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A summer training project

Submitted in partial fulfillment of the
requirement for the
Award of degree of BBA
Jharkhand Rai University, Ranchi
Session 2014-2016

Submitted by
Guided by
Name: Jasni Mardi
Mr.Santanu Mitra

Roll No: 116
‘RSB’ Tranmission (1) LTD
BBA 4th Semester
Industrial Area, Jamshedpur
(Internal Guide)
Dept: Finance

Certificate of Originality

This is to certify that the project entitled “A study on

Working Capital Management” submitted to Bharati
Vidyapeeth Deemed University, Pune in partial fulfillment of
the requirement for the award of the degree of MBA is an
original work carried out by Ms. PRIYANKA RAHA under the
guidance of Mr. SANTANU MITRA. The matter embodied in
this project is a genuine work done by Priyanka Raha to the
best of my knowledge and belief and has not been submitted
before, neither to this University nor to any other University
for the fulfillment of the requirement of any course of study.

Signature of the student
Signature of the Guide



This to certify that the project titled “A study on Working

Capital Management” is an academic work done by
Priyanka Raha Submitted in partial fulfillment of the
requirement for the award of degree of MBA from Bharati
Vidyapeeth Deemed University, Pune. It has been
completed under the guidance of Mr. Nilesh Mate (Faculty
Guide) and Mr. Santanu Mitra & Mr. SK Abdul Maksud
(Corporate Mentor). We thankful to RSB Transmissions (I)
Ltd. for having allowed our student to undergo project work
training. The authenticity of the project work will be
examined by the viva examiner which includes data
verification; checking of information etc. and it may be
rejected due to non-fulfillment of quality standards set by the

Dr. Sachin S. Vernekar

(Director IMED)

At the very outset, it is with a deep sense of gratitude that
acknowledge the able guidance received from MR. SANTANU MITRA
(Manager – Finance & Accounts) and other finance team of RSB
Transmissions (I) Limited, during all stage of this project. The
project owes much of its work to their generative suggestions,
illuminating comments, encouragement and ceaseless patience.
I would like to take the opportunity to thank MR. NILESH MATE
(Faculty guide, IMED BPVDU, PUNE) for his guidance and support
throughout the project. His opinions and experience offered me
valuable insights into the study area and gently enhanced the value of
the project.
Last but not the least, my endless appreciation goes to my family who
has stood by my side and given me moral support whenever I was low
and boosted my will power.
I would fail in my duty, if I do not make a special mention of all others
who helped me directly or indirectly in pursuit of this project.

Thank you


Signature of the student

A well designed and implemented working capital management is
expected to contribute positively to the creation of a firm’s value.
“Working Capital” is the capital invested in different items of current
assets needed for the business, viz, Inventory, Debtors, Cash & Bank
balances and other current assets. These current assets are essential
for smooth business operations and optimum utilization of fixed
assets. The firm should maintain sufficient level of working capital to
produce up to a given capacity and maximize the return on
investment in fixed assets. Shortage of working capital leads to lower
capacity utilization, lower turnover and hence lower profits. Working
Capital, in excess of the amount required to produce to full capacity, is
idle and consequently leads to decline in profits. Hence the dictum
“Adequacy is a virtue, surfeit is not”.

The study concentrates on the main components of working capital

like inventory management, accounts receivable management and
cash management of Public Enterprises. The tools used in this study
includes ratio analysis, trend analysis and percentage method.


Signature of the student

Sl. Page Mark
Contents SIGN.
No. no. s
1 Introduction 20
 Profile of RSB
Transmissions (I) Ltd.
 Vision & mission 8
 History 9-10
 Scope & Objectives 10
 Overview of RSB 11-
Transmissions (I) Ltd. 14
• Product Line
• SWOT Analysis
2 21
Conceptual 22-
3 51
4 Data Analysis 68
5 Findings 70
6 Appendix 71
7 Bibliography 72

Every business whether big, medium or small, needs finance to
carry on its operations and to achieve its target. In-fact, finance is
so indispensable today that its rightly said to be the lifeblood of an
enterprise. Without adequate finance, no enterprise can possibly
accomplish its objectives. So this chapter deals with studying
various aspects of working capital management that is necessary
to carry out the day-to-day operations. The term working capital
refers to that part of firm’s capital which is required for financing
short term or current assets such as cash, marketable securities,
debtors and inventories funds invested in current assets 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 known as revolving or circulating capital. On the whole,
Working Capital Management performs a key function and is of top
priority for every finance manager. All managers must, however,
keep in mind that in their pursuit to liquidity, they should not lose
sight of their basic goal of profitability. They should be able to attain
a judicious mix of liquidity and profitability while managing their
working capital.




 HEADED BY : Mr. R.K. Behera (Chairman)



 MISSION:-To be a leader by providing customer delight

through world class quality in progressive, innovative &
challenging environment.

 We strive to exceed the customer expectation in service, quality

& cost.

 We endeavor to provide an enriching rewarding & environment

friendly work experience for our employees in an achievement
based high performance structure.

 In 1975, Mr. R. K. Behera, a young mechanical engineer from NIT, Jamshedpur,
hailing from a humble service oriented middle class family, shunned the security of a
job and plunged into the hurly burly of high-risk and high-reward business arena and
founded International Auto in Jamshedpur with 15 people and 500 square feet of

 Inspired and motivated by the benevolent ideals of the legendry JRD and obsessed
with an incorrigible and irrepressible passion to create a world class industrial edifice,
R. K. Behera along with his brother S. K. Behera set about meticulously crafting the
present-day RSB enterprise brick by brick.

 Toughened by the early trials and tribulations and propelled by nothing-is-impossible

spirit of the Behera brothers, RSB has now blossomed into a pulsating and
throbbing global engineering institution in automotive components and systems and
construction equipment aggregates.

 RSB now boasts of manufacturing facilities in six different locations in India and one
in the USA with 85,000 square meters of workspace. Latest technologies and
human resources are working together around the world passionately to create an
enduring institution.

 Founder and Chairman Mr. R. K. Behera, Co-Founder and Managing Director Mr. S.
K. Behera and Joint Managing Director Mr. Sailendra Behera now spearhead RSB.

 All RSB manufacturing units are ISO / TS16949, ISO: 14001 and OHSAS: 18001

 S. K. Behera, who has been co-piloting last four decades in his entrepreneurial
journey, started in a humble way in 1975 with a meager monetary help of Rs.
15,000/- from his father and RSB now has grown into multi-product/multi-locational
global engineering enterprise with 13 state-of-the-art manufacturing plants spread
over 7 locations in India namely Jamshedpur (Jharkhand), Pune (Maharashtra),
Dharwad (Karnataka), Chennai (Tamil Nadu), Pantnagar (Uttarakhand), Cuttack
(Orissa) and Lucknow (Uttar Pradesh); and one each in Homer (USA), Silao (Mexico)
and partnered venture at Brazil, with cumulative employment base of more than
4,000 persons.

Study of working capital is discussed under:
 Management of cash and marketable securities
 Management of accounts receivable
 Management of inventory
 Management of current liabilities

The main objective of working capital management is to maintain a
trade of between risk and return for the purchase of raw material
component and spares.

Management Team
• Mr. R. K. Behera - Chairman
• Mr. S. K. Behera – Vice Chairman & Managing Director
• Mr. Sailendra K. Behera – Joint Managing Director
• Mr. M. Sankaranarayanan – Group President
• Mr. Mathura Singh – Senior vice President Finance
• Mr. G. Krishnasami – Vice President: Group Quality.
• Mr. Debasish Basu – Vice President : Strategic, Sourcing
& Supply Chain
• Mr. Bijay Lenka - Associate Vice President: Group
Corporate Finance.
• Mr. Anil Koul - Associate Vice President: Group
Information Technology.

