Professional Documents
Culture Documents
LTD, ERNAKULAM
PROJECT REPORT
Submitted by
SONI MARIAM SAJI
REG NO: 1635F0108
Under the guidance of
S NISHANTI
Professor
In partial fulfillment of the requirements
For the award of the degree
MASTER OF BUSINESS ADMINISTRATION
OF
BHARATHIAR UNIVERSITY
I hereby declare that the project report entitled “ A STUDY ON WORKING CAPITAL
This Project Report is the blossom of an arduous endeavor coupled with the compassionate
blessing of the almighty.
I thank our honourable Secretary Shri. T. P Ramachandran, Sankara College of science and
commerce, for providing me an opportunity to undertake this MBA project work.
WORKING CAPITAL MANAGEMENT
CHAPTER :1
INTRODUCTION
INTRODUCTION
The success and progress of any firm is depends upon the Financial performance. Finance is one
of the most requisites of a business and a modern management, obviously depends largely on the
efficient management of finance. Finance places a vital role in determining the strength, weakness
and control funds of the organization, without Finance no organization can perform its activities
in modern enterprises.
Every business in this world is directing its production activities towards the end goal of economic
development. A developing company requires an increasing volume of investments not only in the
fixed assets but also in working capital. Because of lack of proper investment, the rate of growth
of such entities depends to a great extent on the effective utilization of its capital.
Working capital is an important for efficiently carrying out the day to day operations of every
organization. In all concerns the problem of effective working capital management is of paramount
significance as considerable amount of funds are invested in the forms of various current assets.
In the absence of proper and efficient management of working capital, it would be difficult to
achieve the basic objectives of organizational efficiency.
The present study is undertaken with a view of analyzing the working capital position of the
company and to understand how the inventories, receivables management and cash management
works. The present study is expected to throw light into the way in which the working capital is
utilized in the TRACO CABLE LTD.
Capital is the key input of the production, distribution and development. Therefore it can be
described as the life blood of industry and is pre- requisite for accelerating the process of industrial
development. Working capital is the nerve center of every business concern and undertaking can
work efficiently without adequate amount of working capital. Working capital has to be regarded
as one of the conditioning factors in the long run operation of the firm. Because, the adequate
amount of working capital or current assets, long term investments or fixed assets cannot function.
The need of the study is to analyze the working capital position of the company and to understand
how the inventory, receivables management and cash management works. The study in TRACO
CABLE COMPANY is very important because of the scale of the company. The study is very
helpful to know the working capital management. It also helps in ascertaining how the company
performs in future. This study will help the firm to male projections of working capital
requirements for the next two years. This study also helps to understand the liquidity and
profitability of the company.
RESEARCH METHODOLOGY
“The procedures by which researchers go about their work of describing, explaining and predicting
phenomenon are called methodology”
TYPE OF RESEARCH
Analytical Research is defined as the research in which, researcher has to use facts or
information already available, and analyze these to make a critical evaluation of the facts,
figures,data or material.
RESEARCH DSIGN
The type of research used in this study is analytical. This is an attempt to evaluate the performance
of the company through the financial statement analysis by the financial data which are disclosed
in accounting policies.
SOURCE OF DATA
Secondary data:
The secondary data are those which already collected and stored. Secondary data easily get those
secondary data from records, annual reports of the company etc. It will save the money, time and
efforts collect data.
The major source of data for this project was collected through annual reports of 5 year period
from 2012-2016 and some more information collected from internet and text sources.
SAMPLING DESIGN
Sampling size : Last five years financial statement (period from 2012-2016)
The data were analyzed using the following tools. They are:
Ratio analysis
Balance sheet
The scope of the study is limited to the working capital management of TRACO CABLE
COMPANY LTD, which is one of the Government undertakings functioning in Kerala. The study
has been done for a period of 5 years from 2012-2013 to 2015-2016
The study is designed to cover the analysis of working capital, liquidity and solvency position of
the company on the basis of figures taken from financial statement published by it. The study of
working capital is based on tools like ratio analysis, operating cycle, etc. using the study the firm
can get the necessary information to analyze and formulate strategies to improve the working
capital position of the company
OBJECTIVE OF THE STUDY
PRIMARY OBJECTIVES
To forecast the working capital requirement of TRACO CABLE COMPANY for next two
years
To examine the solvency and liquidity position of TRACO CABLE COMPANY
SECONDARY OBJECTIVES
Indian Scenario
INDIA has made remarkable progress in recent years in the manufacture of cables and
conductors. The country has not only achieved self sufficiency in this field but has also made a big
head way into the international market. Rural electrification and telecommunication networks
undertaken by various state governments as part of national policy lay the crucial infrastructure
backbone for the recently liberalized industry with increased Private Public Participation (PPP)
and privatization. The investment strategy of the government primarily relies on promoting
investment through a combination of public investment with private investment participation. PPP
will promote and streamline strategies for future development and management of the economic
and social infrastructures ensuring effective use of resources, access to modern technology, timely
implementation and operation for rapid economic growth. The Indian economy grew at an average
annual rate of 9% in 2008 before global economic meltdown. Despite the adverse circumstances
Indian economy grew by 6.7% in 2009, 7.9% in 2010, and 8.5% in 2011 and is expected to achieve
a growth rate of 9% in the year 2012. The telecom sector and the power sector needs infrastructure
development which is crustal for fueling for the growth for the economy however power shortage
remain a problem in many part of the country and the distribution segment (transition and
distribution) shows steady growth in the requirement for cables and conductors. In the telecom
sector private investment increased from Rs.6crores in 2003 to Rs.51crores in 2010 and
competition and access to consumers seems to be the driving force. Therefore the pace of economic
and social development of the nation depend to a very large extend of the development of
infrastructure in the power sector as well as in the telecommunication sector.
