PROJECT REPORT ON

“WORKING CAPITAL”

A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE AWARD OF DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

(FINANCIAL MANAGEMENT)

TO
BARKATULLAH UNIVERSITY
BHOPAL

2008-2010

SUBMITTED BY
BHAWNA SONAIKAR

ORGANISATIONAL GUIDE: INSTITUTIONAL

GUIDE
Mr. Mukul Chinchalkar Miss Agnes Peter Belly
(FACULTY)

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 ACKNOWLEDGEMENT
Success is the outcome of diligence & perseverance, I, Bhawna Sonaikar,

student of Third semester MBA programmed, would, like to ascribe to my

success in completing my summer project’ “Working Capital” to Miss

Agnes Peter Belly and to my project supervisor Mr.Mukul Chinchalkar who

have extended their sincere help in accomplishing my project. I really want

to thank the above mentioned persons for their continuous support &

guidance during the project, with out their help my project would have been

a distant dream.

Bhawna Sonaikar

(Projectee)

MBA II SEM

SIST BHOPAL

2
 DECLARATION

I am Bhawna Sonaikar of MBA II semester of Shree Institute of Science &

Technology Bhopal hereby declare that the project report entitled Working

Capital the outcome of my own work and the same has not been submitted

to any University / Institute for the award of any degree or any professional

diploma.

Bhawna Sonaikar

MBA II SEM

SIST, BHOPAL

INTRODUCTION OF WORKING CAPITAL

3
The net working capital of business is its current assets less its current

liabilities.

Current Assets include:

• Stock of Raw Material

• Work in Progress

• Finished Goods

• Trade Debtors

• Prepayments

• Cash Balances

Current Liabilities include:

• Trade Creditors

• Accruals

• Taxation Payable

• Dividends Payable

• Short term Loans

Every business needs adequate liquid resources in order to maintain day to

day cash flows. It needs enough cash to by wages and salaries as they fall

4
due and to pay creditors if it is to keep its workforce and ensure its

supplies. Maintaining adequate working capital; is not just important in the

short term.

Sufficient liquidity must be maintained in order to ensure the survival

of business in the long term as well. Even a profitable business may fail if

it does not have adequate cash flows to meet its liabilities as tyhey fall a

due. Therefore when business make investment decisions they must not

only consider the financial outlay involved with acquiring the new

machine or the new building etc, but must also take account of the

additional current assets that are usually involved with any expansion of

activity .

Increase production tends to engender a need to hold additional stocks of

raw material & work in progress.

Increased sales usually mean that the level of debtor will increase. A

general increase in the firm’s scales of operation tends to imply a need for

greater level of cash.

5
 INTRODUCTION OF COMPANY

The introduction of company can be described in two parts:

• Company Details

• Company Overview

Company Details:

Company Name: United Engineering Services

(Material Handling Equipments)

Address: Plot No. K-1, Sector – ‘A’,

Sanver Road, Industrial Estate,

Indore (M.P) – 452015

Telephone: 0731-6538578, 272030

Mobile: 09826077201

Email: solidconvey@indiatimes.com

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 COMPANY OVERVIEW

United Engineering Services was incorporated in the year of 1988 at

Indore, Madhya Pradesh ever since its inception it has be nurtured by the

multitalented personality of respected CEO, Mr. Mukul Chinchalkar.

Under his experienced and motivating headship the company has been

leading exporters of material handing equipments like stone crushers and

industrial feeders. The below mentioned feature of company have

constantly help standardize among the most distinguish stone crushers

supply in India.

QUALITY ASSURANCE: To ensure the quality of products, the

company follow a standard quality control system and maintain strict vigil

throughout the production process. The company has promptly inspect of

the quality of raw materials used at our manufacturing unit. Further the

finished products are again scrutinized by our quality control inspection to

prevent any sub standard product to reach the hands of the customer. In

addition to it the company take pride to acquire with the fact that the

company have not received any complaints from the customers.

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TEAM: The company thrives on the mutual efforts of highly committed

team of engineers technicians, quality, supervisors etc. they are matchless

experts of their own fields who within the sincere efforts have modeled

our company into and overdriving entity of the market. They have acquired

sound knowledge and understanding of the industry and render their

services accordingly.

CUSTOMERBASE: Due to the fact that quality is tradition at company

and to show the tradition, the company have professional companionship

of the country’s renowned companies like that of BHEL, TATA, BIRLA

etc.and many more.

In addition to that the market is also spread in the countries such as Gulf,

Middle East, and East Asia. And due to this, the company is an all

industrial spare manufacture of the country.

Name of CEO: Mr. Mukul Chinchalkar

Establishment: 1988

Primary Business Type: Manufactures and Exporters

Market Cover: Gulf, Middle East, East Asia

Products offer: Pre cleaner, Bucket Elevators, Industrial Feeders,

Industrial Crushers, Industrial spare and Industrial Conveyors..

