC had a bigger impact over profitability then Current ratio. Also it was observed that there was great variation among industries with respect to the significant measure of liquidity

According to the research conducted by Chandra in 2001, normally a high liquidity is seen as a sign of financial strength. However, some authors like Assaf Neto believe that a high liquidity can be as undesirable as a low one. This would be a consequence of the fact that current assets are usually less profitable than fixed ones. Money invested in assets generates less revenue than fixed assets, thus representing an opportunity cost.

Marques and Braga (1995) confirmed this inverse relationship between liquidity and profitability for a sample of food companies. Blatt (2001), also called a negative relationship between liquidity and profitability, measured by Dynamic Model and profitabilityHowever, Hirigoyen (1985) argues that on mid-term and long-term the relationship between liquidity and profitability could be positive, meaning that a low liquidity would lead to lower profitability due to a greater need for loans and a low profitability would not generate sufficient cash flow to finance the expansion of its needs for working capital, purchase new fixed assets, outstanding loans, etc. And it ends up compromising liquidity, thus forming a vicious circle.

3. NEED OF THE STUDY:

Effective cash optimisation is critical to all organisations, especially in a tough economy. Cash is the lifeblood of organisations. An organisation having a proper set of liquidity management policies and procedures will improve profits, reduce the risk of corporate failure and significantly improve its chances of survival. It also provides a strategic advantage especially in difficult economic times. Effective liquidity management will enable an organisation to derive maximum benefits at minimal cost.

4. OBJECTIVES OF THE STUDY:

The main object of the present study is to examine the overall efficiency of the management of liquidity in selected company. More specifically it seeks to dwells upon mainly the following issues:

a) To measure and evaluate the efficiency of liquidity management by using the ratio analysis

b) To compare the liquidity position of the company from year to year by applying Motaal's comprehensive test.

c) To explore the liquidity-profitability association;

d) To make some suggestions and specific recommendations for improvement of the liquidity management.

5. HYPOTHESES OF THE STUDY:

The following hypotheses were tested in the study:

Hypothesis-1

H0: Liquidity position has no impact on profitability.

Ha: Liquidity position has a significant impact on profitability.

Hypothesis-2

H0: There is no relationship exists between liquidity and profitability.

Ha: There is a significant relationship exists between liquidity and profitability

6. RESEARCH METHODOLOGY AND DATA BASE:

The present study used the secondary data which have been obtained from the published annual reports of Malappuram Co-operative Spinning Mills Limited, Kerala for the five years period from 2006-to-2011. The data have been suitably rearranged, classified, edited and tabulated according to the requirements of the study. Selected financial ratios, Mootal’s Comprehensive Test, Spearman’s Rank Correlation and Student ‘t’ test was applied to meet the objectives of the study and also to test hypotheses framed.

7. LIMITATION OF THE STUDY:

The present study is limited to five years and is purely based on secondary data which were collected from annual reports of Malappuram Co-operative Spinning Mills Limited, Kerala and the findings cannot be generalized because only limited ratios are calculated based on the financial information given by the company.

8. ANALYSIS AND IMPLICATION:

8.1 The important findings of the study were as under: Efficiency of liquidity management: To measure and evaluate the efficiency of liquidity management of Malappuram Co-operative Spinning Mills Limited, Kerala during the study period the ratio analysis techniques was used. Firstly, to know the efficiency of the liquidity management, the comparison of size of working capital has been assessed and the analysis of liquidity ratios was performed. A picture of the size of working capital and important liquidity ratios of the company have been illustrated in table no.1.

Table no. 1: Size of Working Capital and Ratios of Liquidity Management

YEAR	SIZE OF WC (in Rs)	CR (in times)	ALR (In times)	CATTAR (in times)	CATR (in times)	WCTR (in times)	DTR (in times)
2006-07	3657443.64	1.07	0.003	26	3.98	61.73	68.43
2007-08	-12583817	0.79	0.002	23	4.04	-15.53	45.15
2008-09	-27608113.44	0.64	0.001	23	3.78	-6.5	50.98
2009-10	-24510905.11	0.66	0.004	24	3.27	-8.6	34.72
2010-11	-14635741.40	0.81	0.009	30	5.75	-19.11	24.12
Average	-15136226.6	0.794	0.0038	25	4.164	2.398	44.68
S.D	12282099.57	0.1718	0.0031	2.94	0.9369	33.557	16.777
C.V (%)	81.14	21.60	81.5	11.76	22.50	13.90	37.5

