WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

A Project report on

Working capital management of ARSS infrastructure ltd
A project report submitted for the partial fullfillment of

POST GRADUATE DIPLOMA IN MANAGEMENT Submitted by Prakash kumar sahoo Roll no-PGDM9040

HDF SCHOOL OF MANAGEMENT AT-Naranpur,belagachhia,cuttack APPROVED BY AICTE (2009-2011)

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

CERTIFICATE

9MNXNXYTXFYNXK^YMFYYMJXZRRJWUWTOJHY\TWPTKMr. Prakash kumar sahoo 9NYQJI<TWPNSLHFUNYFQRFSFLJRJSYNXFSTWNLNSFQ\TWPFSIYMNX \TWPMFXSTYGJJSXZGRNYYJIJQXJ\MJWJNSFS^KTWR9MJNSIJGYSJXX YTTYMJW\TWPXUZGQNHFYNTSXMFXGJJSIZQ^FHPST\QJILJIFYYMJ WJQJ[FSYUQFHJX9MJUWTOJHY\TWP\FXHFWWNJITZYIZWNSL YTNSARSS infrastructure projects private limited

Date:

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

ACKNOWLEDGEMENT
It gives me immense pleasure to present this project report on Working Capital Management carried out at ARSS infrastructure projects Ltd. In partial fulfillment of post-graduate course of PGDM. No work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report. At the outset I would like to thank Mr. R.R. SINGH sir Head of Dept. (Accounts) for their valuable advice and guidance during my project for timely help concerning various aspects of project. I also thanks to all staff members of account department for help me to complete the summer internship program. I would be failing in my duty if I do not express my deep sense of gratitude to Prof.Nanda sir without his guidance it wouldn t have been possible for me to complete this project work. Lastly I would like to thank my parents, friends and well wishers who encouraged me to do this research work and all those who contributed directly or indirectly in completing this project to whom I am obligated to. Prakash kumar sahoo PGDM

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

DECLAIRATION
I, Prakash kumar sahoo Student of PGDM 2009-2011studying at HDF school of Management, cuttack,orissa declare that the project work entitled Working Capital management of ARSS infrastructure Projects Ltd. was carried by me in the partial fulfillment of PGDM program under the AICTE .This project was undertaken as a part of academic curriculum according to the AICTE'S rules and norms and it has not commercial interest and motive. It is my original work. It is not submitted to any other organization for anyother purpose.

DATE: PLACE: Prakash kumar sahoo PGDM

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

CONTENTS
Chpter No. Particular Page No.

Certificate Acknowledgement Declairation Contents List of tables List of Charts 1 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.4 WORKING CAPITAL MANAGEMENT Introduction Need of working capital Gross W.C and Net W.C Types of working capital Determinants of W.C RESEARCH METHODOLOGY Introduction Types of Reserch methodology Objective of he study Scope and limitation of the study

I II III IV V VI

3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 -4

WORKING CAPITAL SIZE AND ANALYSIS working capital level Working capital trend analysis Current assets analysis Current liability analysis Changes of working capital Operating cycle Working capital leverage

Working Capital Ratio analysis
5.1 Introduction 5.2 Role of ratio analysis 5.3 Limitations of ratio analysis 5.4 Classifications of ratios 5.5 Efficiency ratio 5.6 Liquidity ratio

WORKING CAPITAL MANAGEMENT 5 5.1 5.2 5.3

ARSS INFRASTRUCTURE PROJECTS LTD.

Working Capital components Receivables management Inventory management Cash management

6

Working Capital Finance and Estimation 6.1 Introduction. 6.2 Sources of working capital finance. 6.3 Working capital loan and interest. 6.4 Estimation of working capital.

7

Conclusions and recomandations 7.1 Conclusion 7.2 Recommendations

8 Appendices 8.1 Bibliography 8.2 Balance sheets

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

CHAPTER-1
Working capital management

1) 2) 3) 4) 5)

Introduction Need of working capital Gross w.c & Net w.c Types of working capital Determinants of working capital

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

WORKING CAPITAL MANAGEMENT

1.1) Introduction
³More business fails for lack of cash than for want of profit´. Efficient management of working capital is one of the pre -conditions for the success of an enterprise. Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a f irm and for fulfilment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm¶s liquidity. Holding of excess working ca pital results in the reduction of the profitability. But the proper estimation of working capital actually required, is a difficult task for the management bec ause the amount of working capital varies across firms over the periods depending upon the nature of business, production cycle, credit policy, availability of raw material, etc. Thus efficient management of working capital is an important indicator of sound health of an organisation which requires reduction of unnecessary blocking of capital in order to bring down the cost of financing.

Working capital management
Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firm s current assets

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and current liabilities in such way that the satisfactory level of working capital is mentioned. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of the sa fety.
Definition:-

1. 1.

According to Guttmann & Dougall Excess of current assets over current liabilities . According to Park & Gladson-

The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & Wages payable, accounts payable, taxes owned to government) .
1.2) Need of working capital management

The need for working capital gross or current assets cannot be over emph asized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among oth er things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is nec essary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash aft er expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount r equired to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise

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1.3) Gross working capital and Net working capital
There are two concepts of working capital management

1.

Gross working capital

Gross working capital refers to the firm's investment In current assets. Current assets are the assets which can be convert in to cash within one financial year includes cash, short term securities, debtors, bills receivable and inventory.

2.

Net working capital

Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expect ed to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries.net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required. The concept of working capital was, first evolved by Karl Marx. Marx used the term variable capital means outlays for payrolls advanced to workers before the completion of work. He compared this with constant capital which according to him is nothing but dead labour . This variable capital is nothing wage fund which remains blocked in terms of financial management, in work in-process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave

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credit to the firm by accepti ng periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his variable capital .

