Introduction of working capital

Working capital is an essential tool in any business organization. It is as important

as financing fixed assets, in the sense that, management of both of them have
effects on profitability of an organization. Working capital comprises majorly of
Current Assets and Current Liability. The Current Asset refers to the liquid assets
of an organization, that is, asset that can be easily converted to cash within an
accounting year. They includes cash, short-term securities, debtors, pre-payment
and inventories. It accounts for more than 50% of Total Assets of most
manufacturing firms and even more in other firms (Stephen, 2012). Current
liabilities on the other hand, are the claims against a business organization that
must be met within an accounting year. This includes creditors, bill payable, bank
overdraft and outstanding expenses to mention a few. Inadequate working capital
brings restrictions to trading activities of a firm and causes financial
embarrassment. On the other hand, excess working capital is considered
uneconomical. Thus, an organization must manage working capital as it manages
human assets. The major components of working capital are the Cash, Debtor and
stock. These three are very important and must be regularly checked, to avoid
excesses in any of them. Also, they must be a balance between liquidity and
profitability because there are usually costs attached to each situation (Westonu
and Brigham, 2011). Adequate working capital is also explained in term of Current
ratio. Current ratio, is usually seen as the relationship between Current assets and
liabilities which is the major metric use to measure liquidity of an organization.
Generally, the acceptable current ratio is 2:1(Pandey, 2005), however, this
depends on the types of industry involved. While ratio 1.5:1 may be inadequate in
a manufacturing setting, current ratio of 1:1 may be acceptable as adequate
working capital in a retail business that sells for cash.

Working capital is a measure of both a company's efficiency and its short-term

financial health. Working capital is calculated as:

Working Capital = Current Assets - Current Liabilities

The working capital ratio (Current Assets/Current Liabilities) indicates whether a
company has enough short term assets to cover its short term debt. The working
capital ratio (Current Assets/Current Liabilities) indicates whether a company has
enough short term assets to cover its short term debt. Anything below 1 indicates
negative W/C (working capital). While anything over 2 means that the company is
not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is
sufficient. Also known as "net working capital".

WORKING CAPITAL MANAGEMENT

Working capital management refers to a company's managerial accounting
strategy designed to monitor and utilize the two components of working capital,
current assets and current liabilities, to ensure the most financially efficient
operation of the company.

INTRODUCTION OF ABB INDIA LTD

ABB India Limited is an India-based company, which is engaged in power and
automation business. The Company's segments include Power Systems, which
offers turnkey systems and services for transmission and distributions for power
grid and power plants; Power Products, which manufactures, engineers, supplies
key components to transmit and distribute electricity; Process Automation, which
provides customers with integrated solutions for control, plant optimization and
industry specific application knowledge; Discrete Automation and Motion, which
provides products, with related services, that are used as components in
machinery and automation systems, and Low Voltage Products, which
manufactures products and systems that provide protection, control and
measurement for electrical installations, enclosures, switchboards, electronics and
electromechanical devices for industrial machines, plants and related service. Its
products include Flameproof motors and Frequency controlled motors.

The Indian subcontinent has witnessed an unprecedented level of economic

expansion in recent years. As one of the world’s leading engineering companies
ABB has been steadily expanding its footprint to support this growth. ABB help
customers to use electrical power efficiently, to increase industrial productivity
and to lower environmental impact in a sustainable way. Today, ABB is an integral
part of the growth story of the region. ABB’s operations are organized into four
global divisions, which in turn are made up of specific business units focused on
particular industries and product categories. Click the links below for brief
descriptions of the divisions.

ABB is a global leader in industrial technology. The company employs 140,000

people and operates in approximately 100 countries.

ABB has been successfully investing in the Indian subcontinent ever since and has
steadily expanded its manufacturing, engineering and R&D footprint. Today, ABB
employs over 10,000 people across more than 40 locations in Bangladesh, India
and Sri Lanka. ABB has 12 manufacturing sites on the subcontinent and one of its
seven corporate research centers around the world is based in India.