The market segmentation and structure of the cable industry in India are there both
in Power sector as well in Telecom sector. Power cables are segregated into high and low voltage
varieties. Telecom cables are classified as high capacity cables (Optic Fiber Cables) and low
capacity cables (Jelly Filled Telecom Cables). Organized players have higher presence in Indian
Telecom sector since it involves higher capital and technology inputs when the higher presence of
unorganized players in Indian power cables segment is evident for reasons of low investment. The
current scenario prevailing in the Indian cables industry has ample focus on government policy
along with demand- supply position. In this context, special focus has been given to the impact of
government decisions on the industry for direct foreign investment putting an end to Public sector
monopoly in the Industry
State Scenario
Early telegraph system were the first form of electrical cabling, but transmitted only small
amounts of power. Gutta-percha insulation used for the first time transatlantic cables was
unsuitable for building writing use since Gutta-percha deteriorated rapidly when expose to
air. The first power distribution system developed by Thomas Edison used copper rods,
wrapped in jute and placed in rigid pipes filled with a bituminous compound. Although
vulcanized rubber had been patented by Charles Goodyear in 1844, it was not applied to
cable insulation until the 1880s, when it was used for lighting circuits. Rubber-insulated
cable was used for 11000 volt circuits in 1897 installed for the Niagra Falls Power Project.
Oil-impregnated paper insulated high voltage cables were commercially practical by 1895.
During Second World War several varieties of synthetic rubber and polyethylene insulation
were applied to cables. Modern power came in variety of size, material and type, each
particularly adapted to its uses. Large single insulated conductors are also sometimes called
power called power cables in the trade.
Cable consists of three major components, namely conductors, insulation protection. The
constructional detail individual cables will vary according to their application. The
construction and material are determined by three main factors:- working voltage, which
determines the thickness and composition of insulation ;- current carrying capacity, which
determines the cross-section of the size of conductors;- environmental conductors such as
temperature, chemical or sunlight size of exposure, and mechanical impact, which
determines the form and composition of the cable jacket enclosing conductors. Since power
cable must be flexible, the copper or aluminum conductors are made of stranded wire,
although very small cable may use solid conductors. The cable may includeaninsulated
conductor used for the circuit neutral or for ground [earth] connection.
The overall assembly may be round or flat. Filter strands may be added assembly to
maintain its shape. Special purpose power cable for overload vertical use may have
additional elements such as steel or Kevlar structural support. For circuits opening at 2400
volts between conductors or more, shield may surround each conductor. The equalizes
electrical stress on the cable insulation. The technique was patented by Martin Hochstetler
in 1916, and the shield is sometimes called Hochstetler shield. The individual conductor
shields of a cable are connected to earth ground at one or both ends of a length of cable.
COMPANY PROFILE
TRACO CABLE COMPANY, is incorporated in the year 1960; the foundation stone of
Irimpanam unit was laid down by Shri Manubhai M Shai. The company started its operation
in the year 1964. Shri M.D Jose was the first chairman and the managing director on whose
initiation Irimpanam unit of TRACO CABLE COMPANY commenced its operation.
One of the India’s most sought after Paper Insulated Lead Sheathed Telecommunication Cables
were produced by TRACO in collaboration with Hindustan Cables, West Bengal under an
agreement signed in 1974 until the liberalization of Licensing policy in the country, TRACO was
one of the two manufactures of Telephone Cables in India and only one in the whole of South
India. Always playing its humble role in the process of nation building, TRACO’s cables carry
energy, actuate signals and help to connect people in far flying areas in this vast subcontinent,
that’s India with its quality products.
The superiority of TRACO cables is the result of better know-how combined with well equipped
machinery and efficient work force. Rigorous quality control is maintained during every stage of
production, which ensures, that the products going into the market are according to the IS
specifications. With the progress in Cable Technology, Paper Insulated Cables gave way to the
much more sophisticated Jelly Filled Telephone cables which are superbly suited for
communications. TRACO was one among those who first perceived the opportunities inherent in
this new development. It soon went into Technical collaboration with M/s. General Cables Inc.,
USA, world leaders in the Communication cable field and manufactured them in India to exacting
standards
The company started its function with a capital of Rupees one core divided into 250000
per: shares of Rs.10 each and 750000 equity shares of Rs.10 each. The unit was has been
manufacturing cables required for the Railways, the BSNL and the KSEB. Traco's power cable
manufacturing unit has a workforce of 210 and the telephone cable division around 450. The
estimated turnover of Traco cables is around Rs 44.8crore
MAJOR CUSTOMERS
DIVISIONAL MANAGER
1. Corporate office
The registered and corporate office of traco cable Company is located in Cochin,
panampilly nagar the industrial city of Kerala. Board of directors, MD’s office, and all main
heads of traco Cable Company is located at the registered and corporate office.
2. Tiruvalla unit
In tiruvalla unit of traco cables having two major divisions they are power cable division
and telephone cable divisions
3. Irimpanam unit
In irimpanam unit also having two divisions
Power cable division.
Telephone cable division.
4. Kannur unit
Kannur unit mainly focused on house wiring cables.
ORGANISATIONAL POLICY
WORK
IMPROVEMENT
MISSION
&VISION
PRODUCT METHOD
IMPROVEMENT IMPROVEMENT
BOARD OF DIRECTORS
CHAIRMAN
Shri.K.S.SRINIVAS, IAS,
ADDITIONAL SECRETARY TO GOVERNMENT,
INDUSTRIES DEPARTMENT,
GOVERNMENT OF KERALA,
THIRUVANANTHAPURAM.
MANAGING DIRECTOR
Cdr. (Retd) K.SHAMSUDDIN
MANAGING DIRECTOR
TRACO CABLE COMPANY LIMITED,
COCHIN – 682036.
DIRECTORS
1, Shri.K.S.SRINIVAS , IAS
ADDITIONAL SECRETARY TO GOVERNMENT,
INDUSTRIES DEPARTMENT,
GOVERNMENT OF KERALA,
THIRUVANANTHAPURAM.
2, Cdr. (Retd) K.SHAMSUDDIN
MANAGING DIRECTOR,
TRACO CABLE COMPANY LIMITED,
COCHIN – 682036.
3, Shri.M.RADHAKRISHNAN
JOINT SECRETARY TO GOVERNMENT,
FINANCE DEPARTMENT,
GOVERNMENT OF KERALA,
THIRUVANANTHAPURAM- 695001
4, Shri.R.MADHUSOODHANAN NAIR
MANAGING DIRECTOR
INDUSTRIES DEPARTMENT,
GOVERNMENT OF KERALA,
5, Shri.K.ASOKAN,
MEMBER (TRANSMISSION & TRANSMISSION),
KSEB,
THIRUVANANTHAPURAM.