1.4) Type of working capital
The operating cycle creates the need for current assets (wor king capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital. 1) Permanent working capital or fixed working capital The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital 2) Temporary working capital or variable working capital Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes

A M O U N T

Temporary or variable working capital

A M O U N T

Of

Of

W O R K I N G

W O R K I N G

permanent or fixed working capital TIME

C A P I T

TIME

C A P I T

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Graph shows that the permanent level is fairly castanet; while temporary working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal. This may be because of changes in demand for permanent current assets might be increasing to support a rising level of activity.

1.5) Determinants of working capital
The amount of working capital is depends upon a following factors 1.
Nature of business

Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These bu sinesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc . there requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors. 2.
Length of production cycle

In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quit high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high. 3.
Size and growth of business

In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medi um size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the

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increasing size. 4.
Business/ Trade cycle

If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market, due to increase in the sales, there may more and m ore amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc. 5.
Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher. 6.
Profitability

The profitability of the business may be vary in each and ev ery individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extend that they earned in cash may be used to meet the working capital requirement of the company. 7) Operating efficiency If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.

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CHAPTER-2
Research Methodology

1)Introduction 2)Types of research methodology 3)Objective of the study 4)Scope and limitation of the study

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2.1) Introduction Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. The procedures by which res earcher go about their work of describing, explaining and predicting phen omenon are called methodology. Methods comprise the procedures used for generat ing, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to p roblem. Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without proper data available for analysis you cannot do the research work accurately. 2.2) Types of data collection There are two types of data collection methods available . 1. 2. Primary data collection Secondary data collection

1) Primary data The primary data is that data which is collected fresh or first hand, and for first

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time which is original in nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary data. 2) Secondary data collection method The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc. This project is based on primary data collected through personal interview of head of account department and other concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through five years annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company . Project is based on
1. Annual report of ARSS 2004-2005 2. Annual report of ARSS 2005-2006 3.Annual report of ARSS 2006-2007 4.Annual report of ARSS 2007-2008 5.Annual report of ARSS 2008-2009 6.Annual report of ARSS 2009-2010

2.3) OBJECTIVES OF THE STUDY Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company can not earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis. 1. 2. 3. 4. To study the working capital management of ARSS infrastructure projects private Ltd. To study the optimum level of current assets and current liabilities of the company. To study the liquidity position through various working capital related ratios. To study the working capital components such as receivables accounts, cash management,

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Inventory position 5. To study the way and means of working capital finance of the ARSS infrastructure projects pvt. Ltd. 6. To estimate the working capital requirement of ARSS infrastructure projects pvt.Ltd 7. To study the operating and cash cycle of the company.

2.4) SCOPE & LIMITATIONS OF THE STUDY Scope of the study The scope of the study is identified after and during the study is conducted. The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last 6 years Annual Reports of ARSS infrastructure projects pvt Ltd.And even factors like competitor s analysis, industry analysis were not considered while preparing this project. Limitations of the study Following limitations were encountered while preparing this project:

1) Limited data:This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality.

2) Limited period:This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company

3) Limited area:Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

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CHAPTER-IV

Working capital level and analysis
1)Working capital level 2)Working capital trend analysis 3)Current assets analysis 4)Current liability analysis 5)Changes of working capital 6)Operating cycle 7)Working capital leverage

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Working capital level
The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firm s profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can be threatened solvency of the firms because of its inability to meet its current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance. Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 A) Current Assets Inventories 58,429,517 104,206,335 73,298,835 622,103,160 1,882,704,940 3,701,088,128 Sundry Debtors 1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901 Cash and Bank 19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090536 Balances Loans and 48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936 Advances Total of A (Gross 127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501 W.C.) B) Current Liabilities Current liabilities Provision Total of B Net W.C. (A-B)

42,632,767 7,535,964 50,168,731 77,101,916

121,648,520 9,823,827 131,472,347

105,763,831 35,261,598 141,025,428

858,935,086 92,135,009 951,070,095 1,205,573,857

1,147,928,616 172,295,570 1,320,224,186 2,265,639,440

1,447,454,152 258,380,043 1,705,834,194 5,28,294,8307

176394314 399,820,011

Table ........Size of working capital

Working Capital Trend Analysis:
In working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an analyst to make a study about the trend and direction of working capital over a period of time. Such analysis enables as to study the upward and downward trend in current

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assets and current liabilities and its effect on the working capital position. ³Analysis of working capital´ trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds.

WORKING CAPITAL SIZE OF ARSS

Years Net w.c

2004-2005 2005-2006 2006-2007 2007-2008 77101906 176394314 399820011 1205573857

2008-2009

2009-2010

2265639440 5282948307

W.C indices 100

228.78

518.56

1563.61

2938.49

6851.9

Table .........working capital size

Working Capital Indices base year 2004-2005 taken as 100
8000 7000 6000

Working capital indices
6851.9

w.c indices

5000 4000 3000 2000 1000
100 228.78 518.56 1563.61 2938.49

0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 working capital indices years Exponential Regression for working capital indices

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Observations:
The net working capital of ARSS Infrastructure Projects Limited is continuously increasing from 2004-05 as the indices shows in the figure. The working capital indices of 2009-10 compared to 2004-05 is as 68 times because the current assets are increasing continuously where as the current liabilities are not as increased as current assets. There is sudden increase in current assets of 200708 compared to its previous year i.e. 2.98 times. In 2007-08 the company has taken four projects in road, five projects in railway, one project in irrigation of rupees worth 72686 lacs, 29113 lacs, and 6636 lacs continously. While in 2008-09, the company has taken only three projects of rupees worth 18098 lacs. The no of projects taken in FY 2009-10 are ....... so the value of current assets

increased. However the current liabilities of the company increased only 38.56 crores. In current liability of the company two things are included i.e. sundry creditors and the provisions (taxes, fringe benefit tax, dividend, tax on proposed dividened). The company is bidding for good projects because it has sufficient amount of reserves and surplus as well as inventories that means it is using its long term securities as well as short term securities for it s bidding and execution of the projects.

Current asseets:
Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year.

