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In Fulfillment of the Requirements for Internal Component in

Financial management and auditing


RESEARCH PROJECT ON

Working capital management


By

S. KEERTHINESAN.
(Regd. NO: BC0140030)
UNDER THE GUIDANCE & SUPERVISION OF

PROFESSER, Dr. P. KUMARESHAN.


TABLE CONTENTS :
Definition:

CONCEPT OF WORKING CAPITAL


CONSTITUENTS OF CURRENT ASSETS
CONSTITUENTS OF CURRENT LIABILITIES
CLASSIFICATION OF WORKING CAPITAL
CLASSIFICATION OF WORKING CAPITAL
TEMPORARY OR VARIABLE WORKING CAPITAL
PERMANENT OR FIXED WORKING CAPITAL
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
EXCESS OR INADEQUATE WORKING CAPITAL
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
PERMANENT OR FIXED WORKING CAPITAL
TEMPORARY OR VARIABLE WORKING CAPITAL
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
EXCESS OR INADEQUATE WORKING CAPITAL
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
MANAGEMENT OF WORKING CAPITAL
WORKING CAPITAL ANALYSIS
RATIO ANALYSIS
CONCLUSION
Bibliography.

Working Capital Management


WORKING CAPITAL - Meaning of Working Capital

Definition:

Working capital management is a tactical focus on maintaining a sufficient amount of working


capital to support a business, while minimizing the investment in this area. The core goal in
working capital management is to ensure that there is always sufficient cash on hand to pay for
liabilities as they come due for payment. Since there can be a high cost associated with the
funding of working capital, there is an offsetting pressure to keep funding levels low. 1This latter
goal is achieved by closely monitoring the turnover levels for accounts receivable, inventory, and
accounts payable and taking action when the turnover levels vary from expectations. An
additional tool used to monitor working capital levels is the short-term and medium-term cash
forecast, which tells management when unusually high or low cash levels are expected.

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 p&m, land, building, furniture, etc. 2 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 assts 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

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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 convert in to 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. 3

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 amt. to app. 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. 4

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.

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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.5
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:

On the basis of concept.


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

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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.6

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. 7

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.

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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. 8
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

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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. 9 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.
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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.

DEBTORS CASH FINISHED GOODS RAW MATERIAL WORK IN PROGRESS

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 will 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:

1. Operating efficiency.
2. Management ability.
3. Irregularities of supply.
4. Import policy.
5. Asset structure.
6. Importance of labor.
7. 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. 10The 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.

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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. 11 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:

i. Ratio analysis.
ii. Fund flow analysis.
iii. 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

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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. 12

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

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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:

CURRENT RATIO
QUICK RATIO
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. 13

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
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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

(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
co mpanys 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 :14

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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 BNAK 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.

RESEARCH METHODOLOGY

The methodology, I have adopted for my study is the various tools, which basically analyze critically
financial position of to the organization:15

1) COMMON-SIZE P/L A/C


2) COMMON-SIZE BALANCE SHEET

3) COMPARTIVE P/L A/C

4) COMPARTIVE BALANCE SHEET

5) TREND ANALYSIS

6) RATIO ANALYSIS

15 www.investopedia.com
The above parameters are used for critical analysis of financial position. With the evaluation of

each component, the financial position from different angles is tried to be presented in well and

systematic manner. 16By critical analysis with the help of different tools, it becomes clear how

the financial manager handles the finance matters in profitable manner in the critical challenging

atmosphere, the recommendation are made which would suggest the organization in formulation

of a healthy and strong position financially with proper management system.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent

accounting procedure to convey an under-standing of some financial aspects of a business firm.

It may show position at a moment in time, as in the case of balance sheet or may reveal a series

of activities over a given period of time, as in the case of an income statement. Thus, the term

financial statements generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

16 www.studyfinance.com
1. To provide reliable financial information about economic resources and obligation of a

business firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations)

missing out of business activities.17

4. To provide financial information that assets in estimating the learning potential of the

business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final

picture a final picture of a concern. The utility of these statements is dependent upon a number of

factors. The analysis and interpretation of these statements must be done carefully otherwise

misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these

statements is only approximate. The actual value can only be determined when the business is

sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year,

during the life of a concern. The costs and incomes are apportioned to different periods with a

view to determine profits etc. The allocation of expenses and income depends upon the personal

17 www.telegraph.co.u
judgment of the accountant. The existence of contingent assets and liabilities also make the

statements imprecise. So financial statement are at the most interim reports rather than the final

picture of the firm.18

3. The financial statements are expressed in monetary value, so they appear to give final and

accurate position. The value of fixed assets in the balance sheet neither represent the value for

which fixed assets can be sold nor the amount which will be required to replace these assets. The

balance sheet is prepared on the presumption of a going concern. The concern is expected to

continue in future. So fixed assets are shown at cost less accumulated depreciation. Moreover,

there are certain assets in the balance sheet which will realize nothing at the time of liquidation

but they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The

value of assets decreases with the passage of time current price changes are not taken into

account. The statement are not prepared with the keeping in view the economic conditions. the

balance sheet loses the significance of being an index of current economics realities. 19 Similarly,

the profitability shown by the income statements may be represent the earning capacity of the

concern.

