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Variable Working Capital

Variable Working Capital

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WORKING CAPITAL - Meaning of Working Capital
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Capital required for a business can be classified under two main categories via, 1) 2)

Fixed Capital Working Capital

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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 firm’s 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.
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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 & 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. 2.

Gross working capital 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) 2)

Cash in hand and cash at bank Bills receivables

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Current liabilities are those liabilities.CO.com/MBA-Projects/Finance-Project-Repor. The gross concept is sometimes preferred to the concept of working capital for the following reasons: 1. to app. 9. Prepaid expenses 8. b. 7. Net working capital can be positive or negative. Marketable securities. 3. It enables the enterprise to provide correct amount of working capital at correct time. When the current assets exceeds the current liabilities are more than the current assets. Of profit. Short term loans. or. Sundry creditors. 4. Accrued incomes.. Every management is more interested in total current assets with which it has to operate 2 of 18 16-Aug-11 8:22 AM . Bank overdraft. if it does not amt. d. c. 2. the term working capital refers to the net working. advances and deposits. 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. 7.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . 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. Provision for taxation . Bills payable. 3) 4) 5) Sundry debtors Short term loans and advances. http://www.allprojectreports. CONSTITUENTS OF CURRENT LIABILITIES 1. 6. 2. In a narrow sense. Inventories of stock as: a. Dividends payable. Net working capital is the excess of current assets over current liability.. 5. say: NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.. Accrued or outstanding expenses. Temporary investment of surplus funds.. Raw material Work in process Stores and spares Finished goods 6.

however. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital.com/MBA-Projects/Finance-Project-Repor.allprojectreports. then the source from where it is made available. It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.. is also important for following reasons: · It is qualitative concept. The net working capital concept.CO.. which indicates the firm’s ability to meet to its operating expenses and short-term liabilities.. IT indicates the margin of protection available to the short term creditors. 4. 3. This concept is also useful in determining the rate of return on investments in working capital. · · · 3 of 18 16-Aug-11 8:22 AM . http://www. It is an indicator of the financial soundness of enterprises.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT ..

finished goods and cash balance. IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL Ø SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production. etc. Every firm has to maintain a minimum level of raw material.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT .CO. 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. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. This minimum level of current assts is called permanent or fixed working capital as this part of working is permanently blocked 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. work. Variable working capital can further be classified as seasonal working capital and special working capital. increases their efficiency.. working capital may be classified as: Ø Ø Permanent or fixed working capital. CLASSIFICATION OF WORKING CAPITAL Working capital may be classified in to ways: o o On the basis of concept.. http://www. 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. Ø Ø Ø 4 of 18 16-Aug-11 8:22 AM . As the business grow the requirements of working capital also increases due to increase in current assets. On the basis of time.. 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. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost. On the basis of time.allprojectreports. Ø Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms.com/MBA-Projects/Finance-Project-Repor. reduces wastage and costs and enhances production and profits. On the basis of concept working capital can be classified as gross working capital and net working capital.. Regular Payment Of Salaries.in-process. Ø Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill. Wages And Other Day TO Day Commitments: It leads to the satisfaction of the employees and raises the morale of its employees. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production.

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. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital.. To meet the selling costs as packing. Ø 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.com/MBA-Projects/Finance-Project-Repor. DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL 1. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. confidence. production and sales. advertising.CO. Ø High Morale: Adequate working capital brings an environment of securities. high morale which results in overall efficiency in a business.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT .. Due to lower rate of return n investments. it is the inadequate working capital which is more dangerous from the point of view of the firm. To pay wages and salaries To incur day-to-day expenses and overload costs such as office expenses. etc... Both excess as well as short working capital positions are bad for any business. There are time gaps in purchase of raw material and production.allprojectreports. 4. EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate amount of working capital to run its business operations. http://www. It may reduce the overall efficiency of the business. 6. 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. the values of shares may also fall. There is an operating cycle involved in sales and realization of cash. components and spares. 7. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. and realization of cash. 5. The redundant working capital gives rise to speculative transactions DISADVANTAGES OF INADEQUATE WORKING CAPITAL Every business needs some amounts of working capital. 2. Thus working capital is needed for the following purposes: · · · · For the purpose of raw material. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. 5 of 18 16-Aug-11 8:22 AM . The need for working capital arises due to the time gap between production and realization of cash from sales. 3. Ø Ø Ability To Face Crises: A concern can face the situation during the depression. However.

