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WORKING CAPITAL - Meaning of Working Capital
Capital required for a business can be classified under two main categories via, 1) 2)
Fixed Capital 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 firm’s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for shortterm purposes for the purchase of raw material, payment of wages and other day – today 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 & 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) 3) 4) 5)
Cash in hand and cash at bank Bills receivables Sundry debtors Short term loans and advances. Inventories of stock as:
a. b. c. d.
Raw material Work in process Stores and spares 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
6. 4. The gross concept is sometimes preferred to the concept of working capital for the following reasons: 1. This concept is also useful in determining the rate of return on investments in working capital. Provision for taxation . Dividends payable. to app. 2. It enables the enterprise to provide correct amount of working capital at correct time. Every management is more interested in total current assets with which it has to operate then the source from where it is made available. Sundry creditors. Bills payable. 3. Both the concepts have their own merits. however. Accrued or outstanding expenses. The net working capital concept. 5. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. 7. is also important for following reasons: 2. Bank overdraft. advances and deposits. CONSTITUENTS OF CURRENT LIABILITIES 1.course of business within a short period of normally one accounting year out of the current assts or the income business. 3. Of profit. 4. . It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. if it does not amt. Short term loans.
• • • • It is qualitative concept. 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. . IT indicates the margin of protection available to the short term creditors. which indicates the firm’s ability to meet to its operating expenses and short-term liabilities.
The capital required to meet the seasonal need of the enterprise is called seasonal working capital. finished goods and cash balance. 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.CLASSIFICATION OF WORKING CAPITAL Working capital may be classified in to ways: o o On the basis of concept. . On the basis of time. On the basis of time. working capital may be classified as: Permanent or fixed working capital. work. etc. Every firm has to maintain a minimum level of raw material. 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. As the business grow the requirements of working capital also increases due to increase in current assets. This minimum level of current assts is called permanent or fixed working capital as this part of working is permanently blocked in current assets. On the basis of concept working capital can be classified as gross working capital and net working capital.in-process. Variable working capital can further be classified as seasonal working capital and special 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.
Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost.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. Regular Payment Of Salaries. reduces wastage and costs and enhances production and profits. IMPORTANCE CAPITAL OR ADVANTAGE OF ADEQUATE WORKING SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production. Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms. 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. increases their efficiency. Ability To Face Crises: A concern can face the situation during the depression. 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. . Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production.
If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. Both excess as well as short working capital positions are bad for any business. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL 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. the values of shares may also fall. 4. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. However. high morale which results in overall efficiency in a business. 6. . High Morale: Adequate working capital brings an environment of securities. 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. 5. The redundant working capital gives rise to speculative transactions 2. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. It may reduce the overall efficiency of the business. 3. EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate amount of working capital to run its business operations. 7. confidence. 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.
stores and spares and finished stock. For studying the need of working capital in a business. The need for working capital arises due to the time gap between production and realization of cash from sales. 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. There is an operating cycle involved in sales and realization of cash. To provide credit facilities to the customer. and realization of cash. components and spares. Thus working capital is needed for the following purposes: • • • • • • For the purpose of raw material. work-in-progress. There are others factors also influence the need of working capital in a business. . To pay wages and salaries To incur day-to-day expenses and overload costs such as office expenses. These expenses are called preliminary expenses and are capitalized. advertising.DISADVANTAGES OF INADEQUATE WORKING CAPITAL Every business needs some amounts of working capital. Greater the size of the business unit. The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains maturity. To maintain the inventories of the raw material. generally larger will be the requirements of the working capital. To meet the selling costs as packing. etc. The amount needed for working capital depends upon the size of the company and ambitions of its promoters. production and sales. There are time gaps in purchase of raw material and production. At maturity the amount of working capital required is called normal working capital.
