1REVEIEW OF LITERATURE FOR WORKING CAPITAL Working capital policy refers to the firm's policies regarding : 1) Target levels

for each category of current operating assets and liabilities, and 2) How current assets will be financed. Generally good working capital policy (i.e. under conditions of certainty) is considered to be one in which holdings of cash, securities, inventories, fixed assets, and accounts payables are minimized. The level of accounts receivables should be used as a means of stimulating sales and other income. Previous literature on working capital management has found a negative association, overall, between level of working capital and operating performance as measured by operating returns and operating margins (Peterson and Rajan, 1997). Under conditions of certainty (i.e. sales, costs, lead times, payment periods, and so on, are known), firms have little reason to hold more working capital than a minimum level. Larger amounts would increase the level of operating assets, increase the need for external funding, resulting in lower return on assets and a lower return on equity, without any increase in profit. However the picture changes when uncertainty (i.e. uncertain growth) is introduced (Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables, marketable securities, inventories, and fixed assets will be needed to support increased sales Required levels will be based on expected sales levels and expected order lead times. Additional holdings may be needed to enable the firm to deal with departures from the expected values. Further, firms will also attempt to increase their accounts payable balances as a means of financing increased levels of current operating assets. Firms which are in high growth stages will face the challenge of maintaining the necessary level of operating assets to support subsequent growth, while at the same time attempting to maintain adequate performance indicators.

by the mid-1980s India realized that its poor telecommunications infrastructure and service needed reform. Building local content. etc. or demonopolization. Shaped by legislation dating back to the colonial era and post Second World War socialist policies. the Indian telecom industry is expected to maintain the same growth trajectory. This gap has been fulfilled by this research report which gives an practical insight into the concept of working capital management. Rao (2000). Ltd. role of an Internet service provider (ISP) in a nascent market of India. • The role of technology in the emergence of the information society in India. LITERATURE REVIEW FOR TELECOM INDUSTRY Cygnus Business Consulting & Research Pvt. At the heart of the . provide a broad view of the foreknowledge of new Internet technologies. in India has been bungled. would help in their sustainability. • Internet service providers in India. (2008).H. and the country is witnessing wild momentum in the telecom industry. competitiveness. connecting issues. • T. Chowdary (1999) discusses how Telecom reform.From the above reviews it can be concluded that many researches have been conducted before relating to the concept of working capital but no researches have been conducted to study the working capital management of Reliance Industries Limited. in its “Performance Analysis of Companies (April-June 2008)” has analyzed the Indian telecom industry in the awake of recent global recession and its overall impact on the Indian economy. With almost 5-6million subscribers are being added every month. describes the role that information and communication technologies are playing for Indian society to educate them formally or informally which is ultimately helping India to emerge as an information society. Singh (2005).

this article aims to identify the state’s initial reluctance to recognize telecommunications provision as a basic need as against the robust tradition of public service aligned to the postal services and finds hope in the renewal of public service telecommunications via the Right to Information movement. He discusses the question: ‘Why did India get it so wrong? and What India should do now? • Thomas (2007). regulator.problem lay the monopoly by the government’s Department of Telecommunications (DOT) in equipment. The article follows the methodology of studying the history of telecommunications approach that is conversant with the political economy tradition. This created an untenable situation in which the DOT became policymaker. It uses archival sources. in his article describes the contribution made by telecommunications in India by the state and civil society to public service. operator and also arbitrator in disputes between itself and licensed competitors. All studies done by the researcher suggests that the right to information movement has contributed to the revitalization of participatory democracy in India and to a strengthening of public service telecommunications. The findings of the paper suggests that public service in telecommunication is a relatively ‘‘new’’ concept in the annals of Indian telecommunications and that a deregulated environment along with the Right to Information movement holds significant hope for making public service telecommunications a real alternative. licenser. The National Telecom Policy 1994 spelt out decent objectives for reform but tragically its implementation was entrusted to the DOT. networks and services. personal correspondence. GROWTH IN SEGMENTS . critical account of public service telecommunications in India and suggests that it can be strengthened by learning gained from the continual renewal of public service ideals and action by the postal services and a people-based demand model linked to the Right to Information Movement. The article provides a reflexive. and published information as its research material.