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 A) Current Assets Inventories 58,429,517 104,206,33 73,298,835 622,103,160 1,882,704,940 3,701,088,128 5 Sundry 1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901 Debtors

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Cash and 19,100,114 Bank Balances Loans and 48,575,716 Advances Total of A 127,270,647 (Gross W.C.) C.A 100 indices

50,648,882

116,425,792

373,999,265

717,214,943

1,095,090536

81,219,576 307866661

205,984,507 540,845,439

506,967,157 2,156,643,952

557,410,278

1,406480936

3,585,863,626 6,988,782,501

241.89

424.96

1694.96

2817.51 5491.28

Table........:Current assets size and Current assets indices

Curr

5000

4000

3000

C.A

2000

1000
424.96 241.89 100

0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Composition of current assets in ARSS Analysis of current assets components enable one to examine in which components the working capital fund has locked. A large tie up of funds in inventories affects the profitability of the business or the major portion of current assets is made up cash alone, the profitability will be ........... because cash is non earning assets.

22

£ ¦ ¥¡ £  ££¢ ¡  ¤ ¤
t t
2817.51 1694.96

6000

5491.28

Y

© ¨§ 

  

r

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

Particulars inventories Sundry debtors

2004-2005 45.90% 0.92

2005-2006 33.85 23.32 16.45 26.38 100

2006-2007 13.55 26.83 21.52 38.09 100

2007-2008 28.85 30.31 17.34 23.51 100

2008-2009 52.50 11.95 20.00 15.54 100

2009-2010 52.96 11.25 15.67 20.12 100

Cash and 15.01 bank balance Loans and advances total 38.17 100

Observation: The current assets increases as the sales increase. The excess of current assets is always positive for the company but it is not always good. It may adversely affect the profitability of the firm. There are certain investments for which company pay interest. From the table of composition of current assets, there is good amount of inventory available except one year (2006-07). Excess amount of inventory is good for the company because the company is diversifying its business into different sectors and there is no certainty about the projects (time of the projects) in certain sectors. The loans and advances of the firm are in zigzag way. The loans and advances should be minimum as the high loans create a greater amount of interest. The company was doing well from 2006-07 to 2008-09 as the company had taken four projects in road, five in railway, and one in irrigation. But in 2009-10 it has increased

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because of the ARSS took good projects. The company is doing better in sundry debtors in previous two years. The company had taken its amount from its debtors. Cash and bank balances is good for all the years.

Current liabilities Current liabilities mean the liabilities which the company have to pay in current financial year. It includes sundry creditors means supplier whose payment is due but not paid yet, thus creditors called as current liabilities.Current liabilities also include short term loan and provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance

current liability size
particulars Current liabilities Provision Total of B Indices of C.L 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

42,632,767 121,648,520 105,763,831 7,535,964 100 9,823,827 35,261,598

858,935,086 1,147,928,616 1,447,454,152 92,135,009 1895.7 172,295,570 2631.56 258,380,043 3400.19

50,168,731 131,472,347 141,025,428 262.06 281.1

951,070,095 1,320,224,186 1,705,834,194

Table........current liability size and its indices

Current liability indices
4000 3500 3000

C.L indices

2500 2000 1500 1000 500 0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

C.L indices Exponential Regression for C.L indices

Years

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Figure.......Current liability indices Observation In current liabilities of the company only the sundry creditors and the provision (provision for taxation, fringe benefit tax, dividend and proposed dividend) are included. Current liabilities show continues growth each year except in 2006-07 and 2009-10 because company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm. As a current liability increased in the year 2007-08 by 574.39% it also increased the working capital size in the same year. But company enjoyed over creditors which may include indirect cost of credit terms in future. CHANGES IN WORKING CAPITAL Current liabilities show continues growth each year because company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm. As a current liability increase in the year 2006-07 by 35% it reduce the working capital size in the same year. But company enjoyed over creditors which may include indirect cost of credit terms. 4.5) Changes in working capital

There are so many reasons to changes in working capital as follow 1. Changes in sales and operating expanses:The changes in sales and operating expanses may be due to three reasons 1. There may be long run trend of change e.g. The price of row material say oil may constantly raise necessity the holding of large inventory. Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary.

2.

3.Changes in seasonality in sales activities 4. Policy changes:The second major case of changes in the level of working capital is because of policy changes initiated by management. The term current assets policy may be defined as the relationship between current assets and sales volume.

5. Technology changes:The third major point if changes in working capital are changes in technology because changes in technology to install that technology in our business more working capital is required A change in operating expanses rise or full will have similar effects on the levels of working following working capital statement is prepared on the base of balance sheet of last two year.

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STATEMENT OF CHANGES IN WORKING CAPITAL changes in working capital particulars 2008-2009 2009-2010 increase A)Current assets inventories Sundry debtors Cash and bank balances Loans and advances Total current assets B)Current liabilities Current liabilities provision Total current liabilities Net working capital 1147928616 172295570 1320224186 1447454152 258380043 1705834194 299525536 86084473 385610008 1882704940 428533465 717214943 557410278 3585863626 3701088128 786122901 1095090536 1406480936 6988782501 1818383188 357589436 377875593 849070658 3402918875

decrease

2265639440

5282948306

3017308866

Observation There is a positive working capital which shows the further growth as the company is expanding it s business into other sectors of the construction. The working capital increased due to the following reasons: 1) There is 50% increase in the inventories from previous year because the company is taking new projects in new sectors with good worth. 2) The current liabilities of the firm is very less. 3) The increased total current liabilities is very less compared to the total current assets.

