DISSERTATION REPORT ON

WORKING CAPITAL MANAGEMENT

Submitted by

AKIF AKHLAQ SIDDIQUE

SAVITRIBAI PHULE PUNE UNIVERSITY

In partial fulfillment of the requirement for the award of the Degree

Of

Master of Business Administration (M.B.A)

Batch (2015-2017)

Through

ADITYA INSTITUTE OF MANAGEMENT

PUNE
 A
DISSERTATION REPORT
On
WORKING CAPITAL MANAGEMENT

Submitted by

AKIF AKHLAQ SIDDIQUE

 CERTIFICATE

Mr. AKIF AKHLAQ SIDDIQUE is student of our institute & has carried out the

research work on the Title WORKING CAPITAL MANAGEMENT is genuine

& original work carried out by him for the purpose of the subject (402)

Dissertation.

Faculty Guide Director

 INDEX

Chapter No. TITLE PAGE NO.

1 INTRODUCTION & OBJECTIVE 1-18

1.1 BRIEF INTRODUCTION 1-15

1.2 OBJECTIVES 16

1.3 SCOPE OF THE STUDY 17

1.4 IMPORTANCE OF THE TOPIC 18

2 CRITICAL REVIEW & ANALYSIS 19-34

3 MAJOR FINDINGS & CONCLUSION 35

REFERENCES 36
 CHAPTER 1.1

BRIEF INTRODUCTION

WORKING CAPITAL

Meaning :
Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day
operations. Long terms funds are required to create production facilities through purchase of
fixed assets such as plant & machinery, land, building, furniture, etc. Investments in these assets
represent that part of firms capital which is blocked on permanent or fixed basis and is called
fixed capital. Funds are also needed for short-term purposes for the purchase of raw material,
payment of wages and other day to- day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part of

the firms capital which is required for financing short- term or current assets such as cash,

marketable securities, debtors & inventories. Funds, thus, invested in current assets keep

revolving fast and are being constantly converted in to cash and this cash flows out again

in exchange for other current assets. Hence, it is also known as revolving or circulating capital

or short term capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises
current assets are those Assets which can converted into cash within a short period normally
one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses
 8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net working
capital is the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the
current liabilities are more than the current assets. Current liabilities are those
liabilities, which are intended to be paid in the ordinary course of business within a
short period of normally one accounting year out of the current assts or the income
business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation, if it does not amount to appropriation of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:

1. It enables the enterprise to provide correct amount of working capital at correct time.

2. Every management is more interested in total current assets with which it has to operate
then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterprise would
increase its working capital.

4. This concept is also useful in determining the rate of return on investments in working
capital. The net working capital concept, however, is also important for following
reasons:

It is qualitative concept, which indicates the firms ability to meet to its

operating expenses and short-term liabilities.

IT indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.

o On the basis of time.

 On the basis of concept working capital can be classified as gross working capital and
net working capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has
to maintain a minimum level of raw material, work- in-process, finished goods and cash balance.
This minimum level of current assts is called permanent or fixed working capital as this part of
working is permanently blocked in current assets. As the business grow the requirements of
working capital also increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can further be
classified as seasonal working capital and special working capital. The capital required to meet
the seasonal need of the enterprise is called seasonal working capital. Special working capital is
that part of working capital which is required to meet special exigencies such as launching of
extensive marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required
for short periods and cannot be permanently employed gainfully in the business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital helps in

maintaining the solvency of the business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make prompt

payments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing
can arrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regular

supply of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TO Day

Commitments: It leads to the satisfaction of the employees and raises the morale of
its employees, increases their efficiency, reduces wastage and costs and enhances
production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having

adequate working capital then it can exploit the favorable market conditions such as
purchasing its requirements in bulk when the prices are lower and holdings its inventories
for higher prices.

Ability To Face Crises: A concern can face the situation during the depression.

Quick And Regular Return On Investments: Sufficient working capital

enables a concern to pay quick and regular of dividends to its investors and gains
confidence of the investors and can raise more funds in future.
 High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortages of working capital. Both excess as well as short working capital positions are bad
for any business. However, it is the inadequate working capital which is more dangerous
from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING

CAPITAL

1. Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasing and accumulation of

inventories.

3. Excessive working capital implies excessive debtors and defective credit policy
which causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with banks and other
financial institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares may also fall.

7. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due
to the time gap between production and realization of cash from sales. There is an operating
cycle involved in sales and realization of cash. There are time gaps in purchase of raw material
and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares and
finished stock.