ABB success has been driven particularly by a strong focus on research and
development. The result has been a long track record of innovation. Many of the
technologies that underlie our modern society, from high-voltage DC power
transmission to a revolutionary approach to ship propulsion, were developed or
commercialized by ABB. Today, ABB stands as the largest supplier of industrial
motors and drives, the largest supplier of power grids and the largest provider of
generators to the wind industry.

ABB India, the ABB Group company was incorporated in India in 1949, it is leader
in power automation technologies. These technologies enable industrial
customers to improve their performance along with lower environment impact.
Today, ABB employs over 10,000 people across more than 40 locations in
Bangladesh, India and Sri Lanka. ABB has 12 manufacturing sites on the
subcontinent and one of its seven corporate research centers around the world is
based in India.

The history of ABB goes back to the late nineteenth century, and is a long and
illustrious record of innovation and technological leadership in many industries.
Having helped countries all over the world to build, develop and maintain their
infrastructures, ABB has in recent years gone over from large–scale solutions to
alternative energy and the advanced products and technologies in power and
automation that constitute its Industrial IT offering.

ABB is a global leader in power and automation technologies that enable utility
and industry customers to improve their performance while lowering
environmental impact.

For more than 100 years, ABB and its predecessor companies have set the pace
for innovation in technologies to harvest energy, improve productivity, safeguard
the environment, increase profits, and more. Our modern–day power and
automation technologies are derived from the efforts of dozens of leading
companies and thousands of talented individuals worldwide.

Although certain brand names have changed, the spirit of innovation from these
leading companies and their employees remains at the core of ABB. In celebration
of this heritage.

In 2013, ABB inaugurated two new facilities producing power products in India to
coincide, with the 50 year anniversary of the company's extensive Vadodara
manufacturing hub in the western state of Gujarat. The new units covering an
area of about 15,000 square meters were built in 18 months at an investment of
approximately Rs 250 crore and are located in Savli, close to the Vadodara facility.
The new manufacturing units will produce high–voltage switchgear and
distribution transformers.

Product range of the company includes:

Power Products: Power Products are the key components to transmit and
distribute electricity. The division incorporates ABB's manufacturing network for
transformers, switchgear, circuit breakers, cables and associated equipment. It
also offers all the services needed to ensure products' performance and extend
their lifespan. The division is subdivided into three business units.
Power Systems: Power Systems offers turnkey systems and services for power
transmission and distribution grids, and for power plants. Substations and
substation automation systems are key areas. Additional highlights include flexible
alternating current transmission systems (FACTS), high–voltage direct current
(HVDC) systems and network management systems. In power generation, Power
Systems offers the instrumentation, control and electrification of power plants.
The division is subdivided into four business units.

Automation Products: This ABB business serves customers with energy efficient
and reliable products to improve customers' productivity, including drives, motors
and generators, low voltage products, instrumentation and analytical, and power
electronics. More than one million products are shipped daily to end customers
and channel partners, spanning a wide range of industry and utility operations,
plus commercial and residential buildings.

Process Automation: The main focus of this ABB business is to provide customers
with integrated solutions for control, plant optimization, and industry–specific
application knowledge. The industries served include oil and gas, power,
chemicals and pharmaceuticals, pulp and paper, metals and minerals, marine and
turbocharging. Key customer benefits include improved asset productivity and
energy savings.

Robotics: ABB is a leading supplier of industrial robots – also providing robot

software, peripheral equipment, modular manufacturing cells and service for
tasks such as welding, handling, assembly, painting and finishing, picking, packing,
palletizing and machine tending. Key markets include automotive, plastics, metal
fabrication, foundry, electronics, machine tools, pharmaceutical and food and
beverage industries. A strong solutions focus helps manufacturers improve
productivity, product quality and worker safety. ABB has installed more than
160,000 robots worldwide.