Operating cycle
The need of working capital arrived because of time gap between production of

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goods and their actual realization after sale. This time gap is called Operating Cycle or Working Capital Cycle . The operating cycle of a company consist of time period between procurement of inventory and he collection of cash from receivables. The operating cycle is the length of time between the company's outlay on raw materials, wages and other expanses and inflow of cash from sales of goods. Operating cycle is an important concept in management of cash and management of cash working capital. Th e operating cycle reveals the time that elapses between outlays of cash and inflow of cash. Quicker the operating cycle less amount of investment in working capital is needed and it improves profitability. The duration of the operating cycle depends on nature of industries and efficiency in working capital management. In manufacturing concern ,the working capital cycle/operating cycle starts with the purchase of raw material and ends with the realisation of cash from the sale of finished products.This cycle involves purchase of raw material and stores,its conversion through into stocks of finished goods through work-inprogress with progressive increment of labour and service costs,conversion of finished stock into sales,debtors and receivables and ultimately realisation of cash and this cycle continues again from cash to purchase

DEBTORS (RECEIVABLES)

CASH

FINISHED GOODS

RAW MATERIALS

WORK-IN-PROCESS

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[working capital cycle/operating cycle]

The speed with which the working capital completes one cycle determines the requirements of working capital-longer the period of the cycle larger is the rquirement of working capital
Calculation of operating cycle of ARSS ITEMS 1.Raw material 2.Work-in -progress 3.finished goods Total 2.Debtors conversion period 3.Gross working capital cycle 4.Payment deferal period NET WORKING CAPITAL CYCLE 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Observation: The inventory conversion period of the company is almost same in financial years from 2005 to 2009 but in the financial year 2009-10 there is sudden increase (double times) from its previous year. Raw Material consumption in 2009-10 decreased from previous years while raw material inventory increased . The maximum projects of the company (with joint ventureCompany) finished in the May 2010 as NIRAJ-ARSS joint venture total value of the projects 26288 lacs. The company is engaged in bidding of big projects so the company keeps a better raw material inventory in FY 2009-10. Also the company has a vision of taking tenders of good projects in next financial year. ARSS infrastructure Projects Limited is a construction company and it s coustomers are the Government of different states, Ministry of Railway, Ministry of Infrastructure and the Government agencies like SAIL, NTPC etc. so there is no any debtors available among it s coustomers because the Government or their agencies pays the money instantaneouslybefore/ during or after the project.

28

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The companys debtors are joint venture companies. Sometimes the ARSS and its joint venture companies do the project but the company incurres the whole cost. And there is delayed in payment by its joint venture companies. That comes under the debtors collection period. Common sense tells that longer a company has money out, the more risk it is taking .But there is one positive aspect that will boost the confidence among the companies .The company is not

purchasing on credit from it s supplier. So in credit deferral period the credit purchases taken as a whole sundry creditors. These sundry creditors are for the bank loans, Advances etc. In all the years from 2005 to 2009 the creditors deferral period is 360 days which is good for the company. The company is enjoying the money of it s creditors.
WORKING CAPITAL LEVERAGE

One of the important objectives of working capital manageme nt is by maintaining the optimum level of investment in current assets and by reducing the level of investment in current assets and by reducing the level of current liabilities the company can minimize the investment in the working capital thereby improve ment in return on capital employed is achieved. The term working capital leverage refers to the impact of level of working capital on company s profitability. The working capital management should improve the productivity of investment in current assets and ultimately it will increase the return on capital employed. Higher level of investment in current assets than is actually required means increase in the cost of Interest charges on short term loans and working capital finance raised from banks etc. and will result in lower return on capital employed and vice versa. Working capital leverage measures the responsiveness of ROCE (Return on CapitalEmployed) for changes in current assets. It is measures by applying the following formula,

Working capital leverage=

% Changes in ROCE % Changes in current assets

EBIT Return on capital employed= Total assets

The working capital leverage reflects the sensitivity of return on capital employed to changes in level of current assets. Working capital leverage would be less in the case

29

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of capital intensive capital employed is same working capital leverage expresses the relation of efficiency of working capital management with the profitability of the company.

CALCULATION OF WORKING CAPITAL LEVERAGE YEAR 2004-2005 2005-2006 2006-2007 2007-2008 EBIT Total assets ROCE% %Change in ROCE Current assets %change in current assets 17013036 10.58 N.A 42850664 14.29 35.07 139926233 667642027 20.96 46.68 540845439 75.67 0.62 378403100 19.08 -8.96 160749473 299889528

2008-2009 705936654 18.91 -0.89

2009-2010 1210851636 15.39 -18.61

1983096501 3731842651 7866688809

127270647 307866661 N.A -758.09 -0.05

2156643952 3585863626 6988782501 298.75 -0.03 66.27 -0.01 94.89 -0.20

Working capital N.A leverage

Working Capital Ratio Analysis
30

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Introduction Role of ratio analysis Limitations of ratio analysis Classifications of ratio Efficiency ratio Liquidity ratio

WORKING CAPITAL RATIO ANALYSIS

31

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5.1) Introduction Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as the indicated quotient of two mathematical expressions and as the relationship between two or more things . The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firms financial performance 5.2) Role of ratio analysis Ratio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. A is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good ass istance to predict the future. E.g. On the basis of inventory turnover ratio or debtor s turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate the point out the various arias which need the management attention in order to improve the situation. E.g. Current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to incr ease the liquidity position. As the ratio analysis is concerned with all the aspect of the firm's financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.
5.3) Limitations of ratio analysis

1. The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison 2. Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external analyst has to depend upon th e past which may not necessary to reflect financial position and performance in future. 3. The technique of ratio analysis may prove inadequate in some situations if there is differs in opinion regarding the interpretation of certain ra tio.

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4. As the ratio calculates on the basis of financial statements, the basic limitation which is applicable to the financial statement is equally applicable In case of technique of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis. 5. The technique of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem arias, it dose not provide any solution to rectify the problem arias . 6. For the intra firm comparison, the comparison may be false because different firms use different accounting policies as some firms use LIFO (Last in First out) method while some use FIFO (First inFirst out).

