WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,
1)

Fixed Capital

2)

Working Capital

Every business needs funds for two purposes for its establishment and to carry
out its day- to-day operations. Long terms funds are required to create
production facilities through purchase of fixed assets such as p&m, land,
building, furniture, etc. Investments in these assets represent that part of firms
capital which is blocked on permanent or fixed basis and is called fixed capital.
Funds are also needed for short-term purposes for the purchase of raw material,
payment 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 firms capital which is required for financing
short- term or current assets such as cash, marketable securities, debtors &
inventories. Funds, thus, invested in current assts keep revolving fast and are
being constantly converted in to cash and this cash flows out again in exchange
for other current assets. Hence, it is also known as revolving or circulating
capital or short term capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1.

Gross working capital

2.

Net working capital

The gross working capital is the capital invested in the total current assets of
the enterprises current assets are those

Assets which can convert in to cash within a short period normally one
accounting year.
CONSTITUENTS OF CURRENT ASSETS
1)

Cash in hand and cash at bank

2)

Bills receivables

3)

Sundry debtors

4)

Short term loans and advances.

5)

Inventories of stock as:

a.

Raw material

b.

Work in process

c.

Stores and spares

d.

Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.

In a narrow sense, the term working capital refers to the net working.
Net working capital is the excess of current assets over current liability,
or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT

LIABILITIES.
Net working capital can be positive or negative. When the current assets
exceeds 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 out of the current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1.

Accrued or outstanding expenses.

2.

Short term loans, advances and deposits.

3.

Dividends payable.

4.

Bank overdraft.

5.

Provision for taxation , if it does not amt. to app. Of profit.

6.

Bills payable.

7.

Sundry creditors.

The gross working capital concept is financial or going concern concept

whereas net working capital is an accounting concept of working capital. Both
the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for
the following reasons:
1.

It enables the enterprise to provide correct amount of working capital at

correct time.

2.

Every management is more interested in total current assets with which

it has to operate then the source from where it is made available.

3.

It take into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.

4.

This concept is also useful in determining the rate of return on

investments in working capital. The net working capital concept,
however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability to

meet to its operating expenses and short-term liabilities.

IT indicates the margin of protection available to the short term

creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital

requirement

out

of

the

permanent

sources

of

funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:
o

On the basis of concept.

On the basis of time.

On the basis of concept working capital can be classified as gross

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

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to

ensure effective utilization of fixed facilities and for maintaining the circulation
of current assets. Every firm has to maintain a minimum level of raw material,
work- in-process, finished goods and cash balance. This minimum level of
current assts is called permanent or fixed working capital as this part of working
is permanently blocked in current assets. As the business grow the requirements
of working capital also increases due to increase in current assets.
TEMPORARY 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. Variable
working capital can further be classified as seasonal working capital and special
working capital. The capital required to meet the seasonal need of the enterprise
is called seasonal working capital. Special working capital is that part of
working capital which is required to meet special exigencies such as launching
of extensive marketing for conducting research, etc.
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.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital

helps in maintaining the solvency of the business by providing
uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to

make prompt payments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and

credit standing can arrange loans from banks and other on easy and
favorable terms.

Cash Discounts: Adequate working capital also enables a concern

to avail cash discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital

ensures regular supply of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day

TO Day Commitments: It leads to the satisfaction of the
employees and raises the morale of its employees, increases their
efficiency, reduces wastage and costs and enhances production and
profits.

Exploitation Of Favorable Market Conditions: If a firm

is having adequate working capital then it can exploit the favorable
market conditions such as purchasing its requirements in bulk when the
prices are lower and holdings its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during

the depression.

Quick And Regular Return On Investments: Sufficient

working capital enables a concern to pay quick and regular of dividends
to its investors and gains confidence of the investors and can raise more
funds in future.

High Morale: Adequate working capital brings an environment of

securities, confidence, high morale which results in overall efficiency in a
business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to
run its business operations. It should have neither redundant or excess
working capital nor inadequate nor shortages of working capital. Both excess
as well as short working capital positions are bad for any business. However,

it is the inadequate working capital which is more dangerous from the point
of view of the firm.
DISADVANTAGES OF
WORKING CAPITAL

REDUNDANT

OR

EXCESSIVE

1.

Excessive working capital means ideal funds which earn no profit

for the firm and business cannot earn the required rate of return on its
investments.