So working capital is directly proportional to the length of the manufacturing process. These expenses are called preliminary expenses and are capitalized. water supply and railways because they offer cash sale only and supply services not products. 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. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. Longer the cycle larger is the requirement DEBTORS CASH FINISHED GOODS RAW MATERIAL WORK IN PROGRESS 7.. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require higher working capital. 5.. The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains maturity. of working capital along with fixed investments. Greater the size of the 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. of working capital as compared to a firm having a low rate of 6 of 18 16-Aug-11 8:22 AM . A firm having a high rate of stock turnover wuill needs lower amt. FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS 1..allprojectreports.CO. generally larger will be the requirements of the working capital. SIZE OF THE BUSINESS: requirement of working capital. 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. 4.. a firm requires 6. NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity. · · To provide credit facilities to the customer. Generally. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. For studying the need of working capital in a business. stores and spares and finished stock. 2. greater is the 3.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . http://www. There are others factors also influence the need of working capital in a business. The speed with which the working cycle completes one cycle determines the requirements of working capital. WORKING CAPITAL CYCLE: of working capital. work-in-progress. To maintain the inventories of the raw material. during the busy season. SEASONALS VARIATIONS: larger working capital than in slack season. At maturity the amount of working capital required is called normal working capital. and no funds are tied up in inventories and receivables.com/MBA-Projects/Finance-Project-Repor.

CREDIT POLICY: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. RATE OF GROWTH OF BUSINESS: In faster growing concern. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements. optimistic expansion of business... 11. Import policy. BUSINESS CYCLE: In period of boom. Such firms may generate cash profits from operations and contribute to their working capital. There should be no shortage of funds and also no working capital should be ideal. 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. rise in prices. i. liquidity and structural health of the organization. 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. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its probability. Irregularities of supply. sales decline. it is neither adequate nor excessive as both the situations are bad for any firm. http://www. The dividend policy also affects the requirement of working capital. difficulties are faced in collection from debtor and the firm may have a large amt.CO. of working capital.. MANAGEMENT OF WORKING CAPITAL Management of working capital is concerned with the problem that arises in attempting to manage the current assets. 8. the business contracts. It concerned with the formulation of policies with regard to profitability. 3. 10. Others FACTORS: These are: ü ü ü ü ü ü ü Operating efficiency. Banking facilities. etc. we shall require large amt. Generally rise in prices leads to increase in working capital. So working capital management is three dimensional in nature as 1. turnover. Importance of labor. etc. current liabilities..e. of working capital due to rise in sales. Management ability. 12.com/MBA-Projects/Finance-Project-Repor. monopoly conditions. etc.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . liquidity and risk. 2.allprojectreports. Asset structure. On the contrary in time of depression. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products. 9. there is need for larger amt. It is concerned with the decision about the composition and level of current liabilities. of working capital and vice-versa. 7 of 18 16-Aug-11 8:22 AM . It is concerned with the decision about the composition and level of current assets. when the business is prosperous. of working capital.

allprojectreports. Receivables turnover. Working capital leverage 9. Budgeting. 8. 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. So. 5. Quick ratio 3. The liquidity position of the firm is totally effected by the management of working capital. 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. Preparing schedule of changes of working capital Statement of sources and application of funds. The following ratios can be calculated for these purposes: 1.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . 2. 7. http://www.com/MBA-Projects/Finance-Project-Repor. 3. Inventory turnover. WORKING CAPITAL ANALYSIS As we know working capital is the life blood and the centre of a business.CO. And the most important part is the efficient management of working capital in right time. Absolute liquid ratio 4. Ratio analysis.. It is an effective management tool to study the changes in financial position (working capital) business 8 of 18 16-Aug-11 8:22 AM . Ratio of current liabilities to tangible net worth. The analysis of working capital can be conducted through a number of devices. such as: 1.. Current ratio. Adequate amount of working capital is very much essential for the smooth running of the business. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. Working capital turnover ratio. b. 2.. Payable turnover ratio. RATIO ANALYSIS A ratio is a simple arithmetical expression one number to another. The fund flow analysis consists of: a.. 1. 6. This involves the need of working capital analysis. Fund flow analysis.