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RANGE: The Company manufacturing and offering wide range of

material handling conveyors & subsystem manufacturing from high quality

material, the range is known for its high operational efficiency and long

lasting functional services. The range has wide application area that

includes fertilizers, food processing, automobiles, flow mills, distillates

and many more fields. Beside designing & manufacturing the company has

also offering services relating to installations commissioning as per client

requirements the range includes:

• Belt Conveyors

• Bucket Elevators

• Screw Conveyors

• Crushers

• Feeders

• Belt feeders

• Control gate

• Belt flow Conveyors

• Roller Conveyors.

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PRODUCTS: Hence described earlier the following products are in the

usual manufacturing range:

1. Rollers for belt Conveyors

2. Rollers for Roller conveyors

3. Pulleys for Belt Conveyors

In general the rollers are of variety of lengths for different applications.

According to the width of conveyors belts and the roller conveyors

applications these are normally of following divators and lengths. The

below mentioned table is a brief description. These are some rollers which

are either of rubber lugging or with the rubber rings.

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 RESEARCH METHODOLOGY

STATEMENT OF PROJECT

 Evaluation, analysis & interpretation of working capital management

of United Engineering Services.

 Suggesting ways to improve its working capital utilization.

OBJECTIVE OF RESEARCH

 Estimation of working capital requirement

 Evaluation of working capital management

 Evaluation of Liquidity position & working capital utilization

 Analysis of relationship between working capital and profitability

 Analysis & sources of working capital

 Analyzing the level of current assets with relation to current liabilities.

11
COLLECTION OF DATA:

 Data has been collected from various sources like:

 Annual reports of last three years

 Manual of concerned departments

 Consultants and personnel of United Engineering Services.

 Internet sites like www.google.com,

www.solidconeyor@indiatimes.com

METHODS OF QUANTATIVE ANALYSIS

 Calculation of net working capital requirements.

 Ratio analysis

 Operating cycle & cash cycle

 Cash flow analysis

 Determining the Financing mix

 Statistical tools like graphical presentation

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ASSUMPTIONS

 Year is taken of 365 days

 All purchases have been taken as credit purchases and all sales have

been taken as credit sales.

 In the absence of relevant data the data from internet site is taken as

the relevant information.

LIMITATIONS

 The data is mostly secondary in nature

 Data has been recalculated & regrouped wherever necessary

 In the absence of sufficient data personnel judgment have been taken

on reasonable assumption.

 In the absence of sufficient data in-depth study of cash, Receivables

and inventory management was not possible.

13
 THEORY OF WORKING CAPITAL

MEANING OF WORKING CAPITAL:

Capital required for a business can be classifies under two main categories:

• Fixed Capital

• Working Capital

Every business needs funds for two purposes for its establishments and to

carry out day to day operations. Long term funds are required to create

production facilities through purchase of fixed assets such as plant and

machinery, land and building, furniture etc. Investments in these assets are

representing that part of firm’s capital which is blocked on a permanent or

fixed basis and is called fixed capital. Funds are also needed for short term

purposes for the purchasing of raw materials, payments of wages and other

day to day expenses etc. These funds are known as working capital. In

simple words, Working capital refers to that part of the firm’s capital which

is required for financing short term or current assets such as cash,

marketable securities, debtors and inventories.

CONCEPTS OF WORKING CAPITAL:

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There are two concepts of working capital:

• Balance Sheet concepts

• Operating Cycle or circular flow concept

BALANCE SHEET CONCEPT:

There are two interpretation of working capital under the balance sheet

concept:

• Gross Working Capital

• Net Working Capital

The term working capital refers to the Gross working capital and represents

the amount of funds invested in current assets . Thus, the gross working

capital is the capital invested in total current assets of the enterprises.

Current assets are those assets which are converted into cash within short

periods of normally one accounting year. Example of current assets is:

Constituents of Current Assets:

• Cash in hand and Bank balance

• Bills Receivable

• Sundry Debtors

• Short term Loans and Advances

• Inventories of Stock as:

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  Raw Materials

 Work in Process

 Stores and Spaces

 Finished Goods

• Temporary Investments of Surplus Funds

• Prepaid Expenses

• Accrued Incomes

The term working capital refers to the net working capital. Net working

capital is the excess of current assets over current liabilities or say:

Net Working Capital = Current Assets – Current Liabilities.

NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:

When the current assets exceed the current liabilities, the working capital is

positive and the negative working capital results when the current liabilities

are more than the current assets. Current liabilities are those liabilities which

are intended to be paid in the ordinary course of business within a short

period of normally one accounting year of the current assets or the income of

the business. Examples of current liabilities are:

CONSTITUENTS OF CURRENT LIBILITIES:

• Bills Payable

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 • Sundry Creditors or Account Payable

• Accrued or Outstanding Expenses

• Short term Loans, Advances and Deposits

• Dividends Payable

• Bank Overdraft

• Provision for Taxation, If does not amount to appropriation of profits

The gross working capital concept is financial or going concern concept

whereas net working capital is an accounting concept of working capital.