Board of Directors
• Mr. R. K. Behera - Chairman
• Mr. S. K. Behera - Vice Chairman & Managing Director
• Mr. Sailendra K. Behera - Joint Managing Director
• Mr. M.R. Prasanne – Non-Executive Independent Director
• Mr. Ajit M. Nimbalkar - Non-Executive Independent
• Mr. Sarthak Behnria - Non-Executive Independent Director
• Mr. M. Sanyal - Non-Executive Independent Director
• Mr. R. Chakroborty - Non-Executive Independent Director
• Mr. Nishant Behera – Whole Time Director
• Mr. Rajnikant Behera - Whole Time Director

RSB comprises of four different companies,

 RSB Transmissions (I) Ltd.,

 RSB Transmissions North America Inc. (Formerly known as Miller Brothers

 I-Design Engineering Solutions Ltd. and

 I-vitesse Technologies Pvt. Ltd. (Currently known as RSB Industries)

1.RSB Transmission (I) Ltd.

It was launched in 2000 as the Group Holding Company to bring all the Group Companies
under a common parent and in the wake of globalization, to create a unified structure for
global expansion and diversification and value accretion.

2. RSB Transmissions North America Inc. (Formerly known as Miller Brothers

Manufacturing Co.)

It enters the 21st century in a facility of 98,000 square feet with more than 150 dedicated
employees and projected sales of over $25 million.

3. I-Design Engineering Solutions Limited

It was established in the year 2002 to provide in house R&D support .

4. Ivitesse Technologies Pvt. Ltd.

It is a ISO 9001-200. The company offers a range of comprehensive IT services and


The Group Companies function with the philosophy of providing quality products and
efficient services.

Each of the Group companies is equipped with state-of-the-art technology and latest IT
infrastructure that enables smooth functioning. The Group's core capabilities range from
design to manufacturing of aggregates and systems related to commercial vehicles,
passenger cars, construction equipments, farm and off-highway equipments.

The Group is also in the trailer manufacturing business. The Group has chalked out an
ambitious plan keeping the future in mind. IL&FS has partnered to facilitate expansion
and growth plans of the Group.


 Propeller Shaft
 Axles
 Transmission Components
 Aluminium Castings
 Ferrous Casting
 Running Gear System
 Construction Equipment Aggregates
 Forgings

Propeller Shaft
RSB is a vertically integrated Propeller Shaft Solution provider, enjoying the largest
market share in India. To enhance its in-house technical capabilities and overall
productivity, RSB has developed a technical collaboration with Eugene Klein GmbH,
Germany for acquiring technical know-how in designing, processing and testing.

The Propeller Shaft Manufacturing program covers more than 65 unique part
designations. RSB is focused on catering to the present & futuristic commercial vehicle
power transmission requirements and meeting the stringent quality norms. The six
manufacturing plants set up at 4 locations are functioning to assist Auto OEM’s for
Propeller Shaft solutions targeted towards regular production as well as after market

Axles are one of the most significant products offered by RSB. It has a staggering
capacity to manufacture 2,00,000 Axles/year. There are plans to enhance the capacity by
30% to cater to the export market. Well-equipped manufacturing lines have been
dedicated to develop a variety of Axle.

Transmission Components

RSB's Gear Transmission units provide in-depth product support to prospective OEM
clients based on its vast industry experience and expertise. It manufactures an extensive
range of fully finished gears at two of its plants that are strategically located to cater to
diversified industry sectors inclusive of Commercial Vehicles, Passenger Cars, Tractors,
Pump OEM's. RSB is renowned for its customer services such as, fast turn around and
individual attention to complex orders.

Aluminium Castings
RSB offers precision machined Aluminium castings to domestic as well as export
markets. RSB has been assisting any intricate casting ranging from 0.5 Kg aluminum
component to 8.0 Kg aluminum component. RSB has been successfully managing the
complete supply chain program for a reputed US based OEM and supplies around half a

million components annually. The scope includes local warehousing in US and daily
online supplies. The existing export supply agreement has been renewed for the next
program that reaffirms the faith of the customers.

Ferrous Castings
RSB manufactures Ferrous Castings as per customer design & specifications at its
manufacturing plants located at Jamshedpur & Pune. It offers and supplies a wide range
of products to leading OEM’s like Cummins. RSB completely manages the supply-chain
from Castings procurement stage to the supplies and also conducts periodical supplier

An in-house Quality Control has been ensuring high quality standards. The vast
experience of the professionals and the expertise of RSB has been the key to
manufacturing cost-effective and reliable Automobile Parts.

Running Gear System

RSB manufactures Running Gear Systems like Axle, Fifth Wheel Coupling, King Pin and
Landing Leg, which are designed, developed, tested and validated by its in house R&D
division I-Design. Our Fifth Wheel Coupling design is at par with latest European models.
RSB offers organized after sales service network across major cities in India.

Construction Equipment Aggregates

RSB is a forerunner in the Construction Equipment Aggregates industry in India. It has set
up three modern manufacturing facilities at Jamshedpur, Dharwad and Chennai.

RSB has reached significant milestones in the exports market over past few years. The
services and the efforts are being reflected by the faith of our international customers.
Today, RSB is serving as a single source to many overseas customers and manages their
supply chain.

RSB manufactures forging components with state-of-the art technology and equipment to
cater to the most stringent quality standards of forged components for domestic and
export customers. This facility will be the backbone of the group’s forging requirements,
and will also cater to OEM customers of the country .



 Cost competitiveness in terms of labor and raw material.

 Established manufacturing base

 Qualified and skilled man power

 Manufacturing capabilities with international quality standards

 High operational efficiency


 Low investment in research and development

 Limited knowledge of product liability and offshore warranty handling

 Limited domestic market for various components inhibiting capacity


 Comparatively poor infrastructure for supply chain and exports

 Lack of experience in system integration

 May serve as sourcing hub for global automobile majors

 Significant export opportunities may be realized through diversification

of export basket.

 The growing need to outsource

 Leverage on product engineering expertise to improve the worthiness

and exports of auto component

 Acquisition in foreign markets

 The presence of a large counterfeit components market poses significant

 Pressure on price from OEMs continues

 Imports pose price based competition in the replacement market

 Further marginalization of smaller players likely


Research methodology has multiple dimensions. Research Methodology is a way to

systematically solve the research problems scientifically.

Primary Data:

The information is collected through the primary sources like:

 Talking with the employees of the department.
 Getting information by observations e.g. in manufacturing processes.
 Discussion with the head of the department.

Secondary Data:

The data is collected through the secondary sources like:

 Annual Reports of the company.
 Office manuals of the department.
 Magazines, Reports in the company.
 Policy documents of various departments.


1. To identify the financial strengths & weakness of the company

2. Through the net profit ratio & other profitability ratio, understand the profitability of
the company
3. Evaluating company’s performances relating to financial statement analysis.
4. To know the liquidity position of the company with the help of current ratio.
5. To find out the utility of financial ratio in credit analysis & determining the financial
capacity of the firm.

Introduction of the Topic


Working capital refers to the investment by the company in short terms assets such as
cash, marketable securities. Net current assets or net working capital refers to the current
assets less current liabilities. It measures how much in liquid assets a company has
available to build its business. The fundamental principles of working capital management
are reducing the capital employed and improving efficiency in the areas of receivables,
inventories, and payables.

Symbolically, it means,
Net Current Assets = Current Assets Current Liabilities.


The following are the most important definitions of Working capital:

1) Working capital is the difference between the Current Assets and Current
Liabilities. In other words it is the Net Current Assets.

2) Working capital represents the total of all current assets. In other words it is the
Gross working capital, it is also known as Circulating capital or Current capital for
current assets are rotating in their nature.

Every business needs funds for two purposes for its establishment and to carry out its
day- to-day activities, which are long-term funds and short-term funds. Short-term funds
are needed for the purpose of purchase of raw materials, payment of wages etc. these
funds are known as “Working Capital”. In short its define as “Excess of current assets
over current liabilities”.

The Goal of Capital Management is to manage the firm’s current assets & liabilities, so
that the satisfactory level of working capital is maintained. If the firm cannot maintain the
satisfactory level of working capital, it is likely to become insolvent & may be forced into
bankruptcy. To maintain them margin of safety current asset should be large enough to
cover its current liabilities.

Main theme of the theory of working capital management is interaction between the
current assets & current liabilities and satisfies both maturing short-term debt and
upcoming operational expenses.


 Working capital may be regarded as the lifeblood of the business. Without

sufficient working capital no business organization can run smoothly or

 In the business the Working capital is comparable to the blood of the human body.
Therefore the study of working capital is of major importance to the internal and
external analysis because of its close relationship with the current day to day
operations of a business. The inadequacy or mismanagement of working capital is
the leading cause of business failures.