according to a report by Gartner Inc. VALUE-ADDED SERVICES MARKET A report by market research firm IMRB stated that the mobile value-added services (MVAS) industry was valued at US$ 1. However. the total wireless subscriber base stood at 346.15 billion in June 2008. India is slated to become the largest WiMAX market in the Asia-Pacific by 2013. In WiMax. Further. According to recent data released by the COAI. And investments in WiMAX ventures are slated to top US$ 500 million in India.89 million at the end of December 2008. A recent study sees India's WiMAX subscriber base hitting 14 million by 2013 and growing annually at nearly 130 per cent. and mobile capex is likely to touch US$ 9. according to the data released by COAI. Fixed line capex is projected to be US$ 3.4 billion. The overall cellular services revenue in India is projected to grow at a CAGR of 18 per cent from 2008-2012 to exceed US$ 37 billion. Indian telecom operators added a total of 10. . by 2012.3 million new subscribers in January 2009. India is likely to remain the world's second largest wireless market after China in terms of mobile connections. taking the total user base to 267.2 billion while mobile revenues will reach US$ 39. Cellular market penetration will rise to 60. Strategy Analytics.96 billion by June 2009. fixed line revenues are expected to touch US$ 12.7 per cent from 19.According to a Frost & Sullivan industry analyst.2 billion.8 billion in India.8 per cent in 2007. this figure does not include the number of subscribers added by Reliance Telecom.. according to a report by US-based research and consulting firm. Further. The Indian telecommunications industry is on a growth trajectory with the GSM operators adding a record 9.5 million.66 million wireless subscribers in December 2008. and is expected to grow rapidly at 70 per cent to touch US$ 1.

According to a study by Stanford University and consulting firm BDA. which is expected to reach 18 per cent by 2010. MVAS in India accounts for 10 per cent of the operator's revenue. there were nine deals worth US$ 41 million in 2007 in the mobile VAS space. This topic had been chosen keeping in mind the increasing competition in telecom industry and to study the position of Reliance communications as compared to 4 other top players.Currently. . and till August 2008. Further. which is an important VAS segment. banking. Venture Capitalists like Canaan Partners. Draper Fisher Juvertson. insurance products and also entertainment services. mobile VAS has a US$ 700 million market with a 20 per cent y-o-y growth. This gap has been fulfilled by this research report which gives a practical insight into the concept of working capital management. Presently. seven deals worth US$ 91 million had already been finalized. and rural markets are proving to be very receptive for such marketing. the Indian MVAS is poised to touch US$ 2. Mobile advertising. Marketers are increasingly using MVAS as a step ahead of SMS-based marketing to sell soaps and shampoos. According to Venture Intelligence. Helion.74 billion by 2010. which is likely to touch US$ 3 billion by 2012. and Nexus India are also innovating with services like mobile payment options. offers great potential to become an important revenue source. From the above reviews it can be concluded that many researches have been conducted before but no researches have been conducted to study the performance of leading players. voice-based SMS and satellite video streaming. advertising.

but is bound to reduce profitability of the firm as ideal car yield nothing. The gross working capital concept focuses attention on two aspects of current assets management. To understand working capital better we should have basic knowledge about the various aspects of working capital. Current assets. time is an important factor discounting and compounding aspects of time play an important role in capital budgeting and a minor part in the management of current assets. In fact. by accounting definition are the assets normally converted in to cash in a period of one year. they should not be allowed to lie ideal but should be put to some effective use. Net Working Capital: The term net working capital refers to the difference between the current assets and current liabilities. there are two concepts of working capital:  Gross Working Capital  Net working Capital Gross Working Capital: Gross working capital. inventories and current liabilities. refers to the firm’s investment in current assets: Another aspect of gross working capital points out the need of arranging funds to finance the current assets. The large holdings of current assets.OVERALL VIEW Working Capital management is the management of assets that are current in nature. may strengthen the firm’s liquidity position. and similarly if some surpluses are available. which is also simply known as working capital. 2. Whenever a need of working capital funds arises due to increase in level of business activity or for any other reason the arrangement should be made quickly. In managing fixed assets. 3: CRITICAL REVIEW OF LITERATURE WORKING CAPITAL . market securities receivable. These two aspects will help in remaining away from the two danger points of excessive or inadequate investment in current assets. Net working capital can be positive as well as . The level of fixed assets as well as current assets depends upon the expected sales. the management of current assets is similar to that of fixed assets the sense that is both in cases the firm analyses their effect on its profitability and risk factors. especially cash. 3.2CH NO. but it is only current assets that add fluctuation in the short run to a business. Hence working capital management can be considered as the management of cash. firstly optimum investment in current assets and secondly in financing the current assets. To start with. hence they differ on three major aspects: 1.