OPERATING CYCLE OR CIRCULATING CASH FORMAT:

Working Capital refers to that part of firm’s capital which is

required for financing short term or current assets such as cash,

marketable securities, debtors and inventories. Funds thus invested

in current assets keep revolving fast and being constantly

converted into cash and these cash flows out again in exchange for

other current assets. Hence it is also known as revolving or

circulating capital. The circular flow concept of working capital is

17
based upon this operating or working capital cycle of a firm. The

cycle starts with the purchase of raw material and other resources

And ends with the realization of cash from the sales of finished

goods. It involves purchase of raw material and stores, its

conversion into stocks of finished goods through work in progress

with progressive increment of labor and service cost, conversion of

finished stocks into sales, debtors and receivables and ultimately

realization of cash and this cycle continuous again from cash to

purchase of raw materials and so on. The speed/ time of duration

required to complete one cycle determines the requirements of

working capital longer the period of cycle, larger is the

requirement of working capital.

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Receivable conversion period Raw material storage
(RCP) conversion period (RMSCP)

Cash received form

Debtors and paid to suppliers
Of raw materials

Sales of finished Raw materials

Goods introduced into process

Finished Goods
Produced

Finished goods conversion Work in process

Period (FGCP) Conversion period
(WIPCP)

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 The gross operating cycle of a firm is equal to the length of the inventories

and receivables conversion periods. Thus,

Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP

Where,

RMCP = Raw Material Conversion Period

WIPCP = Work –in- Process Conversion Period

FGCP = Finished Goods Conversion Period

RCP = Receivables Conversion Period

However, a firm may acquire some resources on credit and thus defer

payments for certain period. In that case, net operating cycle period can be

calculated as below:

Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period

Further, following formula can be used to determine the conversion periods.

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  Raw Material Conversion Period = Average Stock of Raw Material.

Raw Material Consumption per day

 Work in process Conversion Period = Average Stock of Work-in-Progress

Total Cost of Production per day

 Finished Goods Conversion Period = Average Stock of Finished Goods

Total Cost of Goods sold per day

 Receivables Conversion Period = Average Accounts Receivables

Net Credit Sales per day

 Payable Deferral Period = Average Payable

Net Credit Purchase per day

CLASSIFICATION OR KIND OF WORKING CAPITAL:

Working capital may be classified in two ways:

• On the basis of concept

• On the basis of time

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 Om the basis of concept, working capital is classified as gross working

capital and net working capital. The classification is important from the

point of view of the financial manager.

On the basis of time, working capital may be classified as:

• Permanent or Fixed working capital

• Temporary or Variable working capital.

t Kinds of Working Capital

On the basis of concept On the basis of time

Permanent or Temporary or
Gross Working Fixed Working Variable Working
Capital Net Working Capital Capital
Capital

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 Regular Reserve Working Special Working
Working Capital Capital Capital

Seasonal Working
Capital

1. PERMANENT OR FIXED WORKING CAPITAL:

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Permanent or fixed working capital is the minimum amount which is

required to ensure effective utilization of fixed facilities and for maintaining

the circulation of current assets. There is always a minimum level of current

assets which is continuously required by the enterprises to carry out its

normal business operations.

2. TEMPRORAY OR VARIABLE WORKING CAPITAL:

Temporary or variable working capital is the amount of working capital

which is required to meet the seasonal demands and some special

exigencies.Varibles working capital can be further classified as second

working capital and special working capital. The capital required to meet the

seasonal needs of the enterprises is called the seasonal working capital.

Temporary working capital differs from permanent working capital in the

sense that is required for short periods and cannot be permanently employed

gainfully in the business

IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING

CAPITAL:

Working capital is the life blood and nerve centre of a business . just a

circulation of a blood is essential in the human body for maintaining life,

working capital is very essential to maintain the smooth running of a

business. No business can run successfully without an adequate amount of

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working capital. The main advantages of maintaining adequate amount of

working capital are as follows:

• Solvency of the Business

• Goodwill

• Easy Loans

• Cash discounts

• Regular supply of Raw Materials

• Regular payments of salaries, wages & other day to day commitments.

• Exploitation of favorable market conditions

• Ability of crisis

• Quick and regular return on investments

• High morals

THE NEED OR OBJECTS OF WORKING CAPITAL:

The need for working capital cannot be emphasized. Every business needs

some amount of working capital. The need of working capital arises due to

the time gap between production and realization of cash from sales. There is

an operating cycle involved in the sales and realization of cash. There are

time gaps in purchase of raw materials and production, production and sales,

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And sales, and realization of cash, thus , working capital is needed for the

following purposes:

 For the purchase of raw materials , components and spaces

 To pay wages and salaries

 To incur day to day expenses and overhead costs such as fuel, power

and office expenses etc.

 To meet the selling costs as packing, advertising etc.

 To provide credit facilities to the customers.

 To maintain the inventories of raw materials, work –in- progress,

stores and spares and finished stock.

FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT:

The working capital requirements of a concern depend upon a large number

of factors such as nature and size of the business, the characteristics of their

operations, the length of production cycle , the rate of stock turnover and the

state of economic situation. However the following are the important factors

generally influencing the working capital requirements.

 NATURE OR CHARACTERSTICS OF A BUSINESS: The

nature and the working capital requirement of enterprises are

interlinked. While a manufacturing industry has a long cycle of

operation of the working capital, the same would be short in an

26
 enterprises involve in providing services. The amount required also

varies as per the nature, an enterprises involved in production would

required more working capital then a service sector enterprise.

