A Project Entitled ““WORKING CAPITAL MANAGEMENT TO ITS OPTIMAL EFFICIENCY “ Submitted for Post-Graduate Degree Master in Business

Administration( Evening Batch ) -: Submitted By:Pinky Yogesh Gandhi -: Under the guidance of :Prof. Alok Pandey -:For The Academic Year:2009-2010

M.S. Hostel Ambe Vidyalaya

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INDEX Topic 1. 7. 8. 3. 9. 10 Definition of Working Capital Need of Working capital Types of working capital Determinants of Working Capital Data for Working capital of 3 Years for M. for 2010-11 Analysis and Conclusion Page No 3 4 5 6 7 9 10 11 12 15 2 . 6. 5.C. Hostel Analysis of Working capital ( with graph ) Analysis of Current Assets ( with graph ) Analysis of Current Liabilities ( with graph ) Actual Calculation / Forecast of W. 4. 2.S.

inventories) over current items owned to employees and others (such as salaries & wages payable. bank over-draft. cash. bill payable. Current liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business. will be. 3 . Definition:According to Guttmann & Dougall“Excess of current assets over current liabilities”. or. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety. within a year. marketable securities. and outstanding expenses. accounts payable. taxes owned to government)”. turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The basic current liabilities are account payable. out of the current assets or earnings of the concern. the current liabilities and the interrelationship that exist between them. According to Park & Gladson“The excess of current assets of a business (i. The major current assets are cash.DEFINITIONS Working capital management is concerned with the problems arise in attempting to manage the current assets.e. The term current assets refers to those assets which in ordinary course of business can be. accounts receivables. account receivable and inventory.

Technically this is refers to operating or cash cycle.Need of working capital management The need for working capital gross or current assets cannot be over emphasized. Therefore sufficient working capital is necessary to sustain sales activity. the objective of financial decision making is to maximize the shareholders wealth. 4 . This is the precise reason why the needs for working capital arise. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Thus some amount of cash is blocked in raw materials. it will be required for purchasing the raw material may be available on credit basis. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress. To achieve this. and ultimately finished goods. it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. finished goods. As already observed. However some part of current assets may be financed by the current liabilities also. and sundry debtors and day to day cash requirements. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. WIP. If the company has certain amount of cash.

The cash outflows resulting from payment of current liabilities are relatively predictable. Net working capital can be positive or negative. bills receivable and inventory. short term securities. among other things. bills payable and outstanding expenses. debtors.Gross working capital and Net working capital There are two concepts of working capital management 1. The more predictable the cash inflows are. on the nature of industries. Gross working capital Gross working capital refers to the firm’s investment In current assets. Efficient working capital management requires that firms should operate with some amount of net working capital. Net working capital Net working capital refers to the difference between current assets and current liabilities. The cash inflow are however difficult to predict. the exact amount varying from firm to firm and depending. the less net working capital will be required. 2. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors.net working capital is necessary because the cash outflows and inflows do not coincide. 5 . Current assets are the assets which can be convert in to cash within year includes cash.

6. Nature of business Some businesses are such.Determinants of working capital The amount of working capital is depends upon a following factors 1. 3. On the other hand. 7) Operating efficiency If the business is carried on more efficiently. in the case of purchase. Size and growth of business In very small company the working capital requirement is quit high due to high overhead. 5. the receivable may not be recovered in time etc. it can operate in profits which may reduce the strain on working capital. as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. it may be necessary for the company to extend more and more credit to customers. working capital may be high as the sales terms of value and quantity may be reducing. because the profits to the extend that they earned in cash may be used to meet the working capital requirement of the company. the working capital requirements may adversely affect by the increasing size. infrastructure oriented project etc. Business/ Trade cycle If the company is the operating in the time of boom. These businesses sell services and not the commodities and that too on cash basis. that their requirement of fixed capital is more rather than working capital. 2. similarly in the case of depressions also. there may be unnecessary piling up of stack without getting sold. due to increase in the sales. 4. there requirement of working capital is less. as such medium size business positively has edge over the small companies. higher buying and selling cost etc. which is in turn its depend on numerous factors. a part of working capital requirement may be financed by them. where requirement of fixed capital is less but more money is blocked in inventories and debtors. but high profitability will positively reduce the strain on working capital requirement of the company. the working capital requirement may be more as the company may like to buy more raw material. the time gap between the acquisition of raw material till the end of final production of finished products itself is quit high. Profitability The profitability of the business may be vary in each and every individual case. But if the business start growing after certain limit. it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc. On the other hand. may increase the production and sales to take the benefit of favorable market. if the credit is offered by suppliers of goods and services. there are some businesses like trading activity. public utility services like railways. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. there may more and more amount of funds blocked in stock and debtors etc. Terms of purchase and sales Some time due to competition or custom. 6 . but it is necessary to purchase on cash basis. As such. Length of production cycle In some business like machine tools industry. due to their very nature. the working capital requirement will be higher. no founds are blocked in piling inventories and also no funds are blocked in receivables. Naturally there need of working capital is high. E.g.

