You are on page 1of 23

1

2

ABSTRACT Working Capital is the amount of fund necessary to cover the cost of operating the enterprise. It is concerned with adequacy of current assets. For example. This paper examines whether significant differences exist among the working capital practices of the INFOSYS LTD. An attempt has been made to analyze whether the working capital policies are aggressive or conservative in nature and whether they are stable over the period of time (2015-2017) This project is based on a case study of INFOSYS LTD. The investment on the purchase of raw material is identified as working capital. Current assets are essential to use fixed assets profitability. No business can run without adequate investment in working capital. Management of working capital is considered to be one of the most important areas day to day management to a firm. a machine cannot run without availability of raw material. 3 .

CHAPTER 1 4 .

These items are also referred as circulating capital. Which is needed for short-term purposes of raw material. The peddler generally owned the horse and wagon so. Current assets are essential to use fixed assets profitability. These borrowing were called working capital loan. they had to be repaid after each trip to demonstrate to the bank that the credit was sound. payment of wages and other day to day expenses etc. is nothing but “dead labour”. The concept of working capital was.e. i. outlays for raw materials and other instruments of production by labour in earlier stages which are now needed live labour to work with in the present stage. then the bank would make another loan. a machine cannot run without availability of raw material. He contrasted this with “constant capital”. or turned over. perhaps. which according to him. as we understand today was embedded in his “variable capital”. thought in a somewhat different form. The term Working Capital originated with the old Yankee peddler. the concept of working capital. in work-in-progress along with other operating expenses until it is released through sale of finished goods. It is concerned with adequacy of current assets. they financed with equity capital. The wagon and horse were the fixed assets. who would load up his wagon with goods and then go off on his route to peddle his wares (Brigham and Gapenski 1996). If the peddler was able to repay the loan. The investment on the purchase of raw material is identified as working capital. to produce the profits. But. Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another. The merchandise was called working capital because it was what he actually sold. This “variable capital” was the wage fund which remains blocked in terms of financial management. 5 . Thus. Working capital is the fund of capital. Although Marx did not mention that workers also gave credit to the firm by accepting periodical payment of wages which funded a portion of work-in-progress. first evolved by Karl Marx (1867). Marx used the term “variable capital” meaning outlays for payrolls advanced to workers before the goods they worked on were complete. No business can run without adequate investment in working capital. and banks that followed this procedure were said to be employing sound banking practices.INTRODUCTION Working Capital is the amount of fund necessary to cover the cost of operating the enterprise. For example. he borrowed the funds to buy the merchandise. Management of working capital is considered to be one of the most important areas of day to day management of the firm.

6. Strengthen the Solvency: Working capital helps to operate the business smoothly without any financial problems for making the payment of short-term liabilities. Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Easy Obtaining Loans: A firm having adequate working capital. Ability to Face Crisis: Adequate working capital enables a firm to face business crisis in emergencies such as depressions. 4. Smooth Business Operation: Working capital is really a life blood of any business organization which maintains the firm in well condition. All expenses and current liabilities are paid on time. Regular Supply of Raw materials: Quick payment of credit purchase of raw materials ensures the regular supply of raw materials from suppliers. wages and overhead can be made without any delay. high solvency and good credit rating can arrange loans from banks and financial institutions in easy and favorable terms. Any day to day financial requirement can be met without any shortage of fund. Enhance Goodwill: Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 5. 3. NEED OF STUDY OF WORKING CAPITAL MANAGEMENT 1. 6 . 2. It ensures regular supply of raw materials and continues production. Goodwill is enhanced because all current liabilities and operating expenses are paid on time. Suppliers are satisfied by the payment on time. Purchase of raw materials and payment of salary.

To find out liquidity position. Tries to examine whether significant differences exist among the working capital practices INFOSYS LTD. profitability position and return on equity of INFOSYS LTD. 7 . This research: 1. OBJECTIVES The present study investigates the relationship of the aggressive and conservative working capital asset management and financing policies and its impact on profitability of INFOSYS for a period of 2015-2017. 2. To analyse whether the working capital policies are aggressive or conservative in nature and whether they are relatively stable over the period of time (2015-2017) 3.