Classification of ratio :-

Basically on the basis of working capital management it can be characterized into following ratios

1) Activity Ratio: Activity ratio is an indicator of how rapidly a firm converts various accounts into cash or sales. The sooner management can convert assets into sales or cash, the more actively the firm run. This ratio is also called Asset Management Ratio. As the assets basically categorized as fixed assets and current assets and again further the current assets classified according to individual components of current assets viz. Inventories, Sundry Debtor, and receivables etc. The important Activity ratios are as follows

(i) Working Capital Turnover Ratio (ii) Inventory Turnover Ratio (iii) Receivable Turnover Ratio (iv)Current Asset Turnover Ratio

1) Working Capital Turnover Ratio:

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A company uses working capital to fund operations and to purchase inventory. These operation and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the cash used to fund operation and sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the cash it uses to fund the sales.

Sales Working Capital Turnover Ratio= Net Working Capital

Particulars sales Net W.C W.C TOR

2004-2005 295777455 77101916 3.83

2005-2006 602467051 176394314 3.42

2006-2007 399820011

2007-2008

2008-2009

2009-2010

1338321101 3136709419 6243752255 10065504283 1205573857 2265639443 5282948306

3.35

2.60

2.76

1.91

W.C TOR
4.5 4 3.5 3
3.83 3.42 3.35 2.76

2.6

W.C TOR

2.5 2 1.5 1 0.5 0 Years 2004-2005 2006-2007 2008-2009 2005-2006 2007-2008 2009-2010 Power Regression for
1.19

Year

Observations

34

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The working capital turnover ratio of ARSS declined from 2004 -05 to 2009-10, however it increased in 2008-09. The reciprocal of the ratio is 0.26, 0.29, 0.30, 0.38, 0.36, and 0.52 continuously. It means that for one rupee of sales, the company needs Rs 0.26, 0.29, 0.30,0.38, 0.36, and 0.52. In previous years the company incurred less money for sales while in these years specially in 2009 -10 it is unable to take projects in that amount. The company is increasing its sales by increasing in the net workin g capital.

Inventory turnover ratio cost of goods sold Inventory TOR = Average inventory

Particulars Cost of goods sold Average inventory Inventory TOR

2005-2006 2006-2007 467324486 1119159494 81317926 88752585 5.75 12.61

2007-2008

2008-2009 2009-2010

2051226344 422819852 6644038328 3 347700997.5 125240406 2791896534 0
5.9

3.38

2.38

Inventory Turnover Ratio
14 12 10
12.61

Inventory TOR

8
5.75 5.9

6 4 2 0 2005-2006
3.38 2.38

Inventory TOR

2006-2007

2007-2008

2008-2009

2009-2010

35

Years

Figure.......Inventory Turnover Ratio

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

Observation: Inventory turnover ratio basically tells about the efficiency of the firm in taking the project and to accomplish that. The inventory turnover shows how rapidly the inventory is turning into receivables through sales. A high inventory turnover ratio is good because the no of days converting the inventories into the sales will become less. As in 2006-07 the inventory turnover ratio is 12.61 times so the inventory holding days is only 29 days while from 2007-08 to 200910 the inventory turnover ratio decreasing means the no of days in inve ntory

converting is increasing. This can bad for the organization as this creates unnecessary tie-up of funds,reduced profit, and increasedcosts.

3) Debtors Turnover Ratio:
A firm sells goods and/ or services for cash and credit. When the firm extends credits to its coustomers, debtors (Accounts Receivables) are created in the firm s accounts. The liquidity position of the firm depends on the quality of debtors to great extent. Gross Sales Debtors Turnover Ratio = Average Debtors

For an Infrastructure Company like ARSS the gross sales considers as the contract revenue. The scrap values are not included in Gross Sales because it further comes into sales with other income. Average Debtors calculated by opening plus closing balance divide by 2.Increasing volume of receivables without a matching increase in sales is reflected by a low receivable turnover ratio. It is indication of slowing down of the collection system or an extend line of credit being allowed by the customer organization. The latter may be due to the fact that the firm is losing out to competition. A credit manager engage in the task of grantingcredit or monitoring receivable should take the hint from a falling receivable turnover

36

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

ratiouse his market intelligence to find out the reason behind such failing trend. Debtor turnover indicates the number of times debtors turnover each year. Generally the higher the value of debtor s turnover, the more is the management of credit.
Particulars Gross sales Average debtors D.T.R A.C.P.* 2004-2005 295777455 1632619 181.2 2 2005-2006 602467051 36478584 16.52 22 2006-2007 216928175 6.17 58 2007-2008 399355338 7.85 46 2008-2009 541053918 11.54 31 2009-2010 607328183 16.57 22

1338321101 3136709419 6243752255 10065504283

Table........Debtor turnover ratio and avarage collection period

16.52

Debtors Turnover11.54 Ratio
7.85

16.57

10 9 8 7 6
6.17

D.T.R

5 4 3 2 1 0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

D.T.R

Year

Observation: Debtors Turnover ratio indicates the no of times debtors turnover each year. Higher the value of debtors turnover, the more efficient is the management of credit because the collection period of the debtors will low. Maximum debtors turnover ratio in all five years is 16.57 in 2009-10. It increases from 2006-07 also there is sudden jump in collecting the amount of debtors in 2008-09 and in 2009-10. The increased Debtors Turnover Ratio shows the better

37

WORKING CAPITAL MANAGEMENT

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management in debtors collection (from it s joint venture companies).

Current Asset Turnover Ratio:
Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets .current assets includes the assets like inventories, sundry debtors, bills receivable, cash in hand or bank, marketabl e securities, prepaid expenses and short term loans and advances.This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm.

Sales Current Asset Turnover Ratio= Current Assets

Particulars Sales C.A C.A TOR

2004-2005 295777455 127270647 2.32

2005-2006 602467015 307866662 1.96

2006-2007 540845439 2.47

2007-2008

2008-2009

2009-2010

1338321101 3136709419 6243752255 10065504283 2156643952 3585863626 6988782501 1.45 1.74 1.44

Table......Current assets Turnover Ratio

2.5 2

2. 2 1.96

1.5

C.A

1 0.5

C.A

38

0 2005-2006 2007-2008 2009-2010 2004-2005 2006-2007 2008-2009

rs

%$ #

('

& 

Curr 

t Ass ts ur v r
2.47

1.74 1.45 1.44

! "    

ti

) 01

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

Observation: This ratio is very significant as it shows how fast the current assets turns into sales. The current asset turnover ratio is in haphazard way but comparing to 2006-07 the ratio is low in recent years. In previous years the ratio was good. The current asset changes in sales in 155days, 184 days, and 146 days continuously in 2004-05, 2005-06, and 2006-07. While in 2007-08, 2008-09, 2009-10 the days are 248 days, 207 days, and 250 da ys continuously. The
increasing no of days of current asset turnover ratio because company can maintain high level of inventory for upcoming its projects.