 To meet the current requirements a business needs working capital to purchase

services, raw materials etc. It is also pointed out that working capital is nothing but
one segment of the capital structure of a business.

 In short, the cash and credit in the business, is comparable to the blood in the
human body like finance’s life and strength i.e. profit of solvency to the business

 Financial management is called upon to maintain always the right cash balance so
that flow of fund is maintained at a desirable speed not allowing slow down. Thus
enterprise can have a balance between liquidity and profitability. Therefore the
management of working capital is essential in each and every activity.








Working Capital can be classified in two ways :

1. On the basis of Concepts.

2. On the basis of Time.


There are 2 concepts:

 Gross Working Capital.

 Net Working Capital.

Gross Working Capital

 In point of view of an Accountant the Gross Working Capital is the total Current
assets where Current assets are the assets that can be converted into cash within
an accounting year & include cash, debtors etc.

 In “Economics Concept” assets are employed to derive a return.

Net Working Capital

Net Working Capital= Current Assets – Current Liabilities

 In point of view of an Accountant Net Working Capital is the difference between

Current Assets and Current Liabilities and it indicates the liquidity position of a firm
& suggests the extent to which working capital needs may be financed by
permanent sources of funds.

It can be positive or negative. When current assets exceed current liabilities, it is

known as ‘positive net working capital’ and if the current liabilities are more than
current assets, it is known as, a working capital deficiency.

Implications of Net Working Capital:

Net working capital is necessary because the cash outflows and inflows do not
coincide. In general the cash outflows resulting from payments of current liability are
relatively predictable. The cash inflows are however difficult to predict. More
predictable the cash inflows are, the less NWC will be required. But where the cash
inflows are uncertain, it will be necessary to maintain adequate current assets to cover
current liabilities.

For evaluating NWC position, an important consideration is tradeoff between

probability and risk. The term profitability is measured by profits after expenses. The
term risk is defined as the profitability that a firm will become technically insolvent so
that it will not be able to meet its obligations when they become due for payment. The
risk of becoming technically insolvent is measured by NWC.

If the firm wants to increase profitability, the risk will definitely increase.

If firm wants to reduce the risk, the profitability will decrease.


 Permanent or Fixed working capital.

 Temporary or Variable working capital.

Permanent or Fixed working capital

 There is always a minimum level of current assets which is continuously required

by a firm to carry on its business operations.

 Thus, the minimum level of investment in current assets that is required too
continues the business without interruption is referred as permanent working

Temporary or Variable working capital

 This is the amount of investment required to take care of fluctuations in business

activity or needed to meet fluctuations in demand consequent upon changes in
production & sales as a result of seasonal changes.


 Permanent is stable over time where as variable is fluctuating according to

seasonal demands.

 Investment in permanent portion can be predicted with some profitability where as

investment in variable cannot be predicted easily.

 While permanent is minimum investment in various current assets, variable is

expected to take care for peak in business activity.
 While permanent component reflects the need for a certain irreducible level of
current assets on a continuous and uninterrupted basis, the temporary portion is
needed to meet seasonal & other temporary requirements.

 Also permanent capital requirements should be financed from Long Term sources
whereas Short Term funds should be used to finance temporary working capital
needs of a firm.


Every company requires funds for investing in two types of capital i.e. fixed capital, which
requires long-term funds, and working capital, which requires short-term funds.

Sources of additional working capital include the following:

 Profits (when you secure it as cash!)

 Payables (credit from suppliers)
 Bank overdrafts or lines of credit
 Short Term loans

If a company have insufficient working capital and try to increase sales, it can easily over-
stretch the financial resources of the business. This is called overtrading. Early warning
signs include:

 Pressure on existing cash

 Exceptional cash generating activities e.g. offering high discounts for early cash
 Seeking greater overdrafts or lines of credit
 Part-paying suppliers or other creditors
 Paying bills in cash to secure additional supplies
 Management pre-occupation with surviving rather than managing
 Frequent short-term emergency requests to the bank (to help pay
wages, pending receipt of a cheque.


 Issue of Shares  Factoring

 Loans from other financial institutions.  Invoice Discounting
 Debentures  Overdraft Facilities
 Trade Credit

Different approaches in determination of Working Capital

1) Industry norm approach
2) Economic modeling approach
3) Strategic choice approach

1) Industry norm approach

 This approach is based on the premise that every company is guide by the industry

 Like if majority of firm has been granting 3 months credit to a customer then others
will have to also follow the majority due to fear of losing customer.

2) Economic modeling approach

 To estimate optimum inventory is decided with the help of EOQ MODEL.

3) Strategic choice approach

 This approach recognizes the variation in business practice and advocates use of
strategy in taking working capital decisions.

 The purpose behind this approach is to prepare the unit to face challenges of
competition & take a strategic position in the market place.

 The emphasis is on strategic behavior of business unit. Thus the firm is

independent in choosing its own course of action which is not guide by the rules of

Need for Working Capital

 As profits earned depend upon magnitude of sales and they don’t convert into cash
instantly, thus there is a need for working capital in the form of Current Assets so
as to deal with the problem arising from lack of immediate realization of cash
against goods sold. This cycle is referred to as “Operating or Cash Cycle”

 It is defined as “The continuing flow from cash to suppliers, to inventory , to

accounts receivable & back into cash “

 Thus needs for working capital arises from cash or operating cycle of a firm.

 Which refers to length of time required to complete the sequence of events?

 Thus operating cycle creates the need for working capital & its length in terms of
time span required to complete the cycle is the major determinant of the firm’s
working capital needs.

Operating or Cash Cycle

The working capital cycle refers to the length of time between the firms paying the cash
for materials, etc., entering into production process/stock & the inflow of cash from
debtors (sales), suppose a company has certain amount of cash it will need raw
materials. Some raw materials will be available on credit but, cash will be paid out for the
other part immediately. Then it has to pay labour costs & incurs factory overheads. These
three combined together will constitute work in progress. After the production
cycle is complete, work in progress will get converted into sundry debtors. Sundry debtors
will be realized in cash after the expiry of the credit period. This cash can be again used
for financing raw material, work in progress etc. thus there is complete cycle from cash to
cash wherein cash gets converted into raw material, work in progress, finished goods and
finally into cash again. Short term funds are required to meet the requirements of funds
during this time period. This time period is dependent upon the length of time within which
the original cash gets converted into cash again. The cycle is also known as operating
cycle or cash cycle.

Working capital cycle can be determined by adding the number of days required for each
stage in the cycle. For example, company holds raw material on average for 60 days, it
gets credit from the supplier for 15 days, finished goods are held for 30 days & 30 days
credit is extended to debtors. The total days are 120, i.e., 60 15 + 15 + 15 + 30 + 30 days
is the total of working capital.

Thus the working capital cycle helps in the forecast, control & management of working
capital. It indicates the total time lag & the relative significance of its constituent parts. The
duration may vary depending upon the business policies. In light of the facts discusses
above we can broadly classify the operating cycle of a firm into three phases:-
1. Acquisition of resources.
2. Manufacture of the product and
3. Sales of the product (cash / credit).

First and second phase of the operating cycle result in cash outflows, and be predicted
with reliability once the production targets and cost of inputs are known. However, the
third phase results in cash inflows which are not certain because sales and collection
which give rise to cash inflows are difficult to forecast accurately.

Operating cycle consists of the following:

 Conversion of cash into raw-materials;
 Conversion of raw-material into work-in-progress;
 Conversion of work-in-progress into finished stock;
 Conversion of finished stock into accounts receivable through sales; and
 Conversion of accounts receivable into cash.

In the form of an equation, the operating cycle process can be expressed as


The time elapsed between cash outlay and cash realization by the sale of finished goods
is the length of an operating cycle. It consisting of:-

 Procurement of raw material, components, stores and spares for the

manufacture of the product
 Conversion of raw material in to finished goods
 Storage of credit to customers, and
 Collection of cash form customer.