I have collected all the figures from the Annual Report and Financial Statement of Infosys for the time period (2015-2017) b. The data required has been collected from the following sources: 1) Secondary Sources: a.RESEARCH METHODOLOGY Methodology of the study refers to the methods used to collect the required data for research work. The secondary data helped me a lot. magazines. 8 . Library Research: A number of books on finance were referred to collect theoretical background related finance. d. A part from here. online database has been used for source of information. Record of the company: This helped me to get details regarding the history of the organization. c. journals.

Sheela Christina (2011) carried out the study on Financial Performance of Wheels India Limited-Chennai. utilization of fixed assets and working capital in the last financial year. This paper examines recent statistics in US textile and clothing trade with selected Latin American and Asian economies. namely ratio analysis. five listed NBFCs have been considered for analyzing comparative financial performance. In addition. which provided for a 10-year quota phase-out process for WTO member countries. The researcher used the financial tools. comparing data on textile exports from the top 10 suppliers between 1995 and 2003. It evaluates the initial effects of the Agreement on Textiles and Clothing (ATC) of 1995. a brief comparison with other international experience of emerging economies is provided in order to elucidate the relevance of the textile industry in the region and world economy. Different statistical tools like. For this purpose the researcher took the past five years’ data and also checked out for the validity and reliability before conducting the study. Correlation and Analysis of Variance have been used extensively. 9 . Finally. Since its accession into WTO. based on all observations and affected least by fluctuations of sampling. The study had an Analytical type of research design supplemented by secondary data collection method. Thus the company could take necessary steps to improve sales and profit. LITERATURE REVIEW Mine Aysen Doyran and Juan Delacruz (2011) suggested that Latin America. In this study. Arithmetic Mean (AM) is an ideal measure of central tendency. Profitability ratios indicated that there was a decrease in the profit level. easy to calculate. has been applied in this study. It has been used to get a stable average and it is easy to understand the results of the study. Prasanta Paul (2011) reported that Financial Performance EvaluationA Comparative Study of Some Selected NBFCs. This empirical work can be the starting point for policy makers to design long-term policies that are needed for Latin America to compete successfully in the US market and promote the restructuring of clothing and textile production at the country level. comparative balance sheet and DuPont analysis and also statistical tools such as trend analysis and correlation. China has replaced Mexico as the top supplier of goods to the US. Coefficient of Variance. Standard Deviation. should take the presence from the Asian textile industry experience. the study revealed that the financial performance was satisfactory. which is rigidly defined. Arithmetic mean.

Niranjana Devi. relative to those receiving footnote presentations. The result of the study with respect to the four objectives. Empirical results reveal that special items receiving an income statement presentation are less persistent. special items were presented as a separate line item on the income statement (income statement presentation) to those aggregated within another line item with disclosure only in the footnotes (footnote presentation). Specifically. the structure and utility of Working Capital and the impact of Working Capital on profitability were examined.Ried Edwardj and Srinivasan Suraj (2010) have made an investigation as to whether the managers’ presentation of special items within the financial statements reflects the economic performance or opportunism. as opposed to opportunistic and motivations. K (Oct 2010) This study looked at working dimension of the companies. the factor that determines the Working Capital. The overall findings are consistent with managers using the income statement versus footnote presentation to assist users in identifying those special items that are most likely to differ from other components of earnings . as well as prior research investigating managers’ presentation choices in other contexts.that is. The study was motivated by an interest to setting standards in performance reporting and financial statement presentation. 10 . namely the types of Working Capital Policies. These results are consistent across numerous alternative specifications. for informational.

The following is the limitations which I observed in “INFOSYS LIMITED” Since the report is exclusively made from secondary source of data. These limitations were mainly due to the organizational setup of the company. There was no scope for gathering sufficient financial information as it is confidential during the time allotted for the project the internal audit is going on and they could not spare much time for the detailed discussion on the subject. They themselves have not maintained the data so accurately but seem to be sufficient for the project. LIMITATIONS OF THE STUDY Working capital management is an effective tool for management control. The direct observation is literally impossible. 11 .

CHAPTER 2 12 .

Gross working capital b. Gross working capital = Current asset b) Net working capital: This is the excess of total current assets over total current liabilities. Thus.Net working capital a) Gross working capital: It is capital invested in total current assets of a firm. Net working capital = Current assets – Current liability. Balance Sheet concept (value based) 2. 13 .CONCEPTIONAL Framework Concept There are two possible interpretations of working capital concept: 1. Balance sheet concept This can be classified in two ways: Balance sheet concept a. Operating cycle concept (time based) 1. Thus.