Current Ratio:
The current ratio is a crude and quick measure of the firm s liquidity. The current is calculated by dividing current assets by current liabilities:

Current Assets Current Ratio = Current Liabilities

Current assets include cash and those assets which can be converted in to cash within a year,such marketable securities, debtors and inventories. All obligations within a year are include in current liabilities. Current liabilities include creditors, bills payable accrued expenses, short term bank loan income tax liabilities and long term debt maturing in the current year. Current ratio indicates the availability of current assets in rupees for every rupee of current

39

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

liability. This ratio is important as the value of the current assets may decrease or increase but the value of the current liabilities is always constant. That has to be paid.

Particulars Current assets Current liabilities

2004-2005 127270647 42632767

2005-2006 307866662 121648520 2.53

2006-2007 540845439 105763831 5.11

2007-2008

2008-2009

2009-2010

2156643952 3585863626 6988782501 858935086 2.51 1147928616 1447454152 3.12 4.83

Current ratio 2.99

Curr
6
5.11

5

4 3 2.99
2.53 2.51 3.12

t

ti

Curr

Curr

2

1

0 2004-2005

2005-2006 2006-2007

2007-2008 2008-2009

2009-2010

Y r

Observation: As a conventional rule, a current ratio of 2 to 1 or more is considered satisfactory. In all the years the current ratio of ARSS is more than 2. It means the company has its short term securities (cash & bank balances, Inventories, Inventories, loans and advances) to fulfill it's short term liabilities (sundry creditors, provision for taxation). Also the current ratio shows the margin of safety for it s creditors. Higher the ratio greater will be the margin of safety.

40

A @9 87

4 3 6 5 2 t ti
4.83

D CB

FE HG I

t

ti

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

Quick Ratio:
Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset other assets which are consider to be relatively liquid and include in quick assets are debtors, bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizing into cash. Their value also is tendency to fluctuate. The quick ratio is found out by dividing quick assetsby current liabilities:Current Assets - Inventories Quick Ratio = Current Liabilities

Particulars C.A Inventories Quick C.A C.L Quick ratio

2004-2005 127270647 58429517 68841130 42632767 1.61

2005-2006 307866662 104206335 203660 326 121648520 1.67

2006-2007 540845439 73298835 467546604 105763831 4.42

2007-2008 622103160 858935086 1.79

2008-2009

2009-2010

2156643952 3585863626 6988782501 1882704940 3701088121 1147928616 1447454152 1.48 2.27 1534540792 1703158686 3287694373

Table.......Quick Ratio

41

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ARSS INFRASTRUCTURE PROJECTS LTD.

Quick
4.42

4.5 4 3.5 3

ti

2.5 2 1.5 1 0.5 0
1.61 1.67 1.79 1.48

Quick

Quick

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Figure.......Current Ratio

Observation: The quick ratio of 1 to 1 is considered as satisfactory financial condition. The company has not a very high ratio throughout except one year 2006 -07. In 2006-07 the company had high value of cash & bank balances, sundry debtors etc. whereas the sundry creditors andprovision were compairatively low. High quick ratio will benefit to the company in its bidding activities i.e It shows the financial strength of the company.

Working Capital Management

Components

42

U TS

P R Q

ti

`YXWV

ba c

2.27

ti

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

Receivables Management Inventory Management Cash Management

43

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

Receivable Management:

Introduction:-

44

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ARSS INFRASTRUCTURE PROJECTS LTD.

Receivables or debtors are the one of the most important parts of the current assets which is created if the company sells the finished goods to the customer but not receive the cash for the same immediately. Trade credit arises when firm sells its products and services on credit and dose not receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in the near future. The receivables include three characteristics: 1) It involve element of risk which should be analyse carefully. 2) It is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, while seller expects an equivalent value to be received later on. 3) It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.

Objective of Receivable Management:
The sales of goods on credit basis are an essential part of the modern competitive economic system. The credit sales are generally made up on account in the sense that there are formal acknowledgements of debt obligation through a financial instrument. As a marketing tool,they are intended to promote sales and there by profit. However extension of credit involves risk and cost, management should weigh the benefit as well as cost to determine the goal of receivable management. Thus the objective of receivable management is to promote sales and profit until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.

Particulars Indices

2005-2006 100

2006-2007 145136306 202

2007-2008 653574370 910

2008-2009 428533465 597

2009-2010 786122901 1095

Sundry Debtor 71791868

Table..........Size Of Receivables

Receivables Indices
1200 1000
910 1095

Receivables Indices

800
597

600 400
202

Receivables Indices

200 0

100

45

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Years

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

Average Collection Period:
The average collection period measures the quality of debtors since it indicate the speed of their collection. The shorter the average collection period, the better the quality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firm s credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects:

1. In determining the collectability of debtors and thus, the efficiency of collection efforts. 2. In ascertaining the firm s comparative strength and advantages related to its credit policy and performance. The debtor s turnover ratio can be transformed in to the number of days of holding of debtors:Particulars Gross sales D.T.R A.C.P* 2004-2005 2005-2006 2006-2007 36478584 16.52 22 216928175 6.17 58 2007-2008 399355338 7.85 46 2008-2009 541053918 11.54 31 2009-2010 607328183 16.57 22

295777455 602467051 1338321101 3136709419 6243752255 10065504283 181.17 2

Avg.Debtors 1632619

Table.............Average collection period

46

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ARSS INFRASTRUCTURE PROJECTS LTD.