http://www. 2. enterprise between beginning and ending of the financial dates. The successful implementation of working capital budget involves the preparing of separate budget for each element of working capital. But a very high degree of liquidity of the firm being tied – up in current assets. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. it is important proper balance in regard to the liquidity of the firm.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . if any. inventories and receivables etc. On the other hand. 2. if the current liabilities cannot be met out of the current assets then the liquidity position is bad.com/MBA-Projects/Finance-Project-Repor. The current assets should either be liquid or near about liquidity.. the smooth functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be strong. Therefore. 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. If current assets can pay off the current liabilities then the liquidity position is satisfactory. A) LIQUIDITY RATIOS Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. 1..CO. and to ensure effective utilization of these resources. such as.. so that corrective actions may be taken in future. So to with the confidence of investors. CURRENT RATIO QUICK RATIO ABSOLUTE LIQUID RATIO 1. also known as working capital ratio is a measure of general liquidity and its most widely 9 of 18 16-Aug-11 8:22 AM .. 3. 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. 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. and then comparing the budgeted figures with actual performance for calculating the variances. To measure the liquidity of a firm. Two types of ratios can be calculated for measuring short-term financial position or short-term solvency position of the firm. cash. The short-term obligations are met by realizing amounts from current.allprojectreports. He objective working capital budget is to ensure availability of funds as and needed. the following ratios can be calculated: 1. These should be convertible in cash for paying obligations of short-term nature. creditors. CURRENT RATIO Current Ratio. Current assets movements ‘ratios. The short term obligations of a firm can be met in time only when it is having sufficient liquid assets. floating or circulating assts. Liquidity ratios.

Current liabilities include outstanding expenses.com/MBA-Projects/Finance-Project-Repor. 10 of 18 16-Aug-11 8:22 AM . A ratio equal or near to the rule of thumb of 2:1 i. This depicts that company’s liquidity position is sound. inventories and work-in-progresses.29 27. 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.08:1 Marketable Securities Cash in hand and Cash at bank. sundry debtors. bill payable. QUICK RATIO Quick ratio is a more rigorous test of liquidity than current ratio. bill receivables..6. Thus. It is defined as the relation between current assets and current liabilities. Year Current Assets Current Liabilities Current Ratio Interpretation:As we know that ideal current ratio for any firm is 2:1.57 33.48 4. used to make the analysis of short-term financial position or liquidity of a firm.allprojectreports.58 4. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. CALCULATION OF CURRENT RATIO (Rupees in crore) e. 2.. QUICK RATIO = QUICK ASSETS CURRENT LIABILITES Where Quick Assets are: 1) 2) 2006 81.42 2. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. current assets double the current liabilities is considered to be satisfactory.. dividend payable etc.e.g.03:1 2008 13. CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITES The two components of this ratio are: 1) 2) CURRENT ASSETS CURRENT LIABILITES Current assets include cash. Its current assets are more than its current liabilities.96:1 2007 83. http://www.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT .12 20. The current ratio of company is more than the ideal ratio.. marketable securities.CO. It measures the firms’ capacity to pay off current obligations immediately. If we see the current ratio of the company for last three years it has increased from 2006 to 2008. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities.

The ideal quick ratio is 1:1. The efficiency with which assets are managed directly affects the volume of sales.06 33. 3.. This shows company has no liquidity problem.09 : 1 2008 5. 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. borrowing power & long term investment. In India. yet there may be doubts regarding their realization into cash immediately or in time. 3) Debtors.3 : 1 2008 61.48 1.58 . CALCULATION OF QUICK RATIO e. Company’s quick ratio is more than ideal ratio. However. firms have credit limits sanctioned from banks and can easily draw cash.42 . Current assets movement ratios measure the efficiency with which a firm manages its resources.g. debtors and bills receivable are generally more liquid than inventories.58 2.48 .CO. large is the amount of sales and profits. 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. a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors..42 1.6 : 1 (Rupees in Crore) 2007 47.43 20.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT .com/MBA-Projects/Finance-Project-Repor. e. Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio Interpretation : These ratio shows that company carries a small amount of cash. B) CURRENT ASSETS MOVEMENT RATIOS Funds are invested in various assets in business to make sales and earn profits.79 20.55 33. ABSOLUTE LIQUID RATIO Although receivables. 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. a firm having a low liquidity position if it has fast moving inventories. These ratios are called turnover ratios because they indicate the 2006 4.69 27.allprojectreports.14 27..g. But there is nothing to be worried about the lack of cash because company has reserve.17 : 1 (Rupees in Crore) 2007 1.15 : 1 2006 44. http://www. As a rule of thumb ratio of 1:1 is considered satisfactory.8 : 1 11 of 18 16-Aug-11 8:22 AM . On the other hand. Year Quick Assets Current Liabilities Quick Ratio Interpretation : A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time.. The better the management of assets.