On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. water supply and railways because they offer cash sale only and supply services not products. during the busy season. 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.FACTORS DETERMINING REQUIREMENTS THE WORKING CAPITAL 1. Longer the cycle larger is the requirement of working capital. 5. and no funds are tied up in inventories and receivables. SIZE OF THE BUSINESS: Greater the size of the business. 3. of working capital along with fixed investments. So working capital is directly proportional to the length of the manufacturing process. a firm requires larger working capital than in slack season. 4. SEASONALS VARIATIONS: Generally. DEBTORS CASH FINISHED GOODS . NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require higher working capital. 2. greater is the requirement of working capital. 6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital.
the business contracts. CREDIT POLICY: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. we shall require large amt. optimistic expansion of business. of working capital. etc. 8. Generally rise in prices leads to increase in working capital. difficulties are faced in collection from debtor and the firm may have a large amt. Such firms may generate cash profits from operations and contribute to their working capital. 9. of working capital. monopoly conditions. 12. A firm having a high rate of stock turnover wuill needs lower amt. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products. rise in prices. . 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. 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. of working capital as compared to a firm having a low rate of turnover. The dividend policy also affects the requirement of working capital. there is need for larger amt. sales decline. 11. when the business is prosperous. of working capital and vice-versa. RATE OF GROWTH OF BUSINESS: In faster growing concern. of working capital due to rise in sales. BUSINESS CYCLE: In period of boom. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements. On the contrary in time of depression.RAW MATERIAL WORK IN PROGRESS 7. etc. 10.
Irregularities of supply. Importance of labor. 3. MANAGEMENT OF WORKING CAPITAL Management of working capital is concerned with the problem that arises in attempting to manage the current assets. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its probability. Import policy.Others FACTORS: These are: Operating efficiency. 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. It is concerned with the decision about the composition and level of current assets. It is concerned with the decision about the composition and level of current liabilities. Asset structure.e. It concerned with the formulation of policies with regard to profitability. There should be no shortage of funds and also no working capital should be ideal. . etc. it is neither adequate nor excessive as both the situations are bad for any firm. Management ability. 2. So working capital management is three dimensional in nature as 1. current liabilities. Banking facilities. liquidity and structural health of the organization. i. liquidity and risk.
RATIO ANALYSIS A ratio is a simple arithmetical expression one number to another. The following ratios can be calculated for these purposes: 1. Adequate amount of working capital is very much essential for the smooth running of the business. Inventory turnover. So. The liquidity position of the firm is totally effected by the management of working capital. Current ratio. 1. . 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. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. such as: 1. This involves the need of working capital analysis. 3. 2. And the most important part is the efficient management of working capital in right time. Ratio analysis. 2. Fund flow analysis.WORKING CAPITAL ANALYSIS As we know working capital is the life blood and the centre of a business. The analysis of working capital can be conducted through a number of devices. Absolute liquid ratio 4. Budgeting. Quick ratio 3.
The fund flow analysis consists of: a. Ratio of current liabilities to tangible net worth. He . Working capital turnover ratio. and then comparing the budgeted figures with actual performance for calculating the variances. 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. b. Working capital leverage 9. 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. Receivables turnover. 6. if any. Payable turnover ratio. so that corrective actions may be taken in future. 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. 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. 2.5. 8. Preparing schedule of changes of working capital Statement of sources and application of funds. 3. 7.
A) LIQUIDITY RATIOS Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The successful implementation of working capital budget involves the preparing of separate budget for each element of working capital. cash. it is important proper balance in regard to the liquidity of the firm. such as. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. Two types of ratios can be calculated for measuring short-term financial position or short-term solvency position of the firm. Therefore. inventories and receivables etc. So to with the confidence of investors. 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. These should be convertible in cash for paying obligations of short-term nature. The short term obligations of a firm can be met in time only when it is having sufficient liquid assets. floating or circulating assts. The current assets should either be liquid or near about liquidity. The short-term obligations are met by realizing amounts from current. creditors. 2. But a very high degree of liquidity of the firm being tied – up in current assets.objective working capital budget is to ensure availability of funds as and needed. 1. and to ensure effective utilization of these resources. Liquidity ratios. If current assets can pay off the current liabilities then the liquidity . the smooth functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be strong. Current assets movements ‘ratios.