300
258

250

peri d

200

Average c ec i

average c peri d

100 50
22 2 46 31 22

0 2005-2006 2007-2008 2009-2010 2004-2005 2006-2007 2008-2009

years

Observation
The average collection period increased from 2004 -05 to 2006-07 and then it decreases from 2006-07 to 2009-10. The increasing average collection period shows the inefficiency of the management in collecting the debtors money while the decreasing average collection period shows the efficient management and better credit policy. The reason behind average collection period is high due to debtors turnover ratio is low. In 2006 -07 the company had taken a no of projects but the company did projects alone. So there is no chance of debting in 2006-07. While in 2007-08 the company had taken 10 projects on the joint venture basis. Company s share is 100% in those projects. In 2008-09 and 2009-10 the company has taken 3 and 5 projects on the joint venture basis so there is case of debting.

Inventory Management:
In financial view, inventory defined as the sum of the value of raw material and supplies,including spares, semi-processed material or work in progress and finished goods. The nature of inventory is lar gely depending upon the type of operation carried on. A firm neglecting the management of inventories will be jeopardizing its long term profitability and may fail ultimately. It is possible to reduce the inventory to a certain level without affecting production and sales, by using simple inventory planning and controlling technique. The reduction in ³excessive´ inventories carries a favourable impact on the company s profitability. Maintaining inventories involves

47

qh p iih

150

h

g

g

ee

Average c

ec i

peri d(I days)

d

df

d

r ur

rs

t

ec i

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

tying up of the company s funds and incurr ence of storage and handling cost. There are three components: Raw material, Work in progress; and finished goods involved in inventory management.

Objective of Inventory Management:
In the case of Inventory Management, the firm is faced with the problem of meeting two conflicting needs: 1) To maintain a large amount of inventory for efficient and smooth production; 2) To maintain a minimum amount of inventory for increasing the profitability; But the firms avoid both the cases. In the first case, the firms avoid overinvestment because of:(a) unnecessary tie-up of the firm s funds and loss of profits (b) excess carrying cost (c)risk of liquidity. Another danger of holding excess inventories is deterioration of the inventories. Maintaining a minimum level of inventories is also dangerous. The consequences of under-investment in inventories are: (a) production hold -ups (b) failure to deliver commitments. So the aim of inventory management is: (1) To ensure a continuous supply of raw material to facilitate unin terrupted production; (2) To maintain a sufficient stock of the raw material in period of short supply and overprices; (3) To maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service; (4) To maintain the carrying cost and time; (5) To control investment in inventories and keep at optimum level;
Particulars Raw materials W.I.P Finished Goods Stores and spares Total 2005-2006 1803094 69724520 32678721 0 104206335 2006-2007 1517210 57300640 14480985 0 73298835 2007-2008 10008237 2008-2009 255489710 2009-2010 464589560

560122560 1512045660 2523687458 40523740 11448623 81715450 33454120 651456230 61354880

622103160 1882704940 3701088128

48

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Indices

100

70.34

597.o

1806.7

3551.7

Table.......Size of inventory

nven o€y n ce  w 

3551 7

3500

nven o y n ce

3000 2500
1806 7

1500 1000
70 34 597

0 2005 5006

2006 2007

2007 2008

2008 2009

2009 2010

ea

Figure........Inventory indices

Inventory Components:
The firm s inventory consist following components (i) Raw material (ii) Work- in-progress (iii) Finished goods

To analyze the level of raw material inventory and work in progress inventory held by the firm on an average it is necessary to examine the efficiency with which the firm converts raw material inventory and work in progress into finished goods. Particulars Raw Material W.I.P Stores&Spares Total(%) 2005-2006 1.73 66.91 0 100 2006-2007 2.07 78.17 19.75 0 100 2007-2008 1.6 90.03 6.51 1.84 100 2008-2009 13.57 80.31 4.34 1.78 100 2009-2010 12.55 68.18 17.6 1.66 100

Finished Goods 31.36

Table........Inventory components(%)

49

v

v

’‘  v

w

500

100

„

2000

nven o y n ce

‰ ‡ˆ ‡ † …

w

4000

ƒ

‚

y

x v v ˜ • ” – —– “

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

100 90 80 70 60 50 40
31.36 66.91 78.17 90.03 80.31

68.18

30 20 10
1.73 0 2.07 0 1.6 1.84 19.75 13.57 6.51 1.78 4.34 1.66 12.55 17.6

0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Figure......Inventory components in %
100
90.03

90 80 70 66.91 60 50 40
31.36 78.17 80.31

68.18

30
19.75

20 10
1.73 0 2.07 0 6.51 1.84 1.6

17.6 13.57 12.55

4.34 1.78

1.66

0 2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

Observation:
As the ARSS Infrastructure Projects Limited is a construction company. And it takes project of different segment in construction sector like road, railway, irrigation, aviation, marine, jetty etc. The company s inventory work in progress is very high in terms of cash as well as

50

g hh

Raw Mat al W.I.P F h dG d St &Spares

e d™

g™dh ™ gefe

WORKING CAPITAL MANAGEMENT

ARSS INFRASTRUCTURE PROJECTS LTD.

in terms of % and it increases year by year. The company is taking a no of projects which completes in more than one year because of season factor.

The company did not concern about the stores and spares in the period of 2005 and 2006. But as the stores and spares plays a important role in the construction industry examples for equipments. So from 2007 onwards the company made a certain account in the inventories. In 2008-09 the recession was happening. The company was unable to good projects because of the downturn in the industry. As mentioned earlier the company had taken only three projects in the railway segment in 2008-09. So the raw material remained high and the finished goods remained low.

Inventory Holding Period:

The reciprocal of inventory turnover gives average inventory holding in percentage term. When the no of days in a year (said as 360) are divided by inventory turnover, days of inventory holding (DIH) can obtain

360 DIH = Inventory Turnover

To examine the efficiency of the firm (how the firm converts raw material into work in process and work-in-process into finished goods), raw material inventory and work in process inventory should be known. The raw material inventory should be related to materials consumed, and work-in-process to the cost of production.

