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MANAGEMENT THESIS – I
“A multi-dimensional analysis of working capital management, techniques, tools and changing patterns in a manufacturing concern at vadodara”
Submitted to, MR. AMOL RANADIVE
Submitted by, KEYUR A. PRAJAPATI (8NBVD062)
Manufacturing is the use of machines, tools and labor to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale. Such finished goods may be used for manufacturing other, more complex products, such as household appliances or automobiles, or sold to wholesalers, who in turn sell them to retailers, who then sell them to end users - the "consumers". Manufacturing takes turns under all types of economic systems. In a free market economy, manufacturing is usually directed toward the mass production of products for sale to consumers at a profit. In a collectivist economy, manufacturing is more frequently directed by the state to supply a centrally planned economy. In free market economies, manufacturing occurs under some degree of government regulation. Modern manufacturing includes all intermediate processes required for the production and integration of a product's components. Some industries, such as semiconductor and steel manufacturers use the term fabrication instead. THE GROWTH RATE OF MANUFACTURING SECTOR IN INDIA The growth rate of manufacturing sector in a country truly reflects its economic potentiality. Most of the developed countries are strong enough in their manufacturing sector. Though the services sector in India has brought faster economic success, still the manufacturing sector plays an important role on the ground of sustainability.
In India, though the manufacturing sector is growing at a faster pace still it has failed to some extent with regards to its percentage share in the total GDP.
The growth rate of manufacturing sector in the country has reached at a two-digit percentage growth in the year 2006-07 from April-August.
Both Government as well as the private sectors has come forward for the development of the manufacturing sector of the country. More investments are being proposed in the sector particularly in the growth rate of capital goods, consumer durables, and some non-durable goods. The coming budget 2007-08 is to emphasize on the manufacturing sector in India’s Economy for sustaining its growth and achieving development goals.
OBJECTIVE OF THE STUDY
A well designed and implemented working capital management is expected to contribute positively to the creation of a firm’s value. The main objective is to examine the trends in working capital management and its impact of firms’ performance.
The trend in working capital needs and profitability of firms are to be examined to
identify the causes for any significant difference between the industries. To study the key variables used in the analysis like inventories days, accounts receivables days, accounts payable days and cash conversion cycle. To analyze how the firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. To study the success factors that contribute to success or failure of a particular firm for example availability of attractive financing, economic conditions, competition, government regulations, technology and environmental factors.
To analyze effective management of working capital as it may have a consequent impact
on small business survival and growth. To study how the firm is meeting day-to-day cash flow needs. To analyze how the firm pays wages and salaries when they fall due. To know how the firm makes regular payments to creditors to ensure continued supplies of goods and services. To know how the firm is meeting with the payments of government taxes To analyze long term survival of the business entity.
Description of the problem
Working capital management is concerned with the problems that arise while managing the current assets, the current liabilities and the interrelationship that exists between them. Thus, the working capital management refers to all aspects of a administration of both current assets and the current liabilities. Every business concern should not have neither ample of ideal funds now into short of working capital as both the conditions are harmful and unprofitable for any business. But out of these two, the shortage of working capital is more dangerous for the well being of the firms. Impact of excessive working capital Excessive WC means idle funds, which earn no profits for the business, cannot earn proper rate of return on its investment. When there is a redundant WC, it may lead to unnecessary purchasing and accumulation of inventories causing more chances if theft, waste and losses. Excessive WC implies excessive debtors and defective credit policy, which may cause higher incidences of bad debts. It may result into overall inefficiency in the organizations. When there is excessive WC relation with banks and other financial institutions may not be maintained. Due to low rate of return on investments the value of shares may also fall. In case of redundant WC there is always a chance of financing long terms assets from short terms funds, which is very harmful in long run for any organization. Impact of inadequate working capital A concern, which had adequate WC, cannot pay its short-term liabilities in time. Thus it will lose its reputation and should be not be able to get good credit facilities. It cannot by its requirements in bulk and cannot avail of discounts. It stagnates growth. It becomes difficult for the firms to exploit favorable market conditions and undertake profitable projects due to non-availability of WC funds.
The firm cannot pay day-to-day expenses of its operations and its credit inefficiencies, increases cost and reduces the profits of the business. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds thus the firm’s profitability would deteriorate. Operating inefficiency creeps in and it becomes difficult to implement operating plans and achieve the firms profit targets. In order to understand and analyze above mentioned problems regarding management of working capital management, I have to use different techniques and tools like length of the operating cycle as a whole as well as of inventory, bills receivables, bills payable etc as well as I have to use ratio analysis to find out the correct status of liquidity of the firm. At the end I will be applying the four principles of working capital management namely principle of risk variation, principle of cost of capital, principle of equity position and principle of maturity payment.
The primary research of our study is to do multi-dimensional analysis of working capital management using different specified techniques and tools and also measure the changing patterns or trends in a manufacturing concern at vadodara.
For the purpose of this study, profitability is measured by return on total assets, which is defined as profit before interest and tax divided by total assets. The efficiency ratios, namely accounts receivable, inventory and accounts payable will be computed using applicable formulas. The cash conversion cycle will be used as a comprehensive measure of working capital.
In order to account for firm’s size and the other variables that may influence profits, the debtequity ratio, the gross working capital turnover ratio and the ratio of current assets to total assets will be included in our study.
Project schedule My project is based on following time table. Date Particular 27th July Synopsis 7th august Questionnaire design 15th august Survey 5th September Analysis of data gathering 30th September Submission of report
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