2006 110. These are : 1. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold .5 times 2007 103.com/MBA-Projects/Finance-Project-Repor. In 2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.g.allprojectreports. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it.75 times INVENTORY CONVERSION PERIOD: INVENTORY CONVERSION PERIOD = 365 (net working days) INVENTORY TURNOVER RATIO e.. It will therefore be advisable to dispose the inventory as soon as possible.. a number of turnover ratios can be calculated.. Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio 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. 4. Where as low inventory turnover ratio indicates the inefficient management of inventory. But the level of inventory should neither be too high nor too low.. Depending upon the purpose. As both the ratios ignore the movement of current assets. http://www. 1. AVERAGE STOCK = OPENING STOCK + CLOSING STOCK 2 (Rupees in Crore) Year Cost of Goods sold Average Stock Inventory Turnover Ratio Interpretation : These ratio shows how rapidly the inventory is turning into receivable through sales. 3. 2.2 36.75 times. the lesser amount of money is required to finance the inventory. poor quality of goods. This shows that the company’s inventory management technique is less efficient as compare to last year. speed with which assets are converted or turned over into sales.8 55. stock accumulations and slow moving goods and low profits as compared to total investment. it is important to calculate the turnover ratio. dull business. 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. A low inventory turnover implies over investment in inventories.8 times 2008 96.59 1.6 73. INVENTORY TURNOVER RATIO = COST OF GOOD SOLD AVERAGE INVENTORY Inventory turnover ratio measures the speed with which the stock is converted into sales.CO.42 2. 12 of 18 16-Aug-11 8:22 AM . 2.35 1.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT .

.33 9.5 times AVERAGE COLLECTION PERIOD : Average Collection Period = No. 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.0 17. the more efficient is the management of credit.. 4. 3.CO.19 8.com/MBA-Projects/Finance-Project-Repor.5 243 days 2007 365 2. http://www. a) b) Debtors Turnover Ratio Average Collection Period DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT) AVERAGE DEBTORS Debtor’s velocity indicates the number of times the debtors are turned over during a year. This shows that company is not utilizing its debtors efficiency.allprojectreports.50 7. Year Days Inventory Turnover Ratio Inventory Conversion Period Interpretation : 2006 365 1. Now their credit policy become liberal as compare to previous year.8 202 days Inventory conversion period shows that how many days inventories takes to convert from raw material to finished goods.8 130 days 2008 365 1.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . Generally higher the value of debtor’s turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets..3 times 2008 169. But in the company the debtor turnover ratio is decreasing year to year. Two types of ratio can be calculated to evaluate the quality of debtors.6 times 2007 151. So liquidity position of a concern also depends upon the quality of trade 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. The higher the values or turnover into sales. In the company inventory conversion period is decreasing.5 18. 2006 166. of Working Days 13 of 18 16-Aug-11 8:22 AM .5 22. Year Sales Average Debtors Debtor Turnover Ratio Interpretation : This ratio indicates the speed with which debtors are being converted or turnover into sales. This shows the efficiency of management to convert the inventory into cash.. The higher the values of debtors turnover.