Milestones:

1949: The company was incorporated on December 24 as the Hindustan Electric

Company.
1965: the company’s name was changed to Hindustan Brown Boveri (HBB).

1989: Pursuant to the Scheme of Amalgamation of Asea Limited with HBB with
effect from 1st January, the name was further changed to Asea Brown Boveri, with
effect from October 13, 1989.

1995: Flakt India Limited was amalgamated with ABB with effect from October 5.

1994–95: a joint venture company– ‘ABB Daimler–Benz Transportation AG’

(Adtranz) was established by ABB Zurich and Daimler–Benz AG, Germany, in
Germany.

1996: A subsidiary of Adtranz was incorporated in India viz. ’ABB Daimler–Benz

Transportation Limited which took over the Transportation Business of the
Company.

1999: ABB’s power generation business was globally transferred into the new 50–
50 JV with Alstom. In India the power generation business has been demerged
and transferred to ABB Alstom Power India with effect from April 1, 1999. In
consideration of the transfer of the power business, each shareholder of ABB has
been allotted one share in ABB Alstom Power India for every share held in the
company.

2001: Making Automation Easier” – in keeping with this commitment, ABB

donated an on–line passport information kiosk to the Passport office, Bangalore
on Thursday the 15th February 2001.

2002: Asea Brown Boveri (ABB) announced the launch of several new and
innovative products and solutions at Elecrama 2002.

2004: Reinforces company strategy of range expansion to complete the value

chain.

2005: Organization realignment and regional approach to enhance synergy and

value creation.

2006: Group CEO Fred Kindle announces new units in Haridwar and Nashik.
2006: Integrated engagement plan to promote technology development in power
and automation and foster industry–academia interface

2007: The company strengthens India commitment with significant expansion

plans.

2008: The company wins Rs. 312–crore power order for Delhi International Airport
Terminal (T3).

2009: The company sets up state–of–the–art manufacturing facility near

Bangalore.

2010: The company inaugurates global wind power generator factory in India.

2011: ABB announced that it will invest about US $ 24 million (Rs 115 crore) in a
new facility in India to manufacture a new range of Miniature Circuit Breakers
(MCB), Residual Current Circuit Breakers (RCCB) and Surge Protection Devices
(SPD).

ABB inaugurated new production line for miniature circuit breakers.

2014: ABB received a contract from Power Grid Corporation of India to construct a
400 kilovolt (kV) gas–insulated switchgear substation to the boost transmission
capacity in the southern region.

OBJECTIVES OF WORKING CAPITAL

The primary objective of working capital management is to ensure smooth
operating cycle of the business. Secondary objectives are to optimize the level of
working capital and minimize the cost of such funds.

1) To Smooth Working Capital of Operating Cycle.

2) To Minimize the Rate of Interest.
3) To Minimize the Cost of Capital.
4) To Optimal Return on Current Asset Investment.
1. Current Ratio

Year 2011-12 2012-13 2013-14 2014-15 2015-16

Values 1.13 1.20 1.21 1.17 1.29

Values of Current Ratio

1.35

1.3 1.29

1.25
1.21
1.2
1.2 Values of Current Ratio
1.17
1.15 1.13

1.1

1.05

1
2011-12 2012-13 2013-14 2014-15 2015-16

Looking at the chart we can see the values of current ratio are consistently near to 1.2:1. In
initial three year current ratio was marginally increasing and then declined to 1.17. in year 2015-
16 it further increase to 1.29.
2. Liquid Ratio/Quick Ratio

Year 2011-12 2012-13 2013-14 2014-15 2015-16

Values 0.88 0.94 0.95 0.92 1.04

Values of Liquid Ratio

1.1

1.05 1.04

0.95 Values of Liquid Ratio

0.95 0.94
0.92

0.9 0.88

0.85

0.8
2011-12 2012-13 2013-14 2014-15 2015-16

Likewise current ratio Quick ratio is also showing similar trends it values are constantly less than 1 upto
year 2014-15 but increase marginally to go more than 1 in 2015-16.
3. Stock Turnover Ratio