The firm should maintain a sound working capital position. It should have adequate
working capital to run its business operations. Both excessive as well as inadequate
working capital positions are dangerous from the firm’s point of view. Excessive working
capital not only impairs the firm’s profitability but also result in production interruptions
and inefficiencies.
Operating cycle for manufacturing firm:

The firm is therefore, required to invest in current assets for smooth and uninterrupted

Here, the length of GOC is the sum of ICP and RCP. ICP is the total time needed for
producing and selling the products. Hence it is the sum total of RMCP, WIPCP and FGCP.
On the other hand, RCP is the total time required to collect the outstanding amount from
customers. Usually, firm acquires resources on credit basis. PDP is the result of such an
incidence and it represents the length of time the firm is able to defer payments on
various resources purchased.

The difference between GOC and PDP is known as Net Operating Cycle and if
Depreciation is excluded from the expenses in computation of operating cycle, the NOC
also represents the cash collection from sale and cash payments for resources acquired
by the firm and during such time interval between cash collection from sale and cash
payments for resources acquired by the firm and during such time interval over which
additional funds called working capital should be obtained in order to carry out the firms
operations. In short, the working capital position is directly proportional to the Net
Operating Cycle.

The dangers of excessive working capital are as follows:

 It results in unnecessary accumulation of inventories. Thus, chances of inventory

mishandling, waste, theft and losses increase.
 It is an indication of defective credit policy, slack collections period. Consequently,
higher incidence of bad debts resulting to which adversely affects profits.
 Excessive working capital makes management complacent which degenerates
into managerial inefficiency.
 Tendencies of accumulating inventories tend to make speculative profits grow.
 This may tend to make dividend policy liberal and difficult to cope with in future
when the firm is unable to make speculative profits.

Inadequate working capital is also bad and has the following dangers:

 It stagnates growth. It becomes difficult for the firm to undertake profitable projects
for non- availability of working capital funds.
 It becomes difficult to implement operating plans and achieve the firms profit target.
 Operating inefficiencies creep in when it becomes difficult even to meet day
 Fixed assets are not efficiently utilized for the lack of working capital funds. Thus,
the firm s profitability would deteriorate.

 Paucity of working capital funds render the firm unable to avail attractive credit
opportunities etc.
 The firm loses its reputation when it is not in a position to honor its short-term

As a result, the firm faces tight credit terms. An enlightened management should,
therefore, maintain the right amount of working capital on a continuous basis. Only then a
proper functioning of business operations will be ensured. Sound financial and statistical
techniques, supported by judgment, should be used to predict the quantum of working
capital needed at different time periods.

A firm s net working capital position is not only important as an index of liquidity but it is
also used as a measure of the firm’s risk. Risk in this regard means chances of the firm
being unable to meet its obligations on due date. The lender considers a positive net
working as a measure of safety. All other things being equal, the more the net working
capital a firm has, the less likely that it will default in meeting its current financial
obligations. Lenders such as commercial banks insist that the firm should maintain a
minimum net working capital position.


 Inventory
 Sundry Debtors
 Cash and Bank Balances
 Loans and advances

 Sundry creditors
 Short term loans and Provisions.

Current Assets:-

Current Assets are assets in the balance sheet which is expected to be realized usually
within one year, or one business cycle – whichever is longer. Current Assets are also
Typical current assets include:
 Cash and Bank balances
 Accounts Receivable
 Inventory
 Short – term – investment,
 Security Deposits, and
 Prepaid accounts which will be used within a year.

Characteristics of Current Assets

 Short Life Span

Cash balances may be held idle for a week or two, thus a/c may have a life span of
30-60 days etc.

 Swift Transformation into other Asset forms

Each CA is swiftly transformed into other asset forms like cash is used for
acquiring raw materials , raw materials are transformed into finished goods and
these sold on credit are convertible into A/R & finally into cash.

Current Liability:-

In accounting, current liabilities are often understood as all liabilities of the business that
are to be settled in cash within the fiscal year or the operating cycle of a given firm,
whichever period is longer. A more complete definition is that current liabilities are
obligations that will be settled by current assets or by the creation of new current

For example, accounts payable for goods, services or supplies that were purchased for
use in the operation of the business and payable within a normal period of time would be
current liabilities.

Current Assets are controlled by using a scientific tool called the “Ratio Analysis”. In
order to control over the Current Assets, a company calculates the Current Ratio.

Current Ratio
This ratio is calculated to judge the Short-term solvency position of a company. In other
words the Current Ratio is determined to know how much asset is there in a company to
pay off the “Liability of rupee one”. It is frequently used as an indicator of a company’s
liquidity, its ability to meet short-term obligations. The formula for calculating current ratio


This ratio varies from industry to industry. In ideal situation the Current Ratio should be
2:1. But for the company like RSB Transmission (I) the ratio should be 1.33. In order to
improve the Current Ratio one has to keep proper control over both current assets and
current liabilities.


Cash is one of the important aspect of Current Asset. Cash Management involves control
and analysis of cash flow during a particular period of time.

Holding excessive cash by a company indicates that the company is not investing its idle
cash in the available profitable project. It adds the implicit of Capital. We must note that
Cash is an asset for the company only when it is used effectively. Idle cash is the

However, the requirement of Cash varies from business to business. A firm may hold cash
at times of lower inflow with an object to finance it ongoing project. A Cash Reserve is
essential to tide over the deficit or future contingencies.

In other words firm that have volatile cash flow are more likely to keep more cash balance
then a non-volatile firm. The most important factor that determines the amount of cash
that a company can hold is the “Conversion Cycle”.

Conversion Cycle is the length of time that a company takes to convert its resource i.e
input to cash flow. It begins from purchasing of raw-material, converting the Raw-material

into Work-in-process, converting the work-in-process to Finished Goods, selling out the
finished goods and ends with collection of money from the Customer.

The Conversion Cycle Diagram:

Motives for holding Cash:

1. To meet the day-to-day requirement of the business.

2. To meet the future contingencies.
3. For speculative business opportunities.

Cash Flow:

Cash Flow refers to the flow of cash into and out of a business over a period of time. The
outflow of cash is measured by the money we pay every month to salaries, suppliers, and
creditors. The inflows are the cash we receive from customers, lenders, and investors.

The Cash Flow is of two types:-

1. Positive Cash Flow

2. Negative Cash Flow

1. Positive Cash Flow:

If the cash coming into the business is more than the cash going out of the business, the
company has a positive cash flow. A positive cash flow is very good and the only concern
here is managing the excess cash prudently.

2. Negative Cash Flow:

If the cash going out of the business is more than the cash coming into the business, the
company has a negative cash flow.

A negative cash flow can be caused by a number of problems that result in a shortage of
cash, such as too much or obsolete inventory, or poor collections on accounts receivable.
If the company doesn't have money in the bank or can't borrow additional cash at this
point, it may be in serious trouble.

Cash Flow Statement

A cash flow statement is prepared to periodically to know the inflow as well as out flow of
cash and whether the company is having a positive cash balance at the end. It is also
drawn to know how much cash is generated by a company from:

1. Operation Activities.
2. Investment Activities

3. Financing Activities

1. Operating Cash Flow (Internal)

Operating cash flow, often referred to as working capital, is the cash flow generated
from internal operations. It is the cash generated from sales of the product or services
of a business. Because it is generated internally, it is under control of a company.

1. Investing Cash Flow (Internal)

Investing cash flow is generated internally from non-operating activities. This

component would include investments in plant and equipment or other fixed assets,
non-recurring gains or losses, or other sources and uses of cash outside of normal
2. Financing Cash Flow (External)

Financing cash flow is the cash to and from external sources, such as lenders,
investors and shareholders. A new loan, the repayment of a loan, the issuance of
stock and the payment of dividend are some of the activities that would be included in
this section of the cash flow statement.

Good cash management means:

 Knowing when, where, and how cash needs will occur,

 Knowing what the best sources are for meeting additional cash needs; and,

 Being prepared to meet these needs when they occur, by keeping good
relationships with bankers and other creditors.

The starting point for avoiding a cash crisis is to develop a cash flow projection. Smart
business owners know how to develop both short-term (weekly, monthly) cash flow
projections to help them manage daily cash, and long-term (annually) cash flow
projections to help them develop the necessary capital strategy to meet their business
needs. They also prepare and use historical cash flow statements to gain an
understanding about where all the money went.

