ASSIGNMENT

OF

“WORKING CAPITAL MANAGEMENT”

ON

Jindal Drilling & Industries Ltd.

SUBMITTED TO
PROF. CHAND TANDON

SUBMITTED BY
SAURABH ANEJA
MBA II YEAR
2009-2011

NEW DELHI INSTITUTE OF MANAGEMENT

Introduction to Working Capital Management

Every business needs adequate liquid resources in order to

maintain day to day cash flow. It needs enough cash to pay
wages and salaries as they fall due and to pay creditors if it is to
keep its workforce and ensure its supplies. It needs investment
to procure fixed assets, which remain in use for a longer period.
Money invested in these assets is called ‘long term funds’ or
fixed capital. Fixed capital includes land and buildings, plant
and machinery, furniture and fittings etc. Business also needs
funds for short term purposes to finance current operations.
Investment in short term assets like cash, inventories, and
debtors is called short term funds or working capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so

does the company’s ability to fund operations, reinvest and meet
capital requirements and payments. Understanding a company’s
cash flow health is essential to making investment decisions. A
good way to judge a company’s cash flow prospects is to look at
its working capital management (WCM). So, working capital
management is an important aspect of financial management. Its
main objective is to determine the optimum amount of working
capital required. It is concerned with the problems that arise in

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attempting to manage the current assets, current liabilities and
the relationship that exists between them.

Positive working capital means that the company is able to pay

off its short-term liabilities. Negative working capital means that
a company currently is unable to meet its short-term liabilities
with its current assets. A negative working capital is a sign of
managerial inefficiency in a business with low inventory and
accounts receivable. In any other situation, it is a sign of a
company may be facing bankruptcy or serious financial trouble.

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 Types of working capital
The type, kinds of a thing are depending upon the different
utilization of working capital. It prominently works in the
direction of performing different functions in different
situation and in the context of divergent variables. So
following are some important types of working capital.

Net Working
Capital Gross Working
Capital
Negative
Working Capital

Types of
Working Capital Permanent
Working capital
Cash Working
Capital

. Balance Sheet
Temporary
Working Capital
Working Capital

1) Net Working Capital:

Term Net working capital can be define in two way

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 i) It is the difference between current assets and
current liabilities.
ii) Amount left for operational requirement.
2) Gross Working Capital:
Gross working capital means the total current assets.
3) Permanent Working Capital:
It is the minimum amount of the current assets, which are
needs to conduct the business even during the dullest season
of the year. This amount varies from year to year depending
upon the growth of a company and stage of the business cycle
in which it operates. It is the amount of funds required to
produce the goods and services, which are necessary to
satisfy demand at a particular point.
It represents the current assets, which are required on a
continuing basis over the year. It is maintain as the medium
to carry on operation at any time. Permanent working capital
has following features:
i) It is classified on the basis of the time factor.
ii) Its size increase with the growth of the business.
iii) It constantly shifted from one assets o another and
continues to remain in the business process.
4) Temporary Working Capital:
It represents the additional assets, which are required at
different times during the operating year. Seasonal working
capital is the additional amount of current assets particularly

5
cash, receivables, and inventory which is required during the
more active business seasons of the year. It is the temporary
investment in the current assets and possesses he following
features:
a) It is not always gainfully employed, though is
May also shift from one asset to another as
permanent working capital does.
b) It is particularly suited to business of seasonal
on cyclical nature.
5) Balance Sheet Working Capital:
The balance sheet working capital is one, which is
calculated from the items appearing in the balance sheet.
Gross working capital, which is represented by the excess of
current assets over current liabilities, is example of the
balance sheet working capital.
6) Cash Working Capital:
It is one, which is calculated from the items appearing in
he Profit and Loss Account. It shows the real flow of money
or value at a particular time and considered to be most
realistic approach in working capital management. It is the
basic of he operation cycle concept, which has assumed a
great importance in financial management in recent year. The
reason is that the cash working capital indicates he adequacy
of he cash flow which is an essential pre requisite of a
business.

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 7) Negative Working Capital:
It emerges when current liabilities exceeds current assets,
such a situation is absolutely theoretical and occurs when a
firm is nearing a crisis of some magnitude.