6, Shri.S.VENKADEESWARAN
MANAGING DIRECTOR,
TELK,
ANGAMALY SOUTH P.O,
ERNAKULAM DIST.
ORGANISATIONAL SETUP
The company‘s Registered office is at Panampilly Nagar, Kochi with manufacturing units
at Irimpanam in Ernakulam District and Thiruvalla in Pathanamthitta District and also a new Unit
at Thalassery in Kannur District. TRACO CABLE COMPANY LIMITED maintains the
traditional lines of management having pyramid structure of hierarchy. The Board of Directors
consists of members appointed by the Government of Kerala and the Managing Director is the
Chief Executive Officer who delegates the authority to the Unit Chiefs and other department heads.
The Head of Irimpanam unit is Mr.Boban George, Senior Manager and different departments such
as Production, Quality Assurance, Finance, Maintenance, Personnel & Administration, Stores,
Purchase and Marketing are having department heads reporting to the unit head.
MARKETING DEPARTMENT
Marketing department serves as the face of the organization, coordinating and producing
all materials representing the company. It is the marketing department's job to reach out to
potential customers, investors and the community, and create an image that represents the company
in a positive light. Marketing departments often collaborate with other divisions within the
company, such as advertising, promotions, sales, product development and market research.
The marketing department moreover plays a vital role in the production planning as a constant
feedback of the quality of finished products is verified regularly to check the possibility of
finishing the production of the uses specified products in time. Hence, the department plays an
overall significant role in the functioning of the organization. Marketing is a matching process by
which a producer provides a marketing mix (product, price, promotion and physical distribution)
that meets consumer demand of a target market within the limits of society. Since the inception
company has been managing its activities with a centralized control. Due to the increase in
competition and necessity to exert full control over the system the company has introduced a
Decentralized way of managing the departmental activities from this fiscal year.
1. Order canvassing:
The department continuously monitors the media, newspapers, sites etc. for canvassing the
orders.
2. Tender participation:
The company participates in tenders. There are two types of bids namely price bid and
technical bid. The companies qualifying in the techno-commercial bid are allowed to participate
in the price bid. The Techno –Commercial bid includes details such as capability of the company,
quality of products and processes, status of past orders etc. If qualified in it, the company can
apply for the actual bid. Performance bank guarantee and security deposit bank guarantee is
required to participate in the bid.
All over India, the company has fixed agents for order canvassing. They are given a
commission of 1% or 2%.
4. Giving information:
The department is entrusted with the responsibility of giving necessary information to all the
other departments. Once the order is received, it is forwarded to the costing department for
evaluation, finance department for funding purposes, purchase department for the purchase of
raw materials and finally to the factory for production planning.
PRODUCTION DEPARTMENT
The production department is the driving force turning the wheels of every manufacturing
company because without it there are no goods to sell to customers. Along with producing the
goods a manufacturer sells, the production department determines how much of those goods can
be produced in a certain time frame.
The main role of production is to turn inputs (raw materials) into outputs (finished goods).
Outputs refer to a finished product or service and inputs are the materials that are needed to
manufacture certain goods. When a business completes this process they are able to achieve
customer satisfaction by producing products that are ready to be used and fit for purpose.
The production department is responsible for ensuring quality is achieved in each item
produced. They will need to carry out inspections and implement suitable quality initiatives.
This is the last step in a long production process. The production department coordinates
the production of each part of the assembled goods to ensure all parts are being produced in
conjunction with each other. All parts of an assembled product are formed from raw material. This
process takes several steps from the production department to make sure each part of the product
is being produced simultaneously or within the same time frame.
a. Material planning
On receipt of trial order / anticipated order /work order from the marketing department, a
material indent is prepared with reference to the customer specification showing quantity and
delivery time. The material indent is forwarded to the Head of Materials for procurement. Material
position is reviewed daily and intended to materials departments for corrective action.
b. Production scheduling
According to the schedule, different shifts are planned. And on completion, the finished
goods are handed over to the Quality Assurance Department. The Quality Assurance
Department conducts various tests and after testing, if they are satisfied they issue a clearance
and the finished goods are dispatched from the stores department.
1) Production log book :- Quantity level assigned to each machine recorded in this
book.
2) Daily production report: - Records details of daily production.
3) Daily production review report :- It reviews weather the daily production is
Achieved as planned or not.
4) Raw material stock position :- Records the position of stock of raw materials.
PURCHASE DEPARTMENT
Duties of purchase department are to purchase various materials for the production process.
Materials which are purchased by purchasing department are as follows:-
(e) Machinery:
Machineries are purchase according to the increase in number of orders for production.
Traco Cable Company has both imported machineries and Indian made machineries.
The vendors are assessed on the basis of a wide variety of factors are as following:
Compliance with other specifications
Co-operation
Credit terms
Discounts received
Freight and delivery charges
Installation cost
Maintenance of specifications
Management Competence
Market information
Price
Promptness of delivery
Service
TRACO Cable Company has a fell functioning store department. Duty of store
department is to take care of raw materials, finished goods, spares and tools. Materials required
for all departments are deals with general store. In TRACO Cable Company the store department
usually follows FIFO method of storage. This FIFO method will help to avoid deterioration of
materials and to avoid confusion on fluctuation of prices. A day book is maintained in this store
department for recording all the daily transaction taken place.
There are mainly three stores TRACO namely:
General store
Spare and tools store
Finished goods store
In general store all materials which required for all departments are maintained
Materials handled by general store are as follows:-
Raw materials
Printed stationary and other stationary materials
Packaging materials
Miscellaneous materials
Electrical consumable materials
Building materials
All consumable materials
In spare and tools store all tools, spares, machinery, etc. for production process
(c) Finished goods store:
In finished goods store all final products are stored here. After testing, the goods are packed and
dispatched.
Statutory auditing
Outside auditing
Accounts general auditing etc.
(e) Short term objectives in store department
FINANCE DEPARTMENT
The roles and responsibilities of a finance manager require a sincere commitment and an
inexhaustible need for new challenges. Each industry has its own rules and spending regulations
so that finance managers must adhere to and more importantly hold each department of
the business accountable to in order to maintain a fully functioning and federally compliant
organization. Finance managers may allocate resources to each department and draw up plans for
future departmental budgeting in an effort to maximize company finances for optimal performance
and also have final approval for all financial transactions for purchases occurring from outside the
business.