 MANAFACTURE PRODUCTION POLICY: Each enterprises in

the manufacturing sector has its own production policy, some follow

the policy of uniform production even if the demand varies from time

to time and other may follow the principles of demand based

production in which production is based on the demand during the

particular phase of time. Accordingly the working capital

requirements vary for both of them.

 OPERATIONS: The requirement of working capital fluctuates for

seasonal business. The working capital needs of such business may

increase considerably during the busy season and decrease during the

 MARKET CONDITION: If there is a high competition in the

chosen project category then one shall need to offer sops like credit,

immediate delivery of goods etc for which the working capital

requirement will be high. Otherwise if there is no competition or less

competition in the market then the working capital requirements will

be low.

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 AVABILITY OF RAW MATERIAL: If raw material is readily

available then one need not maintain a large stock of the same thereby

reducing the working capital investment in the raw material stock . On

other hand if raw material is not readily available then a large

inventory stocks need to be maintained, there by calling for

substantial investment in the same.

 GROWTH AND EXAPNSION: Growth and Expansions in the

volume of business result in enhancement of the working capital

requirements. As business growth and expands it needs a larger

amount of the working capital. Normally the needs for increased

working capital funds processed growth in business activities.

 PRICE LEVEL CHANGES : Generally raising price level require a

higher investment in the working capital. With increasing prices, the

same levels of current assets needs enhanced investments.

 MANAFACTURING CYCLE: The manufacturing cycle starts with

the purchase of raw material and is completed with the production of

finished goods. If the manufacturing cycle involves a longer period

28
 the need for working capital would be more. At time business needs to

estimate the requirement of working capital in advance for proper

control and management. The factors discussed above influence the

quantum of working capital in the business. The assessment of the

working capital requirement is made keeping this factor in view. Each

constituents of the working capital retains it form for a certain period

and that holding period is determined by the factors discussed above.

So for correct assessment of the working capital requirement the

duration at various stages of the working capital cycle is estimated.

Thereafter proper value is assigned to the respective current assets,

depending on its level of completion. The basis for assigning value to

each component is given below:

COMPONENTS OF WORKING
CAPITAL
Stock of Raw Material
Stock of Work -in- Process
Stock of finished Goods
Debtors
Cah
BASIS OF VALUATION
Purchase of Raw Material
At cost of Market value which is lower
Cost of Production
Cost of Sales or Sales Value
Working Expenses

Each constituent of the working capital is valued on the basis of valuation

Enumerated above for the holding period estimated. The total of all such

valuation becomes the total estimated working capital requirement.

29
 The assessment of the working capital should be accurate even in the case

of small and micro enterprises where business operation is not very large.

We know that working capital has a very close relationship with day-to-day

operations of a business. Negligence in proper assessment of the working

capital, therefore, can affect the day-to-day operations severely. It may lead

to cash crisis and ultimately to liquidation. An inaccurate assessment of the

working capital may cause either under-assessment or over-assessment of

the working capital and both of them are dangerous.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY:

The following are the general principles of a sound working capital

management policy:

PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY

PRINCIPLES OF PRINCIPLES OF PRINCIPLES OF PRINCIPLES OF

RISK COST OF EQUITY MATURITY OF
VARIATIONS CAPITAL PRINCIPLES PAYMENTS

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1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):

Risk here refers to the inability of a firm to meet its obligations as and when

they become due for payment. Larger investment in current Assets with less

dependence on short term borrowings, increase liquidity, reduces risk and

thereby decreases the opportunity for gain or loss. On the other hand less

investments in current assets with greater dependence on short term

borrowings, reduces liquidity and increase profitability. In other words there

is a definite inverse relationship between the degree of risk and profitability.

In other words, there is a definite inverse relationship between the risk and

profitability. A conservative management prefers to minimize risk by

maintaining a higher level of current assets or working capital while a liberal

management assumes greater risk by reducing working capital. However, the

goal of management should be to establish a suitable trade off between

profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL: The various source of raising

working capital finance have different cost of capital and the degree of risk

involved. Generally, higher and risk however the risk lower is the cost and

lower the risk higher is the cost. A sound working capital management

should always try to achieve a proper balance between these two.

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3.PRINCIPLE OF EQUITY POSITION: The principle is concerned with

planning the total investments in current assets. According to this principle,

the amount of working capital invested in each component should be

adequately justified by a firm’s equity position. Every rupee invested in

current assets should contribute to the net worth of the firm. The level of

current assets may be measured with the help of two ratios:

1. Current assets as a percentage of total assets and

2. Current assets as a percentage of total sales

While deciding about the composition of current assets, the financial

manager may consider the relevant industrial averages.

4. PRINCIPLES OF MATURITY OF PAYMENT: The principle is

concerned with planning the source of finance for working capital.

According to the principles, a firm should make every effort to relate

maturities of payment to its flow of internally generated funds. Maturity

pattern of various current obligations is an important factor in risk

assumptions and risk assessments. Generally shorter the maturity schedule

of current liabilities in relation to expected cash inflows, the greater the

inability to meet its obligations in time.