5. There are certain factors which have a bearing on the financial position and operating result of

the business but they do not become a part of these statements because they cannot be measured

in monetary terms. The basic limitation of the traditional financial statements comprising the

balance sheet, profit & loss A/c is that they do not give all the information regarding the financial
18www.statista.com

19 www.nasdaq.com
operation of the firm. Nevertheless, they provide some extremely useful information to the extent

the balance sheet mirrors the financial position on a particular data in lines of the structure of

assets, liabilities etc. and the profit & loss A/c shows the result of operation during a certain

period in terms revenue obtained and cost incurred during the year. Thus, the financial position

and operation of the firm.

Apple Inc.

Apple Campus

(1 Infinite Loop, Cupertino, California)

Type Public

Traded as
NASDAQ: AAPL
NASDAQ-100 component

DJIA component

S&P 100 component

S&P 500 component

Industry
Computer hardwared

Computer software

Consumer electronics

Digital distribution

Far bless Silicon Design

Corporate venture capital

Founded April 1, 1976; 40 years ago in Cupertino, California, United States

Founders
Steve Jobs

Steve Wozniak

Ronald Wayne

Headquarters Apple Campus, Cupertino, California, United States

Number of locations 478 Apple retail stores in 17 countries (as of March 2016)[1]

Area served Worldwide

Key people
Arthur D. Levinson (Chairman) [2]

Tim Cook (Chief executive officer)

Jonathan Ive (Chief design officer)

Luca Maestri (Chief financial officer)


Jeff Williams (Chief operating officer)

Products Mac, iPod ,i Phone ,i Pad ,Apple Watch ,Apple TV ,macOS ,iOS,
,watch OS , TV OS , i Life ,i Work

Services Apple Pay


Apple Store ,Online Apple Store
iTunes Store
iOS App Store
Mac App Store ,i Books Store
Apple Music ,i Cloud

Revenue US$215.639 billion (2016)[3]

Operating income US$60.024 billion (2016)[3]

Net income US$45.687 billion (2016)[3]

Total assets US$321.686 billion (2016)[3]

Total equity US$128.249 billion (2016)[3]

Number of employees 115,000 (as of July 2016)[4]

Subsidiaries FileMaker Inc.


Anobit
Braeburn Capital
Beats Electronics
Apple Energy, LLC
Apple Sales International[5]

Contact Information

Apple, Inc. P:(408) 996-1010


1 Infinite Loop Investor Relations:
Cupertino California 95014-2083 (408) 974-5420
www.apple.com

Employees
Shareholders

31.2
Other institutional
Individual stakeholders 8% 0.91%
Chief Executive Officer &
30.1
Director
Mutual fund holders
6%
Five Year Financial Summary20

TOTAL REVENUE

CASH & SHORT TERM INVESTMENTS

CASH FROM OPERATIONS

Income TOP EXECUTIVES Statement: 21


All Currency in US Dollars
Annual Data Tim Cook
| 4 Year
Quarterly Data Jeffrey E. Williams Chief Operating
2013 2014 Officer
2015 2016 Trend

Revenue Net Revenues Luca Maestri Chief Financial Officer &


170.9B 183.2B 231.3B 214.2B
Senior Vice President
and Income
Cost of Goods Kevin
Sold M. Lynch 100.5B 104.6B 131.0B
Vice President-Technology 121.0B