Quality control is there to ensure that the product being sold is not in any way harmful
or defective. Quality control is a process employed to ensure a certain level of quality in a product
or service. It may include whatever actions a business deems necessary to provide for the control
and verification of certain characteristics of a product or service. The basic goal of quality control
is to ensure that the products, services, or processes provided meet specific requirements and are
dependable, satisfactory, and fiscally sound. Quality control involves the examination of a product
or process for certain minimum levels of quality. The goal of a quality control team is to identify
products or services that do not meet a company’s specified standards of quality.
‘TRACO Cable Company Limited shall strive for continual improvement in its
performance, by meeting the needs of internal and external customers, complying with
regulations through the involvement of all its employees’.
Testing and release or rejection of all incoming raw materials, packing materials, in-process /
intermediates and finished products as per specified specifications.
Maintaining testing records as per standard procedures for raw materials, packing materials,
in-process / intermediates and finished products.
(b) Quality assurance in traco cable company
TRACO CABLE COMPANY has a well known label of quality products. Main duty of
quality assurance department is to ensure the products have reached its international standard
specification and also ensure that the quality is higher than the competitors. Traco has ISO
certification so that it is the responsibility to ensure the right quality for the products. It is also the
responsibility of the Quality Assurance Department to check whether the quality of the
finished goods match the International standard.
Breaking load
Diameter is checked.
Wrapping test
MAINTENANCEDEPARTMENT
TRACO cables have a well functioning maintenance department. The main duty of the
maintenance department is to maintenance and preservation of machinery and infrastructure. It is
the responsibility of the maintenance department to make sure that the factory premises are clean
and all the necessary facilities are available for a good working environment. The maintenance
department should ensure that all machines are well functioning for the production. The machines
which is used for production should be properly maintained and repaired whenever it necessary.
This will result in smooth working of the production process without any disruption.
(a) Responsibilities of maintenance department
The main responsibilities of maintenance department is to
Timely inspection and servicing of equipment,
Instructing workers on proper use of equipment,
Raising timely indent for replacement of equipment or spare parts.
Breakdown maintenance
Break down Maintenance is done when any of the machines in the production unit fails to do
its particular work. It refers to the repair work taken after the failure of a machine or equipment.
For example Replacement of the torn belt is a case of breakdown maintenance. Breakdown
maintenance is corrective maintenance as it is undertaken to restore equipment to an accepted
standard. It involves mainly the repair of defective equipment.
Preventive maintenance
Preventive Maintenance is a precautionary measure that is taken so as to prevent any kind of
machine breakdown in the future. It consists of routine actions taken in a planned manner to
prevent breakdowns.
There are two constituents of preventive maintenance they are:-
Lubrication: Lubrication ensures long and safe working of the equipment without
mishaps.
Inspection: Inspection facilitates detection of faults in equipment so that repairs
and replacements may be undertaken before the faults assume the proportion and shape
of a breakdown.
(h) Discipline
There are certain standing orders set by the organization on the conduct of employees.
Standing orders works as the main guideline regarding the discipline. In case of misconduct, the
following steps are taken:
First the management issues a note to the delinquent furnish replay on the allegation regarding
misconduct
Then it sends a charge memo asking for explanation and the reasons for not taking disciplinary
action as per standing orders.
An enquiry officer is appointed for a domestic enquiry considering the gravity of the
misconduct management witnesses as well as witnesses from the delinquent with opportunity
to give evidence and to produce documents related to the matter.
Management side represented by presenting officer and delinquent side can be represented by
a co worker or an advocate.
Then a decision is taken based on finding of the enquiry report
Disciplinary authority communicates the enquiry report to the delinquent calling for his
explanation and if no satisfactory replay is furnished disciplinary action taken.
Disciplinary actions like
Barring increments without cumulative effect
Barring increments with cumulative effect
Warning MEMO or reprimand
Frequent instants of disciplinary action
Absenteeism
Failure to obey orders of superior’s affecting the work
Causing damages to company property due to accidents
Using abuse languages against superiors or co-workers
Man handling other
(i) Incentives and fringe benefits
Incentives are usually given to the workers. A production target will be given to the
workers. Incentives will be given accordingly by cash. Also, there is a special pay. Several fringe
benefits given by the company to employees such as regards fringe benefit they are:
Milk allowance,
Heavy duty allowance,
Night shift allowance and
Over time allowance.
Special allowance.
There is a welfare fund provided by the company. On retirement, a fixed amount will be given
to the employees. This is applicable to the workers and officers. There is a provident fund for the
employees.
Transfer of the employees depends upon the vacancy created in the company. Job rotation is
not here. Promotion is done according to the performance appraisal.
(m) Trade unions
There are two recognized trade unions in the company. They are:
TCEU –TRACO Cable Employees Union (CITU)
TCEA –TRACO Cable Employees Association (INTUC)
There are two more UN recognized but registered trade unions of AITUC and STU who
was not success full in the referendum.
CATEGORY NUMBER
SKILLED WORKMEN 45
UNSKILLED 1
CASUAL LABOUR 8
REVIEW OF LITERATURE
REVIEW OF LITERATURE
Sagan in his paper (1955), perhaps the first theoretical paper on the theory of working capital
management, emphasized the need for management of working capital accounts and warned
that it could vitally affect the health of the company. He realized the need to build up a theory
of working capital management. He discussed mainly the role and functions of money
manager’s operations were primarily in the area of cash flows generated in the course of
business transactions. However, money manager must be familiar with what is being done with
the control of inventories, receivables and payables because all these accounts affect cash
position. Thus, Sagan concentrated mainly on cash component of working capital.
Welter in his study (1970) stated that the working capital originated because of the global
delay between the moment expenditure for purchase of raw material was made and the moment
when payment were received for the sale of finished product. Delay centers are located
throughout the production and marketing functions. The study requires specifying the delay
and working capital tied up in each delay center with the help of information regarding average
delay and added value. He recognized that by more rapid and precise information through
computers and improved professional ability of management, saving through reduction of
working capital could be possible by reducing the length of global delay among the different
delay centers. However, better information and improved staff involve cost.