82 670786.S.6 28431858.40 2006-07 179300 757054.11 278237.DATA FROM BALANCE SHEET OF M.62 31047328.15 Size of Working capital Particulars A Current Assets Closing Stock Deposits ( Assets Loans and Advance ( Asset ) Cash in Hand Bank Account TOTAL OF CURRENT ASSETS B) Current Liabilities Duties and Taxes Provisions Sundry Creditors TOTAL OF CURRENT LIABILITIES 2007-08 155314 759554.75 15650678.67 1172564 790755 15803832.82 1400877.86 32891043.6 31489509. HOSTEL Size of Working capital Particulars A Current Assets Closing Stock Deposits ( Assets Loans and Advance ( Asset ) Cash in Hand Bank Account TOTAL OF CURRENT ASSETS Current Liabilities Duties and Taxes Provisions Sundry Creditors TOTAL OF CURRENT LIABILITIES WORKING CAPITAL ( Current assets Current Liabilities ) 1156972 1357130 13136576.11 -184120.94 17767151.00 15396649.73 7 .94 WORKING CAPITAL ( Current assets Current Liabilities ) 15123891.

21 39607926.12 1242783 1134769 16454370.Size of Working capital Particulars A Current Assets Closing Stock Deposits ( Assets Loans and Advance ( Asset ) Cash in Hand Bank Account TOTAL OF CURRENT ASSETS Current Liabilities Duties and Taxes Provisions Sundry Creditors TOTAL OF CURRENT LIABILITIES WORKING CAPITAL ( Current assets .Current Liabilities ) 2008-09 254666 757054.81 87647.13 20776003.6 37339776.13 18831922.5 1168781.99 8 .

73 98.15 100 2007-08 32891043.94 2008-09 150 2006-07 100 Working Capital 50 2007-08 0 1 Years Current Assets Analysis Years Current Assets Indices 2006-07 31047328.40 100 2007-08 15123891.67 105.23 2008-09 20776003.57 9 .12 127.Working Capital Analysis Years Net Working Capital Indices 2006-07 15396649.99 134.94 2008-09 39607926.

This indicates inefficient collection management. This has been rectified by putting a parents teachers meeting in the 1 Week of March from academic year 2010-11 10 . We see that the current assets are increasing with the sales. 91 % in 2006-07. Current assets components show LOANS AND ADVANCES ( Please note that Outstanding fees are included in this head which constitute 95% of loans and advances ) are the major part in current assets. The fees are paid only when there is a parents teachers meeting is held. And from last 3 years parents teachers meeting is not held in the month of February and march and Parents pay the due fees only in April when the term is over. so adequate steps had been taken to reduce it to half in 2007-08. But the same has increased to double in 2008-09 which can adversely affect the profitability as the same can in invested in short term advances and interest can be gained on them . The Proportion of cash in the total assets in the year 2006-07 is very high . After analyzing the whole situation I realized that as it is a residential school and students come from out of Vadodara . Sales have increased due to hike in FEES and increase in occupancy. 95% in 2007-08 and 94% in 2008-09 . Current assets include some funds investments for which company pay interest. The excess of current assets is showing positive liquidity position of the firm but it is not always good because excess current assets then required. it may adversely affects on profitability.140 120 100 80 60 40 20 0 Years After analyzing the data for current assets .

33 140 120 100 80 60 40 20 0 Y ears Current liabilities mean the liabilities which have to pay in current year. 11 . It includes sundry creditor’s means supplier whose payment is due but not paid yet.94 113. company has to pay interest thus the management of current liabilities has importance. Current liabilities also includes bank overdraft.00 100 2007-08 17767151. For some current assets like bank overdrafts and short term loan.13 120. To get maximum credit from Supplier which is profitable to the company it reduces the need of working Capital of firm. thus creditors called as current liabilities.52 2008-09 18831922. Current liabilities also include short term loan and provision as tax provision. the total working capital also decreased.Current Liabilities Analysis Years Current Liabilities Indices 2006-07 15650678. Current liabilities show continues growth each year because company creates The credit in the market by good transaction. As the proportion of Sundry creditors increased in Year 2007-08 .