. 1 the company requires 60 paisa as working capital.64 14 of 18 16-Aug-11 8:22 AM . In 2008.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . 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.64 = .6 38 days 2007 365 8.. It measures the quality of debtors. Working Capital Turnover Ratio = Cost of Sales Net Working Capital 2006 365 9.0 53. 5.com/MBA-Projects/Finance-Project-Repor.5 103. It also helps to analysis the credit policy adopted by company.08 2007 151. Generally. WORKING CAPITAL TURNOVER RATIO : Working capital turnover ratio indicates the velocity of utilization of net working capital. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. http://www. INVENTORIES 2006 166.4 2008 169. the reciprocal of this ratio (1/1. These changes in policy are due to competitor’s credit policy.3 44 days 2008 365 7. In the firm average collection period increasing year to year.87 3.609) shows that for sales of Rs. But a very high working capital turnover is not a good situation for any firm.5 62. It shows that the firm has Liberal Credit policy.g. This ratio measures the efficiency with which the working capital is used by the firm.09 1.52 2. This ratio indicates the number of times the working capital is turned over in the course of the year. Year Sales Networking Capital Working Capital Turnover Interpretation : This ratio indicates low much net working capital requires for sales.5 49 days Working Capital Turnover = Sales Networking Capital e. Average Collection Period = 365 (Net Working Days) Debtors Turnover Ratio Year Days Debtor Turnover Ratio Average Collection Period Interpretation : The average collection period measures the quality of debtors and it helps in analyzing the efficiency of collection efforts.CO. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.allprojectreports.. 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..

the company has no problem for meeting its requirement as compare to 2007. in Crores) Year Current Assets Interpretation : This graph shows that there is 64% increase in current assets in 2008. DEBTORS : (Rs.CO. The reason for increasing credit is competition and company liberal credit policy.57 CURRENT LIABILITY : 15 of 18 16-Aug-11 8:22 AM . So in 2008. 5.69 2006-2007 1. CASH BNAK BALANCE : (Rs. it has to manage its inventories efficiently.69 crores but in 2007 it has decrease to 1. in Crores) Year Inventories Interpretation : Inventories is a major part of current assets. The above graph is indicate that in 2006 the cash is 4. it is increased upto approx. Cash is needed to keep the business running on a continuous basis. In 2008. It represents an extension of credit to customers.15 2007-2008 136..33 2006-2007 19.. Increase in current assets shows the liquidity soundness of company. (Rs. 2005-2006 17.01 CURRENT ASSETS : (Rs. If any company wants to manage its working capital efficiency.29 2006-2007 83.05 2007-2008 25.69 2007-2008 75. This increase is arise because there is approx. in 2006-2007 is 43% and in 2007-2008 is 54% of their current assets. So the organization should have sufficient cash to meet various requirements.15 2006-2007 35. 2005-2006 81. in Crores) Year Debtors Interpretation : Debtors constitute a substantial portion of total current assets.1% cash balance.94 2005-2006 4. The company should try to reduce the inventory upto 10% or 20% of current assets. The graph shows that inventory in 2005-2006 is 45%.com/MBA-Projects/Finance-Project-Repor. in Crores) Year Cash Bank Balance Interpretation : Cash is basic input or component of working capital. The above graph is depict that there is increase in debtors..05 2005-2006 37.allprojectreports.79 2007-2008 5. The result of that it disturb the firms manufacturing operations.. In India it constitute one third of current assets. http://www.79.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . 50% increase in inventories.

09 RESEARCH METHODOLOGY The methodology. By critical analysis with the help of different tools. In the company there is increase in working capital.48 NET WOKRING CAPITAL : (Rs. In 2008 the current liabilities of the company increased.87 2006-2007 62. http://www. But still increase in current assets are more than its current liabilities. COMMON-SIZE P/L A/C COMMON-SIZE BALANCE SHEET COMPARTIVE P/L A/C COMPARTIVE BALANCE SHEET TREND ANALYSIS RATIO ANALYSIS The above parameters are used for critical analysis of financial position. which basically analyze critically financial position of to the organization: I. There should be an optimum level of working capital. ratios and comparative analysis. in Crores) Year Current Liability Interpretation : Current liabilities shows company short term debts pay to outsiders. With the evaluation of each component. the recommendation are made which would suggest the organization in formulation of a healthy and strong position financially with proper management system.. in Crores) Year Net Working Capital Interpretation : Working capital is required to finance day to day operations of a firm.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . VI. IV. V. II.allprojectreports. III.53 2007-2008 103. The increase in working capital arises because the company has expanded its business.. I sincerely hope..com/MBA-Projects/Finance-Project-Repor. 2005-2006 53. (Rs. It should not be too less or not too excess. it becomes clear how the financial manager handles the finance matters in profitable manner in the critical challenging atmosphere. the organization would be able to conquer its in efficiencies and makes the desired changes..58 2007-2008 33. through the evaluation of various percentage. I have adopted for my study is the various tools.42 2006-2007 20.CO. 2005-2006 27. ANALYSIS OF FINANCIAL STATEMENTS 16 of 18 16-Aug-11 8:22 AM . the financial position from different angles is tried to be presented in well and systematic manner.