2.

Redundant working capital leads to unnecessary purchasing and

accumulation of inventories.

3.

Excessive working capital implies excessive debtors and defective

credit policy which causes higher incidence of bad debts.

4.

It may reduce the overall efficiency of the business.

5.

If a firm is having excessive working capital then the relations with

banks and other financial institution may not be maintained.

6.

Due to lower rate of return n investments, the values of shares may

also fall.

7.

The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working
capital arises due to the time gap between production and realization of cash
from sales. There is an operating cycle involved in sales and realization of cash.
There are time gaps in purchase of raw material and production; production and
sales; and realization of cash.
Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office

expenses.

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

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress,

stores and spares and finished stock.

For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion and formation etc.
These expenses are called preliminary expenses and are capitalized. The
amount needed for working capital depends upon the size of the company
and ambitions of its promoters. Greater the size of the business unit,
generally larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth
and expensing of the business till it gains maturity. At maturity the amount of
working capital required is called normal working capital.
There are others factors also influence the need of working capital in a
business.
FACTORS DETERMINING
REQUIREMENTS

THE

WORKING

CAPITAL

1. NATURE OF BUSINESS: The requirements of working is

very limited in public utility undertakings such as electricity, water
supply and railways because they offer cash sale only and supply
services not products, and no funds are tied up in inventories and
receivables. On the other hand the trading and financial firms requires

less investment in fixed assets but have to invest large amt. of working
capital along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the
business, greater is the requirement of working capital.
3. PRODUCTION POLICY: If the policy is to keep production
steady by accumulating inventories it will require higher working
capital.
4. LENTH OF PRDUCTION CYCLE: The longer the
manufacturing time the raw material and other supplies have to be
carried for a longer in the process with progressive increment of labor
and service costs before the final product is obtained. So working
capital is directly proportional to the length of the manufacturing
process.
5. SEASONALS VARIATIONS: Generally, during the busy
season, a firm requires larger working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the
working cycle completes one cycle determines the requirements of
working capital. Longer the cycle larger is the requirement of working
capital.

DEBTORS
CASH

RAW MATERIAL

FINISHED GOODS

WORK IN PROGRESS

7.

RATE OF STOCK TURNOVER: There is an inverse corelationship between the question of working capital and the velocity
or speed with which the sales are affected. A firm having a high rate of
stock turnover wuill needs lower amt. of working capital as compared
to a firm having a low rate of turnover.

8.

CREDIT POLICY: A concern that purchases its requirements on

credit and sales its product / services on cash requires lesser amt. of
working capital and vice-versa.

9.

BUSINESS CYCLE: In period of boom, when the business is

prosperous, there is need for larger amt. of working capital due to rise
in sales, rise in prices, optimistic expansion of business, etc. On the
contrary in time of depression, the business contracts, sales decline,
difficulties are faced in collection from debtor and the firm may have a
large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing

concern, we shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some
firms have more earning capacity than other due to quality of their
products, monopoly conditions, etc. Such firms may generate cash
profits from operations and contribute to their working capital. The
dividend policy also affects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its
profits needs working capital than the firm that retains larger part of its
profits and does not pay so high rate of cash dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also
affect the working capital requirements. Generally rise in prices leads
to increase in working capital.
Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises
in attempting to manage the current assets, current liabilities. The basic
goal of working capital management is to manage the current assets and
current liabilities of a firm in such a way that a satisfactory level of
working capital is maintained, i.e. it is neither adequate nor excessive as
both the situations are bad for any firm. There should be no shortage of
funds and also no working capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES of a firm has a great on its probability,
liquidity and structural health of the organization. So working capital
management is three dimensional in nature as
1.

It concerned with the formulation of policies with regard to

profitability, liquidity and risk.

2.

It is concerned with the decision about the composition and level of

current assets.

3.

It is concerned with the decision about the composition and level of

current liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business.
Adequate amount of working capital is very much essential for the
smooth running of the business. And the most important part is the
efficient management of working capital in right time. The liquidity
position of the firm is totally effected by the management of working
capital. So, a study of changes in the uses and sources of working capital
is necessary to evaluate the efficiency with which the working capital is
employed in a business. This involves the need of working capital
analysis.
The analysis of working capital can be conducted through a number of
devices, such as:
1.