Source: Computed from the annual reports of Malappuram Co-operative Spinning Mill LTd

Note: S.D = Standard Deviation; C.V = Co-Variance; WC = Working Capital; CR = Current Ratio; ALR = Absolute Liquidity Ratio; CATTAR = Current Assets to Total Assets Ratio; CATR = Current Asset Turnover Ratio; WCTR = Working Capital Turnover Ratio; DTR = Debtors Turnover Ratio; ACP = Average Collection Period.

8.2 Size of working capital:

Greater the amount of net working capital, the greater in the liquidity. The above table no:1 shows that Malappuram Co-operative Spinning Mills Limited, Kerala had both positive and negative working capital throughout the period of study and the quantum of working capital showed a decreasing trend. Compared to past, the present working capital is unsatisfactory in the study period. The standard deviation is Rs 12282099.57 and the coefficient variance was 81.14. The average size of working capital was Rs -15136226.6 which shows that the liquidity position of the company is not good.

8.3 Current Ratio:

table no:1 shows that during 2006-07 current ratio was 1.7 times which indicates that for every current liability, the company equal current assets. Later in 2007-08, it has been decreased to 0.79 times. Later again it shows a decreasing trend. It indicates that the company's liquidity position is not well. It has less current assets rather than the standard norm of 2:l. So, current asset ratio is not satisfactory during the study period.

8.4 Absolute liquidity ratio:

The Absolute liquidity ratio's Standard ratio is 0.50:1. As per table no:1 the absolute liquidity ratio is less than the standard ratio of 0.5:1, so bad liquidity position with regards to creditors. The company is not maintaining sufficient liquidity funds to meet the creditor's obligation and day-to-day activities.

8.5 Current assets to total assets ratio:

table no:1 show that the mean of current assets to total assets is 25. it indicates that the 25% of the total investment of the company was made for working capital purpose. It shows Company maintains bad liquidity and profitability position. So, it is not satisfactory during the study period. The standard deviation and coefficient of variance was 2.14 and 11.76 respectively.

8.6 Current assets to turn over ratio:

This ratio is applied to measure the turnover and profitability of the total current assets employed to conduct the operation of a firm. The higher the current assets to turn over ratio, better the utilization of current assets. The lower the turnover of the current assets ratio, worse the utilization of current assets. It is observed from table no 1 the average of current assets to turnover ratio was 4.16 times, it means fewer turnovers, so not utilization of current assets properly.

8.7 Working capital turnover ratio:

The working capital turnover ratio shows fluctuations trend and fluctuating between 61.73 times to -19.11 times during the period of study. On the average of the working capital turnover ratio is 2.39. It signifies that the performance of utilization of short term funds is not satisfactory during the period.

8.8 Debtor's turnover ratio:

The debtor's turnover ratio indicates the speed of the debtor's are converted into cash. Generally the higher the turnover, the more efficient is the trade credit management. On the other hand, low debtor's turnover implies inefficient management of debtors and less liquid debtors. Table no:1 reveals that the average of debtors turnover ratio was 44.68 during the study period. it indicates that the performance of debtor's management as well as liquidity of debtors was not good.

9. LIQUIDITY POSITION:

To evaluate the liquidity position of the company, Mootaal’s comprehensive test has been applied.

Table no 2: Statement of liquidity in order of Ranking of Spinning mill

Years	As % to total current assets Liquidity rank
Years	Debtor	Cash	Loans and advances	Inventories	Debtors	Cash	Loans and advances	Inventories	Total rank	Ultimate rank
2006-07	5.82	0.29	22.7	48.45	5	5	4	4	18	5
2007-08	8.86	0.34	27.3	41.11	3	3	2	5	13	3
2008-09	7.41	0.30	25.8	56.69	4	4	3	1	12	4
2009-10	12.61	0.65	27.9	51.94	2	2	1	3	8	1
2010-11	17.70	1.21	21.4	54.81	1	1	5	2	9	2

(Source: Computed from the annual reports of Malappuram Co-operative Spinning Mill LTd.)

