A STUDY OF “WORKING CAPITAL MANAGEMENT” AT CAUVESOFT TECHNOLOGIES

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(THEORETICAL BACKGROUND) 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 OVERVIEW OF FINANCIAL MANAGEMENT WORKING CAPITAL MANAGEMENT – WHAT FOR? WORKING CAPITAL MEANING, DEFINATION NEED FOR WORKING CAPITAL OPERATING CYCLE TYPES OF WORKING CAPITAL DETERMINANTS OF WORKING CAPITAL WORKING CAPITAL FINANCING EXCESSIVE OR INADEQUATE WORKING CAPITAL-THE DANGEROUS

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2.1 OVERVIEW OF FINANCIAL MANAGEMENT
Finance is regarded as the lifeblood of any business organization. The Financial management study of about the process of procuring of financial resources and its judicious utilization with a view to maximizing the shareholders wealth. Efficient management of every business enterprise is largely dependent on the efficient management of its finance. “Financial Management is concerned with the efficient use of an important economic resource, namely capital funds”. From the starting and registration to winding up of a unit, finance play dominate role in each and every business unit. In short financial management is managerial activity, which is concerned with planning and controlling of the firm’s financial resources. Modern approach of financial management requires four broad decision areas of financial management viz.,  Investment Decision  Financing Decision  The dividend policy Decision  Working Capital Management This report covers analysis of the last decision i.e., Working Capital Management. It is very important for short-term survival, which is must for long-term success. It is concerned with the management of current assets.

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2.2 WORKING CAPITAL MANAGEMENT – WHAT FOR?
Management of working capital is an extremely important area of financial management as current assets represent more than half of the total assets of a business. Fixed assets through essential for a business organization, does not by itself produce revenue or income. Fixed assets act with current assets to generate revenue or income. Therefore, working capital is necessary for utilizing the productive capacity of fixed capital. For shortage of working capital, the enterprise would suffer reduction in earnings due to productive capacity remain unutilized. While, excess working capital leads to extra cost for want of productive capacity. Thus, the amount of working capital in every enterprise, whether manufacturing or non-manufacturing, should be neither more or less than what is actually required. Working capital in business is just live blood in human body. Optimum and appropriate movement of blood through the body is extremely necessary to continue life. Like human blood, the proper circulation of funds (working/circulating capital) is utmost necessary to continue business. If the circulation of working capital becomes weak, the businesses can hardly prosper and service. An enterprise should maintain optimum amount of working capital so as to carry on the productive and distributive activities smoothly. While, the determination of optimum level of working capital involves fundamental decisions to an organization’s liquidity, which in turn are influenced by a trade off between profitability and liquidity. Thus, goal of working capital management is to manage the firm’s current assets and liabilities in such a way that satisfactory level of working capital minted.

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it is “net current assets or net working capital. NWC = Net working Capital CA = Current Assets CL = Current Liabilities Net working capital can also be defined as that portion of firm’s current assets. (6) . which can be. gross working capital and Net working capital. Symbolically: NWC = CA – CL. Net working capital refers to the different between current assets and current liabilities are those claims of outsiders. Current assets are the assets. Gross working capital refers to organizations investment in total current assets. DEFINATION In accounting “Working capital is the difference between the inflow and out flow of funds. which are accepted to mature for payment within an accounting year and include creditors. marketable securities. it is also known as circulating capital. convert in to cash with in an accounting year and include cash.2. Working capital is defined as excess of current assets over current liabilities and provision. intently etc.e. In other word.3 WORKING CAPITAL MEANING. which is financed by long-term funds.” Working capital can be defined broadly in two different ways i. Where. bills payable and outstanding expenses.” It other words it is the net cash inflow.