Ratio analysis.

2.

Fund flow analysis.

3.

Budgeting.

1.

RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The

technique of ratio analysis can be employed for measuring short-term
liquidity or working capital position of a firm. The following ratios can
be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio

4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.

2.

FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the

source from which additional funds were derived and the use to which
these sources were put. The fund flow analysis consists of:

a.

Preparing schedule of changes of working capital

b.

Statement of sources and application of funds.

It is an effective management tool to study the changes in financial

position (working capital) business enterprise between beginning and
ending of the financial dates.

3.

WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans

and polices to be pursued in the future period time. Working capital
budget as a part of the total budge ting process of a business is prepared
estimating future long term and short term working capital needs and

sources to finance them, and then comparing the budgeted figures with
actual performance for calculating the variances, if any, so that corrective
actions may be taken in future. He objective working capital budget is to
ensure availability of funds as and needed, and to ensure effective
utilization of these resources. The successful implementation of working
capital budget involves the preparing of separate budget for each element
of working capital, such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT TERM FINANCIAL POSITION

OR TEST OF LIQUIDITY
The short term creditors of a company such as suppliers of goods of
credit and commercial banks short-term loans are primarily interested to
know the ability of a firm to meet its obligations in time. The short term
obligations of a firm can be met in time only when it is having sufficient
liquid assets. So to with the confidence of investors, creditors, the
smooth functioning of the firm and the efficient use of fixed assets the
liquid position of the firm must be strong. But a very high degree of
liquidity of the firm being tied up in current assets. Therefore, it is
important proper balance in regard to the liquidity of the firm. Two
types of ratios can be calculated for measuring short-term financial
position or short-term solvency position of the firm.
1.

Liquidity ratios.

2.

Current assets movements ratios.

A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as
and when these become due. The short-term obligations are met by

realizing amounts from current, floating or circulating assts. The current

assets should either be liquid or near about liquidity. These should be
convertible in cash for paying obligations of short-term nature. The
sufficiency or insufficiency of current assets should be assessed by
comparing them with short-term liabilities. If current assets can pay off
the current liabilities then the liquidity position is satisfactory. On the
other hand, if the current liabilities cannot be met out of the current
assets then the liquidity position is bad. To measure the liquidity of a
firm, the following ratios can be calculated:
1.

CURRENT RATIO

2.

QUICK RATIO

3.

ABSOLUTE LIQUID RATIO

1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of
general liquidity and its most widely used to make the analysis of shortterm financial position or liquidity of a firm. It is defined as the relation
between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1)

CURRENT ASSETS

2)

CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables,

sundry debtors, inventories and work-in-progresses. Current liabilities
include outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and
has the ability to pay its current obligations in time. On the hand a low
current ratio represents that the liquidity position of the firm is not good
and the firm shall not be able to pay its current liabilities in time. A ratio
equal or near to the rule of thumb of 2:1 i.e. current assets double the
current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)
e.g.

Year

2011

2012

2013

Current Assets

81.29

83.12

13,6.57

Current Liabilities

27.42

20.58

33.48

Current Ratio

2.96:1

4.03:1

4.08:1

Interpretation:As we know that ideal current ratio for any firm is 2:1. If we see the
current ratio of the company for last three years it has increased from
2011 to 2013. The current ratio of company is more than the ideal ratio.

This depicts that companys liquidity position is sound. Its current

assets are more than its current liabilities.
2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick
ratio may be defined as the relationship between quick/liquid assets and
current or liquid liabilities. An asset is said to be liquid if it can be
converted into cash with a short period without loss of value. It
measures the firms capacity to pay off current obligations immediately.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1)

Marketable Securities

2)

Cash in hand and Cash at bank.

3)

Debtors.

A high ratio is an indication that the firm is liquid and has the ability to
meet its current liabilities in time and on the other hand a low quick
ratio represents that the firms liquidity position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally
thought that if quick assets are equal to the current liabilities then the
concern may be able to meet its short-term obligations. However, a firm
having high quick ratio may not have a satisfactory liquidity position if
it has slow paying debtors. On the other hand, a firm having a low
liquidity position if it has fast moving inventories.
CALCULATION OF QUICK RATIO

e.g.