For studying the need of working capital in a business, one has to study the business under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size
of the company and ambitions of its promoters. Greater the size of the business unit,
generally larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of
the business till it gains maturity. At maturity the amount of working capital required is called
normal working capital.
There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS:

1. NATURE OF BUSINESS: The requirements of working is very limited in

public utility undertakings such as electricity, water supply and railways because they
offer cash sale only and supply services not products, and no funds are tied up in
inventories and receivables. On the other hand the trading and financial firms requires
less investment in fixed assets but have to invest large amt. of working capital along
with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the
requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady by

accumulating inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw
material and other supplies have to be carried for a longer in the process with
progressive increment of labor and service costs before the final product is obtained.
So working capital is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires

larger working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the working cycle
completes one cycle determines the requirements of working capital. Longer the cycle
larger is the requirement of working capital.

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between

the question of working capital and the velocity or speed with which the sales are
 affected. A firm having a high rate of stock turnover wuill needs lower amt. of
working capital as compared to a firm having a low rate of turnover.

8. CREDIT POLICY: A concern that purchases its requirements on credit and sales
its product / services on cash requires lesser amt. of working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there

is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic
expansion of business, etc. On the contrary in time of depression, the business
contracts, sales decline, difficulties are faced in collection from debtor and the firm
may have a large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall

require large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more
earning capacity than other due to quality of their products, monopoly conditions, etc.
Such firms may generate cash profits from operations and contribute to their working
capital. The dividend policy also affects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its profits needs
working capital than the firm that retains larger part of its profits and does not pay so
high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the working
capital requirements. Generally rise in prices leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency.
 Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL:

 Management of working capital is concerned with the problem that arises in attempting
to manage the current assets, current liabilities. The basic goal of working capital
management is to manage the current assets and current liabilities of a firm in such a way
that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor
excessive as both the situations are bad for any firm. There should be no shortage of
funds and also no working capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES of a firm has a great on its probability, liquidity and
structural health of the organization. So working capital management is three dimensional
in nature as

1. It concerned with the formulation of policies with regard to profitability, liquidity

and risk.

2. It is concerned with the decision about the composition and level of current assets.

3. It is concerned with the decision about the composition and level of current
liabilities.

Working capital cycle

Definition
The working capital cycle (WCC) is the amount of time it takes to turn the net current assets and
current liabilities into cash. The longer the cycle is, the longer a business is tying up capital in its
working capital without earning a return on it. Therefore, companies strive to reduce their
working capital cycle by collecting receivables quicker or sometimes stretching accounts
payable.

Meaning
A positive working capital cycle balances incoming and outgoing payments to minimize net
working capital and maximize free cash flow. For example, a company that pays its suppliers in
30 days but takes 60 days to collect its receivables has a working capital cycle of 30 days. This
30-day cycle usually needs to be funded through a bank operating line, and the interest on this
financing is a carrying cost that reduces the company's profitability. Growing businesses require
cash, and being able to free up cash by shortening the working capital cycle is the most
inexpensive way to grow. Sophisticated buyers review closely a target's working capital cycle
because it provides them with an idea of the management's effectiveness at managing their
balance sheet and generating free cash flows.

As an absolute rule of funders, each of them wants to see a positive working capital. Such
situation gives them the possibility to think that your company has more than enough current
assets to cover financial obligations. Though, the same cant be said about the negative working
capital. A large number of funders believe that businesses cant be sustainable with a negative
working capital, which is a wrong way of thinking. In order to run a sustainable business with a
negative working capital its essential to understand some key components.

1. Approach your suppliers and persuade them to let you purchase the inventory on 1-2 month
credit terms, but keep in mind that you must sell the purchased goods, to consumers, for money.
2. Effectively monitor your inventory management, make sure that its often refilled and with the
help of your supplier, back up your warehouse.

Plus, big companies like McDonalds, Amazon, Dell, General Electric and Wal-Mart are using
negative working capital.

Decisions relating to working capital and short-term financing are referred to as working capital
management. These involve managing the relationship between a firm's short-term assets and its
short-term liabilities. The goal of working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both maturing short-term
debt and upcoming operational expenses.

A managerial accounting strategy focusing on maintaining efficient levels of both components of

working capital, current assets and current liabilities, in respect to each other. Working capital
management ensures a company has sufficient cash flow in order to meet its short-term debt
obligations and operating expenses.

Decision criteria
By definition, working capital management entails short-term decisionsgenerally, relating to
the next one-year periodwhich are "reversible". These decisions are therefore not taken on the
same basis as capital-investment decisions (NPV or related, as above); rather, they will be based
on cash flows, or profitability, or both.