Table no 3: Rank Correlation between Liquidity and Profitability

Year	Current Asset to Total Asset (in times)	Liquidity Rank	Return on Capital Employed	Profitability Rank	Rank's Difference	D^2
2006-07	26	2	-0.57	1	1	1
2007-08	23	4.5	-9.41	5	0.5	0.25
2008-09	23	4.5	-8.61	4	0.5	0.25
2009-10	24	3	-1.77	3	0	0
2010-11	30	1	-1.59	2	1	1
Correlation Coefficient (r) = 0.8720

(Source: Computed from the annual reports of Malappuram Co-operative Spinning Mill LTd.)

Table no.: 3 illustrates correlation results calculated for liquidity and profitability of Malappuram Co-operative Spinning Mills Limited, Kerala, which revealed that there is a high positive correlation between liquidity and profitability since the correlation coefficient value was found to be 0.8720.

The significance of correlation coefficient (r_s) was tested through student ‘t’ test and the results are illustrated as under:

Table no. 4: Results of t-Test

Hypothesis	H0: There is no relationship exists between liquidity and profitability. Ha: There is a significant relationship exists between liquidity and profitability.
Type of test	Two-tailed test
Level of significance	α =0.05
Test statistic	r_s= r x √(n-1) r_s= 1.74
Calculated value (r_s)	1.74
Table value (r _0.05)	0.9000

(Source: Computed from the annual reports of Malappuram Co-operative Spinning Mill Ltd.)

From the above table no.: 4, it is confirmed that there is significant relationship between liquidity and profitability. Hence we reject the null hypothesis (H₀) and conclude that liquidity and profitability are dependent on each other.

11. SUGGESTIONS:

 The company maintains sufficient cash in hand, cash at bank and marketable securities to meet the creditors obligation and day to day operations.

 As per current asset to turn over ratio the company not utilizes current assets in proper way. Hence, the company should take necessary steps for utilization of current assets.

 The structural determinants of working capital of the company reveal that the debtor's contributed was the highest to the gross working capital. So, the management should put more stress on the recovery of debts to reduce the number of days its debtors are outstanding.

 Working capital turnover ratio is to measure the efficiency of the utilization of net working capital. During the study period it is not satisfactory. So the company utilizes short term funds effectively in order to increasing the sales of the firm.

12. CONCLUSION

Liquidity management is a concept which is receiving serious attention all over the world especially with the current financial conditions in the economies across the world. Profitability and liquidity are the most prominent issues in the corporate finance literature. The ultimate goal for any firm is to maximize profitability and long term sustainability. This study empirically examines the relationship between profitability and liquidity for the selected company. Correlation analysis, students ‘t’ test and Mootal’s comprehensive test were used in the analysis and findings suggest that there is significant relationship between the firm’s profitability and its liquidity level.

13. REFERENCES:

1. Amit K. Mallik, Debashish Sur and Debdas Rakshit, (2005) "Working capital and Profitability: A study on their relationship with References to Selected Companies in Indian Pharmaceutical Industry", GITAM Journal of Management, Vol 3, Pp. 51-62.

2. Kim, C.S., Mauer, D.S. And Sherman, A.E..(1998) "The Determinants of Corporate Liquidity Theory and Evidence", Journal of financial and quantitative analysis, Vol 33,Pp.335-359.

3. Murthy (2010), First Edition, Financial Management, Margham publications, Chennai.

4. Raheman, A and Nasr, M.., (2007), "Working Capital Management and Profitability- Case of Pakistani Firms', International Review of Business Research Papers, Vol 3, Pp. 279-300.

5. Srinivasan N.P and M. Sakthivel Murugan (2006), Financial Management, Vrinda Publications (P) Ltd., New Delhi.

6. Viswanathan. P.K, Business Statistics: An Applied Orientation, Pearson Education

7. Hirigoyen, G. (1985). Rentabilité Et Solvabilité. Direction et Gestion, 3, 13-26

8. Eljelly, A. (2004). Liquidity – profitability tradeoff: an empirical investigation in an emerging market. IJCM, 14 (2), 48-61.

9. Annual reports of Malappuram Co-operative Spinning Mills Limited, Kerala

Received on 11.01.2014 Modified on 08.04.2014

Asian J. Management 5(3): July-September, 2014 page 354-358