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Research Method Used

Research is a systematic purposive investigation looking for the facts through
verifiable methods in order to establish a relationship between them and to
conclude from them broad principles or laws. There are various types of research
based on the intent:
1. Pure and Applied Research
2. Exploratory Research
3. Descriptive Research
4. Diagnostic Study
5. Evaluation Studies
6. Action Research
This project report is based on Exploratory Research, that is, I have conducted a
preliminary study of an unfamiliar problem. I have done it to generate new ideas or
increase my familiarity with the problem. Generally the methods used are literature
survey, experience survey, case studies etc.

Data Collection Method
There are two categories of data collection methods: Primary and Secondary. I
have used both sources of data. The sources include websites, text book and
reference books. Details of these sources are available in Bibliography and
Webliography.

.  To understand the trend exhibited by the working capital over the period.OBJECTIVES  To understand the concept of Working Capital.  To analyze the current working mechanism of Sources and Investments of funds in the Company.  To understand the need and importance of working capital finance in an Organization.  To analyze the overall short-term fund requirements of the Company.

no capital means no production and no customers. to provide for adequate working capital. All this indicates that proper estimation of the Working Capital requirements is a must for running the business efficiently and profitably. Therefore. insufficient inventory may cause loss of sales to Customers. For example. Working capital is therefore:- Current WORKING CAPITAL = Assets || . .. It is represented by excess of Current assets over Current Liabilities.WORKING CAPITAL MANAGEMENT INTRODUCTION TO WORKING CAPITAL “Working Capital is the Life-Blood And Controlling Nerve Center of a Business” The term Working Capital refers to the capital required for day-to-day operations of a business enterprise.. On the other hand too little investment can be expensive. which means no capital.Current liabilities stock + debtors + cash The importance of having working capital is best understood as 'costs expended before payment received for goods/service provided to the customer'. Too large investment in Current Assets means blocking the capital that can be used productively elsewhere. It is necessary for any organization to run successfully its affairs.

Net working capital can be positive or negative. sometimes called liquid assets. A positive net working capital will arise when current assets increase current liabilities. as:   Raw material  Work in progress  Stores and spares  Finished Goods Temporary Investments of surplus funds . which are either held in the form of cash or are expected to be converted in cash within the accounting period in one-year duration. Current Assets: Current assets. which in ordinary course of business can be converted into cash within a short period of normally one accounting year. Current liabilities are those claims of outsiders.There are basically two concepts of working capital Gross Working Capital: It is the amount of capital invested in the total Current assets of the enterprise. Current assets are those assets. A negative working capital will arise when current liabilities are in excess of current assets. The operating cycle is the time taken to convert the raw materials into finished goods and convert receivables (goods sold on credit) into cash. which are expected to mature for payment within an accounting year. Current Assets include:  Cash in hand  Bank balances  Bills Receivables  Sundry Debtors (less provision for bad debts)  Short term loans and advances  Inventories of stocks.  Net Working Capital: It refers to the difference between net current assets and liabilities. are those resources of a firm.

It may be due to mismanagement of current assets. if it does not amount to appropriation of profits. . Current assets are converted into cash to pay current liabilities. It is a conventional rule to maintain the level of current assets twice the level of current liabilities. Excessive liquidity is also bad. Gross Working Capital is a Going Concern/Financial Concept where as the Net Working Capital is an Accounting Concept of working capital.  Dividends Payable  Bank Overdraft  Provision for taxation. Current Liabilities include:  Bills Payable  Sundry creditors or Accounts Payable  Accrued or Outstanding expenses  Short term loans. Prepaid expenses  Accrued Incomes. Therefore prompt and timely action should be taken by the management to improve and correct the imbalances in the liquidity position of the firm. Current Liabilities: Current Liabilities are debts payable within an accounting period. Advances or deposits. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity and at times it may prove to be harmful for the company’s reputation.

. (Money invested in one area may "cost" opportunities for investment in other areas. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible.) If a department is operating with more working capital than is necessary.IMPORTANCE OF WORKING CAPITAL Working capital constitutes part of the Crown's investment in a department. liquidity position and other requirements of the company. such cash may more appropriately be "invested" in other assets or in reducing other liabilities.  To help the company to maintain good business relations.  To determine the future capital.  To maintain the level of current assets twice the level of current liabilities. However. OBJECTIVE: The objective of working capital management is to maintain the optimum balance of each of the working capital components. Other objectives of working capital management are as follows:  To identify cash flow cycles of the firm. this over-investment represents an unnecessary cost to the Crown. Working capital management takes place at two levels:  Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management. Associated with this is an opportunity cost to the Crown. thereby maximizing the interest earned.

working capital management is not an end in itself. It is an integral part of the department's overall management. When considering these techniques and strategies. some departments have significant inventory levels. The emphasis that needs to be placed on each component varies according to department. departments need to recognize that each department has a unique mix of working capital components. The needs of efficient Working capital management must be considered in relation to other aspects of the department's financial and non-financial performance . The individual components of working capital can be effectively managed by using various techniques and strategies. For example. others have little if any inventory. Furthermore.