Agarwal (1983) also studied working capital management on the basis of sample of 34 large
manufacturing and trading public limited companies in ten industries in private sector for the
period 1966-67 to 1976-77. Applying the same techniques of ratio analysis, responses to
questionnaire and interview, the study concluded the all though the working capital per rupee
of sales showed a declining trend over the years but still there appeared a sufficient scope for
reduction investment in almost all the segments of working capital.
Chakraborty (1973) approached working capital as a segment of capital employed rather than
a mere cover of creditors. He emphasized that working capital is the fund to pay all the
operating expenses of running a business. He pointed out that return of capital employed, an
aggregate measure of overall efficiency in running a business, would be adversely by excessive
working capital. Similarly, too little working capital might reduce the earning capacity of the
fixed capital employed over the succeeding period. For knowing the appropriateness of
working capital amount, he applied Operating Cycle(OC) Concept.
Warren and Shelton (1971) applied financial simulation to simulate future financial
statements of a firm, based on a set of simultaneous equations. Financial simulation approach
makes it possible to incorporate both the uncertainty of the future and the many
interrelationships between currentassets, current liabilities and other balance sheet accounts.
The strength of simulation as a tool of analysis is that it permits the financial manager to
incorporate in his planning both the most likely value of an activity and the margin of error
associated with this estimate. Warren and Shelton presented a model in which twenty
simultaneous equations were used to forecast future balance sheet of the firm including
forecasted current assets and forecasted current liabilities. Current assets and current liabilities
were forecasted in aggregate by directly relating to firm sales. However, individual working
capital accounts can also be forecasted in a larger simulation system. Moreover, future
financial statements can be simulated over a range of different assumptions to portray inherent
uncertainty of the future.
Verma (1989) evaluated working capital management in iron and steel industry by taking a
sample of selected units in both private and public sectors over the period 1978-79 to 1985-86.
Sample included Tata Iron and Steel Company Ltd. (TISCO) in private sector and Steel
Authority of India Ltd. (SAIL) and Indian Iron and Steel Company, a wholly owned subsidiary
of SAIL, in public sector. By using the techniques of ratio analysis, growth rates and simple
linear regression analysis, the study revealed that private sector had certainly an edge over
public sector in respect of working capital management. Simple regression results revealed
that working capital and sales were functionally related concepts. The study further showed
that all the firms in the industry had made excessive use of bank borrowings to meet their
working capital requirement vis-à-vis the norms suggested by Tandon Committee.
Wilson N describes working capital is a financial metric which represent the amount of day
by day operating liquidity available to a business. Along with fixed assets such as plant and
equipment, working capital is considered a part of operating capital. It is calculated as current
assets minus current liabilities. A company can be endowed with assets and profitability, but
short of liquidity, if these assets cannot readily be converted into cash.
According to P Chandra, under a flexible policy the investment in current assets is high. This
means a huge balance of cash and marketable securities, carries large amount of inventories,
and grants generous terms of credits to customers. Under a restrictive policy, the investment
in current assets is low this means that the firms keeps a small balance of low. Cash and
marketable securities, manage with small amount of inventories and offer stiff terms of credit.
According to the article of Joshua Kennon “The number one reason most people look at balance
sheet is to find out a company’s working capital position. It reveals more about the financial
condition of a business than almost any other calculation. It tells you what would be left if a
company raised all of its short term resources, and used them to pay off its short term liabilities.
The more working capital, the less financial stain a company experiences. By studying company’s
position, you can clearly see if it has the resources necessary to expand internally or if it will have
to turn to a bank and take on debt”.
Bhatt V. V. (1972) widely touches upon a method of appraising working capital finance
applications of large manufacturing concerns. It states that similar methods need to be devised for
other sectors such as agriculture, trade etc. The author is of the view that banks while providing
short-term finance, concentrate their attention on adequacy of security and repayment capacity.
On being satisfied with these two criteria they do not generally carry out any detail appraisal of
the working of the concerns.
Smith Keith V. (1973) believes that Research which concerns shorter range or working capital
decision making would appear to have been less productive. The inability of financial managers
to plan and control properly the current assets and current liabilities of their respective firms has
been the probable cause of business failure in recent years. Current assets collectively represent
the single largest investment for many firms, while current liabilities account for a major part of
total financing in many instances. This paper covers eight distinct approaches to working capital
management. The first three - aggregate guidelines, constraints set and cost balancing are partial
models; two other approaches - probability models and portfolio theory, emphasize future
uncertainty and interdepencies while the remaining three approaches - mathematical programming,
multiple goals and financial simulation have a wider systematic focus.
Natarajan Sundar (1980) is of the opinion that working capital is important at both, the national
and the corporate level. Control on working capital at the national level is exercised primarily
through credit controls. The Tandon Study Group has provided a comprehensive operational
framework for the same. In operational terms, efficient working capital consists of determining the
optimum level of working capital, financing it imaginatively and exercising control over it. He
concludes that at the corporate level investment in working capital is as important as investment
in fixed assets. And especially for a company which is not growing, survival will be possible only
so long as it can match increase in operational cost with improved operational efficiency, one of
the most important aspects of which is management of working capital.
Kaveri V. S. (1985) has based his writing on the RBI‟s studies on finances of large public limited
companies. This review of working capital finance refers to two points of time i.e., the accounting
years ending in 1979 and 1983 and is based on the data as given in the Reserve Bank of India on
studies of these companies for the respective dates. He observes that the Indian industry has by
and large failed to change its pattern of working capital financing in keeping with the norms
suggested by the Chore Committee. While the position of working capital management showed
some investment between 1975-79 and 1979-83, industries have not succeeded in widening the
base of long-term funds to the desired extent. The author concludes with the observation that
despite giving sufficient time to the industries to readjust the capital structure so as to shift from
the first method to the second method, progress achieved towards this end fell short of what was
desired under the second method of working capital finance.