It is defined as the relation between current assets and current liabilities. inventories and work-in-progresses. sundry debtors. 3.position is satisfactory. 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 RATIO Current Ratio. CURRENT RATIO QUICK RATIO ABSOLUTE LIQUID RATIO 1. Thus. dividend payable etc. if the current liabilities cannot be met out of the current assets then the liquidity position is bad. Current liabilities include outstanding expenses. also known as working capital ratio is a measure of general liquidity and its most widely used to make the analysis of short-term financial position or liquidity of a firm. CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITES The two components of this ratio are: 1) 2) CURRENT ASSETS CURRENT LIABILITES Current assets include cash. A ratio equal or near to . bill payable. 2. the following ratios can be calculated: 1. On the other hand. 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. bill receivables. To measure the liquidity of a firm. marketable securities.
CALCULATION OF CURRENT RATIO (Rupees in crore) e. QUICK RATIO Quick ratio is a more rigorous test of liquidity than current ratio. An asset is said to be liquid if it can be converted into cash with a short period without loss of value.03:1 2008 13. It measures the firms’ capacity to pay off current obligations immediately. The current ratio of company is more than the ideal ratio.the rule of thumb of 2:1 i.58 4.08:1 Interpretation:As we know that ideal current ratio for any firm is 2:1.48 4. If we see the current ratio of the company for last three years it has increased from 2006 to 2008.96:1 2007 83. This depicts that company’s liquidity position is sound. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities.6.42 2.g. current assets double the current liabilities is considered to be satisfactory. Year Current Assets Current Liabilities Current Ratio 2006 81.29 27.12 20. 2. QUICK RATIO = QUICK ASSETS CURRENT LIABILITES Where Quick Assets are: .57 33.e. Its current assets are more than its current liabilities.
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.48 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. As a rule of thumb ratio of 1:1 is considered satisfactory.6 : 1 2007 47. Year Quick Assets Current Liabilities Quick Ratio 2006 44.42 1.14 27. Company’s quick ratio is more than ideal ratio. However. 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. The ideal quick ratio is 1:1. a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. CALCULATION OF QUICK RATIO e.3 : 1 (Rupees in Crore) 2008 61. This shows company has no liquidity problem. debtors and bills receivable are generally more liquid than inventories. ABSOLUTE LIQUID RATIO Although receivables. On the other hand. 3. yet there may be doubts regarding their realization into cash .g.1) 2) 3) Marketable Securities Cash in hand and Cash at bank.58 2.43 20.55 33. Debtors.
58 .48 . These are : 1. Depending upon the purpose. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales.g. The efficiency with which assets are managed directly affects the volume of sales. large is the amount of sales and profits. The better the management of assets. Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio 2006 4. 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.immediately or in time.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.06 33. B) CURRENT ASSETS MOVEMENT RATIOS Funds are invested in various assets in business to make sales and earn profits.69 27.79 20. e.17 : 1 (Rupees in Crore) 2007 1. firms have credit limits sanctioned from banks and can easily draw cash.09 : 1 2008 5. In India.42 . Inventory Turnover Ratio . a number of turnover ratios can be calculated. borrowing power & long term investment. Current assets movement ratios measure the efficiency with which a firm manages its resources.
1.2. 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. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold . A low inventory turnover implies over investment in inventories. Where as low inventory turnover ratio indicates the inefficient management of inventory. it is important to calculate the turnover ratio. AVERAGE STOCK = OPENING STOCK + CLOSING STOCK 2 . But the level of inventory should neither be too high nor too low. stock accumulations and slow moving goods and low profits as compared to total investment. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. poor quality of goods. It will therefore be advisable to dispose the inventory as soon as possible. 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. INVENTORY TURNOVER RATIO = COST OF GOOD SOLD AVERAGE INVENTORY Inventory turnover ratio measures the speed with which the stock is converted into sales. dull business. As both the ratios ignore the movement of current assets. 3. the lesser amount of money is required to finance the inventory.
DEBTORS TURNOVER RATIO : .35 1.2 36.42 2.75 times. In 2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.59 1.g. This shows the efficiency of management to convert the inventory into cash.8 202 days Interpretation : Inventory conversion period shows that how many days inventories takes to convert from raw material to finished goods. 2.5 times 2007 103.8 times 2008 96.8 55. In the company inventory conversion period is decreasing. Year Days Inventory Turnover Ratio Inventory Conversion Period 2006 365 1. 3. This shows that the company’s inventory management technique is less efficient as compare to last year.75 times Interpretation : These ratio shows how rapidly the inventory is turning into receivable through sales.8 130 days 2008 365 1.(Rupees in Crore) Year Cost of Goods sold Average Stock Inventory Turnover Ratio 2006 110.6 73.5 243 days 2007 365 2. INVENTORY CONVERSION PERIOD: INVENTORY CONVERSION PERIOD = 365 (net working days) INVENTORY TURNOVER RATIO e.