(Rupees in Crore)

Year

2011

2012

2013

Quick Assets

44.14

47.43

61.55

Current Liabilities

27.42

20.58

33.48

Quick Ratio

1.6 : 1

2.3 : 1

1.8 : 1

Interpretation :
A quick ratio is an indication that the firm is liquid and has the
ability to meet its current liabilities in time. The ideal quick ratio is
1:1. Companys quick ratio is more than ideal ratio. This shows
company has no liquidity problem.
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more
liquid than inventories, yet there may be doubts regarding their
realization into cash immediately or in time. So absolute liquid ratio
should be calculated together with current ratio and acid test ratio so as
to exclude even receivables from the current assets and find out the
absolute liquid assets. Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO =

ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g.

(Rupees in Crore)

Year

2011

2012

2013

Absolute Liquid Assets

4.69

1.79

5.06

Current Liabilities

27.42

20.58

33.48

Absolute Liquid Ratio

.17 : 1

.09 : 1

.15 : 1

Interpretation :
These ratio shows that company carries a small amount of cash. But
there is nothing to be worried about the lack of cash because company
has reserve, borrowing power & long term investment. In India, firms
have credit limits sanctioned from banks and can easily draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and
earn profits. The efficiency with which assets are managed directly
affects the volume of sales. The better the management of assets, large
is the amount of sales and profits. Current assets movement ratios
measure the efficiency with which a firm manages its resources. These
ratios are called turnover ratios because they indicate the speed with
which assets are converted or turned over into sales. Depending upon
the purpose, a number of turnover ratios can be calculated. These are :
1.

Inventory Turnover Ratio

2.

Debtors Turnover Ratio

3.

Creditors Turnover Ratio

4.

Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets
include high amount of debtors due to slow credit collections and
moreover if the assets include high amount of slow moving inventories.
As both the ratios ignore the movement of current assets, it is important
to calculate the turnover ratio.
1.

INVENTORY TURNOVER OR STOCK TURNOVER

RATIO :
Every firm has to maintain a certain amount of inventory of
finished goods so as to meet the requirements of the business. But
the level of inventory should neither be too high nor too low.
Because it is harmful to hold more inventory as some amount of
capital is blocked in it and some cost is involved in it. It will
therefore be advisable to dispose the inventory as soon as possible.

INVENTORY TURNOVER RATIO =

COST OF GOOD SOLD

AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is
converted into sales. Usually a high inventory ratio indicates an
efficient management of inventory because more frequently the
stocks are sold ; the lesser amount of money is required to finance
the inventory. Where as low inventory turnover ratio indicates the
inefficient management of inventory. A low inventory turnover
implies over investment in inventories, dull business, poor quality
of goods, stock accumulations and slow moving goods and low
profits as compared to total investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

2
(Rupees in Crore)

Year

2011

2012

2013

Cost of Goods sold

110.6

103.2

96.8

Average Stock

73.59

36.42

55.35

1.5 times

2.8 times

1.75 times

Inventory Turnover Ratio

Interpretation :
These ratio shows how rapidly the inventory is turning into
receivable through sales. In 2012 the company has high inventory
turnover ratio but in 2013 it has reduced to 1.75 times. This shows that
the companys inventory management technique is less efficient as
compare to last year.
2.

INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO
e.g.

Year

2011

2012

2013

Days

365

365

365

Inventory Turnover Ratio

Inventory Conversion Period

1.5

2.8

1.8

243 days

130 days

202 days

Interpretation :
Inventory conversion period shows that how many days inventories
takes to convert from raw material to finished goods. In the company
inventory conversion period is decreasing. This shows the efficiency of
management to convert the inventory into cash.
3.

DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to

increase its sales and a liberal credit policy may result in tying up
substantial funds of a firm in the form of trade debtors. Trade debtors
are expected to be converted into cash within a short period and are
included in current assets. So liquidity position of a concern also
depends upon the quality of trade debtors. Two types of ratio can be
calculated to evaluate the quality of debtors.
a)

Debtors Turnover Ratio

b)

Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS
Debtors velocity indicates the number of times the debtors are
turned over during a year. Generally higher the value of debtors
turnover ratio the more efficient is the management of debtors/sales or
more liquid are the debtors. Whereas a low debtors turnover ratio
indicates poor management of debtors/sales and less liquid debtors. This

ratio should be compared with ratios of other firms doing the same
business and a trend may be found to make a better interpretation of the
ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2

e.g.