for the academic year 2010-2011.The sales for each year remains the same as the occupancy of the residential school is Fixed and it is used to the optimum from last two decades. September and December. we need to know the sales for the whole year and the credit limit for each month . The payment Schedule as decided by the trend and the management is as follows April( Durin g Time of Admission or readmission ) 5000 20000 Old Students New Students June 10000 10000 September 10000 10000 December 10000 5000 February 10000 Total Fees 45000 45000 On the basis of the schedule we will predict the sales amount for each month for the next academic year April 6500000 12000000 June 13000000 6000000 September 13000000 6000000 December 13000000 3000000 February 13000000 0 Old Students New Students FACTS FOR COLLECTION OF FEES The Parents Teachers meeting is Fixed in the month of June. FACTS USED IN CALCULATION OF DEBTORS 1. The Credit limit is Different for old and New students. I have collected data for last 3 years to understand the trend of the cash in flow and outflow. The average Fee Structure is Rs. The Credit is given only in the month of February . 45000/. FORECAST OF WORKING CAPITAL 2010-2011 12 . when no parents meeting is held hence the collection is extended till April after Final Exams. 45000/2. Total Occupancy is 1900 from which 1300 are old students and 600 are new students. Total Average fees is Rs. Initially to calculate the debtors.Now The pilot project which is intended by me is estimating the requirement of working capital for each month of the academic year 2010-11 For this . Hence the collection remains 100% for the first 4 installments.

CURRENT ASSETS April Debtors Raw material Stock Cash Predetermined Loans and Advances TOTAL CURRENT ASSETS 1510000 610000 2400000 2245000 2100000 1825000 925000 1510000 2100000 1975000 14825000 900000 510000 100000 May 0 510000 100000 June 0 1400000 1000000 July 0 1245000 1000000 August 0 1100000 1000000 September 0 825000 1000000 October 0 825000 100000 November 0 510000 1000000 December 0 1100000 1000000 January 0 975000 1000000 February 13000000 825000 1000000 March 13000000 725000 1000000 20000000 34725000 CURRENT LIABILITIES Sundry Creditors Wages Other Creditors ( Laundry ) Taxes and Duties TOTAL CURRENT LIABILTIES 3175000 850000 850000 3175000 3175000 3175000 2275000 1750000 3175000 3175000 3175000 1425000 850000 900000 850000 850000 1425000 850000 900000 1425000 850000 900000 1425000 850000 900000 1425000 850000 0 850000 900000 1425000 850000 900000 1425000 850000 900000 1425000 850000 900000 1425000 850000 900000 1200000 4375000 WORKING CAPITAL (A-B) -1665000 -240000 1550000 -930000 -1075000 -1350000 -1350000 -240000 -1075000 -1200000 11650000 30350000 13 .

1. No Closing stock usually found . Hence we see a closing stock of Rs. Rs. It Includes Spices. Grains for which only stock is maintained for next month .00.FACTS ABOUT THE CALCULATIONS DONE ABOVE 1.000 in the moth of April and May as the grains are stored for whole year . for all month except April. Pulses etc 3. b) Grains and vegetables : Has got 2 types : i) ii) Grains and vegetables which have to stock up eg.10. In the months mentioned above the is only Rs. Wheat Potatoes etc during their peak season. 10.000 for operating Months i. Wages : Paid in One months Arrears Other major expenses are laundry expenses .e. 6. 8.000/4. 20000000 is put on the basis of analysis of data for last 3 years CURRENT LIABILITIES 5. May and October as the school remains closed for Summer vacation and Diwali Vacation Respectively. 7. One month Credit is given Approximate tax is calculated on the basis of the data given by the Finance Department . Loans and Advances are on pure discretion of The management . Raw material stock contains 2 components : a) Housekeeping material (Meant for month to month indent). The stock value increases in the month of December because the grains are purchased in bulk. Predetermined Cash : The minimum cash balance decided is Rs. 14 . 5. Rice . Sundry Creditors : One months credit is given.00.

In the month of February and March . In the month of June . We purchase in cash / Cheque for fast delivery of stock . When we start the new academic year .35000000 30000000 25000000 20000000 15000000 10000000 5000000 0 -5000000 April May June July Aug. As we are having a negative Working capital the cost of money locked in working capital is saved . 15 . We enjoy Negative working capital for almost all the month as the fees are taken in advance and we receive credit for one month from all our vendors 2. we need to have a collection day in the month of February or March so that the debtors don’t increase . our Debtors are at its peak as the fees remain outstanding for 2 months. Sept Oct Nov Dec Jan Feb Mar Analysis of the Forecast 1. Apart from the Financial Benefits . Negative working capital forces a company to serve its customers quickly. CONCLUSION In order to have a zero budgeting for the whole year round . 3.

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