0 17.6 times 2007 151.19 8.33 9. Trade debtors are expected to be converted into cash within a short period and are included in current assets.50 7.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. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid debtors.g. Two types of ratio can be calculated to evaluate the quality of debtors.5 times Interpretation : .3 times 2008 169.5 18. 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. Year Sales Average Debtors Debtor Turnover Ratio 2006 166.5 22. 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. AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR 2 e. Generally higher the value of debtor’s turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. So liquidity position of a concern also depends upon the quality of trade debtors.
Now their credit policy become liberal as compare to previous year. In the firm average collection period increasing year to year. 5.6 38 days 2007 365 8. 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. 4. These changes in policy are due to competitor’s credit policy. Generally. The higher the values of debtors turnover.3 44 days 2008 365 7. This shows that company is not utilizing its debtors efficiency. AVERAGE COLLECTION PERIOD : Average Collection Period = No. Average Collection Period = 365 (Net Working Days) Debtors Turnover Ratio Year Days Debtor Turnover Ratio Average Collection Period 2006 365 9. It measures the quality of debtors. 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. The higher the values or turnover into sales. It also helps to analysis the credit policy adopted by company. It shows that the firm has Liberal Credit policy. WORKING CAPITAL TURNOVER RATIO : . the more efficient is the management of credit.5 49 days Interpretation : The average collection period measures the quality of debtors and it helps in analyzing the efficiency of collection efforts. But in the company the debtor turnover ratio is decreasing year to year.This ratio indicates the speed with which debtors are being converted or turnover into sales.
This ratio indicates the number of times the working capital is turned over in the course of the year. 1 the company requires 60 paisa as working capital. But a very high working capital turnover is not a good situation for any firm.64 = .g. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale. the reciprocal of this ratio (1/1.64 Interpretation : This ratio indicates low much net working capital requires for sales.0 53.5 103.609) shows that for sales of Rs.09 1.52 2.08 2007 151. in Crores) .4 2008 169. This ratio measures the efficiency with which the working capital is used by the firm.5 62. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. Year Sales Networking Capital Working Capital Turnover 2006 166. In 2008. INVENTORIES (Rs. Working Capital Turnover Ratio = Cost of Sales Net Working Capital Working Capital Turnover = Sales Networking Capital e.Working capital turnover ratio indicates the velocity of utilization of net working capital.87 3.
in 20062007 is 43% and in 2007-2008 is 54% of their current assets. The graph shows that inventory in 2005-2006 is 45%. it is increased upto approx. The above graph is indicate that in 2006 the cash is 4. the company has no problem for meeting its requirement as compare to 2007. in Crores) Year Debtors 2005-2006 17.01 Interpretation : Inventories is a major part of current assets.69 crores but in 2007 it has decrease to 1. it has to manage its inventories efficiently. In 2008. If any company wants to manage its working capital efficiency.15 2006-2007 35. The company should try to reduce the inventory upto 10% or 20% of current assets. The result of that it disturb the firms manufacturing operations.69 2006-2007 1.69 2007-2008 75.Year Inventories 2005-2006 37. in Crores) Year Cash Bank Balance 2005-2006 4.94 Interpretation : .79 2007-2008 5. Cash is needed to keep the business running on a continuous basis.1% cash balance. So in 2008. CASH BNAK BALANCE : (Rs. DEBTORS : (Rs. 5.05 2007-2008 25. So the organization should have sufficient cash to meet various requirements.79.33 2006-2007 19.05 Interpretation : Cash is basic input or component of working capital.