Cash Flow Statement of RSB is given below:-


Cash Flow Statement
(Figures Rs. In Lacs)
Particulars 2010-11 2009-10

A. Cash flow from Operating Activity

Net Profit before tax 4,955 1,427
Adjustments for:
Depreciation 3,171 2,833
Unrealized Foreign Exchange (Gain) /Loss (net) 68 19
Loss / (Profit) on sale of Fixed Assets 12 9
Liabilities no longer required written back - (13)
Item Considered Separately:
Interest Expenses 3,493 3,677
Interest & Dividend Income (38) (34)
11, 7,9
Cash flow before working capital changes 662 17

Changes in Working Capital

(Increase) / Decrease in Sundry Debtors (3,136) (334)
(Increase) / Decrease in Loans and Advances (1,510) (512)
(Increase) / Decrease in Other Current Assets (79) (3)
(Increase) / Decrease in Inventories (2,145) (264)
(Increase) / Decrease in Current Liabilities & Provisions 4,137 1,259
8,929 8,063
Taxes paid (including TDS & prior period taxes) (787) (100)
Cash generated from Operating Activities 8,142 7,963

B. Cash flow from Investing Activities

Purchase of Fixed Assets (4,714) (1,891)
Purchase of Investments (726) (9)
Share application money received back - 20
Interest & Dividend received 38 34
Cash used in Investing Activities 5,402 1,846

C. Cash flow Financing Activities

Net Proceeds from borrowing (Term Loan) (153) (2,712)
Net Proceeds from borrowing (Working Capital) 1,215 498
Net Proceeds from borrowing (Unsecured) (442) (326)
Interest Paid (3,493) (3,677)
Equity Dividend Paid [Including Dividend Tax] (138) -
Preference Dividend Paid [Including Dividend Tax] (44) (33)
Cash generated from Financing Activities (3,056) (6,251)

D. Net Increase in Cash and Cash Equivalents (A+B+C) (316) (134)

E. Cash and Cash Equivalents at the beginning 1,148 760

Add: Cash and Cash equivalents acquired on amalgamation - 522
Total Cash and Cash Equivalent at the beginning 1,148 1,282

F. Cash and Cash Equivalents at the end 832 1,148

Net Decrease in Cash and Cash Equivalent (F- E) 316 134


Cash budget is an estimation of the cash inflows and outflows for a business for a specific
period of time. Cash budgets are often used to assess whether the entity has sufficient
cash to fulfill regular operations and/or whether too much cash is being left in
unproductive capacities. A cash budget is extremely important, especially for small
businesses, because it allows a company to determine how much credit it can extend to
customers before it begins to have liquidity problems.

The receipt section of Cash Flow shows the receipts from all sources such as:

 Cash collected from Customer

 Sale proceed of Plant & Machinery
 Advances received from Customer
 Scrap sales
Whereas in the payment section we record the anticipated payment to:

 Salaries to employee
 Payment to Supplier of Raw-material
 Payment of Interest.
 Payment of Statutory dues etc.

An Illustration on Cash Budget for a M/s ABC for the 1st 5 months of FY 2009-10

Rs. In Lac

Description Apr-09 May-09 Jun-09 Jul-09 Aug-09

A. Total Sources of Cash 777.49 780.60 780.71 682.33 682.36


Payment to Creditors 525.38 528.38 425.38 450.04 480.04

Personal Cost 51.78 51.78 51.78 51.77 51.77
Manufacturing Cost 62.77 62.77 62.77 55.49 55.49
Indirect Cost 23.21 23.21 23.21 22.21 22.21
Corporate Expenses 18.91 18.91 18.91 18.91 18.91
Finance Cost 15.06 15.06 15.06 14.08 14.08
Payment of Duty & Taxes 22.29 22.29 134.79 20.99 20.99

B. Operating Activity 719.39 722.39 731.89 633.48 663.48

Loan Repayment 15.00 15.00 15.00 15.00 15.00

Capital Commitment (08-09) 40.00 40.00 30.00 30.00 -

C. Financing Activity 55.00 55.00 45.00 45.00 15.00

D. Cash Balance (A-B-C) 3.11 3.21 3.82 3.85 3.87
The above Cash budget shows that in the 1 5 months of operation M/s ABC will
generates surplus cash after incurring all expenditure and also meeting the capital
commitment of the company.

If the Cash Flow shows a negative cash balance then it is a matter of concern. In such
case the management has to decide whether:

1. the company will go for a short-term loan or

2. curtail some Revenue expenditure or
3. postpone the Capital investment and so on

Cash Management Services in India:

Management of cash flow is an important function for every business organization. Bank
pays a vital role in cash management of a company. A bank’s main activity is collection
and payment of cheques. The introductions of electronic banking services make the
management of Cash faster and easier too.

The Reserve Bank of India (RBI) has placed an emphasis on upgrading technological
infrastructure. Electronic banking, cheque imaging, enterprise resource planning (ERP),
real time gross settlements (RTGS) are just few of the new initiatives. The payment or
clearing mechanism in bank can is shown below:-

A. Paper based payment system
In India payments are mainly paper based and cheques are the widely accepted mode of
fund transfer. The clearing of these cheques are done through the clearing house. At
present we have clearing house in 990 locations. SBI is said to be pioneer in the clearing

Local Clearing:

Local Clearing handles only those cheques that are drawn on branches within the
jurisdiction of the local Clearing House. Generally, the distance between the Clearing
House and the participating branches is defined, taking into account the local
transportation and communication facilities as the cheques have to physically move to
and from the Clearing House. For example, for a cheque to be processed in Local
Clearing in Mumbai, both the presenting and drawee branches should be within the
jurisdiction of the Clearing House in Mumbai.

Generally a local cheque should be clear within 48 hours from the time of deposit. Under
local clearing system, cheques are processed at the Clearing Houses by using Magnetic
Ink Character Recognition (MICR) technology.

Outstation Clearing:

A cheque that is not drawn on the same location where it is deposited becomes an
outstation cheque. In such case the banker of the drawer of the cheque send the cheque
to the drawee’s bank for collection. The collection of such cheques will take 20 days.
Sometimes the CMS banker gives credit of such cheques depending upon the credit
worthiness of the depositor. In such cased the CMS banker discount the cheque and
gives credit to the depositor immediately.

B. Electronic System of Clearing:

It provides the means to electronically transfer cheque images and completely replaces
the traditional physical routines of moving paper cheques between local banks.

The main features are:

 Faster cheque clearing.

 Faster cheques deposit which means increase on your return of fund.
 Improve control and reconciliation (clearing cheques on the same day).
Following are some the Electronic System of clearing cheques:

Real Time Gross Settlement

RTGS system is a funds transfer mechanism where transfer of money takes place from
one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible
money transfer system through the banking channel. Settlement in 'real time' means
payment transaction is not subjected to any waiting period. The transactions are settled
as soon as they are processed. 'Gross settlement' means the transaction is settled on
one to one basis without bunching with any other transaction. Considering that money
transfer takes place in the books of the Reserve Bank of India, the payment is taken as
final and irrevocable.

The RTGS system is primarily for large value transactions. The minimum amount to be
remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions.

Under normal circumstances the beneficiary branches are expected to receive the funds
in real time as soon as funds are transferred by the remitting bank. The beneficiary bank
has to credit the beneficiary's account within two hours of receiving the funds transfer

Electronic Fund Transfer System (EFT) or National Electronics Funds Transfer

System (NEFT)

EFT and NEFT are electronic fund transfer modes that operate on a deferred net
settlement (DNS) basis which settles transactions in batches. In DNS, the settlement
takes place at a particular point of time. All transactions are held up till that time. For
example, NEFT settlement takes place 6 times a day during the week days (9.00 am,
11.00 am, 12.00 noon. 13.00 hours, 15.00 hours and 17.00 hours) and 3 times during
Saturdays (9.00 am, 11.00 am and 12.00 noon). Any transaction initiated after a
designated settlement time would have to wait till the next designated settlement time.
Contrary to this, in RTGS, transactions are processed continuously throughout the RTGS
business hours.

No minimum or maximum stipulation has been fixed for EFT and NEFT transactions.