Year

2011

2012

2013

Sales

166.0

151.5

169.5

Average Debtors

17.33

18.19

22.50

9.6 times

8.3 times

7.5 times

Debtor Turnover Ratio

Interpretation :
This ratio indicates the speed with which debtors are being
converted or turnover into sales. The higher the values or turnover into
sales. The higher the values of debtors turnover, the more efficient is the
management of credit. But in the company the debtor turnover ratio is
decreasing year to year. This shows that company is not utilizing its
debtors efficiency. Now their credit policy become liberal as compare to
previous year.
4.

AVERAGE COLLECTION PERIOD :

Average Collection Period =

No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number
of days for which a firm has to wait before its receivables are converted
into cash. It measures the quality of debtors. Generally, shorter the
average collection period the better is the quality of debtors as a short
collection period implies quick payment by debtors and vice-versa.
Average Collection Period =

365 (Net Working Days)

Debtors Turnover Ratio

Year

2011

2012

2013

Days

365

365

365

Debtor Turnover Ratio

9.6

8.3

7.5

38 days

44 days

49 days

Average Collection Period

Interpretation :
The average collection period measures the quality of
debtors and it helps in analyzing the efficiency of collection efforts. It
also helps to analysis the credit policy adopted by company. In the firm
average collection period increasing year to year. It shows that the firm
has Liberal Credit policy. These changes in policy are due to
competitors credit policy.
5.

WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization
of net working capital. This ratio indicates the number of times

the working capital is turned over in the course of the year. This
ratio measures the efficiency with which the working capital is
used by the firm. A higher ratio indicates efficient utilization of
working capital and a low ratio indicates otherwise. But a very
high working capital turnover is not a good situation for any firm.
Working Capital Turnover Ratio =

Cost of Sales
Net Working Capital

Working Capital Turnover

Sales
Networking Capital

e.g.

Year

2011

2012

2013

Sales

166.0

151.5

169.5

Networking Capital

53.87

62.52

103.09

Working Capital Turnover

3.08

2.4

1.64

Interpretation :
This ratio indicates low much net working capital requires
for sales. In 2013, the reciprocal of this ratio (1/1.64 = .609) shows that
for sales of Rs. 1 the company requires 60 paisa as working capital.

Thus this ratio is helpful to forecast the working capital requirement on

the basis of sale.
INVENTORIES
(Rs. in Crores)

Year

Inventories

2010-2011

2011-2012

2012-2013

37.15

35.69

75.01

Interpretation :
Inventories is a major part of current assets. If any company wants
to manage its working capital efficiency, it has to manage its inventories
efficiently. The graph shows that inventory in 2010-2011 is 45%, in
2011-2012 is 43% and in 2012-2013 is 54% of their current assets. The
company should try to reduce the inventory upto 10% or 20% of current
assets.
CASH BNAK BALANCE :
(Rs. in Crores)

Year

Cash Bank Balance

2010-2011

2011-2012

2012-2013

4.69

1.79

5.05

Interpretation :
Cash is basic input or component of working capital. Cash is
needed to keep the business running on a continuous basis. So the

organization should have sufficient cash to meet various requirements.

The above graph is indicate that in 2011 the cash is 4.69 crores but in
2012 it has decrease to 1.79. The result of that it disturb the firms
manufacturing operations. In 2013, it is increased upto approx. 5.1%
cash balance. So in 2013, the company has no problem for meeting its
requirement as compare to 2012.
DEBTORS :
(Rs. in Crores)

Year

Debtors

2010-2011

2011-2012

2012-2013

17.33

19.05

25.94

Interpretation :
Debtors constitute a substantial portion of total current assets. In
India it constitute one third of current assets. The above graph is depict
that there is increase in debtors. It represents an extension of credit to
customers. The reason for increasing credit is competition and company
liberal credit policy.

CURRENT ASSETS :
(Rs. in Crores)

Year

Current Assets

2010-2011

2011-2012

2012-2013

81.29

83.15

136.57

Interpretation :
This graph shows that there is 64% increase in current assets in
2013. This increase is arise because there is approx. 50% increase in
inventories. Increase in current assets shows the liquidity soundness of
company.