Operating Cycle Concept Working capital cycle refers to the length of time between the firms paying cash for materials for entering into production process and the inflow of cash from debtors (sales).Special working working capital capital 14 . Current liability: Those liabilities which are usually paid within a short period say an accounting year. each is covered into materials. for example. WIP into finished goods. materials into WIP.Reverse II. This cycle goes on and this is called operating cycle.Regular I.Seasonal working capital working capital II. Operating cycle concept a)permanent or b)temporary or fixed working variable working capital capital I. 2.NOTE:- Current assets: Those assets which can be easily converted into cash within a short period say an accounting year. debtors into cash and again cash to raw materials. finished goods into debtors.

Reserve working capital: It is that part of permanent working capital which is required to meet contingencies that may arise any time during the course of business. II. It is also referred as variable working capital. Special Working Capital: It is that part of temporary working capital which is required to meet the special demands of the firm. II. Seasonal working capital: It is that part of temporary working capital which is required to meet the seasonal demands of the firm. It remains permanently blocked in current assets and is more or less stable Its parts: I. Uncertainty in demand and supply of goods. Risk and uncertainty involved in managing the cash flows. escalation in cost both operating and financing costs. b) Temporary working Capital: It refers to that part of total working capital which is required over and above permanent working capital. IMPORTANCE OF WORKING CAPITAL I. a) Permanent working capital It refers to the hard core working capital which is that minimum level of investments in the current assets that is carried by the business at all times to carry out minimum level of its activities. Its parts I. II. 15 . Regular Working Capital: It is that part of permanent working capital which is required to ensure the circulation of current assets.

has a modest working capital requirement. A service firm. Seasonality of operations Firms. the working capital requirement of the firm is determined by a host of factors. Nature of business The working capital requirement of the firm is closely related to the nature of its business. which has a short operating cycle and which sells predominantly on cash basis. a manufacturing concern like a machine tools unit. Further. rather a continuous review must be made in order to assess the working capital requirement in the changing situation. Thus.. change in sales volume. the determination of working capital requirement is not once a whole exercise. 2. has a very substantial working capital requirements.DETERMINANTS OF WORKING CAPITAL 1.g. which have marked seasonality in their operations usually. have highly fluctuating working capital requirements. If the operations are smooth and even throughout the year the working capital requirement will be constant and not be affected by the seasonal factor. like an electricity undertaking or a transport corporation. 3. On the other hand. which may require the review of the working capital requirement e. Operating cycle Time taken from the stage when cash is put into the stage when cash is released. which has a long operating cycle and which sells largely on credit. There are various reasons. etc 16 . Every consideration is to be weighted relatively to determine the working capital requirements.

17 . inventory policies. the sales level. II. Long Term Sources I. IV. Policy C represents a moderate approach. Preference Share Capital: It is also one of the cheapest and most convenient means of procuring finance. Issue of Debentures: In the modern era debentures are considered to be an important source of procuring the finance. 3. credit policies and current assets. Interest rates has to be paid on debentures and is refunded after specific period. Retained Earnings: It is the cheapest and most convenient means of procuring finance under the means company is not required to bare compulsory burden of interest payment. Optimal level of working capital investment Risk of long term versus short term debt FINANCING OF WORKING CAPITAL A. the length of operating cycle. Company is just required to bear dividend on preference shares. Equity Share Capital: IN India for a long term periods it is a main source of procuring working capital. unexpected demand and unanticipated delays in obtaining new inventories. 2. Policy B represents conservative approach. Policy A represents aggressive approach. III. 1. Working Capital Investment The size and nature of investment in current assets is a function of different factors such as type of products manufactured.

