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INTRODUCTION Company Profile:Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company.

It is one of the largest and most respected companies in India's private sector. Seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision.

M/s Larsen & Toubro Ltd. ECC Division is prestigious organization having business worldwide, its ECC Division undertake engineering contracts of various construction in the field of Electrical, Mechanical & Civil Engineering. The Company having its headquarter at Chennai, and whole India is distributed in regions having respective regional headquarters, viz. Mumbai, Ahmadabad, Kolkata, Delhi, Hyderabad, Chandigarh etc. which coordinate all activities of sites within their region.
Chattisgarh state have rich natural resources, coal is found in abundance thus various thermal power plant are established at various places, Sipat Super Thermal Power Plant is one of the biggest Thermal Power Plant, wherein our company execute construction of Boiler Erection & Electrical Cabling works and some other misc. works. Our Principal employer is M/s National Thermal Power Corporation Ltd.

The workforces consist of 2500 workmen and Engineers and staff in various cadre, the workforce consist of employees from all over India.

THEORY OF WORKING CAPITAL
WORKING CAPITAL MANAGEMENT

In simple words. land and building. marketable securities. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety. Working capital refers to that part of the firm’s capital which is required for financing short term or current assets such as cash. Working Capital is the difference between resources in cash or readily convertible into cash and organizational commitments for which cash will soon be required or within one year without undergoing a diminution in value and without disrupting the operation of the firm. the current liabilities and the inter relationship that exist between them. It also refers to the amount of current Assets that exceeds current Liabilities. Working Capital is also known as Revolving or Circulating Capital or Short Term Capital. Funds are also needed for short term purposes for the purchasing of raw materials. payments of wages and other day to day expenses etc. debtors and inventories. Marketable Securities. Investments in these assets are representing that part of firm’s capital which is blocked on a permanent or fixed basis and is called fixed capital. Debtors and Inventories. The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. Capital required for a business can be classifies under two main categories:    Fixed Capital  Working Capital  Every business needs funds for two purposes for its establishments and to carry out day to day operations. CONCEPTS OF WORKING CAPITAL: . It is concerned with the problem arise in attempting to manage the current assets.Working Capital is the amount of capital that a business has available to meet the day to day cash requirements of its operations. which is required for financing Short-Term or Current Assets such as Cash. These funds are known as working capital. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery. Working Capital refers to that part of the firm capital. furniture etc.

Net working capital is the excess of current assets over current liabilities or say: Net Working Capital = Current Assets – Current Liabilities. Thus. Current assets are those assets which are converted into cash within short periods of normally one accounting year. . Example of current assets is: Constituents of Current Assets:      Cash in hand and Bank balance  Bills Receivable  Sundry Debtors  Short term Loans and Advances  Inventories of Stock as:     Raw Materials  Work in Process  Stores and Spaces          Finished Goods · ·  Temporary Investments of Surplus Funds · ·  Prepaid Expenses ·  Accrued Incomes · The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say The term working capital refers to the net working capital. the gross working capital is the capital invested in total current assets of the enterprises.There are two concepts of working capital:    Balance Sheet concepts  Operating Cycle or circular flow concept  BALANCE SHEET CONCEPT: There are two interpretation of working capital under the balance sheet concept:    Gross Working Capital  Net Working Capital  The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets.

Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year of the current assets or the income of the business. Advances and Deposits  Dividends Payable  Bank Overdraft  Provision for Taxation. its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost. . conversion of finished stocks into sales. The cycle starts with the purchase of raw material and other resources And ends with the realization of cash from the sales of finished goods. the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Hence it is also known as revolving or circulating capital. debtors and inventories. marketable securities. If does not amount to appropriation of profits. Examples of current liabilities are: CONSTITUENTS OF CURRENT LIBILITIES:              Bills Payable  Sundry Creditors or Account Payable  Accrued or Outstanding Expenses  Short term Loans. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm.  The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. OPERATING CYCLE OR CIRCULATING CASH FORMAT: Working Capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash. It involves purchase of raw material and stores. Funds thus invested in current assets keep revolving fast and being constantly converted into cash and these cash flows out again in exchange for other current assets.NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE: When the current assets exceed the current liabilities.

larger is the requirement of working capital. RMCP = Raw Material Conversion Period WIPCP = Work –in. The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus. Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP Where.debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on.Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period However. a firm may acquire some resources on credit and thus defer payments for certain period. In that case. net operating cycle period can be calculated as below: Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period . The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle.

following formula can be used to determine the conversion periods. Raw Material Conversion Period = Average Stock of Raw Material. working capital is classified as gross working .Further. Raw Material Consumption per day Work in process Conversion Period = Average Stock of Work-in-Progress Total Cost of Production per day Finished Goods Conversion Period = Average Stock of Finished Goods Total Cost of Goods sold per day Receivables Conversion Period = Average Accounts Receivables Net Credit Sales per day Payable Deferral Period = Average Payable Net Credit Purchase per day CLASSIFICATION OR KIND OF WORKING CAPITAL: Working capital may be classified in two ways:    On the basis of concept  On the basis of time  On the basis of concept.