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CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:

 Growth may be stunted. It may become difficult for the enterprises to

undertake profitable projects due to non availability of working

capital.

 Implementations of operating plans may brome difficult and

consequently the profit goals may not be achieved.

 Cash crisis may emerge due to paucity of working funds.

 Optimum capacity utilization of fixed assets may not be achieved due

to non availability of the working capital.

The business may fail to honour its commitment in time thereby adversely

affecting its creditability. This situation may lead to business closure.

The business may be compelled to by raw materials on credit and sell

finished goods on cash. In the process it may end up with increasing cost of

purchase and reducing selling price by offering discounts . both the situation

would affect profitable adversely.

Now avaibility of stocks due to non availability of funds may result in

production stoppage. While underassessment of working capital has

disastrous implications on business overassesments of working capital also

has its own dangerous.

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CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING

CAPITAL:

 Excess of working capital may result in un necessary accumulation of

inventories.

 It may lead to offer too liberal credit terms to buyers and very poor

recovery system & cash management.

 It may make management complacent leading to its inefficiency.

 Over investment in working capital makes capital less productive and

may reduce return on investment.

Working Capital is very essential for success of business & therefore needs

efficient management and control. Each of the components of working

capital needs proper management to optimize profit.

INVENTORY MANAGEMNT: Inventory includes all type of stocks. For

effective working capital management, inventory needs to be managed

effectively. The level of inventory should be such that the total cost of

ordering and holding inventory is the least. Simultaneously stock out costs

should be minimized. Business therefore should fix the minimum safety

stock level reorder level of ordering quantity so that the inventory costs is

reduced and outs management become efficient.

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RECEIVABLE MANAGEMENT: Given a choice, every business would

prefer selling its produce on cash basis. However, due to factors like trade

policies , prevailing market conditions etc. Business are compelled to sells

their goods on credit. In certain circumstances a business may deliberately

extend credit as a strategy of increasing sales. Extending credit means

creating current assets in the form of debtors or account receivables.

Investment in the type of current assets needs proper and effective

management as, it gives rise to costs such as :

 Cost of carrying receivables

35
  Cost of bad debts losses

Thus the objective of any management policy pertaining to accounts

receivables would be to ensure the benefits arising due to the receivables

are more then the costs incurred for the receivables and the gap between

benefit and costs increased resulting in increase profits. An effective

control of receivables

Help a great deal in properly managing it. Each business should therefore try

to find out coverage credit extends to its clients using the below given

formula:

Average Credit = Total amount of receivable

(Extend in days) Average credit sale per day

Each business should project expected sales and expected investments in

receivable based on various factor, which influence the working capital

requirement. From this it would be possible to find out the average credit

days using the above given formula. A business should continuously try

to monitor the credit days and see that the average. Credit offer to clients

is not crossing the budgeted period otherwise the requirement of

investment in the working capital would increase and as a result,

activities may get squeezed. This may lead to cash crisis.

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CASH BUDGET: Cash budget basically incorporates estimates of

future inflow and outflows of cash cover a projected short period of time

which may usually be a year, a half or a quarter year . effective cash

management is facilated if the cash budget is further broken down into

months, weeks or even a daily basis.

There are two components of cash budget are:

1. Cash inflows

2. Cash outflows

The main source for thses flows are given here under:

1. Cash Sales

2. Cash received from debtors

3. Cash received from Loans, deposits etc.

4. Cash receipts other revenue income

5. Cash received from sale of investment or assets.

CASH OUTFLOWS:

1. Cash Purchase

2. Cash payments to Creditors

3. Cash payment for other revenue expenditure

4. Cash payment for assets creation

5. Cash payments for withdrawals, taxes.

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 6. Repayments of Loan etc.

A suggestive for, at for cash budget is given below:

MONTHS
PARTICULARS JANUARY FERBUARY MARCH
Estimated cash inflows
………………………………
………………………………….
I. Total cash inflows
Estimated cash outflows
……………………………..
…………………………..
II. Total cash outflows
III. Opening cash balances
IV. Add/deduct surplus/deflictduring the month ( I-
II)
V. Closing cash balances (III -IV)
VI. Minimum level of cash balance
VII. Estimated excess or short fall of cash (V-VI)

38
 DATA ANALYSIS

WORKING CAPITAL ESTIMATION

Current assets Loans & advances FY 05-06 FY 06-07 FY 07-08

Currents assets
Inventories
stock in trade 223.94 662.87 1176.85
work in progress 2528.4 4563.76 8714.56
raw materials 7224.96 8145.37 9242.58
stores and spare parts 1131.8 1463.13 1810.73
Total Inventories 11109.1 14835.13 20944.72
Debtors 5516.14 7402.6 14211.12

Cash & Bank balances 1027.1 8042.12 5225.01

(subtracting FCCB issue unutilized -6910.46 -5272.52
money as it amounts to long term
liability)
loans and advances 3249.1 7529.5 8647.1
Net current assets 20901.44 30898.89 43755.43
Current Liabilities FY 05-06 FY06-07 FY 07-08

Sundry Creditors 1476.37 1589.57 3748.82

Creditors for capital expenditure 1456.05 365.64 258.4
other liabilities 342.26 645.34 621.04
unclaimed dividend 21.33 31.66 35.29
sundry deposits 174.14 229.23 321.66
advances from customers 217.21 362.59 73.55
interest accrued but not due on loan 7.04 20.05 32.12
Net current liabilities 3694.404 3244.08 5090.88

39
INVENTORIES

In the context of United Engineering Services the major increase in the

present three financial years has been of the inventory.