.CLASSIFICATION OF WORKING CAPITAL Working Capital is classified on the following two basis: (a) On basis of time (b) On basis of concept KINDS OF WORKING CAPITAL On basis of Concept Gross Net Fixed Capital On basis of Time Permanent/ Temporary/ Working Working Variable Capital Working Working Capital Capital Regular Reserve WC WC Seasonal Special WC WC Permanent or Fixed Working Capital: Is the minimum amount of Working Capital required to ensure effective utilization of fixed facilities and for maintaining the circulation of Current assets.

There is always a minimum level of Current Assets. such as strikes. from inventories to receivables and from receivables to cash and so on. requirements of permanent Working capital also increase due to increase in current assets. i. which is required to meet seasonal demands and some special exigencies such as launching of extensive marketing campaign for conducting research etc. Minimum level of Current Assets is called permanent or fixed working capital as this part of Working Capital is permanently blocked in Current Assets. rise in prices. which are continuously required by the enterprise to carry out its normal business operations. Finished goods and cash balance. Work-in-Progress. Reserve Working Capital: It is the excess amount over the requirement for regular Working Capital which may be provided for contingencies that may arise at unstated periods. . As the business grows. ii. Temporary or Variable Working Capital: It is the amount of Working Capital. depression etc. Regular Working Capital: It is required to ensure circulation of Current Assets from cash to inventories. Example: Every firm has to maintain a minimum amount of raw materials.

correspondingly. etc.  Production Policy-The production policies pursued by the management has a significant effect on the requirements of working capital of the business. sales will increase. levels of inventories and book debts will also fall.. Every company according to their nature of business has to maintain a certain level of working capital. specially the temporary working capital requirement of the firm. When there is a decline in the economy sales will fall and consequently. Under boom. the firm’s investment in inventories and book debts will also increase. The production schedule has a great influence on the level of inventories.  Seasonal Variations-Most firms experience seasonal and cyclical fluctuations in the demand for their products and sevices. When there is an upward swing in the economy. additional investment in fixed assets may be made by some firms to increase their productive capacity. will also have its effect on working capital requirements. . The decision of the management regarding automation.FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS  Nature or Characteristics of Business-The working capital requirements of an enterprise are basically related to the conduct of the business. This act of the firm will require further additions of working cpital. These business variations effect the working capital requirement.

Longer the manufacturing cycle. increases resulting in more and more funds blocked in these current assets. recession. It is. it is logical to expect that a large amount of working capital will be required. inventories etc. The working capital requirements can also be affected by the credit facilities enjoyed by the company. may have higher sales but will need more working capital as compared to a company which has an efficient debt collection machinery and observing strict terms.As a result. . larger will be the firm’s working capital requirements. In case of recession period.  Business cycle-Different phases of business cycle i. of course. There will be a fall in inventories and cash requirements etc. also affect the working capital reuirement. The composition of working capital in a growing company also shifts with economic circumstances and corporate practices. In case of boom condition business activities expand .  Rate of growth of Business-As a company grows.  Manufacturing Process/ Length of product cycle-The manufacturing process comprises of the purchase and use of raw materials and the production of finished goods. there is usually dullness in business activities and there will be an opposite effect on the level of working capital requirement. recovery etc. Credit policy-A company which allows liberal credits to its customers. difficult to determine precisely the relationship between the growth in the volume of business of a company and the increase in its working capital. boom. the need for cash.e.

which will help improve profits and reduce risks. There are two elements in the business cycle that absorbs cash: . the more cash it requires for working capital and investment. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of firm’s total profits. The faster a business expands.WORKING CAPITAL CYCLE The working capital cycle can be defined as: “The period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer”. Good management of working capital will generate cash. The cheapest and best sources of cash exist as working capital right within business.

g.TIME IS MONEY. the business will generate more cash or it will need to borrow less money to fund working capital. reduce inventory levels relative to sales). Similarly. if you can negotiate improved terms with suppliers e. you effectively create free finance to help fund future sales. If you can get money to move faster around the cycle (e. Inventory (Stocks and work-in-progress)  Receivables (Debtors owing you money) The main sources of cash are Payables (your creditors) and Equity and Loans. .g. you could reduce the cost of bank interest or you’ll have additional free money available to support additional sales growth or investment. When it comes to managing working capital. collect monies due from debtors more quickly) or reduce the amount of money tied up (e. As a consequence. get longer credit or an increased credit limit.g.