With a view to rationalize the service charges levied by banks for offering various
electronic products, a broad framework has been mandated as under:

a) Inward transactions – Free, no charge to be levied

b) Outward transactions –
Rs. 1 lakh to Rs. 5 lakh - not exceeding Rs. 25 per transaction.
Rs. 5 lakh and above – not exceeding Rs. 50 per transaction.
The remitting customer has to furnish the following information to a bank for affecting a
RTGS remittance:

1. Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC Number of the receiving branch


Receivables Management in helps you in maintain tight control over Accounts

Receivables by providing the capabilities to help in tracking invoices, process receipts,
and analyze customer activity, so as to manage sales made on accounts more effectively
and yet maintain lower overhead costs.


1. Helps to improve customer satisfaction.

Enhance service levels and increase retention with customized information, history,
and notes that are easily accessible when working with customers.

2. Take control of sales processes.

Manage your sales process more effectively by measuring trends and analyzing
performance with comprehensive customer tracking combined with sales tracking by
person or territory.

3. Enhance your productivity.

Help in reducing administrative costs and enhance office productivity with automated
receipt processing and posting and personalized statement cycles that fit your
customers and business.

4. Streamline revenue allocation.

Simplify the task of deferring revenues over multiple periods with automatically
managed calculations and journal entries customized to fit a business needs.

5. Provide access to vital information.

Provide information needed to take more effective business decisions with
comprehensive reporting capabilities and straightforward customer account and sales
performance tracking.

Credit Term

Credit Standard or negotiated terms (offered by a seller to a buyer) that control

(1) The monthly and total credit amount,

(2) Maximum time allowed for repayment,
(3) Discount for cash or early payment, and
(4) The amount or rate of late payment penalty.

Assessing Credit Risk

There are several factors that go into assessing risk but the most important is payment
history. If we have paid all our accounts on time and as agreed, then there will
probably be considered a low risk. On the other hand, if we've had numerous late
payments or even collection accounts, your risk factor goes up.

Another thing that creditors consider when assessing risk is the amount of outstanding
debt -- too much and you appear to be overextended which makes you a higher risk.

Other indicators of risk include the Length of credit history. If the credit history is too
short, there is not much of a picture for potential creditors to look at.


In financial accounting and finance, bad debt is the portion of receivables that can no
longer be collected, typically from accounts receivable or loans. Bad debt in accounting
is considered an expense.

Because of the matching principle of accounting, revenues and expenses should be

recorded in the period in which they are incurred. When a sale is made on account,
revenue is recorded along with account receivable. Because there is an inherent risk
that clients might default on payment, accounts receivable have to be recorded at net
realizable value. The portion of the account receivable that is estimated to be not
collectible is set aside in a contra-asset account called Allowance for Doubtful
Accounts. At the end of each accounting cycle, adjusting entries are made to charge as
expense the uncollectible receivable. The actual amount of uncollectible receivable is
written off as an expense from Allowance for Doubtful Accounts to the account called
Bad Debt Expense.

Ageing Analysis

Knowing 'who owes you' is not as important as knowing 'when it was owed'. It is sufficient
to know how much is owed to you in terms of a monthly period. Basically, the idea is to
reduce the amounts in categories 2, 3 and 4 (see below), and also to ensure that the
percentage of 2, 3 and 4 does not increase from one month to the next in any one

i.e. if category number 3 (currently showing 4.5%) increased to 6% the following month,
you have failed to collect as much revenue in the 31 - 60 day category as you did last
month. This slide is also the first sign of a longer term problem: if you do not work hard to
reduce this important area you may be looking at legal remedies, or even write off - and
that means spending money to get money.

 Category number 1 is for the most recent full month, and if you allow 30 days credit
this should add up to all of your sales for the past month.

 Category number 2 is for all those invoices that are now 31 - 60 days after the
invoice date. These are the most recent 'debtors' if you give 30 days to pay.

 Category number 3 has not paid you after 60 days from the invoice date.

 Category number 4 has not paid you for 3 months since the invoice date.

Amount in Rs.

Sl. No Day Category Amount in Category %

1 0 - 30 Days 380,000

2 31 - 60 Days* 147,000

3 61 - 90 Days 25,000

4 91 + Days 12,500

Total Amount Outstanding 564,500

Note: The 'sum': 380,000 / 564,500 x 100 = 67.5%

* Below, 30 - 60 Day Analysis (from the above details)

Amount in Rs.

Name Tel. No. Invoice No. Invoice Date Goods/ Service Amount

X Co. 02468 1357913 00000098 18/10/00 Code 3 16000.00

ABC Co 01234 5678900 11111198 22/09/00 Code 1 40000.00

04321 1234567 22222298 20/10/00 Code 2 23000.00


PQR Co 04321 9876543 33333398 15/10/00 Code 1 15000.00

White Co. 01234 6789012 44444498 03/10/00 Code 1 13000.00


Action for Recovering Debt

You should raise a debtor list every week. Look at telephone collection for all the large
accounts (large, is what you consider large) and send letters to all that remain. In my,
humble, opinion you should never send two letters without telephoning the customer to
find out why no payment has been received.

Alternatively, a debt recovery service can be consulted to help recover debts owed to your
business. Click the link above for more information.

Anyway, a telephone call is cheaper than a letter, a lot less bother/administration and
gets you real information. It is what you do with that information that makes telephoning
the customer a more powerful tool.



Creditors are a vital part of effective cash management and should be managed carefully
to enhance the cash position.

There is an old adage in business that if you can buy well then you can sell well.
Management of your creditors and suppliers is just as important as the management of
your debtors. It is important to look after your creditors - slow payment by you may create
ill feeling and can signal that your company is inefficient (or in trouble!).


Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business. It is also used for a list of the contents of a household
and for a list for testamentary purposes of the possessions of someone who has died. In
accounting inventory is considered an asset.

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

Time - The time lags present in the supply chain, from supplier to user at every stage,
requires that you maintain certain amount of inventory to use in this "lead time"

Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand,

supply and movements of goods.

Economies of scale - Ideal condition of "one unit at a time at a place where user needs it,
when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk
buying, movement and storing brings in economies of scale, thus inventory.

All these stock reasons can apply to any owner or product stage.

Buffer stock is held in individual workstations against the possibility that the upstream
workstation may be a little delayed in long setup or change-over time. This stock is then
used while that change-over is happening. This stock can be eliminated by tools like

These classifications apply along the whole Supply chain not just within a facility or plant.

Where these stocks contain the same or similar items it is often the work practice to hold
all these stocks mixed together before or after the sub-process to which they relate. This
'reduces' costs. Because they are mixed-up together there is no visual reminder to
operators of the adjacent sub-processes or line management of the stock which is due to
a particular cause and should be a particular individual's responsibility with inevitable
consequences. Some plants have centralized stock holding across sub-processes which
makes the situation even more acute.

The basis of Inventory accounting

Inventory needs to be accounted where it is held across accounting period boundaries

since generally expenses should be matched against the results of that expense within
the same period. When processes were simple and short then inventories were small but
with more complex processes then inventories became larger and significant valued items
on the balance sheet. This need to value unsold and incomplete goods has driven many
new behaviors into management practice. Perhaps most significant of these are the
complexities of fixed cost recovery, transfer pricing, and the separation of direct from
indirect costs. This, supposedly, precluded "anticipating income" or "declaring dividends
out of capital". It is one of the intangible benefits of Lean and the TPS that process times
shorten and stock levels decline to the point where the importance of this activity is

hugely reduced and therefore effort, especially managerial, to achieve it can be



Profit and Loss Account
(Figures Rs. In

Particulars 2010-11 2009-10

Sales 83,684 54,628
Other Income 268 70
TOTAL 83,952 54,698
Cost of Materials Consumed 50,662 32,405
Operating and Other Expenses 21,670 14,356
Financial Charges 3,493 3,677
Depreciation 3,171 2,833
TOTAL 78,996 53,271
Profit before Taxation 4,955 1,427
Less: Provision
- Current Tax 988 243
- Deferred Tax 814 405
- MAT credit entitlement (433) -
Profit after Taxation 3,587 779
Add: Profit and Loss Account brought forward 5,009 2,027
Addition on Amalgamation with International Auto - 2,417
Ltd. &
IAL Construction & Agri Equipments (P) Ltd.
Profit available for Appropriation 8,596 5,224
Dividend on PCCPS - 28
Provision for Proposed Dividend on PCCPS 51 38
Proposed Dividend on Equity Shares 158 118
Corporate Dividend Tax - 5
Corporate Dividend Tax on Proposed Dividend 34
Balance Carried to the Balance Sheet 8,353 5,009
8,596 5,224