One measure of cash flow is provided by the cash conversion cycle

the net number of days from the outlay of cash for raw material to
receiving payment from the customer. As a management tool, this
metric makes explicit the inter-relatedness of decisions relating to
inventories, accounts receivable and payable, and cash. Because this
number effectively corresponds to the time that the firm's cash is tied
up in operations and unavailable for other activities, management
generally aims at a low net count.

In this context, the most useful measure of profitability is return on

capital (ROC). The result is shown as a percentage, determined by
dividing relevant income for the 12 months by capital employed; return
on equity (ROE) shows this result for the firm's shareholders. Firm
value is enhanced when, and if, the return on capital, which results
from working-capital management, exceeds the cost of capital, which
results from capital investment decisions as above. ROC measures are
therefore useful as a management tool, in that they link short-term
 policy with long-term decision making. See economic value added
(EVA).

Credit policy of the firm: Another factor affecting working capital

management is credit policy of the firm. It includes buying of raw
material and selling of finished goods either in cash or on credit. This
affects the cash conversion cycle.

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques for
the management of working capital. The policies aim at managing the current assets (generally
cash and cash equivalents, inventories and debtors) and the short-term financing, such that cash
flows and returns are acceptable.

cash management Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows

for uninterrupted production but reduces the investment in raw
materialsand minimizes reordering costsand hence increases cash
flow. Besides this, the lead times in production should be lowered to
reduce Work in Process (WIP) and similarly, the Finished Goods should
be kept on as low level as possible to avoid over productionsee
Supply chain management; Just In Time (JIT); Economic order quantity
(EOQ); Economic quantity

Debtors management. Identify the appropriate credit policy, i.e.

credit terms which will attract customers, such that any impact on cash
flows and the cash conversion cycle will be offset by increased revenue
and hence Return on Capital (or vice versa); see Discounts and
allowances.
 Short-term financing. Identify the appropriate source of financing,
given the cash conversion cycle: the inventory is ideally financed by
credit granted by the supplier; however, it may be necessary to utilize
a bank loan (or overdraft), or to "convert debtors to cash" through
"factoring.

CHAPTER 1.2

OBJECTIVES

The following are the main objectives which has been undertaken in the present study:

1. To determine the amount of working capital requirement and to calculate various ratios
relating to working capital.

2. To suggest the steps to be taken to increase the efficiency in management of working capital.

3. To understand the need for adequate working capital in a firm.

4. To understand various tools to analyze working capital.

 Chapter 1.3

SCOPE OF THE STUDY

The scope of the project is to study:

1. working capital management.

2. working capital cycle.

3. working capital analysis.

 Chapter 1.4

IMPORTANCE OF THE TOPIC

The importance of the study is that as a student of finance I got a chance to understand
various concepts relating to working capital and its management.

This study also enabled to learn something about the working capital cycle. It also
helped to learn about analysis of working capital through various tools.
 CHAPTER 2

CRITICAL REVIEW & ANALYSIS

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate
amount of working capital is very much essential for the smooth running of the business.
And the most important part is the efficient management of working capital in right time.
The liquidity position of the firm is totally effected by the management of working
capital. So, a study of changes in the uses and sources of working capital is necessary to
evaluate the efficiency with which the working capital is employed in a business. This
involves the need of working capital analysis.

The analysis of working capital can be conducted through a number of devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique of ratio
analysis can be employed for measuring short-term liquidity or working capital position
of a firm. The following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from which
additional funds were derived and the use to which these sources were put. The fund flow
analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working
capital) business enterprise between beginning and ending of the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be

pursued in the future period time. Working capital budget as a part of the total budge ting
process of a business is prepared estimating future long term and short term working
capital needs and sources to finance them, and then comparing the budgeted figures with
actual performance for calculating the variances, if any, so that corrective actions may be
taken in future. He objective working capital budget is to ensure availability of funds as
and needed, and to ensure effective utilization of these resources. The successful
implementation of working capital budget involves the preparing of separate budget for
each element of working capital, such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF

LIQUIDITY

The short term creditors of a company such as suppliers of goods of credit and
commercial banks short-term loans are primarily interested to know the ability of a firm
to meet its obligations in time. The short term obligations of a firm can be met in time
only when it is having sufficient liquid assets. So to with the confidence of investors,
creditors, the smooth functioning of the firm and the efficient use of fixed assets the
liquid position of the firm must be strong. But a very high degree of liquidity of the
firm being tied up in current assets. Therefore, it is important proper balance in regard
to the liquidity of the firm. Two types of ratios can be calculated for measuring short-
term financial position or short-term solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and when these
become due. The short-term obligations are met by realizing amounts from current,
floating or circulating assts. The current assets should either be liquid or near about
liquidity. These should be convertible in cash for paying obligations of short-term
nature. The sufficiency or insufficiency of current assets should be assessed by
comparing them with short-term liabilities. If current assets can pay off the current
liabilities then the liquidity position is satisfactory. On the other hand, if the current
liabilities cannot be met out of the current assets then the liquidity position is bad. To
measure the liquidity of a firm, the following ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity and
its most widely used to make the analysis of short-term financial position or liquidity of
a firm. It is defined as the relation between current assets and current liabilities. Thus,
 CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors,
inventories and work-in-progresses. Current liabilities include outstanding expenses,
bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability
to pay its current obligations in time. On the hand a low current ratio represents that the
liquidity position of the firm is not good and the firm shall not be able to pay its current
liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets
double the current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)

e.g.

Year 2011 2012 2013

Current Assets 81.29 83.12 13,6.57

Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the
company for last three years it has increased from 2011 to 2013. The current ratio of
company is more than the ideal ratio. This depicts that companys liquidity position is
sound. Its current assets are more than its current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be
defined as the relationship between quick/liquid assets and current or liquid liabilities.
An asset is said to be liquid if it can be converted into cash with a short period without
loss of value. It measures the firms capacity to pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

CURRENT LIABILITES

Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time and on the other hand a low quick ratio represents that the firms
liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if

quick assets are equal to the current liabilities then the concern may be able to meet its
 short-term obligations. However, a firm having high quick ratio may not have a
satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm
having a low liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2011 2012 2013

Quick Assets 44.14 47.43 61.55

Current Liabilities 27.42 20.58 33.48

Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :

A quick ratio is an indication that the firm is liquid and has the ability to meet its
current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more
than ideal ratio. This shows company has no liquidity problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately
or in time. So absolute liquid ratio should be calculated together with current ratio and
acid test ratio so as to exclude even receivables from the current assets and find out the
absolute liquid assets. Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

 CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2011 2012 2013

Absolute Liquid Assets 4.69 1.79 5.06

Current Liabilities 27.42 20.58 33.48

Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

These ratio shows that company carries a small amount of cash. But there is
nothing to be worried about the lack of cash because company has reserve, borrowing
power & long term investment. In India, firms have credit limits sanctioned from banks
and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits.
The efficiency with which assets are managed directly affects the volume of sales. The
better the management of assets, large is the amount of sales and profits. Current assets
movement ratios measure the efficiency with which a firm manages its resources. These
ratios are called turnover ratios because they indicate the speed with which assets are
converted or turned over into sales. Depending upon the purpose, a number of turnover
ratios can be calculated. These are :

1. Inventory Turnover Ratio

 2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high
amount of debtors due to slow credit collections and moreover if the assets include high
amount of slow moving inventories. As both the ratios ignore the movement of current
assets, it is important to calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO :

Every firm has to maintain a certain amount of inventory of finished goods so as

to meet the requirements of the business. But the level of inventory should neither
be too high nor too low. Because it is harmful to hold more inventory as some
amount of capital is blocked in it and some cost is involved in it. It will therefore
be advisable to dispose the inventory as soon as possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the stock is converted
into sales. Usually a high inventory ratio indicates an efficient management of
inventory because more frequently the stocks are sold ; the lesser amount of
money is required to finance the inventory. Where as low inventory turnover ratio
indicates the inefficient management of inventory. A low inventory turnover
implies over investment in inventories, dull business, poor quality of goods, stock
accumulations and slow moving goods and low profits as compared to total
investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

 2

(Rupees in Crore)

Year 2011 2012 2013

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

Interpretation :

These ratio shows how rapidly the inventory is turning into receivable through
sales. In 2012 the company has high inventory turnover ratio but in 2013 it has reduced
to 1.75 times. This shows that the companys inventory management technique is less
efficient as compare to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.

Year 2011 2012 2013

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 days 202 days

Interpretation :

Inventory conversion period shows that how many days inventories takes to
convert from raw material to finished goods. In the company inventory conversion
period is decreasing. This shows the efficiency of management to convert the inventory
into cash.

3. DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its sales and
a liberal credit policy may result in tying up substantial funds of a firm in the form of
trade debtors. Trade debtors are expected to be converted into cash within a short period
and are included in current assets. So liquidity position of a concern also depends upon
the quality of trade debtors. Two types of ratio can be calculated to evaluate the quality
of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtors velocity indicates the number of times the debtors are turned over during
a year. Generally higher the value of debtors turnover ratio the more efficient is the
management of debtors/sales or more liquid are the debtors. Whereas a low debtors
turnover ratio indicates poor management of debtors/sales and less liquid debtors. This
 ratio should be compared with ratios of other firms doing the same business and a trend
may be found to make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

e.g.

Year 2011 2012 2013

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation :

This ratio indicates the speed with which debtors are being converted or turnover
into sales. The higher the values or turnover into sales. The higher the values of debtors
turnover, the more efficient is the management of credit. But in the company the debtor
turnover ratio is decreasing year to year. This shows that company is not utilizing its
debtors efficiency. Now their credit policy become liberal as compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

 The average collection period ratio represents the average number of days for
which a firm has to wait before its receivables are converted into cash. It measures the
quality of debtors. Generally, shorter the average collection period the better is the
quality of debtors as a short collection period implies quick payment by debtors and
vice-versa.

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

Year 2011 2012 2013

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44 days 49 days

Interpretation :

The average collection period measures the quality of debtors and it helps
in analyzing the efficiency of collection efforts. It also helps to analysis the credit
policy adopted by company. In the firm average collection period increasing year to
year. It shows that the firm has Liberal Credit policy. These changes in policy are due to
competitors credit policy.

5. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net

working capital. This ratio indicates the number of times the working capital is
turned over in the course of the year. This ratio measures the efficiency with
which the working capital is used by the firm. A higher ratio indicates efficient
 utilization of working capital and a low ratio indicates otherwise. But a very
high working capital turnover is not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales

Networking Capital

e.g.

Year 2011 2012 2013

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

Interpretation :

This ratio indicates low much net working capital requires for sales. In
2013, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the
company requires 60 paisa as working capital. Thus this ratio is helpful to forecast the
working capital requirement on the basis of sale.

INVENTORIES
(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Inventories 37.15 35.69 75.01

Interpretation :

Inventories is a major part of current assets. If any company wants to manage its
working capital efficiency, it has to manage its inventories efficiently. The graph shows
that inventory in 2010-2011 is 45%, in 2011-2012 is 43% and in 2012-2013 is 54% of
their current assets. The company should try to reduce the inventory upto 10% or 20%
of current assets.

CASH BANK BALANCE :

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Cash Bank Balance 4.69 1.79 5.05

Interpretation :

Cash is basic input or component of working capital. Cash is needed to keep the
business running on a continuous basis. So the organization should have sufficient cash
to meet various requirements. The above graph is indicate that in 2011 the cash is 4.69
crores but in 2012 it has decrease to 1.79. The result of that it disturb the firms
manufacturing operations. In 2013, it is increased upto approx. 5.1% cash balance. So
in 2013, the company has no problem for meeting its requirement as compare to 2012.

DEBTORS :
(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Debtors 17.33 19.05 25.94

Interpretation :

Debtors constitute a substantial portion of total current assets. In India it constitute

one third of current assets. The above graph is depict that there is increase in debtors. It
represents an extension of credit to customers. The reason for increasing credit is
competition and company liberal credit policy.

CURRENT ASSETS :

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Current Assets 81.29 83.15 136.57

Interpretation :

This graph shows that there is 64% increase in current assets in 2013. This increase
is arise because there is approx. 50% increase in inventories. Increase in current assets
shows the liquidity soundness of company.

CURRENT LIABILITY :
(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Current Liability 27.42 20.58 33.48

Interpretation :

Current liabilities shows company short term debts pay to outsiders. In 2013 the
current liabilities of the company increased. But still increase in current assets are more
than its current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Net Working Capital 53.87 62.53 103.09

Interpretation :

Working capital is required to finance day to day operations of a firm. There should
be an optimum level of working capital. It should not be too less or not too excess. In
the company there is increase in working capital. The increase in working capital arises
because the company has expanded its business.
 CHAPTER 3

MAJOR FINDINGS & CONCLUSION

 To start any business, First of all we need finance and the success of that business entirely
depends on the proper management of day-to-day finance and the management of this short-term
capital or finance of the business is called Working capital Management.

Working Capital is the money used to pay for the everyday trading activities carried out by the
business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and
so on. I have tried to put my best effort to complete this task on the basis of skill that I have
achieved during the last one year study in the institute. I have tried to put my maximum effort to
get the accurate data.

I have learned that there should be no shortage of funds and also no working capital should
be idle.

REFERENCES

References:
www.google.com

www.investopedia.com
www.moneycontrol.com