insurance companies. Grants. etc. out of the two. government provides some financial help. e. Government help: For encouraging the industries. Both excess as well as shortage of working capital situations are bad for any business. III.g. Like all forms of financing. Under this system common masses deposit their money for a specific period on a certain rate of interest. Commercial banks: The commercial banks. Outstanding Expenses: Outstanding expenses (or accounts payable) are a “free” source of working capital because you acquire goods and services you need to run your business before you have to for pay them. Public deposits: In our country. EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate working capital to run its business operations. II. a major portion of the working capital is procured through public deposits. Loans from financial institution: the need of working capital could also be met by taking loans from various companies. Trade Credit: Trade is a spontaneous source of financing because because it arises automatically as part of the purchase transaction. exemption in taxes. trade credit is subject to the risk of buyer default. mostly grant the financial help. IV. Short Term Sources I. Spontaneous financing of Working Capital I. C. for pr4oviding working capital to the industries. inadequacy or shortage of working capital is more dangerous from the point of view of the firm. trusts etc. The commercial banks also contribute to the working capital by purchasing shares and debentures. B. subsidies. However. 18 . It should have neither redundant or excess working capital nor inadequate nor shortage of working capital. II.

DISADVANTAGES OR DANGERS OF INADEQUATE OR SHORT WORKING CAPITAL 1. credit worthiness suffers. Overall efficiency in the organization. non. Idle funds. Improper utilization the fixed assets and ROA/ROI sharply. Unnecessary purchasing and accumulation of inventories over required level. 3. 4. Difficult for the firm to exploit favorable market situation. Cant play off its short term liabilities in time. 2. poor return on investment.DISADVANTAGES OF REDUNDANT OR EXCESS WORKING CAPITAL 1. Excessive debtors and defective credit policy. 5. 6.profitable for business. the market value of shares may fall. higher incidence of B/D. 4. 19 . When there is excessive Working capital. 3. 2. Due to low rate of return of investments. Economies of scale are not possible. Day to day liquidity worsens 5.

liquidity and structural health of the organization. wages and overheads. Total costs incurred on materials. WORKING CAPITAL MANAGEMENT (WCM) Management of working capital is concerned with the problems that arise in attempting to manage the current assets. 20 .e. 7. The length of time for which raw materials remain in stores before they are issued to production. 2. the time taken for conversation of RM into FG. 3. the current liabilities and the inter-relationship that exists between them. i. 5. The length of production cycle or WIP. 4. Time-lag payment of wages and other overhead. FORECASTING/ESTIMATION OF WORKING CAPITAL REQUIREMENTS Factors to be considered are:- 1. 6. In other words it refers to all aspects of administration of current assets and current liabilities. The amount of cash required to pay day to day expenses of the business and advance payment if any. Working capital management policies of affirm have a great effect on its profitability. The average period of credit allowed to customers. The average period of credit to be allowed to suppliers.

the business may experience a short term cash fall. profits do not necessarily coincide with their associated cash inflows and outflows. efforts should be made to adhere to the estimates of receipt and payment of cash. as far as possible. CASH VS PROFIT Sales and cost and. 21 . CALCULATING CASH FLOWS Project cumulative positive net cash flow over several periods and. CASH MANAGEMENT STRATEGIES 1. Cash management will be successful only if cash collections are accelerated and cash payments (distribution). it is more important to forecast the likely cash requirements than to project profitability etc. For this reason it is essential to forecast cash flows as well as project likely profits. conversely. 2. Cash forecast and budgeting. The net result is that the cash receipts often lag cash payments and. Cash planning. whilst profits may be reported. a flow cumulative negative cash flow. 3. are delayed. MANAGEMENT OF CASH IMPORTANCE OF CASH When planning the short or long term funding requirements of a business. Receipts and disbursements method adjusted net income method (Sources and uses of cash) MANAGEMENT CASH FLOWS After estimating cash flows. therefore.

5. 3. But for investment in receivables the firm has to incur certain costs (opportunity cost and time value). Lock box system (collecting centers at different locations). 3. Inter-bank transfers. Further. Quick conversion of payment into cash. 4. 2. A concern is required to allow credit in order to expand in sales volume. 22 . Centralization of payments. there is a risk of bad debts also and it is therefore very necessary to have a proper control and management of receivables. Adjusting payroll funds (Reducing frequency of payments). 2. 4. METHODS OF DECELERATING CASH OUTFLOWS 1.METHOD OF ACCELERATING CASH INFLOWS 1. 6. Payment through cheques and drafts. Making use of Float (Difference between balance in bank pass book and bank column of cash book) MANAGEMENT OF RECEIVABLES Receivables (Sundry Debtors) result from credit sales. Decentralized collections. Paying on the last date. Prompt payment from customers (Debtors). Receivables contribute a significant portion of current assets.

23 .