There are a number of factors affecting the working capital requirement. in fact. “the inadequacy or mis-management of working capital is one of a few leading causes of business failure. Importance of working capital management: Management of working capital is very much important for the success of the business.negative. therefore Working Capital can be said to measure the liquidity of the firm. account for a very large portion of the total investment of the firm. Current assets. So a thorough analysis of all these factors should be made before trying to estimate the amount of working capital needed. Nature of business: Nature of business is an important factor in determining the working capital requirements. As pointed out by Ralph Kennedy and Stewart MC Muller. These factors have different importance in different businesses and at different times. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. Determinants of Working Capital: There is no specific method to determine working capital requirement for a business. There are some businesses which require a very .e. The net working capital helps in comparing the liquidity of the same firm over time. Some of the different factors are mentioned here below:1. It has been emphasized that a business should maintain sound working capital position and also that there should not be an excessive level of investment in the working capital components. Table showing Current assets as percentage of Total assets Year Percentage 2004 31% 2005 26% 2006 35% 40 35 30 25 20 15 10 5 0 2004 2005 2006 It can be visualized from the table that in the first year of our study i. In other words. the goal of working capital management is to manage the current assets and liabilities in such a way that a acceptable level of net working capital is maintained. For purposes of the working capital management. 2004 it was 31% which was reduced to 26% in the next year and in 2006 it is 35% shows fluctuating trend.

Hence it is but obvious that production policy has to be planned well in advance with respect to fluctuation. 5. These fluctuations affect the business with respect to working capital because during the time of boom. due to an increase in business activity the amount of working capital requirement increases and the reverse is true in the case of recession. There businesses. Size is usually measured in terms of scale of operating cycle. are of the trading and financing type. every business has to cope with different types of fluctuations. Hence a firm should always frame a rational credit policy based on the credit worthiness of the customer.e. for example. There are businesses which require large investment in fixed assets and normal investment in the form of working capital. 4. 2. Financial arrangement for seasonal working capital requirements are to be made in advance. No two companies can have similar production policy in all respects because it depends upon the circumstances of an individual company. 6. Size of business: It is another important factor in determining the working capital requirements of a business. Firm’s Credit Policy: The credit policy of a firm affects working capital by influencing the level of book debts. Production Policy: As stated above. The amount of working capital needed is directly proportional to the scale of operating cycle i. 3.nominal amount to be invested in fixed assets but a large chunk of the total investment is in the form of working capital. The credit term is fairly constant in an industry but individuals also have their role in framing their credit policy. Availability of Credit: The terms on which a company is able to avail credit from its suppliers of goods and devices credit/also affects the working capital requirement. the larger the scale of operating cycle the large will be the amount working capital and vice versa. Hence the amount of working capital needed will depend upon . Business Fluctuations: Most business experience cyclical and seasonal fluctuations in demand for their goods and services. A liberal credit policy will lead to more amount being committed to working capital requirements whereas a stern credit policy may decrease the amount of working capital requirement appreciably but the repercussions of the two are not simple. If a company in a position to get credit on liberal terms and in a short span of time then it will be in a position to work with less amount of working capital.

7. The changes in price level may not affect all the firms in same way. After this finished goods are ready for sale and by selling the finished goods either account receivable are created and cash is received.78 2. So in case of growth or expansion the aspect of working capital needs to be planned in advance. often supplemented by long term borrowings. dividend and the balance is ploughed in the business. As circulation increases. Working capital is considered to efficiently circulate when it turns over quickly. 8. Growth and Expansion activities: The working capital needs of a firm increases as it grows in term of sale or fixed assets. the investment in current assets will decrease. wages overhead expenses. There is no precise way to determine the relation between the amount of sales and working capital requirement but one thing is sure that an increase in sales never precedes the increase in working capital but it is always the other way round. Price Level Changes: Generally increase in price level makes the commodities dearer. This account of profit is used for paying taxes.98 1. The companies which are in a position to alter the price of these commodities in accordance with the price level changes will face fewer problems as compared to others. Table showing Current Assets Turnover Ratio Year 2004 2005 2006 Ratio (in times) 1. CIRCULATION SYSTEM OF WORKING CAPITAL In the beginning the funds are obtained by issuing shares.the terms a firm is granted credit by its creditors. Fast turnover current assets results in a better rate on investment. The reactions of all firms with regards to price level changes will be different from one other. In this process profit is earned. Current assets turnover ratio speaks about the efficiency of Kotak Mahindra in the utilisation of current assets.98 . Hence with increase in price level the working capital requirements also increases. Much of these collected funds are used in purchasing fixed assets and remaining funds are used for day to day operation as pay for raw material.