5 OPERATING CYCLE The operating cycle is the length of time required to complete the following stages of the cycle. V. But there is always time gap between the day of sales & its realization from debtors realization from debtors will take time but firm has arrange money for purchase of raw material. We will hardly find a business firm. IV. 2. Conversion of cash in to Raw materials.2. Operating cycle consists of five Phases: I. II. Conversion work in process in to finished goods. to pay for salary. firms differ in their requirement of working capital. The operating cycle can be said to be reason for the need for working capital. which doesn’t require any amount of working capital. Conversation of raw material in to work-in-process. Indeed. Conversion of finished goods in to receivables. In its endeavor to do so. We known that firm should aimed at maximizing the wealth of its shareholders.4 NEED FOR WORKING CAPITAL The need for working capital to run the day-to-day business activities cannot over emphasized. Therefore sufficient working capital in needed. firm should earn sufficient return from its operation. wages and other expenses. Conversion of Receivables in to cash (7) . III. Earning a study amount of profit require successful sales activity.

Symbolically: O = R + W + F + D . D= Debtors collection period. O= Length of operating cycle. W= work in progress period. R= Raw Material storage period. F= Finished stock storage period.C.) 2.6 TYPES OF WORKING CAPITAL There are mainly two types of working capital. Where. Account Receivable Phase-V Cash Phase-I Raw Material Finished Good Phase-IV Phase-II Work in Progress Phase-III (Figure 1: -OPERATING CYCLE OF MANUFACTURING FIRM. a) Permanent Working Capital b) Temporary Working Capital (8) . C= Creditors payment period.

etc. (9) . inventory. The operating cycle is continuous process and therefore the need for current assets is felt constantly. As this type of working capital is minimum necessary for the business at all points of time. However there is always a minimum level of current assets. fluctuating or variable working capital. The temporary working capital is the additional funds required. This minimum level of working capital is necessary on the regular basis even if the management of working capital is done efficiently in the organization. b) Temporary Working Capital: The amount over and above the permanent level of working capital is temporary. It increases and decreases over time. by firm to carry or its business operations is called permanent or fixed working capital. it is financed by the long-term sources. which are continuously required. The additional requirement may be during more active season when the volume of production and sales more goes up necessitating extra blockage of funds temporarily in current assets like Bank Balance. But the magnitude of current assets needed is not always the same. The need for such type of working arises because of fluctuations in production and sales. debtors. Whose volume is different at different points of time and hence it is financed by short-term sources.a) Permanent Working Capital: The need for current assets arises because of operating cycle.

Temporary Working Capital Permanent working Capital Time (Figure 2a) However when the business is growing. C. C. The working capital graph will be rising one as given in figure below: A M O U N T O F W.Both concepts are depicted in the following figure: A M O U N T O F W. Temporary Working Capital Permanent Working Capital Time (Figure 2b) (10) . the level of permanent working capital also grows.

Again major sale of such services are on cash basis. III. 1. which generally influence the working capital requirement of firms. A large no.7 DETERMINANTS OF WORKING CAPITAL There are no set formulates to determine the working capital requirements of firms. influence working capital needs of firms. Nature of Business: Business firm can be dividend in to three categories given below: I. 2. the higher is the requirement of working capital. Service organization or public utilities Trading or financial organization Manufacturing organization Service organizations don’t normally hold any inventory or the level inventory may be very low. Volume of sales: The higher the sales on credit basis. Hence working capital requirement of such organization are relatively very high. Trading or financial organization have to maintain sufficient amount of cash and inventory. Working capital requirement of manufacturing organization normally falls between the above two extremes. (11) . II.2. Therefore. of factors each having a different importance. However. the factors may vary from organization to organization. an analysis or relevant factors should be made inorder to determine total investment in working capital. The following is the description of factors. Hence they require very less amount of working capital. as more and more amount is getting blocked in debtors.

the volume of sales increases necessitating higher level of inventories and debtors. the need for working capital is reduced. Tax rates vary in different forms of organization and accordingly working capital requirement of different organization will be different. 6. Depression has exactly an opposite effect on the level of working capital requirement.3. more Amount of working capital is required to sustain higher levels of activity during prosperity. Obviously the larger the manufacturing cycle of a company the higher is the volume of working capital needed to finance blockage of money in raw material. work in progress and finished good. Business Cycle: No business can remain study for all the time. if the organization is availing liberal credit term from its suppliers. The organization has to pay its taxes in time. Credit Policy: If the organization is following a liberal credit p[policy for its customers. (12) . i. 5. However. Manufacturing Cycle: The manufacturing cycle refers to the time spent by a product right from the stage of purchase of its raw material to the stage of completion of finished goods. 4. Tax Structure: The entire profit generated may not be available to the organization because of a simplest fact.e. It passes through the stages of prosperity and depression. it will result in higher debtors leading to requirement of more working capital. During Prosperity.