(Figures. Rs. In Lacks)
Particulars 2010-11 2009-10


Shareholder's funds
Share Capital 2,087 2,087
Reserves and Surplus 19,382 16,038
21,469 18,125
Loan Funds
Secured Loans 27,720 25,875
Unsecured Loans 1,458 2,684
29,179 28,559

Deferred Tax (Net) 2,882 2,068


Fixed Assets
Gross Block 52,387 46,858
Less: Depreciation 13,048 10,315
Net Block 39,338 36,543
Capital Work-in-Progress 801 2,065
40,139 38,609

Investments 3,838 3,113

Current Assets, Loans and Advances
Inventories 9,479 7,334
Sundry Debtors 6,963 3,885
Cash and Bank Balance 832 1,148
Loans and Advances 3,986 3,249
Other Current Assets 83 4
21,344 15,620
Less: Current Liabilities and
Current Liabilities 11,046 8,207
Provisions 745 383
11,791 8,590
Net Current Assets 9,552 7,030

TOTAL ASSETS (NET) 53,530 48,752


A. Financial Ratio

1. Current Ratio :-

Current ratio measures the ability of the enterprise to meet its current obligation. It shows
how liquid a firm is to meet its debts in short runs.

It is computed as :
Current Asset
Current Ratio = -------------------------------
Current Liability

Particulars 2009-2010 2010-2011

Current Asset (Rs. In Lacks) 15620 21344

Current Liabilities (Rs. In lacks) 8590 11791

Current Ratio 1.81 1.81

Interpretation: -

In India the ideal current ratio is 1.25:1.we see here that the RSB’s current ratio is far
above the ideal current ratio. It indicates that the firm is in a liquid position and has ability
to meet its requirements in the short run. A more than ideal current ratio signifies that the
firm has employed less in its long term assets thus compromising on its profitability. There
has been a notable increase in the current ratio over the years signifying that more and
more long term sources of funds have been employed to finance the current assets.
2. Quick Ratio :-

It expresses the relationship between quick assets and current liabilities. Quick assets are
defined as the assets that can be easily liquidated. It excludes from the current assets
inventories and prepaid Expenses that are the most liquid assets.
It is computed as:

Current Asset – (Inventories +Prepaid Expenses)

Quick Ratio = -----------------------------------------------------------------------

Current Liability

Quick Assets = Current Assets – (Inventory + Prepaid Expenses)

Current Assets (2010-2011) = 21344
Inventory (2010-2011) = 9479
Quick Assets = 21344 – 9479 = 11865

Current Assets (2009-2010) = 15620

Inventory (2009-2010) = 7334
Quick Assets = 8286

Particulars 2009-2010 2010-2011

Quick Asset (Rs. In Lacks) 8286 11865

Current Liabilities (Rs. In lacks) 8590 11791

Quick Ratio 0.96 1.01

Interpretation: -
in the years we can see a significant difference between the current ratio and the quick
ratio .this signifies that a major part of the current assets is in the form of inventory. An
ideal quick ratio is 1:1 which shows that for each unit of short term liability. There is a
highly liquid asset and the company will not face any difficulty to meet any unforeseen
situation. It can be noted here that there has been effort put in by the company to improve
its quick ratio and in the year ended 2011 it has liquid asset sufficient to meet its short
term liabilities.

B. Profitability Ratio:-

1. Net Profit Ratio: -

Net Profit (After Tax & Interest)

Net Profit Ratio = -------------------------------------------- X 100

Particulars 2009-2010 2010-2011

Net Profit (PAT) (Rs. in Lacs) 779 3587

Turnover (Rs. in Lacs) 54628 83684

Net Profit/Loss Ratio (%) 1.43 4.29

Interpretation: -
In the Year 2010-11 Turnover of RSB has increased as compare to year 2009-10 and also
increased Company’s Net Profit. The increase in Net Profit ratio shows the growth of the

2. Profitability Ratio
a. Profitability Ratio = ----------------x 100

Particulars 2009-2010 2010-2011

Turnover (Rs. in Lacs) 54628 83684
EBDIT (Rs. in Lacs) 7937 11619
Profitability Ratio (%) 14.53 13.88


Profitability ratio varies from company to company. For Automotive companies like RSB
13% profitability ratio is considered good. Higher value as compared to previous year
indicates that the company is doing well.

EBDIT = Earnings before Tax + Depreciation + Interest.


1. Profitability Ratio = ----------------x 100

Particulars 2009-2010 2010-2011

Turnover (Rs. in Lacs) 54628 83684

EBT (Rs. in Lacs) 1427 4955

Profitability Ratio (%) 2.61 5.92
EBT = Earnings before Tax

Interpretation :-

C. Activity Ratio

1. Inventory Turnover Ratio: -

This ratio measures how much time a company takes to convert its cash out flows during
purchase of inventory material to sales of finished goods or cash inflows.

Cost of Sales
Inventory Turnover Ratio = -----------------------------
Average Inventory

Particulars 2009-2010 2010-2011

Cost of Sales (Rs. in Lacs) 32405 50662

Average Inventory (Rs. in Lacs) 7334 9479

Inventory Turnover Ratio (In Times) 4 5

It can be observed from the above figure that ITR has increased in the year 2010 -11 to 5
compared to previous year that was 4. It is good for company as it shows the efficiency
of stock management

2. Inventory Holding Period: -

Average Inventory
Inventory Holding Period = -----------------------------x 365
Cost of Sales

Particulars 2009-2010 2010-2011

Cost of Sales (Rs. in Lacs) 32405 50662
Average Inventory (Rs. in Lacs) 7334 9479
Inventory Holding Period (In Days) 83 68

Interpretation: -
Inventory holding period has decreased from 83 days to 68 days in the year 2010-11. It
means company has reduced the inventory carrying cost and better utilization of fund and
also improves the profitability.

3. Debtors Turnover Ratio:-

This ratio establishes a relationship between net credit sales and average debtors and
bills receivables. The objective of computing this ratio is to determine the efficiency with
which the debtors are managed.
It is computed as:

Net Credit Sales

Debtors Turnover Ratio = ---------------------------
Average Debtors

Particulars 2009-2010 2010-2011

Net Credit Sales (Rs. In lakhs) 54628 83684
Average Debtors (Rs. In lakhs) 3885 6963
Debtors Turnover Ratio (In Times) 14 12


This ratio indicates the number of times sales is converted to debtors and to cash. This
indicates the efficiency of receivables management in the company. A higher debtor’s
turnover ratio indicates efficient receivables management. We can see an increase in the
debtor’s turnover over the years indicating the efforts put in by the company to manage its
debtors. This can also be achieved when there are a few suppliers for the product they
offer. In the year 2011 there is a dip in the debtors turnover ratio which is due to an
increase in the sales. To increase the sales companies have to offer a higher credit period
thus reducing the debtor’s turnover ratio .

5. Debtors Collection Period: -

The Average Collection Period measures the average number of days it takes for the
company to collect revenue from its credit sales. This ratio reflects how easily the
company can collect on its customers. It also can be used as a gauge of how loose or
tight the company maintains its credit policies. A particular thing to watch out for is if the
Average Collection Period is rising over time. This could be an indicator that the
company’s customers are in trouble, which could spell trouble ahead.
This could also indicate the company has loosened its credit policies with customers,
meaning that they may have been extending credit to companies where they normally
would not have. This could temporarily boost sales, but could also result in an increase in
sales revenue that cannot be recovered, as shown in the Allowance for Doubtful

Average Debtors
Debtors collection period = -------------------------- x 365
Net Credit Sales

Particulars 2009-2010 2010-2011

Net Credit Sales (Rs. In lakhs) 54628 83684

Average Debtors (Rs. In lakhs) 3885 6963

Debtors collection period (In Days) 26 30

Interpretation: -
The credit policy of the Company is 30 days and RSB has maintained its credit period in
the year 2010-11.Although the collection period has gone up from previous year but
maintained within the credit period. It seems the Company has improved the fund flow

6. Creditors Turnover Ratio: -

This ratio establishes a relationship between net credit purchase and avg creditors and
bills payable. It helps in judging the efficiency in getting the benefit of credit purchase offer
by suppliers of goods. A high ratio indicates the shorter payment period and a low ratio
indicates a longer payment period.
It is computed as:

Net Credit Purchase

Creditors Turnover Ratio = -------------------------------
Average Creditors

Particulars 2009-2010 2010-2011

Average Creditors (Rs. in Lacs) 1336 1635
Net Credit Purchase (Rs. in Lacs) 13106 18288

Creditors Turnover Ratio (In Times) 37 33


This ratio indicates the no of time purchase is converted to creditors. If a company has a
higher creditability its suppliers offer them a higher credit pwriod. A lower creditoras ratio
is seen beneficial for the company as creditors is a no interest bearing source of fund.
There is less cost involved in financing the current assets. From the creditors. There has
been a increase in the creditors turnover ratio which is due to the increase in purchase.