INVENTORIES

25000

20000
stock in trade
15000 work in progress
raw materials
10000 stores and spare parts
Total Inventories
5000

0
FY 05-06 FY 06-07 FY 07-08

Reasons:

 The pile up of inventory that is used in trial run, before hand to be

used in the checking the machinery & the newly installed production

capacity.

 The increased inventory to produce more goods so as to utilize the

new plant set up

DEBTORS AND AVERAGE RECEIVABLES

The debtors are increasing heavily in the financial year 06-07 because of a

sales boom that has accounted for huge accounts receivables increase.

40
 DEBTORS AND AVERAGE RECEIVABLES

16000
14000
12000
10000
8000 Debtors
6000
4000
2000
0
FY 05-06 FY 06-07 FY 07-08

CASH AND BANK BALANCES

Cash and bank balance as per the balance sheet it is seen to be increasing but

from the above chart it is seen to be decreasing. This discrepancy can be

attributed to the fact that balance sheet figures carry additional cash balance

of unutilized FCCB issue proceeds which amount to long term liability as

well. Thus the actual figures are distorted because the money from FCCB

issue has to be returned and it is a kind of long term loan which the company

has sought for expansion purpose. As a result to find the actual outlay of

cash the unutilized money has been subtracted. Also we should take note of

the fact that the FCCB money can only be used for expansion purpose and

not as money for usual application of working capital.

41
 C AS H & B AN K B ALAN C E

5225.01
FY 07-08

8042.12
FY 06-07 Cash & B ank balanc es

1027.1
FY 05-06

0 2000 4000 6000 8000 10000

LOANS AND ADVANCES

Loans & advances are increasing on the part of increased advances that are

given to pile up inventory when the company went for the expansion mode

42
 LOANS AND ADVANCES

FY 05-06
17%

FY 07-08 FY 05-06
44% FY 06-07
FY 07-08
FY 06-07
39%

CURRENT ASSETS includes cash & those assets which can be easily

converted into cash within a short period generally one year such as

marketable securities , bills receivables, sundry debtors, inventories, work in

progress, prepaid expenses etc .The total current assets are the sum of below

contingency i.e.

Current Assets = Stock/ Inventory + Sundry Debtors + Advances +

Cash and bank balances + other current assets

43
 CURRENT ASSETS

loans and advances

FY 07-08
Cash & Bank balances
Debtors
Total Inventories
FY 06-07
stores and spare parts
raw materials
work in progress
FY 05-06
stock in trade

0 5000 10000 15000 20000 25000

NET CURRENT ASSETS

FY 05-06
22%

FY 07-08
46%

FY06-07
32%

Conclusions: The trend of the current assets in United Engineering Services

throughout the period from 2005-08 are shown in the pie-chart .it is evident

from the table that the current assets in United engineering Services has

increased except in year 2006-07.

44
CURRENT LAIBILITIES

These are those obligations which are payable within a short period of

generally one year and includes outstanding expenses, bills payable, sundry

creditors, accrued expenses, bank overdraft, short term advances, income tax

payable.

TOTAL CURRENT LAIBILITIES

Sundry Creditors
4000
Creditors for capital
3500
expenditure
3000 other liabilities
2500
2000 unclaimed dividend

1500
sundry deposits
1000
500 advances from
0 customers
FY 05-06 FY06-07 FY 07-08 interest accrued but not
due on loan

45
 NET CURRENT LAIBILITIES

6000

5000

4000

3000 Net current liabilities

2000

1000

0
FY 05-06 FY06-07 FY 07-08

Conclusion: The trend of Current Liabilities of United Engineering Services

throughout the period from 2005-2008 are shown in the table. It is evident

from the table that it shows increasing trends in the year 2005 to 2008. It

shows that the United Engineering Services has stability in trends of Current

Liabilities.

CREDITORS AND CREDITORS OF CAPITAL EXPENDITURE

Creditors of United Engineering Services limited are increasing from 70 Cr

(FY 05-06) to 18 Cr (FY 06-07) to 12 Cr (FY 07-08). The main reason for

the increase in can be attributed to the heavy purchase of the inventory for

stocking it up for trial run & use before the expansion mode.

46
Creditors for capital expenditure seem to be decreasing over the three years

i.e. from 18Cr (FY 05-06) to 12 Cr (FY 06-07) which is in sync with the

fact that the expansion work that has been in process and all preparations for

that are coming to an end.