N. C. Gupta study (1987) examined that the determinants of total inventory investments in
aluminum and non- ferrous semi firms in private sector. The data had been taken from Stock
Exchange, Official Directory, Mumbai for 9 years 1966-67 to 1974 -75. Variables considered were
current sale change, one -lagged sales change, inventory stock at the beginning, gross fixed
investment during the year, flow of net debt (external finance) and profits net of dividend and taxes
but the gross of depreciation provision ( retained earnings or internal finance) . Demand factor and
external finance turned out to be significant determinants of aluminum. Both retained earnings and
external finance were important determinants in case of non- ferrous semis. Competition for
investmentfunds between fixed and inventory investment was suggested both in aluminum and
non-ferrous semis.
Cohn and Pringle in their study (1973) illustrated the extension of Capital Asset Pricing Model
(CAPM) for working capital management decisions. They tried to interrelate long – term
investment and financing decisions and working capital management decisions through CAPM.
They emphasized that an active working capital management policy based on CAPM could be
employed to keep the firm’s shares in a given risk class. By risk, he meant unsystematic risk, the
only risk deemed relevant by CAPM. Owing to the lumpy nature for long -term financial decision,
the firm is continually subjects to shifts in the risk of its equity. The fluid nature of working capital,
can be exploited so as to offset or moderate such swings.
Wilson N describes working capital is the financial metric which represent the amount of day by
day operating liquidity available to a business. Along with fixed asset such as plant and equipment,
working capital is considered a part of operating capital. It is calculated as current assets minus
current liabilities. A company can endowed with assets and profitability, but short of liquidity if
these assets cannot readily be converted into cash.
Bhattacharyya Hrishikes (1987) tries to develop a comprehensive theory and tool of working
capital management from the system’s point of view. According to this study, capital is often used
to refer to capital goods consisting of a great variety of things, namely, machines of various kinds,
plants, houses, tools, raw materials and goods-in-process. A finance manager of a firm looks for
these things on the assets side of the balance sheet. For capital he turns his attention to the other
side of the balance sheet and never commits a mistake. His purpose is to balance the two sides in
such a way that net worth of the firm increases without increasing the riskiness of the business.
This balancing is financing, i.e., financing the assets of the firm by generating streams of liabilities
continuously to match with the dynamism of the former. The study is an improvement of the
concept of Park and Gladson who were not able to capture the entire techno-financial operating
structure of a firm.
Rao K.V. and Rao Chinta (1991) observe the strong and weak points of conventional techniques
of working capital analysis. The result has been obviously mixed while some of the conventional
techniques which could comprehend the working capital behavior well; others failed in doing the
job properly. The authors have attempted to evaluate the efficiency of working capital management
with the help of conventional techniques i.e., ratio analysis. The article concludes prodding future
scholars to search for a comprehensive and decisive yardstick in evaluating the working capital
efficiency.
Hamlin Alan P. and Heath field David F. (1991) opine that working capital is necessary input
to the production process and yet is ignored in most economic models of production. The
implications of modeling the time dimension of production, and hence, the working capital
requirements of firms are explored, with the particular stress placed on the competitive advantage
gained by firms that retained flexibility in the time structure of their production. In this article they
have attempted to explore only this most basic role of time in the production process and so focus
is on the implications of explicitly recognizing the need for working capital
WORKING CAPITAL AND THEORATICAL FRAMEWORK
Working Capital is the life blood of every business concern. Business firm
cannot make progress without adequate working capital. Inadequate working capital means
shortage of inputs, whereas excess of it leads to extra cost. So the quantum of working capital in
every business firm should be neither more nor less than what is actually required. The
management has to see that funds invested as working capital in their organization earn return at
least as much as they would have earned return if it invested anywhere else. At the time of
increasing capital costs and scare funds, the area of working capital management assumes added
importance as it deeply influences a firm's liquidity and profitability. A notable feature of
utilization of funds is that they are of recurring nature. Therefore, efficient working capital
management requires a proper balance between generation and utilization of these funds without
which either shortage of funds will cause obstruction in the smoother functioning of the
organization or excess funds will prevent the firm from conducting its business efficiently. So the
main objective of working capital management is to arrange the needed funds on the right time
from the right source and for the right period, so that a tradeoff between liquidity and profitability
may be achieved. A firm may exist without making profits but cannot survive without liquidity.
The function of working capital management organization is similar that of heart in a human body.
Also it is an important function of financial management. The financial manager must determine
the satisfactory level of working capital funds and also the optimum mix of current assets and
current liabilities. He must ensure that the appropriate sources of funds are used to finance working
capital and should also see that short term obligation of the business are met well in time.
In financial literature there are two concepts of working capital. They are,
Under gross concept, working capital means the total of current assets, viz, cash, marketable
securities, inventories of raw materials, work in progress, finished goods and receivables.
Working capital requirements of a concern depends on a number of factors, each of which should
be considered carefully for determining the proper amount of working capital. It may be however
be added that these factors affect differently to the different units and these keeps varying from
time to time. In general, the determinants of working capital which re common to all organization’s
can be summarized as under:
Nature of business:
Need for working capital is highly depends on what type of business, the firm in. there are trading
firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc. public utilities like
railways, electricity, ete., need much less inventories and cash. Manufacturing concerns stands in
between these two extends. Working capital requirement for manufacturing concerns depends on
various factors like the products, technologies, marketing policies.
Production policies:
Production policies of the organization effects working capital requirements very
highly. Seasonal industries, which produces only in specific season requires more
working capital. Some industries which produces round the year but sale mainly done in some
special seasons are also need to keep more working capital.
Size of business:
Size of business is another factor to determines the need for working capital
Length of operating cycle:
Operating cycle of the firm also influence the working capital. Longer the orating
cycle, the higher will be the working capital requirement of the organization.
Credit policy:
Companies; follows liberal credit policy needs to keep more working capital with
them. Efficiency of debt collecting machinery is also relevant in this matter. Credit
availability form suppliers also effects the company’s working capital requirements. A company
doesn’t enjoy a liberal credit from its suppliers will have to keep more working capital
Business fluctuation:
Cyclical changes in the economy also influencing the working capital. During boom period, the
tendency of management is to pile up inventories of raw materials and finished goods to avail the
advantage of rising prove. This creates demand for more capital. Similarly during depression when
the prices and demand for manufactured goods. Constantly reduce the industrial and trading
activities show a downward termed. Hence the demand for working capital is low.