CURRENT LIABILITY :
(Rs. in Crores)

Year

Current Liability

2010-2011

2011-2012

2012-2013

27.42

20.58

33.48

Interpretation :
Current liabilities shows company short term debts pay to outsiders.
In 2013 the current liabilities of the company increased. But still
increase in current assets are more than its current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crores)

Year

Net Working Capital

2010-2011

2011-2012

2012-2013

53.87

62.53

103.09

Interpretation :
Working capital is required to finance day to day operations of a
firm. There should be an optimum level of working capital. It should
not be too less or not too excess. In the company there is increase in
working capital. The increase in working capital arises because the
company has expanded its business.

RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which
basically analyze critically financial position of to the organization:

I.
II.

COMMON-SIZE P/L A/C

COMMON-SIZE BALANCE SHEET

III.

COMPARTIVE P/L A/C

IV.

COMPARTIVE BALANCE SHEET

V.
VI.

TREND ANALYSIS
RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With
the evaluation of each component, the financial position from different angles is
tried to be presented in well and systematic manner. By critical analysis with the
help of different tools, it becomes clear how the financial manager handles the
finance matters in profitable manner in the critical challenging atmosphere, the

recommendation are made which would suggest the organization in formulation

of a healthy and strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in
efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and
consistent accounting procedure to convey an under-standing of some financial
aspects of a business firm. It may show position at a moment in time, as in the
case of balance sheet or may reveal a series of activities over a given period of
time, as in the case of an income statement. Thus, the term financial
statements generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: 1. To provide reliable financial information about economic resources and
obligation of a business firm.

2. To provide other needed information about charges in such economic

resources and obligation.
3. To provide reliable information about change in net resources (recourses less
obligations) missing out of business activities.
4. To provide financial information that assets in estimating the learning
potential of the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do
not present a final picture a final picture of a concern. The utility of these
statements is dependent upon a number of factors. The analysis and
interpretation of these statements must be done carefully otherwise misleading
conclusion may be drawn.
Financial statements suffer from the following limitations: 1. Financial statements do not given a final picture of the concern. The data
given in these statements is only approximate. The actual value can only be
determined when the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods,
generally one year, during the life of a concern. The costs and incomes are
apportioned to different periods with a view to determine profits etc. The
allocation of expenses and income depends upon the personal judgment of the
accountant. The existence of contingent assets and liabilities also make the
statements imprecise. So financial statement are at the most interim reports
rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to

give final and accurate position. The value of fixed assets in the balance sheet
neither represent the value for which fixed assets can be sold nor the amount
which will be required to replace these assets. The balance sheet is prepared on
the presumption of a going concern. The concern is expected to continue in
future. So fixed assets are shown at cost less accumulated deprecation.
Moreover, there are certain assets in the balance sheet which will realize
nothing at the time of liquidation but they are shown in the balance sheets.
4. The financial statements are prepared on the basis of historical costs Or
original costs. The value of assets decreases with the passage of time current
price changes are not taken into account. The statement are not prepared with
the keeping in view the economic conditions. the balance sheet loses the
significance of being an index of current economics realities. Similarly, the
profitability shown by the income statements may be represent the earning
capacity of the concern.
5. There are certain factors which have a bearing on the financial position and
operating result of the business but they do not become a part of these
statements because they cannot be measured in monetary terms. The basic
limitation of the traditional financial statements comprising the balance sheet,
profit & loss A/c is that they do not give all the information regarding the
financial operation of the firm. Nevertheless, they provide some extremely
useful information to the extent the balance sheet mirrors the financial position
on a particular data in lines of the structure of assets, liabilities etc. and the
profit & loss A/c shows the result of operation during a certain period in terms
revenue obtained and cost incurred during the year. Thus, the financial position
and operation of the firm.

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the
available accounting data and financial statements. The analysis is done
CALCULATIONS OF RATIOS

Ratios are relationship expressed in mathematical terms between figures, which

are connected with each other in some manner.

CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon the basis of

classification
The traditional classification has been on the basis of the financial statement to
which the determination of ratios belongs.

These are:

Profit & Loss account ratios

Balance Sheet ratios

Composite ratios

Project Description :
Title : Project Report on Working Capital Management

Pages : 73

Description : Project Report on Working Capital Management, Working capital

analysis, Working Capital Management - Meaning & Concept, working capital
Classification, Importance, Advantages and Disadvantages of Working Capital,
Factors determining the working capital requirements & Ratio Analysis
Category : Project Report for MBA
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