CREDITORS FOR CAPITAL EXPENDITURE

1600
1400
1200
1000 Creditors for capital
800 expenditure
600
400
200
0
FY 05-06 FY06-07 FY 07-08

47
 RATIO ANALYSIS

FY 06-
FY 05-06 07 FY 07-08
47163.7
Current assets 29843.52 2 61410.49
current liabilities 7611.44 6597.95 7459.4
14530.4
quick assets 12759.32 6 20880.64
quick liabilities 7611.44 6597.95 7459.4
Net turnover (sales) 45503 52527.1 81786.93
40565.7
working capital 22232.08 7 53951.09
average inventory (average of opening & 14476.4
closing stock of year) 8594.615 65 22666.83
47018.3
cost of goods sold = cost of sales 37398 1 67855.4
124436.
total assets 87666 12 138465.6
total annual expenses -(depreciation +debt 27364.0
expenses) 37313.16 6 23898.65
63633.3
average gross income 97754.89 7 51858
PROFIT before interest and taxes 5998 8120.16 14612.92
Total interest 747.8 2653.75 5214.77
Net Profit after tax (NPAT) 4115 3893.37 7383.56
106917.
capital employed (FA+CA-CL ) 89529.68 71 111772.7
113515.
investment (FA+CA) 97141.12 66 119232.1
66351.9
Fixed assets 67297.6 4 57821.59

LIQUIDITY RATIOS

CURRENT RATIO

Current ratio is defined as the relationship between current assets and current

liabilities. It is a measure of general liquidity & is most widely used to make

the analysis of short term financial position of a firm. Current ratio is the

48
ratio of current assets to current liabilities. A relatively higher ratio is an

indication that the firm is liquid and has the ability to pay its current

obligations on time. On the other hand a low current ratio indicates that the

Liquidity position of the firm is not good and shall not be able to pay its

current liabilities in time. Current Ratio:

The Current ratio is calculated by dividing current assets by current

liabilities:

Current ratio: Current Assets

Current Liabilities

FIANANCIAL CURRENT CURRENT

YEAR ASSETS LAIBILITIES CURRENT RATIO
FY 2005-2006 29843.52 7611.44 3.92
FY 2006-2007 47163.72 6597.95 7.14
FY2007-2008 61410.49 7459.4 8.23

49
 CURRENT RATIO

20%

43% FY 2005-2006
FY 2006-2007
FY2007-2008

37%

50
 QUICK ASSETS
QUICK
FIANANCIAL YEAR LIABILITITES CURRENT LAIBILITIES QUICK RATIO
FY 2005-2006 12759.32 7611.44 1.67
FY 2006-2007 14530.46 6597.95 2.2
FY2007-2008 20880.64 7459.4 2.78

QUICK RATIO: Quick ratio or liquid ratio is a more rigorous test of

liquidity than the current ratio. The term liquidity refers to the ability of the

firm to pay short term obligations as and when they become due. Quick ratio

may be defined as ration of quick assets to quick liabilities. Liquid assets

include all the current assets excluding inventories & prepaid expenses.

Liquid liabilities mean all liabilities excluding bank overdraft. Inventories &

prepaid expenses are not termed as liquid assets because they cannot be

converted into cash immediately without a loss of value.

51
 QUICK RATIO

25%

42% FY 2005-2006
FY 2006-2007
FY2007-2008

33%

CURRENT SCENERIO INTERPRETATION

While interpreting the figures of both the above ratios we should keep in

mind the following one point

 United Engineering Services is a manufacturing concern

Since it is manufacturing concern the an excess of inventory as compared to

other industry models such as the services sector is an integral fact. As a

result it is bound to have higher current ratio and quick ratio as compared to

other industries.

The sharp rise of current ratio from 20% (FY 05-06) to 37% (FY 06-07) to

43 %( FY 07-08) Can be attributed to

a. Higher pile up of inventory which was to be used up for trial run in

producing new products from the new plant set up.

52
 b. Higher prepaid expenses related to advances given so as to pile up the

inventory so that when the inventory is needed for trial run, it’s

available.

c. An increase in average receivables which was in sync with increased

capacity of production and also increased sales.

An important point to note here is that an excess of cash balance arising out

of idle money coming out of FCCB issue expense has been deducted as

correspondingly it accounts for long term liability (debentures) which have

no effect on working capital management.

The quick ratio is a more important indicator of liquid position of United

Engineering Services as it hardly varies from 25% (FY 06-07) to 33% (FY

07-08). Obviously the effect of inventories has been negated.

EFFICIENCY RATIO

From the perspective of working capital management we would be

discussing three important ratios they are.

 Sales to working capital ratio

 Inventory turnover ratio

 Current assets turnover ratio.

53
SALES TO WORKING CAPITAL RATIO

This ratio is computed by dividing working capital by sales. This ratio helps

to measure efficiency of the utilization of net working capital. It signifies

that for an amount of sales. A relative amount of working capital is needed.

If any increase in sales in contemplated, working capital should be adequate

& thus this ratio helps management to maintain the adequate level of

working capital

Financial Year FY 05-06 FY 06-07 FY 07-08

Sales to working capital
ratio 2.046727 1.294863 1.51595

SALES TO WORKING CAPITAL RATIO

2.046727

2.5 1.515946
1.29486264
2
1.5
1
0.5
0
FY 05-06 FY 06-07 FY07-08

Sales to working capital ratio

54
CURRENT SCENERIO INTERPRETATION

As seen from the above table the ratio has decreased from 2 (FY 05-06)

to 1.29 in (FY 06-07) and then increased to 1.5 (FY 07-08). This ratio is

again indicative of the fact that the year in which the expansion took

place the sales did not match up with the scale of expansion. Otherwise it

would have remained intact and not decreased. The slight increase from

1.29 to 1.51 is indicative of the fact that the full impact of expansion is

being slowly realized & sales are slowly increasing.