Current asset policies:
The quantum of working capital of a company is significantly determined by its
current assets policies. A company with conservative assets policy may operate with relatively
high level of working capital than its sales volume. A company pursuing an aggressive amount
assets policy operates with a relatively lower level of working capital.
Fluctuations of supply and seasonal variations:
Some companies need to keep large amount of working capital due to their irregular sales and
intermittent supply. Similarly companies using bulky materials also maintain large reserves’ of
raw material inventories. This increase the need of working capital. Some companies manufacture
and sell goods only during certain seasons. Working capital requirements of such industries will
be higher during certain season of such industries period.
Other factors:
Effective co ordination between production and distribution can reduce the need for working
capital. Transportation and communication means. If developed helps to reduce the working
capital requirement.
EXCESS OR ADEQUATE WORKING CAPITAL
Every business concern should have adequate working capital to run its business
operations. It should not have either redundant / excess working capital or
inadequate/ shortage of working capital. Both excess as well as shortage of working capital
situations are bad for any business. However, out of the two, inadequacy or shortage of working
capital is more dangerous from the point of view of the firm.
Disadvantages of Redundant or Excess Working Capital:
1.Idle funds, non-profitable for business, poor ROI.
2. Unnecessary purchasing & accumulation of inventories over required level.
3. Excessive debtors and defective credit policy, higher incidence of B/D.
4.Overall inefficiency in the organization.
5. When there is excessive working capital, Credit worthiness suffers.
6. Due to low rate of return on investments, the market value of shares may fall.
Disadvantages or Dangers of Inadequate or Short Working Capital:
1Can not pay off its short-term liabilities in time.
2. Economies of scale are not possible.
3. Difficult for the firm to exploit favorable market situations.
4. Day-to-day liquidity worsens.
5. Improper utilization the fixed assets and ROA/ROI falls sharply.
Need for working capital
The basic objective of financial management is to maximize shareholder’s wealth. For this it is
necessary to generate sufficient profits. The extent to it, which the profit can be earned, largely
depends on the magnitude of sales. However sales do not convert into cash instantly. There is
invariable the time gap between the sales of goods and receipts of cash. There is, therefore, a need
for working capital in the form of Current Assets to deal with the problem arising. Out of the lack
of immediate realization of cash again goods sold. Therefore, sufficient working capital is
necessary to sustain sales activity.
Working capital is needed for the following purpose:
1. For the purchase of raw material, components and spares.
2. To incur day to day expenses and overhead costs such as fuel, power and
office expenses, etc.
3. To meet selling costs as packing, advertisement etc.
4. To provide credit facilities to the customers.
5. To maintain the inventories of raw material, work in progress, stores and spare
and finished goods.
6. To pay wages and salaries
Cash
Debtors
Raw materials
Finished goods
CURRENT ASSET
CURRENT LIABILITIES
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CURRENT ASSET
Inventory 1738.48 1460.93 277.55
Trade receivables 2874.95 3214.68 339.73
Cash& cash equivalance 594.92 1747.47 1152.55
Other current asset 68.01 50.07 17.94
Loans and advances 87.99 257.05 169.06
TOTAL C. A 5364.35 6730.2
CURRENT LIABILITIES
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CURRENT LIABILITIES
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CURRENT LIABILITIES
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RATIO ANAYSIS
Ratio analysis is a powerful tool for the analysis of financial performance. It is an important
technique of financial analysis. Ratio means that it is one number expressed in terms of another
can be worked out by dividing.
1. LIQUIDITY RATIOS
CURRENT RATIO
This is the most widely used ratio. It is the ratio of current asset to current liabilities. It shows
a firm ability to cover its current liabilities with its current assets. The current ratio is mainly
used to give an idea of the company’s ability to payback its current liabilities with its current
assets. As such, current ratio can be used to take rough measurement of a company’s financial
health. Current ratio of 2 : 1 is considered as ideal ratio or standard ratio. A high ratio indicates
sound solvency position and a low ratio indicates inadequate working capital.
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QUICK RATIO
The acid test ratio or quick ratio is very similar to the current ratio except for the fact that it
excludes inventory. This is the ratio of liquid asset to liquid liabilities. It shows a firm ability
to meet current liabilities with its most liquid assets. 1:1 ratio is considered as ideal ratio for a
concern because it is wise to keep the liquid assets at least equal to the liquid liabilities at all
times. Liquid liabilities include all items of current liabilities except bank overdraft.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITIES
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INTERPRETATION
Quick ratio shows the relationship between quick assets and liabilities. The standard quick
ratio for a firm is 1: 1. In 2012b it was 2.15. After 2012 there is a decreasing trend, this is
because of an increase in current liabilities and a decrease in quick assets mainly due to low
cash and bank balance.
INTERPRETATION
The absolute liquidity ratio includes cash and cash at bank. Absolute liquidity ratio shows
the relationship between absolute liquid asset and current liabilities. In the year 2012 the ratio
is 0.001.The ratio was increased to 0.19 during 2013. That is increased to 0.28 in 2014. The
increasing absolute liquidity ratio is mainly due to increase in cash balance. But in 2015 the
ratio is dropped to 0.18. Here, the ratio shows a fluctuating trend. The company is not good in
a good liquidity position. Company is needed to maintain sufficient liquidity to ensure smooth
running of the firms operation.
The term gross working capital represents the amount fund invested in current assets. Thus gross
working capital is the working capital invested in total assets of the enterprise.Gross working
capital is the sum of all of a company's current assets (assets that are convertible to cash within a
year or less). Gross working capital includes assets such as cash, checking and savings account
balances, accounts receivable, short-term investments, inventory and marketable securities
Table 1
CURRENT ASSETS 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
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Inventories Sundry debtors Cash &bank Other current Loans and
balance assets advances
Interpretation:
This table shows the components of asset of the company, which are the main parts of the
working capital. In this table the current asset of each items shows variations in each year.The
amount of working capital of the company is analyzed by knowing the position of each items in
the current assets.
The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are
generated from each dollar of company assets. For instance, a ratio of .5 means that each dollar of
assets generates 50 cents of sales.The asset turnover ratio is calculated by dividing net sales by average
total assets.