The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital. No business can run successfully without an adequate amount of working capital. IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL: Working capital is the life blood and nerve centre of a business. On the basis of time. Exploitation of favorable market conditions  Ability of crisis  Quick and regular return on investments  High morals         . The classification is important from the point of view of the financial manager. The main advantages of maintaining adequate amount of working capital are as follows:       Solvency of the Business Goodwill Easy Loans Cash discounts Regular supply of Raw Materials Regular payments of salaries. 2.capital and net working capital. working capital is very essential to maintain the smooth running of a business. PERMANENT OR FIXED WORKING CAPITAL: Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. TEMPRORAY OR VARIABLE WORKING CAPITAL: Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. working capital may be classified as:   Permanent or Fixed working capital  Temporary or Variable working capital 1. wages & other day to day commitments. Just a circulation of a blood is essential in the human body for maintaining life.Varibles working capital can be further classified as second working capital and special working capital. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations. 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.

  To meet the selling costs as packing. working capital is needed for the following purposes:  For the purchase of raw materials . power and office expenses etc.    To incur day to day expenses and overhead costs such as fuel. thus.progress. advertising etc. components and spaces.   To maintain the inventories of raw materials.  THE NEED OR OBJECTS OF WORKING CAPITAL: The need for working capital cannot be emphasized. and realization of cash. The need of working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. And sales. work –in.    To pay wages and salaries. production and sales. There are time gaps in purchase of raw materials and production. Every business needs some amount of working capital.    To provide credit facilities to the customers. stores and spares and finished stock .

 MANAFACTURE PRODUCTION POLICY: Each enterprises in the manufacturing sector has its own production policy. an enterprises involved in production would required more working capital then a service sector enterprise.  NATURE OR CHARACTERSTICS OF A BUSINESS : The nature and the working capital requirement of enterprises are interlinked. the same would be short in an enterprises involve in providing services. The amount required also varies as per the nature. However the following are the important factors generally influencing the working capital requirements. On other hand if raw material is . While a manufacturing industry has a long cycle of operation of the working capital.  MARKET CONDITION: If there is a high competition in the chosen project category then one shall need to offer sops like credit.  OPERATIONS: The requirement of working capital fluctuates for seasonal business. immediate delivery of goods etc for which the working capital requirement will be high.FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT : The working capital requirements of a concern depend upon a large number of factors such as nature and size of the business. the characteristics of their operations.  AVABILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock . the length of production cycle. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low. The working capital needs of such business may increase considerably during the busy. the rate of stock turnover and the state of economic situation. some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. Accordingly the working capital requirements vary for both of them.

If the manufacturing cycle involves a longer period the need for working capital would be more. As business growth and expands it needs a larger amount of the working capital. The assessment of the working capital requirement is made keeping this factor in view.  GROWTH AND EXAPNSION: Growth and Expansions in the volume of business result in enhancement of the working capital requirements. there by calling for substantial investment in the same.  MANAFACTURING CYCLE: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. Thereafter proper value is assigned to the respective current assets.not readily available then a large inventory stocks need to be maintained. The basis for assigning value to each component is given below: COMPONENTS OF WORKING CAPITAL Stock of Raw Material Stock of Work -in. depending on its level of completion. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above. With increasing prices. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated.  PRICE LEVEL CHANGES : Generally raising price level requires a higher investment in the working capital. The factors discussed above influence the quantum of working capital in the business.Process Stock of finished Goods Debtors Cash BASIS OF VALUATION Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales Value Working Expenses . At time business needs to estimate the requirement of working capital in advance for proper control and management. Normally the needs for increased working capital funds processed growth in business activities. the same levels of current assets needs enhanced investments.

can affect the day-to-day operations severely. We know that working capital has a very close relationship with day-to-day operations of a business. An inaccurate assessment of the working capital may cause either under-assessment or overassessment of the working capital and both of them are dangerous. therefore. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY: The following are the general principles of a sound working capital management policy: PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY PRINCIPLES OF RISK VARIATIONS PRINCIPLES OF COST OF CAPITAL PRINCIPLES OF EQUITY PRINCIPLES PRINCIPLES OF MATURITY OF PAYMENTS . It may lead to cash crisis and ultimately to liquidation. Negligence in proper assessment of the working capital. The total of all such valuation becomes the total estimated working capital requirement.Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated.