It represents an extension of credit to customers.58 2007-2008 33. But still increase in current assets are more than its current liabilities.42 2006-2007 20. 50% increase in inventories.57 Interpretation : This graph shows that there is 64% increase in current assets in 2008.48 Interpretation : Current liabilities shows company short term debts pay to outsiders. The reason for increasing credit is competition and company liberal credit policy. This increase is arise because there is approx. CURRENT LIABILITY : (Rs. In India it constitute one third of current assets.Debtors constitute a substantial portion of total current assets.15 2007-2008 136. in Crores) Year Current Liability 2005-2006 27. NET WOKRING CAPITAL : . CURRENT ASSETS : (Rs. Increase in current assets shows the liquidity soundness of company.29 2006-2007 83. in Crores) Year Current Assets 2005-2006 81. In 2008 the current liabilities of the company increased. The above graph is depict that there is increase in debtors.
RESEARCH METHODOLOGY The methodology. In the company there is increase in working capital.09 Interpretation : Working capital is required to finance day to day operations of a firm. It should not be too less or not too excess. IV. the . By critical analysis with the help of different tools. in Crores) Year Net Working Capital 2005-2006 53. which basically analyze critically financial position of to the organization: I. II. VI. the financial position from different angles is tried to be presented in well and systematic manner. COMPARTIVE P/L A/C COMPARTIVE BALANCE SHEET TREND ANALYSIS RATIO ANALYSIS The above parameters are used for critical analysis of financial position. I have adopted for my study is the various tools. COMMON-SIZE P/L A/C COMMON-SIZE BALANCE SHEET III. There should be an optimum level of working capital.(Rs. With the evaluation of each component. The increase in working capital arises because the company has expanded its business. V.53 2007-2008 103. it becomes clear how the financial manager handles the finance matters in profitable manner in the critical challenging atmosphere.87 2006-2007 62.
the organization would be able to conquer its in efficiencies and makes the desired changes. as in the case of an income statement. (2) The income statement or the profit and loss Account. 2. To provide financial information that assets in estimating the learning potential of the business.recommendation are made which would suggest the organization in formulation of a healthy and strong position financially with proper management system. 4. It may show position at a moment in time. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities. To provide other needed information about charges in such economic resources and obligation. ratios and comparative analysis. . 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. OBJECTIVES OF FINANCIAL STATEMENTS: According to accounting Principal Board of America (APB) states The following objectives of financial statements: 1. as in the case of balance sheet or may reveal a series of activities over a given period of time. the term ‘financial statements’ generally refers to the two statements (1) The position statement or Balance sheet. 3. To provide reliable financial information about economic resources and obligation of a business firm. through the evaluation of various percentage. I sincerely hope. Thus.
during the life of a concern. The data given in these statements is only approximate. Financial statements do not given a final picture of the concern. still they do not present a final picture a final picture of a concern. they provide some extremely useful information to the extent the . The financial statements are expressed in monetary value. Similarly. So financial statement are at the most interim reports rather than the final picture of the firm. the balance sheet loses the significance of being an index of current economics realities. 5. Moreover. The actual value can only be determined when the business is sold or liquidated. Nevertheless. 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 concern is expected to continue in future. the profitability shown by the income statements may be represent the earning capacity of the concern. 2. The basic limitation of the traditional financial statements comprising the balance sheet. so they appear to give final and accurate position. Financial statements have been prepared for different accounting periods. The balance sheet is prepared on the presumption of a going concern. 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. generally one year. The financial statements are prepared on the basis of historical costs Or original costs. The allocation of expenses and income depends upon the personal judgment of the accountant. The value of assets decreases with the passage of time current price changes are not taken into account.LIMITATIONS OF FINANCIAL STATEMENTS: Though financial statements are relevant and useful for a concern. Financial statements suffer from the following limitations: 1. The existence of contingent assets and liabilities also make the statements imprecise. profit & loss A/c is that they do not give all the information regarding the financial operation of the firm. 3. The costs and incomes are apportioned to different periods with a view to determine profits etc. The statement are not prepared with the keeping in view the economic conditions. The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn. So fixed assets are shown at cost less accumulated deprecation. The utility of these statements is dependent upon a number of factors. 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.
Thus. 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. the financial position and operation of the firm. liabilities etc.balance sheet mirrors the financial position on a particular data in lines of the structure of assets. 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. which are connected with each other in some manner. These are:• • • Profit & Loss account ratios Balance Sheet ratios Composite ratios . 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. The analysis is done CALCULATIONS OF RATIOS Ratios are relationship expressed in mathematical terms between figures.