In 2005 current assets turnover ratio is highest one i.71 1. Current Ratio 2.5 0 2004 2005 2006 The ratio average is 2.23 2.5 1 0.e.88 2.84 1. Current Assets Turnover (times) 3. Ratios useful to analyze working capital management (A) Efficiency Ratios 1.97 7. Cash Ratio 2004 4.AcidTestRatio 3. Working Capital Turnover (times) 2. 2.08 2006 5.98 during the 3 year study.03 0.36% over the previous year and additional activity needs more funds.24 3 2.49 2.57 2005 10. Inventory turnover (times) (B) Liquidity Ratio 1.05 Ideal Ratio 2.41 1.78 9. Reasons being during this year company has achieved sales growth 44.24 times in the study period of 3 years.98 9.0 0.80 0.0 1.Average: 2.5 .12 1.15 0. KOTAK MAHINDRA LIFE INSURANCE LTD.20 1.5 2 1.98 0.

50 0.38 0. RM to Inventory 0. . CA 0. Stock spares to inventory 0. is quite acceptable.27 5.40 0. Loans and Advances to CA 0. Receivables to CA 0.  As we look at the extent of liquidity of working capital.14 0. Finished Goods to Inventory 0. This indicates improvement on the liquidity front.03 0.30 0.  If we analyze the structural health of working capital.32 2006 0. the proportion of current assets to total assets has been appropriate during this period.  Receivables turnover also shows a declining trend. Cash to CA 0. Decreasing efficiency in the use of current assets hints of the possibility of problems in working capital management.  As shown by current assets turnover ratio. CL 0.42 7. the utilisation of current assets in terms of sales has shown a decreasing trend which shows that current assets has been effectively used to achieve sales.12 9.  Again if we look at the efficiency with which individual elements of working capital have been utilized.38 2005 0. we notice that the ratio shows an increasing trend. It shows that working capital has not been effectively used over the period of years except in the year 2005.14 0.06 10. WIP to inventory 0.56 Interpretation (Ratio Analysis)  The utilization rate of net working capital as depicted by working capital turnover ratio is fluctuating during the period.14 .46 0.26 0.50 0.44 8.15 3. the picture of inventory turnover is not very bright. Our analysis above indicates the areas of concern to management in making best possible use of resources.(C) Structural Health of Working Capital Ratio/Year 2004 1.31 2. Inventory to CA 0.19 0.08 0.02 0.27 4. Generally such a situation does not suit the company.04 0.11 0.35 0. Such a higher proportion of current asset in the assets portfolio of Kotak Mahindra Life Insurance Ltd.15 0.15 6.

07 172.22 10. Among its various components.37/190.28 Proceeds from Loss from operation borrowings Sale of assets 27.28 = 97. spared and finished goods in particular need further analysis as here stand out to the problem areas.36 114.29 146.38% b) Cash from long term sources to total cash available = 162.87 137.33% c) Proceeds from sale of non-current assets to total cash = 17 14/19028 = 0.51 5.90% Schedule of Changes in Working Capital Particulars Amount (in lacs) Dec’2005 Dec’2006 93.14 247.29 Changes in Working Capital Increase Decrease (Debit) (Credit) 52.63 21.36 116. raw materials.27 5.64 20.66 288.87 123.01 61.52 20.28 = 85.On further analysis.44 172. Cash Flow Statement (2005-06) Sources Amount A ( in Lacs) 162.01 190.96 74.48 1.85 61.95 8.71 5.34 Change in cash Total 190.44 74. inventory constitutes a major proportion of total current assets.02 110.29 172.96 Current Assets Inventories Sundry Debtors Cash and Bank balances Other current assets Current Liabilities Working capital (CA-CL) Increase in Working Capital .37 Application Amount B (in Lacs) 185. stocks.31/190.28 Summary of Cash Flow Analysis a) Cash from operation to total cash available = 185.

Networking capital has been increased over the years. Ratio of fund flow from operations to total funds in the business (-) 123.Fund Flow Statement (2005-06) Sources Increase in loan Sale of asset Total Amount A (in lacs) 162. Funds from operations to finance permanent address (123. Company should take corrective actions to covert loss from operation to funds from operation.31 Amount B (in Lacs) 61.87 Summary of Fund Flow Analysis 1.44 123.87/85.44 2. which has increased liquidity 2. . Increase in net working capital — 61.85) Interpretation (Fund Flow Statement) 1.31 Application Increase in working capital Loss from operation 185.87) 3.31 = (66.37 22.94 185.

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