PRINCIPLE OF EQUITY POSITION: The principle is concerned with planning the total investments in current assets. Current assets as a percentage of total sales While deciding about the composition of current assets. the goal of management should be to establish a suitable tradeoff between profitability and risk. . In other words there is a definite inverse relationship between the degree of risk and profitability. reduces liquidity and increase profitability. Current assets as a percentage of total assets and 2. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. 3. However. higher and risk however the risk lower is the cost and lower the risk higher is the cost. 2. Larger investment in current Assets with less dependence on short term borrowings. PRINCIPLES OF COST OF CAPITAL: The various source of raising working capital finance have different cost of capital and the degree of risk involved. On the other hand less investments in current assets with greater dependence on short term borrowings. Generally.1.PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY): Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. there is a definite inverse relationship between the risk and profitability. A sound working capital management should always try to achieve a proper balance between these two. increase liquidity. According to this principle. the financial manager may consider the relevant industrial averages. Every rupee invested in current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios: 1. the amount of working capital invested in each component should be adequately justified by a firm’s equity position. In other words. reduces risk and thereby decreases the opportunity for gain or loss.

The business may be compelled to by raw materials on credit and sell finished goods on cash. a firm should make every effort to relate maturities of payment to its flow of internally generated funds. In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts.    Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. the greater the inability to meet its obligations in time.   Implementations of operating plans may brome difficult and consequently the profit goals may not be achieved.   Cash crisis may emerge due to paucity of working funds. According to the principles. CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:  Growth may be stunted. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Both the situation would affect profitable adversely. . While underassessment of working capital has disastrous implications on business overassesments of working capital also has its own dangerous. Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows. Now avaibility of stocks due to non availability of funds may result in production stoppage. This situation may lead to business closure.  The business may fail to honour its commitment in time thereby adversely affecting its creditability.4. It may become difficult for the enterprises to undertake profitable projects due to non-availability of working capital. PRINCIPLES OF MATURITY OF PAYMENT: The principle is concerned with planning the source of finance for working capital.

  Working Capital is very essential for success of business & therefore needs efficient management and control. .  It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management. Simultaneously stock out costs should be minimized. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Each of the components of working capital needs proper management to optimize profit INVENTORY MANAGEMNT: Inventory includes all type of stocks.   Over investment in working capital makes capital less productive and may reduce return on investment. inventory needs to be managed effectively.    It may make management complacent leading to its inefficiency. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient.CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL: Excess of working capital may result in un necessary accumulation of inventories. For effective working capital management.

  Cost of carrying receivables   Cost of bad debts losses  Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more than the costs incurred for the receivables and the gap between benefit and costs increased resulting in increased profits. it gives rise to costs such as. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result. Extending credit means creating current assets in the form of debtors or account receivables. A business should continuously try to monitor the credit days and see that the average. prevailing market conditions etc. . due to factors like trade policies. every business would prefer selling its produce on cash basis. Business are compelled to sells their goods on credit. An effective control of receivables helps a great deal in properly managing it. Each business should therefore try to find out coverage credit extends to its clients using the below given formula: Average Credit = Total amount of receivable (Extend in days) Average credit sale per day Each business should project expected sales and expected investments in receivable based on various factor. From this it would be possible to find out the average credit days using the above given formula.RECEIVABLE MANAGEMENT: Given a choice. Investment in the type of current assets needs proper and effective management as. However. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. which influence the working capital requirement. This may lead to cash crisis. activities may get squeezed.

Effective cash management is facilities if the cash budget is further broken down into months. . Repayments of Loan etc. weeks or even a daily basis. a half or a quarter year. 4. 6. Cash received from Loans. Cash payment for other revenue expenditure 4. CASH OUTFLOWS: 1. There are two components of cash budget are: 1. Cash payments for withdrawals. Cash Purchase 2. Cash payment for assets creation 5. Cash received from debtors 3. Cash payments to Creditors 3. deposits etc.CASH BUDGET: Cash budget basically incorporates estimates of future inflow and outflows of cash cover a projected short period of time which may usually be a year. Cash receipts other revenue income 5. taxes. Cash inflows 2. Cash Sales 2. Cash received from sale of investment or assets. Cash outflows The main sources for these flows are given here under: 1.

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