FINANCING OF WORKING CAPITAL There are two types of working capital requirements in a companyi) Permanent or Fixed Working Capital Requirements ii) Temporary or Variable Working Capital Requirements Depending on the above mentioned requirements following are the sources of financing working capital- SOURCES Long Term Sources Short Term Sources Shares Commercial Banks Debentures Commercial paper Public Deposits Loans from Financial institutions Trade Creditors Installment credit Accounts payables Accrued Expenses .

A useful tool for the small-business owner is the operating cycle. Consequently. working capital financing is needed. Inventory is analyzed by the average number of days it takes to turn over the sale of a product (from the point it comes in your door to the point it is converted to cash or an account receivable). accounts receivables are analyzed by the average number of days it takes to collect an account. Accounts payables are analyzed by the average number of days it takes to pay a supplier invoice. In other words. In fact. Inventory and Accounts Payable cycles in terms of days. the term means a lot of different things to a lot of different people. This shortfall is typically covered by the net profits generated internally or by externally borrowed funds or by a combination of the two. Most businesses need short-term working capital at some point in their operations. For instance.WORKING CAPITAL ANALYSIS Working capital is one of the most difficult financial concepts to understand for the smallbusiness owner. retailers must find working capital to fund seasonal inventory buildup between September and November for Christmas sales. By definition. . Most businesses cannot finance the Operating Cycle (accounts receivable days + inventory days) with accounts payable financing alone. But even a business that is not seasonal occasionally experiences peak months when orders are unusually high. Working Capital is the amount by which current assets exceed current liabilities. The operating cycle analyzes the Accounts Receivable.

you might miss out on the one big order that could have put your business over the hump. If you have paid on time in the past. if you receive a big . you might be able to solicit their help in providing short-term working capital. you will have several potential sources of funding. If you get caught off guard. These funds might be injected from your own personal resources or from a family member. The important thing is to plan ahead. a trade creditor may be willing to extend terms to enable you to meet a big order. this is very rare for a new business. friend or third-party investor.This creates a need for Working Capital to fund the resulting Inventory and Accounts Receivable buildup. However. Here are the five most common sources of short-term working capital financing:  Equity  Trade Creditors  Factoring  Line Of credit  Short-term Loans Equity: If your business is in its first year of operation and has not yet become profitable. If your new venture experiences a need for short-term Working Capital during its first few years of operation. Trade Creditors: If you have a particularly good relationship established with your trade creditors. For instance. then you might have to rely on equity funds for short-term working capital needs. Some small businesses have enough cash reserves to fund seasonal Working Capital needs.

Factoring: Factoring is another resource for short-term working capital financing. The funds are repaid once you collect the accounts receivable that resulted from the short-term sales peak. A line of credit allows you to borrow funds for short-term needs when they arise. If you have established a good banking relationship with a banker. you might have success in obtaining a one-time short-term loan (less than a year) to finance your temporary working capital needs. you could obtain 60-day terms from your supplier if 30-day terms are normally given. . your business might qualify for one. However. he or she might be willing to provide a short-term note for one order or for a seasonal inventory and/or accounts receivable buildup. In addition to analyzing the average number of days it takes to make a product (inventory days) and collect on an account (account receivable days) vs. Line Of Credit: Banks to new businesses do not often give Lines of credit. a factoring company buys your account receivable and then handles the collection. the operating cycle analysis provides one other important analysis. Short-term loan: While your new business may not qualify for a line of credit from a bank. Lines of credit typically are made for one year at a time and are expected to be paid off for 30 to 60 consecutive days sometime during the year to ensure that the funds are used for short-term needs only. if your new business is well capitalized by equity and you have good collateral. the number of days financed by accounts payable. The trade creditor will want proof of the order and may want to file a lien on it as security. Once you have filled an order.order that you can fulfill. This type of financing is more expensive than conventional bank financing but is often used by new businesses. ship out and collect in 60 days.

The primary objective of working capital management is to ensure that sufficient cash is available to:  Meet day-to-day cash flow needs. more sales means more debtors and higher working capital demands). and  Overtrading (trying to maintain a level of sales which is higher than working capital can sustain – for businesses which extend credit terms. . a good understanding of working capital is imperative to make any venture successful.  Pay government taxation and providers of capital – dividends.From the operating cycle. a computation can be made of the dollars required to support one day of accounts receivable and inventory and the dollars provided by a day of accounts payable. Since cash flow is the name of the game for all business owners. Working capital has a direct impact on CASH FLOW in a business.  Pay wages and salaries when they fall due. and  Ensure the long-term survival of the business entity. Poor working capital management can lead to:  Over-capitalization (and therefore waste through under utilization of resources and hence poor returns).  Pay creditors to ensure continued supplies of goods and services.