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100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
INTERPRETATION
Current asset ratio is analyzed by the sales is divided with the current assets of the company. In
the above following table shows that the company’s current asset turnover ratio is very poor. The
company shows a fluctuating trend in current asset turnover. In 2012 – 2013 there is an increase
of 0.1. And 2013 to 2015 there is variation in current asset turnover. This ratio is poor due to
decrease in sales.
Working capital turnover is a measurement comparing the depletion of working capital used to fund
operations and purchase inventory, which is then converted into sales revenue for the company. The
working capital turnover ratio is used to analyze the relationship between the money that funds operations
and the sales generated from these operations.
TABLE 4
YEAR SALES NET WORKING CAPITAL RATIO
2011-2012 8249.72 2816.35 2.93
INTERPRETATION
The working capital turnover ratio measures how well a company is utilizing its working capital
for supporting a given level of sales. Here, only in 2012 , 2013 and 2015 shows an increasing
trends. The least working capital ratio of Traco Company ltd is 1.72 in 2016.This will leads to an
excessive amount of bad debts and obsolete inventory.
FIXED ASSETS
INTERPRETATION
This ratio is calculated to measure the adequacy of investment in fixed assets.Fixed assets ratio
should not be more than 1.Here the fixed assets ratio is more than 1 in all years, if the fixed asset
ratio is less than 1, it shows that a part of working capital has been financed through long term
funds.
Every firm has to maintain a certain level of inventory or stock of finished goods so as to be able to meet
the requirements of the business. But the level of inventory should neither be too high nor too low. Inventory
turnover ratio of cost of goods sold by a business to its average inventory during a given accounting period.
This ratio reveals the number of times finished stock is turned over during a given accounting period.
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INTERPRETATION
The inventory turnover ratio signifies the liquidity of the inventory. A high inventory turnover ratio
indicates the efficiency of the management is converting stock into cash quickly, sound liquidity position
and quality of gods maintained. In 2012 and 2013 it is an increasing trend, but there is a variation in the
stock turnover during 2014 to 2016.
TABLE-7
TABLE 8
NET SALES FINISHED GOODS RATIO
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INTERPRETATION
Finished goods turnover ratio helps in ascertaining the efficiency of the firm to sell the finished
goods in the market. In the table shows that in 2012 to 2013 it is very high. And in 2013 to 2014
it is very low. The finished goods ae turned over faster, the amount of locking up of funds would
be less.
FINISHED GOODS STORAGE PERIOD
When the goods is completed as to manufacturing but not yet sold or distributed to the end
user, it is called finished goods. This is the last stage for the processing of goods. The goods are
ready to be consumed or distributed. The cost of finished goods considered a short term asset.
The formula for calculating finished goods storage period by this formula.
FINISHED GOODS STORAGE PERIOD = CLOSING STOCK OF FINISHED GOODS * 365
SALES
TABLE 9
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Raw material turnover gives the number of times raw materials turns into sales in a year. The
reciprocal of raw material turnover gives average raw material holding period in percentage
terms
TABLE 10
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INTERPRETATION
Raw material storage period in Traco cable company ltd is showing a fluctuating trend. The
raw material storage period is high in the year 2013- 2014. It shows that on that year the sales of
the company is less and the high sales is in 2012 to 2014.
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INTERPRETATION
Work in progress refers to raw materials, labor and overhead costs incurred for products that
are at various stages of the production process. Work in progress is showing a fluctuating
tendency during the period of study. It is high during the year 2014- 2015 and low during 2011-
2012
PROFITABILITY RATIO
Business firm is basically a profit earning organization. The income statement of the firm shows
the profit earned by the firm during the accounting period. Profitability is an indication of with
the operation of the business is carried out.
INTERPRETATION
Gross profit ratio measure the relationship of gross profit to net sales. Here we can see that a
stable trend of gross profit to net sales of Traco cable company ltd. The highest gross profit ratio
is 1.12 in the year 2015. Th low gross profit ratio indicates the high cost of goods sold due to
number of internal and external reasons.
INTERPRETATION
Net profit ratio shows the relationship between net profit and net sales. A high net profit ratio
indicates the efficiency of the management, inventory manufacturing, selling, administration and
other activities of the firm. The company has a fluctuating trend during 2012 to 2016. And there
is a slight increase in 2015 that is 0.07.
TRENG ANALYSIS
Trend analysis helps in easily knowing the direction of movement of the activity of the
business i.e. whether upward or downward. The financial statements may be analyzed by
computing trends of series of information. Trend analysis determines the direction upwards or
downwards and involves the computation of the percentage relationship that each item bears to
the same item in the base year. In case of comparative statement, an item is compared with itself
in the previous year to know whether it has increased or decreased or remained constant. Common
size analysis is to ascertain whether the proportion of an item (say cost of revenue from
operations) is increasing or decreasing in the common base (say revenue from operations). But in
case of trend analysis, the behavior of the same item over a given period, during the last 5 years.
The trend percentages are calculated in relation to this base year. If a figure in other year is less
than the figure in base year, the trend percentage will be less than 100 and it will be more than
100 if figure is more than the base year figure.
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INTERPRETION
The trend analysis of working capital in Traco cable company ltd from 2012 to 2016 shows a
fluctuating trend percentage. The least trend percentage occurs in the year 2015 i.e. 120.02%.
There is an increasing trend during 2012 to 2013.
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DU PONT ANALYSIS
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AS ON 2013
BALANCE SHEET AS ON 31 ST MARCH 2013
NON CURRENT ASSET SHARE HOLDERS FUND
Tangiable asset 1166.85 Share capital 1301.81
Capital work in progress 0.14 Reserve and surplus -4452.17
Non current investment 0.02 Share application money 2705.65
Long term loans and advances 151.22
NON CURRENT LIABILITY
CURRENT ASSET
Long term borrowings 955.3
Inventory 1738.48
Trade receivables 2874.95 CURRENT LIABILITY
Cash& cash equivalance 594.92
Other current assets 68.01 Short term borrowings 2418.3
Loan and advances 87.99 Trade payable 1264.98
Other current liability 1969.33
Short term provisons 519.38
AS ON 2014
BALANCESHEET AS ON 31 ST MARCH 2014
AS ON 2015
BAANCE SHEET AS ON 31 ST MARCH 2015
EQUITY AND LIABILITIES ASSETS
Shareholder's fund Non current assets
BALANCESHEET AS ON 31-03-2016