Joel M. Podolny Vice President


Depreciation And Amortization 6.8B 7.9B 11.3B 10.5B

20 http://www.marketwatch.com

21
All Currency in US Dollars
Annual Data
4 Year
| 2013 2014 2015 2016 Trend
Quarterly Data

Operating Gross Income 63.6B 70.7B 89.0B 82.7B


Expenses
General Expenses 15.3B 18.0B 22.4B 24.2B

Research And Development 4.5B 6.0B 8.1B 10.0B

Total Operating Expenses 122.5B 130.6B 164.7B 155.7B

Non- Operating Income 48.3B 52.7B 66.6B 58.5B


Operating
Expenses Extraordinary Credit -- 0.00 0.00 548.0M

Extraordinary Charge - 0.00 0.00 0.00


300.0M

Interest Expense On Debt 136.0M 384.0M 733.0M 1.5B

Other Expenses 652.0M -585.0M 3.7B -200.0M

Income Pre-Tax Income 50.2B 53.5B 72.5B 61.4B


Taxes,
Minority Income Taxes -13.1B -14.0B -19.1B -15.7B
Interest and
Extra Items
Net Income 37.0B 39.5B 53.4B 45.7B

Shares To Shares To Calculate EPS 6.5B 6.1B 5.8B 5.5B


Calculate
EPS Shares To Calculate EPS 6.5B 6.1B 5.8B 5.5B
Diluted

Earnings EPS $5.68 $6.45 $9.22 $8.31


Per Share
EPS Diluted $5.68 $6.45 $9.22 $8.31
Balance sheet :
4 Year
Annual Data All Currency in US Dollars Trend

|
Quarterly Data 2013 2014 2015 2016

Assets Cash 13.0B 12.6B 19.1B 19.4B

Short Term Investment Cash 3.5B -415.0M 7.3B -636.0M

Cash & Short Term Investments 40.5B 25.1B 41.6B 67.2B

Receivables Receivables 20.6B 27.2B 30.3B 29.3B

Inventories Inventories 1.8B 2.1B 2.3B 2.1B

Current Other Current Assets 10.3B 14.1B 15.1B 8.3B


Assets
Current Assets 73.3B 68.5B 89.4B 106.9B

Total Assets Property, Plant and Equipment - 28.5B 39.0B 49.3B 61.2B
Gross

Depreciation -11.9B -18.4B -26.8B -34.2B

Intangible Assets 5.8B 8.8B 9.0B 8.6B

Other Assets 10.9B 12.5B 14.6B 17.4B

Total Assets 207.0B 231.8B 290.5B 321.7B

Liabilities Accounts Payable 22.4B 30.2B 35.5B 37.3B

Short Term Debt 0.00 6.3B 11.0B 11.6B

Accrued Expenses 1.3B 2.3B 25.2B 22.0B

Other Current Liabilities 19.1B 24.5B 34.1B 30.1B

Other Liabilities 43.7B 63.4B 80.6B 79.0B

Total Long Term Debt 17.0B 29.0B 53.5B 75.4B


Liabilities

Deferred Taxes -16.5B -20.3B -24.1B -26.0B


4 Year
Annual Data All Currency in US Dollars Trend

|
Quarterly Data 2013 2014 2015 2016

Other Liabilities 429.0M 567.0M 1.2B 1.4B

Total Liabilities 83.5B 120.3B 171.1B 193.4B

Equity Minority Interest 0.00 0.00 0.00 0.00 --

Preferred Stock 0.00 0.00 0.00 0.00 --

Common Equity 123.5B 111.5B 119.4B 128.2B

Total Shareholder Equity 123.5B 111.5B 119.4B 128.2B

Share Common Shares Outstanding 6.3B 5.9B 5.6B 5.3B


Information

Annual Financials for Apple Inc.


View Ratios

Fiscal year is October-


5-year
September. All values USD 2012 2013 2014 2015 2016
trend
millions.

Sales/Revenue 155.97B 170.87B 183.24B 231.28B 214.23B

Sales Growth - 9.55% 7.24% 26.22% -7.37%

Cost of Goods Sold


87.92B 107.24B 112.55B 142.26B 131.51B
(COGS) incl. D&A

COGS excluding D&A 84.64B 100.48B 104.61B 131B 121B


Fiscal year is October-
5-year
September. All values USD 2012 2013 2014 2015 2016
trend
millions.

Depreciation &
Amortization 3.28B 6.76B 7.95B 11.26B 10.51B
Expense

Depreciation 2.67B 5.8B 6.86B 10.01B 9.03B

Amortization of
605M 960M 1.08B 1.25B 1.47B
Intangibles

COGS Growth - 21.98% 4.96% 26.39% -7.56%

Gross Income 68.06B 63.63B 70.69B 89.03B 82.72B

Gross Income Growth - -6.51% 11.10% 25.94% -7.08%

Gross Profit Margin - - - - 38.61% NA

5-year
2012 2013 2014 2015 2016
trend

SG&A Expense 13.42B 15.31B 18.03B 22.4B 24.24B

Research &
3.38B 4.48B 6.04B 8.07B 10.05B
Development

Other SG&A 10.04B 10.83B 11.99B 14.33B 14.19B

SGA Growth - 14.04% 17.83% 24.19% 8.23%

Other Operating - - - - -
Expense
Unusual Expense 655M 300M - - (548M)
5-year
2012 2013 2014 2015 2016
trend