2.. The balance sheet is prepared on the presumption of a going concern. http://www. 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.. (2) The income statement or the profit and loss Account. The financial statements are prepared on the basis of historical costs Or original costs. the balance sheet loses the significance of being an index of current economics realities. during the life of a concern. The utility of these statements is dependent upon a number of factors. Nevertheless. generally one year. To provide financial information that assets in estimating the learning potential of the business. 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 actual value can only be determined when the business is sold or liquidated. 4.CO. 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. 2. 3. 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. profit & loss A/c is that they do not give all the information regarding the financial operation of the firm. the term ‘financial statements’ generally refers to the two statements (1) The position statement or Balance sheet.. 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. 4. The existence of contingent assets and liabilities also make the statements imprecise. So fixed assets are shown at cost less accumulated deprecation. OBJECTIVES OF FINANCIAL STATEMENTS: According to accounting Principal Board of America (APB) states The following objectives of financial statements: 1.allprojectreports. Financial statements do not given a final picture of the concern. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities. the financial position and operation of the firm. Financial statements suffer from the following limitations: 1. liabilities etc. Thus. Moreover. 5. as in the case of balance sheet or may reveal a series of activities over a given period of time. Thus. To provide reliable financial information about economic resources and obligation of a business firm.com/MBA-Projects/Finance-Project-Repor. LIMITATIONS OF FINANCIAL STATEMENTS: Though financial statements are relevant and useful for a concern. FINANCIAL STATEMENT ANALYSIS It is the process of identifying the financial strength and weakness of a firm from the available accounting data 17 of 18 16-Aug-11 8:22 AM . The statement are not prepared with the keeping in view the economic conditions. The allocation of expenses and income depends upon the personal judgment of the accountant. To provide other needed information about charges in such economic resources and obligation. the profitability shown by the income statements may be represent the earning capacity of the concern. 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. still they do not present a final picture a final picture of a concern. 3. The financial statements are expressed in monetary value. as in the case of an income statement. It may show position at a moment in time. So financial statement are at the most interim reports rather than the final picture of the firm. The basic limitation of the traditional financial statements comprising the balance sheet. Similarly. The costs and incomes are apportioned to different periods with a view to determine profits etc. so they appear to give final and accurate position. The concern is expected to continue in future.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT . The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn. Financial statements have been prepared for different accounting periods.. The data given in these statements is only approximate. The value of assets decreases with the passage of time current price changes are not taken into account.

Finance Online material backed by Textbooks Academic support. synopsis. its cost is Rs..allprojectreports. These are:· · · Profit & Loss account ratios Balance Sheet ratios Composite ratios Project Description : Title : Working Capital Management of ____________ Pages : 73 Category : Project Report for MBA We made this project of various companies like Reliance Industries. Grasim Industries.in Ads by Google Business Finance Axis Bank : Connecting World Team Bank DLA Firm Website Developed by India (Private Policy) MBA Analysis 18 of 18 16-Aug-11 8:22 AM . The analysis is done CALCULATIONS OF RATIOS Ratios are relationship expressed in mathematical terms between figures. 2499/.PROJECT REPORT ON WORKING CAPITAL MANAGEMENT .. Finance Software A Free. mail us at this id : bkm@allprojectreports. Dabur India Ltd.CO. 2999/.com/managingyourmoney Online MBA ..com/MBA-Projects/Finance-Project-Repor. Safe & Simplified Tool for Managing Your Money.com www. etc.utsglobal. and project proposal projectfever. Try It Now! MBA Projects MBA Project reports.perfios. Enrol Now! www. and financial statements. If you need this project.com We will send you a hardcopy with hard binding and a softcopy in CD from courier. 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.edu. which are connected with each other in some manner. http://www.only without Synopsis and Rs.only with synopsis...

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