WORKING-CAPITAL MANAGEMENT AND PROFITABILITY OF THE CONSTRUCTION SECTOR IN BANGALORE Mihir Dash* INTRODUCTION The construction industry is the second largest industry in India, accounting for approximately 8% of India’s Gross Domestic Product. It is currently worth about $125 billion, and is growing at about 6.5% p.a. The key drivers of this growth are government investment in infrastructure creation and real-estate demand in the residential and industrial sectors. With the present emphasis on creating physical infrastructure, massive investment in excess of $165 billion is proposed in the Twelfth Five Year Plan, and the construction industry would play a crucial role in this regard 1 . The government’s commitments to infrastructure development, especially in the power and road sectors, are likely to add further impetus to the industry’s growth. Construction activity plays an integral part in infrastructure and industrial development. The industry generates substantial employment and provides a major growth impetus to other sectors through backward and forward linkages, including cement, steel, bricks/tiles, sand/aggregates, fxtures/fttings, paints and chemicals, construction equipment, petro- 1 http://planningcommission.gov.in/aboutus/committee/wrk- grp12/transport/report/wg_reports_construction.pdf products, timber, mineral products, aluminum, glass, and plastics 2 . However, there are several fnancial bottlenecks curtailing the smooth growth of the Indian construction industry. The construction industry is highly capital intensive, and construction companies need to have access to funds for meeting contractual commitments. Generally, big construction companies tend to have ready access to fnancing, whereas the small- and medium-scale enterprises still struggle to secure fnancing. There is usually a delay in release of working capital to contractors. The unavailability of short-term bridge fnance and an absence of a system of factoring bills add to the woes of small contractors. Also, construction equipment account for nearly 20% of typical project costs, which is unaffordable for small-scale contractors. There is a need to introduce new construction- specifc fnancing and insurance products due to the industry- specifc risks, particularly for small-scale players. 2 http://planningcommission.gov.in/plans/planrel/fveyr/10th/ volume2/v2_ch7_7.pdf * Professor & Head of Department, Management Science, School of Business, Alliance University, Bangalore, Karnataka, India. Email: mihirda@rediffmail.com Abstract Working-capital management is an important decision in fnancial management, playing a key role in a frm’s fnancial 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 proftability in the construction sector in Bangalore, India. The data for the study were collected from a sample of fve major builders based in Bangalore, and pertains to a study period during 2006-11. The study contributes to the literature by using fxed-effects-panel-regression analysis rather than pooled regression, as the fxed-effects panel regression allows control for company-specifc differences in proftability as well as for year-to-year differences in proftability 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 proftability, viz. average collection period and accounts payable, both of which were found to have signifcant positive impact on proftability. Keywords: Working-Capital Management, Construction Industry, Project Cycle, Average Collection Period, Accounts Payable Journal of Commerce & Accounting Research 7 (4) 2018, 40-46 http://publishingindia.com/jcar/