INVENTORY TURNOVER RATIO

This ration indicates the effectiveness and efficiency of inventory

management. This ratio is calculated as cost of goods sold: average

inventory shows how speedily the inventory is turned into accounts

receivables through sales. The higher the inventory turnover ratio (also

called stock velocity) the more the efficient inventory management.

Financial Year FY 05-06 FY 06-07 FY07-08

inventory turnover ratio/ stock 4.3513 3.24791
velocity 29 38 2.9936

55
 INVENTORY TURNOVER RATIO

FY07-08

inventory turnover ratio/

FY 06-07
stock velocity

FY 05-06

0 1 2 3 4 5

CURRENT SCENERIO INTERPRETATION

The stock velocity is decreasing subsequently from 4.35 (FY 06-07) to 2.99

(FY 07-08) which shows inefficiency on the part of inventory management.

Partly the reason for the fall can be attributed to stocking up of inventory

for the trail run & using them in testing the expansion mode machinery.

CURRENT ASSETS TURNOVER RATIO

This ratio is indicated by sales upon current assets. This ratio indicates the

efficiency with which the current assets turn into sales & higher current

assets turnover ratio implies by & large a more efficient use of funds in

current assets. Thus, a high turnover rate indicates reduced lock up of funds

56
in current assets. An analysis of this ratio over a period reflects working

capital management of the firm

Financial Year FY 05-06 FY 06-07 FY07-08

current assets turnover
ratio 1.52472 1.11371834 1.331807

CURRENT ASSETS TURNOVER RATIO

1.6 1.52472
1.4 1.331807
1.2 1.11371834
1
0.8 current assets turnover
ratio
0.6
0.4
0.2
0
FY 05-06 FY 06-07 FY07-08

CURRENT SCENERIO INTERPRETATION

The ratio is slightly decreasing from 1.52 (FY 05-06) to 1.11 (FY 06-07)

& then increasing to 1.33 (FY 07-08) which shows that sales increase is

not matched by the increase in current assets in the expansion phase of

United Engineering Services . The reason can be well attributed to the piling

up of trial stock and not full use of the expanded production capacity.

57
OPERATING RATIOS

 Working ratio

 Interest coverage ratios

WORKING RATIO

A ratio used to measure a company's ability to recover operating costs

from annual revenue. This ratio is calculated by taking the company's

total annual expenses (excluding depreciation and debt-related expenses)

and dividing it by the annual gross income. A working ratio below 1

implies that the company is able to recover operating costs, whereas a

ratio above 1 reflects the company's inability to do so.

Financial Year FY 05-06 FY 06-07 FY07-08

working ratio 0.381701 0.43002689 0.460848

58
 WORKING RATIO

FY07-08 0.460848

FY 06-07 0.43002689 working ratio

FY 05-06 0.381701

0 0.1 0.2 0.3 0.4 0.5

CURRENT SCENERIO INTERPRETATION

The ratio consistently has been below 1 which means company can very

well take out its operating costs, though the margin of comfort is slightly

decreasing because of the increase in expenses of the United Engineering

Services

59
 COCLUSION

Working capital management is an important aspect of any business. Every

business concern should have adequate working capital to run its business

operation. Every concern should have neither redundant of excess working

capital nor inadequate or shortage of working capital. Both excess as well as

short working capital positions are bad for any business.

The three elements of working capital management are cash management

receivable management and inventory management. If a finance manager

maintains these three elements of working capital management properly

means the concern will get dramatic improvement in their sales volume and

also in business. Working capital policies of a firm have a great effect on its

profitability, liquidity and structured health of the organization.

Every concern should adopt some new tread management strategies that will

help in greater productivity, inventory optimization and also better working

capital management. So, it is noted that working capital is a means to run

business smoothly and profitability. Thus, the concept of working capital

has its own important in a going concern.

60
Good management of working capital is part of good finance management

effective use of working capital will contribute to the operational efficiency

of a department; optimum use will help to generate maximum return.

United Engineering Services is also using “SAP” 6.0 versions which is very

advanced to do every transaction of any organization. ‘SAP’ 6.0 also

applicable for e-transaction.

61
 BIBLOGRAPHY

 Financial Management theory and practice by Prassanna Chandra

 Financial Management theory and practice by Shashi .K. Gupta &

R.K. Sharma.

 Www. Google.com, www. Wikepidia.com

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 FINDING AND SUGGESTION

• Making available just adequate quantum of working capital. Some of

the existing machinery is new with absolute equipments requiring

modernization and rebuilding.

• The company should administrate their credit on the basis of certain

well recognized and established principle of credit administration.

• The company should maintain an optimum level of cash in the

business in order to maintain a proper liquidity in the business.

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64