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Material consumed Raw Material Inventory Turnover = Avg. Raw Material Inventory

Cost of Production Work-in-Process Inventory Turnover = Avg. work-in-process inventory

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Cash Management:
Cash is common purchasing power or medium of exchange. As such, it forms the most important component of working capital. The term cash with reference to cash management is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of cash includes near cash items, such as marketable securities or bank time deposits. The basic characteristic of near-cash assets is that they can readily be converted into cash. They also provide short term investment outlet for excess and are also useful for meeting planned outflow of funds. Irrespective of the form in which it is held, a distinguishing feature of cash as assets is that it has no earning power. Company have to always maintain the cash balance to fulfill the dally requirement of expenses. There are four primary motives for maintain the cash as follow:

Cash management is concerned with the managing of:

(i) Cash flows into and out of the firm, (ii) Cash flows within the firm, and (iii) Cash balances held by the firm at a point of the time by financing deficit or investing surplus cash. Motives for Holding Cash: The firm s need to hold cash may be attributed to the following three motives:

Transaction Motive: The transactions motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments, for purchases, wages and salaries,

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operating expenses, taxes, dividends etc. There should be a proper channel between the cash inflow and cash outflow in the firm. For periods when cash payments exceed cash receipts, the firm should maintain some cash balance to be able to make required payments. Usually the firm maintains such accounts to meet anticipated payments whose timings is not perfectly matched with cash receipts. The Precautionary Motive:

The precautionary motive is the need to hold cash to meet contingencies in the future. It helps in the future. The precautionary amount of cash depends upon the predictability of cash flows. If cash flows are predicted with accuracy, less cash will be maintained for emergency. If the firm is able to borrow at short notice there will less need for precautionary balance. Generally the precautionary balance held in marketable securities and relatively less in cash.

The speculative Motive: The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. As the firm can postpone materials purchasing when

the price of materials is high. And make purchase in future when the price of materials falls. The primary motives to hold cash and marketable securities are: the transactions and the precautionary motives.

Advantage of Cash Management: Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither profit nor losses but without cash, profit remains meaningless for an enterprise owner. 1. A sufficient of cash can keep an unsuccessful firm going despite losses; 2. An efficient cash management through a relevant and timely cash budget may enable a firm to obtain optimum working capital and ease the strains of cash shortage, fascinating

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temporary investment of cash and providing funds normal growth; 3. Cash management involves balance sheet changes and other cash flow that do not appear in the profit and loss account such as capital expenditure;

Particulars

2004-2005

2005-2006 50648882 265.18

2006-2007 116425792 609.55

2007-2008 373999265 1958.09

2008-2009 717214943 3755.02

2009-2010 1095090536 5733.42

Cash &Bank 19100114 balance Indices 100

Table.........Cash&Bank balance Indices

Cash&Bank balance ndices
6000

Cash&Bank balance indices

5000
3755.02

4000 3000
1958.09

2000
609.55

1000
100

265.18

0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Years

Figure.........Cash & Bank balance indices

Observation:
The cash and bank balances of ARSS was continuously increasing from 2005-06 to 2009-10. The reason of increasing cash and bank balances was the increasing no of projects with their value. The company entered into new areas and earned increasing profits. There was a sharp increase in cash and bank balances in 2007-08 from it s previous year (i.e. 212.23% increase). There was increase due to 10 projects of railway, road, irrigation taken.

56

i

5733.42

Indices

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Cash Cycle: One of the distinguishing features of the fund employed as working capital is that constantly changes its form to drive Äbusiness wheel . It is also known as Äcirculating capital which

means current assets of the company, which are changed in ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables and receivables to cash.

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Working capital finance and estimation

Introduction Sources of capital finance Working capital loan and interest Estimation of working capital

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Introduction:
Funds available for period of one year or less is called short term finance. In India short term finance are used as working capital finance. Two most significant short term sources of finance for working capital are trade credit and bank borrowing. Trade credit ratio of current assets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grown faster than the growth in sales. Bank borrowing is the next source of working capital finance. The relative importance of this varies from time to time depending on the prevailing environment. In India the primary source of working capital financing are trade credit and short term bank credit. After determine the level of working capital, a firm has to consider how it will finance. Following are sources of working capital finance. Sources of Working Capital Finance: 1) Trade credit 2) Bank Finance

1) Trade credit: Trade credit refers to the credit that a customer gets from suppliers of goods in the normal course of business. The deferral of payment in short term financing is called trade credit. It is major source of financing for firm. Particularly small firms are heavily depend on trade credit

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as a source of finance since they find it difficult to raised funds from banks or other sources in the capital market. Trade credit is mostly an informal arrangement, and it granted on an open account basis. For ARSS infrastructure Projects Limited the sundry creditors are the trade credit finance which is shown in the balance sheet of the firm.

2) Bank finance: Banks are main institutional source of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital in India. A banks considers firm s contract revenue and services and desirable levels of current assets in determining its working capital requirements. The amount approved by bank for the firm s working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system. In practice banks do not lend 100% credit limit; they deduct margin money.

There are two types of loans involved as bank finance in ARSS Infrastructure Projects Limited.

1) Secured loans in which the term loan, working capital loan; and loan from NBFCs. The working capital loan is secured by way of mortgages of land and building and hypothecation of plant and machinery, stock and book debts.

2) Unsecured loans in which the loans from banks and from others are included.

Particulars W.C loan Interest

2005-2006 12.34 1.64

2006-2007 23.04 2.89

2007-2008 48.33 7.34

(Amount in crores) 2008-2009 2009-2010 139.06 23.99 288.54 46.33

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Table.........Working capital loan size

3500000000 3000000000 2500000000
2885494519

1500000000 1000000000 500000000
123413232 483320993 230446691

1390672703

W.C lo n Expon nti l Regression for W.C lo n

0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

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j j k j

2000000000