7. Creditors payment period:-

The average payment period (APP) is defined as the no of days a company takes to pay
off credit purchase.
App is computed as:

Average Creditors
Creditors payment period = ------------------------------- x 365
Net Credit Purchase

Particulars 2009-2010 2010-2011
Average Creditors (Rs. in Lacs) 1336 1635
Net Credit Purchase (Rs. in Lacs) 13106 18288

Creditors payment period (In Days) 37 33

Interpretation: -
The Creditors payment period reduced from 37 days to 33 days in the year 2010-11. It
means Company pay more attention towards the satisfaction of their Creditors.

D. Financial Ratios

1. Interest Coverage Ratio: -

This ratio determines how easily a company can pay interest on outstanding debts. More
the interest coverage ratio more beneficiary for the company. Minimum Interest Coverage
Ratio should be 1%.

EBT+ Depreciation + Interest

Interest coverage ratio = ------------------------------------------

Particulars 2009-2010 2010-2011
Interest (Rs. in Lacs) 3677 3493
EBDIT (Rs. in Lacs) 7937 11619
Interest coverage ratio (%) 2.16 3.33

EBDIT = Earnings before Tax + Depreciation + Interest.

Here we can see that Interest coverage ratio has increased as compared to previous
year. It shows the company is earning sufficient profit to pay of its interest.

2. Debt to Equity Ratio: -

This Ratio show how much a company is depended on debt.

Total Debts
Debt to Equity Ratio = ------------------------------------------
Equity (Share Capital + R & S)

Particulars 2009-2010 2010-2011

Equity (Rs. in Lacs) 18125 21469
Total Debts (Rs. in Lacs) 30627 32060
Debt to Equity Ratio (In Times) 1.69 1.49

In 2010-2011 some of debts are paid off , so the company ‘s dependency decreased as
compared to previous year

3. Total Assets Turnover Ratio: -

Total Assets Turnover ratio = -----------------
Net Block

Particulars 2009-2010 2010-2011

Turnover (Rs. in Lacs) 54628 83684

Net Block (Rs. in Lacs) 36543 39338
Total Assets Turnover ratio (In Times) 1.49 2.13

It is assumed that the total asset turnover ratio should be more than 3 for the company.
Since in both the year total asset turnover ratio is less than 3 that means some of the
assets are kept unused / idle or not properly used or there is customer demand reduced.
But the company is trying to improve its Total Asset Turnover Ratio.

4. Return on Capital Employed:-

PAT + Depreciation
Return on Capital Employed = -------------------------------- x100
Capital Employed

Particulars 2009-2010 2010-2011

PAT + Depreciation (Rs. in Lacs) 3612 6758

Capital Employed (Rs. in Lacs) 48752 53529

Return on Capital Employed (%) 7.41 12.62

Capital Employed = Total Assets – Current Liabilities.

For 2009-2010 : Rs. (57342 – 8590) = Rs.48752

For 2010-2011: Rs. (65320 – 11791) = Rs. 53529


Return on capital Employed should be 18% as per the market which indicates that the
company is not employing its capital effectively and is not generating shareholders value.
Since ROI is less therefore Return on capital employed is also less, as they are directly

5. Return on Investment:-

Return on Investment = ---------------x100
Net Block

Particulars 2009-2010 2010-2011

PAT (Rs. in Lacs) 779 3587
Net Block (Rs. in Lacs) 36543 39338
Return on Investment (%) 2.13 9.12

Return on Investment (ROI) should be minimum 14% as per the lending rate. Since in
both the year ROI is less than 14%, this indicates that company is not able to earn the
expected amount / profit invested. But the company is trying to improve.


RSB Transmissions (I) Ltd. is taking all the efforts to maintain its Working Capital
As explained earlier Current Ratio is the indicator of a company’s Short-term Solvency
position of any company. RSB is very concerned about its Current Ratio.
The Current Ratio for an industry like RSB should be ideally 1.33 times and should at-
least be greater than 1.
The Current Ratio for the financial year 2010-11 is 1.94 which means the Current Assets
of RSB is 1.94 times of Current Liabilities. In other words the company has Rs.1.94 to pay
the liability of Re.1. Earlier in the financial year 2009-10 was 1.55.

For effective management of Fund I found the following system in RSB:

1. Real Time Gross Settlement (RTGS):

RSB has an arrangement with its banker both Bank of India & IDBI for RTGS facility.
RSB has an arrangement with its banker IDBI Bank Ltd for discounting its Hundies drawn
on Tata Motors Limited.

At the beginning of a financial year RSB like any other company draws an Annual Cash
Budget. The Annual Budget is then converted into monthly for a better control. The main
object of preparing this cash budget is to see whether the company is having a positive or
negative cash flow. In case the negative Cash Flow the company has to decide whether
to go for a short term loan or to drop some capital requirement.
RSB has been given on an average 30 days credit to its Customers. The realization of
receivables within period will indicate a better position.

In short,

 Standard current ratio is 2:1 and for manufacturing industry it is 1.33:1. RSB’s
current ratio is in improving Trend and this is a good sign of Improvement.

 Inventory turnover ratio is improving from 2009-10 to 2010-11, which means

inventory is used in better way so it is good for the company.

 Debtors collection period is improving from 2009-10 to 2010-11. The increase in

ratio is beneficial for the company because as ratio increases the number of days
of collection for debtors decreases.

 Assets turnover ratio of 2010-11 is improving as compare to 2009-10. It means the
better utilization of Fixed Assets of the company.

 Interest coverage ratio has increased from previous year.


1) What is the working capital position of RSB?
2) What steps would you take to improve your working capital?
3) How to control internal cash management?
4) How to make cash flow statement?
5) What is the current ratio position?

But I found the following good about the company:

1. The current ratio of the company is in improving trend. This is a good sign of
2. The company is also bold in realizing its receivables in time.
However, if company manages its working capital effectively then its current assets will
automatically improve.

In my opinion the company may take the following measures to improve its working

Measures To improve working capital management

 The essence of effective working capital management is proper cash flow

forecasting. The company should take into account the impact of unforeseen
events, market cycles, loss of a prime customer and action by competitors.

 It should have contingency plans to tide over unexpected events. While market
leaders can manage uncertainty better, even other companies must have risk
management procedure; these must be based on objective and realistic view of the
role of working capital.
 Addressing the issue of working capital on a corporate wide basis has certain
advantages; cash generated at one location can be utilized at another, for this to
happen, information access, efficient banking channels, good linkages between
production and milling, internal systems to move cash and good treasury practice
should be in place.
 An innovative approach, combining operational and financial skills and an all
encompassing view of the company’s operations will help in identifying and
implementing strategies that generate short term cash. This can be achieved by
having the right set of executives who are responsible for setting targets and
performance levels...
 Collaborating with its customers instead of being focused only on own operation
will also yield good result.

Working capital management is an important yard stick to measure a company

operational and financial efficiency. These aspects must form part of the company’s
strategic and operation thinking. Efforts should constantly be made to improve the
working capital, position. This will yield greater efficiencies and improve customer

RSB strong expertise in the it based engineering solution for products and process
integration has help RSB India has a large auto component industry noted for its world
class capabilities. There is huge demand in domestic markets due to infrastructure
developments and RSB is able to leverage its knowledge of Indian market. There are
favorable government policies and regulations to boost the auto industry.


1) website


2) Annual reports of RSB Transmission (I) Ltd.

3) Books