Methods of Calculation of
Required Working
Capital

The methods of calculation of required working capital are as

follows:

Working Capital Cycle:

The working capital cycle is also known as operating cycle. It

refers to the duration between the firm’s payment of cash for
raw material, entering into production and inflow of cash from
debtors and realization of receivables. Simply speaking,
operating cycle is the duration between the outflow of cash and
inflow of cash and this may be evidenced from the following
working capital cycle. Receivables

Cash Finished Goods

Raw Material Work In Process

The above and network diagram may offer a clear picture of a
complete working capital i.e. it is a cash phenomenon. In the
diagram, raw material, stock refers to material only. In work
in process, components involve are raw material, wages, and
overhead more specifically manufacturing overheads.
Finished stock consists components of material, wages and
overheads inclusive of factory, office and administration and
selling and distribution. Debtors include material, wages,
overheads and profits. Credit involves for the components of
raw material, etc. something a contingency margin is also
given while estimating the working capital requirement.
The operating cycle consists of him following events, which
continues throughout his life of a firm remaining engaged in
commercial activities.

Avg. Stock of Raw Material

1) Raw Material Holding Period =
Avg. Cost of Consumption per day

Avg. Stock of Work in Process

2) Work in Process Holding Period =
Avg. Cost of Production per day

Avg. Stock of Finished Goods

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 3) Finished Goods Holding Period =
Avg. Cost of Goods Sold per day

Avg. Book Debt

4) Receivables Collection Period =
Avg. Credit Sales per day

Avg. Trade Creditors

5) Creditors Collection Period =
Avg. Credit Purchased per day

In the form of a simple equation working capital cycle or

operating cycle can be represented as bellow:

O = R+W+F+D-C
where, O = Operating Cycle (In Days)
R = Raw Materials Holding Period
W = Work in Process Holding Period
F = Finished Goods Holding Period
D = Receivables Collection Period
C = Creditors Collection Period.

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Components of Working Capital:

Current Assets: Amount

i) Stock of Raw Material (for…month consumption) ------

ii) Work In Process (for…Month) ------

a) Raw Materials
b) Direct Labour
c) Overheads

iii) Stock of Finished Goods (for…month sales) ------

iv) Sundry Debtors or Receivables (for…month sales) ------

v) Payments in Advance (if any) ------

vi) Balance of Cash (required to meet day-to-day Expenses) ------

vii) Any Other (if any) ------

Less: Current Liabilities:

i) Creditors (for…month purchase of raw materials)

------
ii) Outstanding Expenses (for month)
------
iii) Others (if any)
------

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Working Capital (CA – CL)
---------
Add: Provision/ Margin for contingencies
------
Net Working Capital Required
----------

Evaluation of working
capital
The working capital management needs attention of all the
finance head/ working capital management is important for
avoiding unnecessary blockage of fund. Like that liquidity is
important at it refer to the short-term financial strength of

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 company. It is very important to have proper balance in regard
to the liquidity of the firm.

Table I - Statement of Working Capital

Requirement
Rs. In
Crore
s)
Mar' Mar' Mar' Mar'0 Mar'
Particulars 10 09 08 7 06
A. Current Assets
Inventories 11.93 13.25 7.23 6.88 3.73
126.7
Sundry Debtors 252.8 299.7 1 90.31 43.98
Cash And Bank 1.12 17.04 56.77 1.96 2.31
135.2 140.8
Loans And Advances 3 5 70.3 26.6 14.18
401.0 470.8 261.0 125.7
Total Current Assets 8 4 1 5 64.2

B. Current
Liabilities
213.2 306.5 119.5
Liabilities 8 1 4 86 45.75
Provisions 5.4 3.67 3.81 0.72 2.97
218. 310. 123. 48.7
Total Current Liabilities 68 19 35 86.72 2

Net Working Capital 182. 160. 137. 15.4

Requirement (A-B) 4 65 66 39.03 8

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Table II - Statement of Changes in Working
Capital
(Rs. In Crores)
Effect on
Working
Capital
Mar' Mar' Decrea
Particulars 09 10 Increase se
A. Current Assets
Inventories 13.25 11.93 1.32
Sundry Debtors 299.7 252.8 46.9
Cash And Bank 17.04 1.12 15.92
140.8 135.2
Loans And Advances 5 3 5.62
470.8 401.0
Total Current Assets 4 8

B. Current Liabilities
306.5 213.2
Liabilities 1 8 93.23
Provisions 3.67 5.4 1.73
310. 218.
Total Current Liabilities 19 68

Net Working Capital 160. 182.

Requirement (A-B) 65 4 21.75

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Graph Showing Working

Capital

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Graph Showing Working

Capital movement

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Table I: -
It is observed that current asset and the current liabilities has
been increase from 2006-10. Working capital of JDI Ltd. shows
a fluctuation of current liabilities and current assets.