SG&A Expense 13.42B 15.31B 18.03B 22.4B 24.24B

EBIT after Unusual


53.98B 48.02B - - 59.03B
Expense

Non Operating
696M 652M (585M) 3.7B (200M)
Income/Expense

Non-Operating
1.09B 1.62B 1.8B 2.92B 4B
Interest Income

Equity in Affiliates - - - - -
(Pretax)
Interest Expense - 136M 384M 733M 1.46B

Interest Expense 182.35


- - 90.89% 98.64%
Growth %

Gross Interest
- 136M 384M 733M 1.46B
Expense

Interest - - - - -
Capitalized
Pretax Income 55.76B 50.16B 53.48B 72.52B 61.37B

Pretax Income - -
- 6.64% 35.59%
Growth 10.06% 15.37%

Pretax Margin - - - - 28.65% NA

Income Tax 14.03B 13.12B 13.97B 19.12B 15.69B

Income Tax -
8.42B 10.42B 9.48B 13B 8.64B
Current Domestic

Income Tax -
1.2B 1.56B 2.15B 4.74B 2.11B
Current Foreign
5-year
2012 2013 2014 2015 2016
trend

SG&A Expense 13.42B 15.31B 18.03B 22.4B 24.24B

Income Tax - 4.9B 1.57B 3.01B 3.19B 4.91B


Deferred
Domestic
Income Tax -
(490M) (426M) (658M) (1.81B) 33M
Deferred Foreign

Income Tax - - - - -
Credits
Equity in Affiliates - - - - -

Other After Tax


- - - - -
Income (Expense)

Consolidated Net 41.73B 37.04B 39.51B 53.39B 45.69B


Income
Minority Interest - - - - -
Expense
Net Income 41.73B 37.04B 39.51B 53.39B 45.69B

Net Income - - 6.68% 35.14% -


Growth 11.25% 14.43%
Net Margin - - - - 21.33% NA
Growth
Extraordinaries & - - - - -
Discontinued
Operations
Extra Items & - - - - -
Gain/Loss Sale
Of Assets
Cumulativ - - - - -
e Effect -
Accounting
Discontinued
- - - - -
Operations

Net Income After


41.73B 37.04B 39.51B 53.39B 45.69B
Extraordinaries
5-year
2012 2013 2014 2015 2016
trend

SG&A Expense 13.42B 15.31B 18.03B 22.4B 24.24B

Preferred Dividends - - - - -

Net Income Available


41.73B 37.04B 39.51B 53.39B 45.69B
to Common

EPS (Basic) 6.38 5.72 6.49 9.28 8.35

EPS (Basic) - - 13.49% 42.99% -


Growth 10.33% 10.02%
Basic Shares 6.54B 6.48B 6.09B 5.75B 5.47B
Outstanding
EPS (Diluted) 6.31 5.68 6.45 9.22 8.31

EPS (Diluted)
- -9.96% 13.58% 42.95% -9.87%
Growth

Diluted Shares 6.62B 6.52B 6.12B 5.79B 5.5B


Outstanding
EBITDA 57.91B 55.08B 60.6B 77.89B 68.99B

EBITDA Growth - -4.89% 10.03% 28.52% -


11.43%
EBITDA Margin - - - - 32.20% NA

CONCLUSION

This chapter presents the summary and conclusions of the present study. It gives an account of
the significance of Working Capital Management in Cotton Textile industry in India. The
rationale of the current study, objectives, hypothesis, research methodology and brief review of
earlier studies are described. The major determinants of performance of working capital and its
impact on profitability across different sizes of textile firms in India are evaluated. Sufficient
doses of working capital is required to facilitate the procurement of inputs, to hire manpower,
create value addition through transformation of inputs into output, carrying inputs and outputs
for a better market time. Further, a series of market facilitating infrastructure such as warehouse,
cold storage, transport, packaging and extension of credit time to customers are to be financed
before the product realizes the investment made in it. While the length of operating cycle,
availability of credit lines, lead-time in supply chain, market compulsions for extension of
customer credit determine the quantum of working capital required for financing each operating
cycle. An estimation and provision of such funds draws greater significance.

Bibliography:
Primary sources:
1. www.money.cnn.com
2. www.marketwatch.com
3. www.gurufocus.com
4. profit.ndtv.com.
5. www.statista.com.