Year 2011-12 2012-13 2013-14 2014-15 2015-16

Values 6.02 6.01 5.58 5.94 5.81

Values of Stock Turnover Ratio

6.1
6.02 6.01
6
5.94
5.9
5.81
5.8
Values of Stock Turnover Ratio
5.7

5.6 5.58

5.5

5.4

5.3
2011-12 2012-13 2013-14 2014-15 2015-16

The stock turnover ratio value are again consistently near to 6 times a year. Only in year 2013-14 the
value of stock turnover ratio is 5.58 times which is lowest in past five financial years.
4. Debtors Turnover Ratio

Year 2011-12 2012-13 2013-14 2014-15 2015-16

Values 2.41 2.31 2.38 2.44 2.40

Values of Debtors Turnover Ratio

2.5

2.45 2.44
2.41
2.4
2.4 2.38
Values of Debtors Turnover Ratio
2.35
2.31
2.3

2.25

2.2
2011-12 2012-13 2013-14 2014-15 2015-16

Like other ratio related to working capital management debtors turnover ratio is also quite consistent
and the value are ranging from 2.3 to2.45 times a year. Similarly average collection period is near to 150
days. This may not be regarded good collection period.
5. Average Collection Period

Year 2011-12 2012-13 2013-14 2014-15 2015-16

Values 151 157 152 149 152

Values of Average Collection Period

158 157

156

154
152 152 Values of Average Collection
152 151 Period

150 149

148

146

144
2011-12 2012-13 2013-14 2014-15 2015-16
6. Working Capital Turnover Ratio

Year 2011-12 2012-13 2013-14 2014-15 2015-16

Values 6 4.88 4.19 4.45 3.62

Values of Working Capital Turnover Ratio

7
6
6

4.88
5
4.45
4.19
Values of Working Capital
4 3.62 Turnover Ratio

0
2011-12 2012-13 2013-14 2014-15 2015-16

As far as working capital turnover ratio is concerned it is 6 times in 2011-12 but it has gradually decrease
to 4.88 and 4.19 times in next two financial year. Further it reduce to 3.6 times a year in financial year
2015-16.
Finding and Conclusion

1. The values of current ratio are consistently close to 1.2:1 in past year. This show that
company is reasonably solvent. However the current ratio less than 2:1 is an indicator of
improper solvency hence company must have ability of management to negotiate with
the clients for delay in payments.
2. Quick ratio indicates how much cash or cash equivalents are there in the company. To
pay its obligations in times. Amy value less than 1 is indicator of poor liquidity. The
company has consistently quick ratio less than 1. So as far liquidity front company can be
considered as risky.
3. For any manufacturing company the value of stock turnover ratio is generally on the
lower side but below 10 times a year is not a good sign for any company. ABB India
limited must improve its stock management the major component of current asset is
inventory but the company must have less a proportion of inventory.
4. As far as receivable management of company it is again not satisfactory. The company at
present receives money from its debtors only two times a day ( average 150 days). The
company may face several cash crunch in absence of receivable in times from the
customer.
5. The working capital turnover ratio indicates who many times a firm is rotating its
investment in working capital. In case of AAB India Limited working capital turnover is
not adequate more and more rotation of working capital improves sales turnover and
also profit in the Business.
6. Over all the working capital management of ABB India Limited can not be considered
satisfactory and hence require a change in inventory, receivable and cash management
of the business so that the solvency can be maintained and profit can be increased by
proper utilization of working capital investment.
Bibliography

1. F
2. F
3. F
4. F

Websiites:

1. www.moneycontrol.com
2. www.investopedia.com
3. www.myaccounting.com
4. www.abbindialtd.com
5. www.economictimes.com