Table II: -
Statement of changes in the working capital is prepared
to show the changes in the working capital between the two
balance sheet dates. This statement is prepared with the help of
the current asset and current liabilities derived from the 2
balance sheets

So,
i) An increase in current asset increases working capital
ii) A decrease in current assets decreases in working
capital
iii) An increase in current liabilities decreases working
capital.

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 iv) A decrease in current liabilities increase working capital
It is worth noting that schedule of changes in working capital
is prepared only from current assets and current liabilities and
the other information is not of any use for preparing this
statement.

Profit & Loss - Jindal Drilling &

Industries Ltd.
(Rs. In
Crores.)
Mar'1 Mar'0 Mar'0 Mar'0 Mar'0
0 9 8 7 6
12 12 12 12 12
Mont Mont Mont Mont Mont
hs hs hs hs hs
INCOME:
1,195. 777.8 412.7 304.4 223.8
Sales Turnover 37 3 6 9 3
Excise Duty 0 0 0 0 0
1,195. 777.8 412.7 304.4 223.8
NET SALES 37 3 6 9 3
Other Income 0 0 0 0 0
1,200. 782.5 414.7 306.2 225.7
TOTAL INCOME 81 8 7 5 1
EXPENDITURE:
Manufacturing 645.8 339.4 227.8 174.2
Expenses 962.3 4 7 9 3
Material Consumed 43.58 22.7 16.29 19.41 18.11
Personal Expenses 37.11 26.1 12.15 6.31 4.31
Selling Expenses 0 0.67 0.52 0.86 0.23
Administrative
Expenses 15.75 9.08 7.06 6.58 5.24
Expenses
Capitalised 0 0 0 0 0
Provisions Made 0 0 0 0 0

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TOTAL 1,058. 375.4 261.0 202.1
EXPENDITURE 73 704.4 9 5 2
Operating Profit 136.64 73.43 37.27 43.44 21.72
EBITDA 142.07 78.18 39.28 45.2 23.6
Depreciation 12.1 12.81 8.95 10.04 11.26
Other Write-offs 0 0 0 0 0
129.9
EBIT 8 65.37 30.33 35.16 12.33
Interest 1.87 2.66 3.27 4.11 1.39
EBT 128.11 62.71 27.06 31.05 10.94
Taxes 43.97 20.02 10.47 11.25 1.47
Profit and Loss
for the Year 84.14 42.69 16.59 19.8 9.47
Non Recurring
Items 0 -5.48 1.78 -1.79 -2.49
Other Non Cash
Adjustments 0.01 0.12 0 0 0
Other Adjustments 0 0 0 0 0
REPORTED PAT 84.14 37.33 18.37 17.95 6.98

Balancesheet
- Jindal
Drilling &
Industries
Ltd.
(RS. In
Crores)
Mar'1 Mar'0 Mar'0 Mar'0 Mar'0
Particulars 0 9 8 7 6
12 12 12 12 12
Mont Mont Mont Mont Mont
Liabilities hs hs hs hs hs
Share Capital 11.47 11.47 11.47 10.27 10.27
339.6 258.8 224.6
Reserves & Surplus 8 8 9 60 42.65
351.1 270.3 236.1
Net Worth 5 5 5 70.27 52.92
Secured Loans 19.05 39.5 40.36 21.27 62.65

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Unsecured Loans 0 0 0 3.55 8.56
309.8 276.5 124.1
TOTAL LIABILITIES 370.2 5 2 95.09 2
Assets
129.4 127.4 102.3
Gross Block 1 8 3 56.41 46.1
(-) Acc. Depreciation 54.75 43.53 32.63 25.3 16.08
A. Net Block 74.66 83.95 69.69 31.1 30.02
B. Capital Work in
Progress. 0.83 0.39 4.32 0 78.45
112.3
C. Investments. 2 64.85 64.85 24.94 0.17
Inventories 11.93 13.25 7.23 6.88 3.73
126.7
Sundry Debtors 252.8 299.7 1 90.31 43.98
Cash And Bank 1.12 17.04 56.77 1.96 2.31
135.2 140.8
Loans And Advances 3 5 70.3 26.6 14.18
Total Current 401.0 470.8 261.0 125.7
Assets 7 5 1 6 64.2
213.2 306.5 119.5
Current Liabilities 8 1 4 86 45.75
Provisions 5.4 3.67 3.81 0.72 2.97
Total Current 218.6 310.1 123.3
Liabilities 8 9 5 86.72 48.72
D. NET CURRENT 182.3 160.6 137.6
ASSETS 9 6 6 39.04 15.48
Misc. Expenses 0 0 0 0 0
TOTAL ASSETS 309.8 276.5 124.1
(A+B+C+D) 370.2 5 2 95.09 2

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