The effect of the adoption of emerging electronic payments options on improving working capital management and profitability of firms in India

The emergence of electronic payment (EP) options in India, their increasing coverage in terms of number of branches, options and pan-India availability and their phenomenal growth in the last few years are opening up a wonderful opportunity for Indian firms to improve/optimise working capital management (WCM), leading to an increase in the profitability and value. Many studies have shown that efficient WCM has a direct relationship with profitability of the firm. The emerging EP options (and non-EP options as well) help the firm: to improve (or rather reduce) the day’s sales outstanding (DSO) and quickly collect payment, thereby reducing the cash conversion cycle time — an important measure of how efficiently the working capital is managed; to allow timely disbursal of payments, to take advantage of early payment discounts; and to reduce the overall cost associated with these transactions, resulting in optimised working capital requirements and associated benefits. Indian firms can immediately shift to EP (if they have not already done so) and benefit. This paper analyses the impact of efficient WCM on the profitability of firms, discusses the emerging EP options in India and their coverage and growth, and examines how they affect the various aspects of WCM in India — especially in accounts receivable, accounts payable and transaction costs.