Efficient working capital management requires efficient planning and a constant review of the needs for an appropriate working capital strategy. The reason may be that the organization may procure the funds whenever it needs the funds. Dividend Pay out ratio: If dividend payout ratio is high. 8. (13) .7.Size of the Firm: Bigger firms may require lesser working capital as compared to their total sales or assets. If the firm adopts a labor-intensive process. The level of Working Capital is determined by a wide variety of factors that are partly internal to the firm and partly external to it. Of course the absolute amount of working capital will be higher in bigger firms. the requirement of working capital will be larger. Availability of Funds: If the credit worthiness of an organization is good. it may manage the business with less Working Capital. the organization may have earned profit but-the profits available only after payment of dividends is available for financing working capital. 9. 10. Hence. this would reduce the requirements of Working Capital. higher working capital will be required if Dividend payout ratio is high. Change in Technology: Change in technology affect the requirement for working Capital. If the firm decides to go for automation.

2. Figure given below shows the financing-mix or sources-mix or working capital. Financing Mix Spontaneous Sources Negotiated Sources Short-term Sources Long-term Sources (1) Trade Credit (2) Outstanding Expenses (3) Bills payable etc. A source is said to be spontaneous when its use is automatic or arise in the normal course of business activities.8 WORKING CAPITAL FINANCING A firm must tap the right sources in financing its current assets requirements. (14) . (1) BOD/Cash Credit (2) Public Deposit (3) Short-loans (4) Bill Discounting (5) Commercial Paper (6) Factory etc. A source is said to be negotiated when its use depends on prior deliberations between the borrower and the lender. (1) Share Capital (2) Retained Earnings (3) Debentures (4) Other Longterm funds.

(Table 1) Proportion of W. Working capital Financing of CauveSoft Technologies. Commercial Bills Market. The proportion can be shown in following table: Sources A) B) Equity Share Short-term Loan From BOB. The company used both long and short-term sources for financing working capital requirements. It can be conveniently financed by shares. Spontaneous sources of finances are cost free.(1) Long-term Financing: Long-term working capital should be provided in such a manner that the enterprise might have its uninterrupted use for a long time. The major sources of such financing are trade credit (creditors and bill payable) and outstanding expenses. Commercial papers. debentures. reserve surplus etc. Certificate of deposit. It includes Bank Credit. and Factoring. Financing (in %) 80% 20% (15) . (2) Short-term financing: The category of funds covers the need of working capital for financing day-to-day business requirements. loans from financial Institution term loans from banks.C. Therefore a firm would like o finance its curre3nt assets with spontaneous sources as much as possible. (3) Spontaneous Financing: It refers to the automatic sources of short-term funds arising in the normal course of business.

no profit is earned when it is so. 2) The situation may lead to unnecessary purchases and accumulation of inventories. which may not have matching demand. This cause more chances of theft. the rate of return on its investments goes down. losses. (16) . It should have adequate working capital to run its business operations. 3) These arise an imbalance between liquidity and profitability. The dangers of excessive Working Capital are as follows: 1) A firm may be tempted to over trade and lose heavily. 6) The excess of working capital may lead to carelessness about cost of production. etc. 5) The situation leads to greater production. which earn no profit for the firm paucity of working capital not only impairs firm’s profitability but also results in production interruptions and inefficiencies. 2) It may fail to pay its dividend because of non-availability of funds. Both excessive as well as inadequate working capital positions are dangerous from the firm’s point of view.9 EXCESSIVE DANGEROUS OR INADEQUATE WORKING CAPITAL-THE The firm should maintain a sound working capital position. waste. In adequate working capital is also bad and has the following dangers: 1) It stagnates growth. 4) It means funds are idle when funds are idle. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds.2. Excessive Working capital means idle funds.

(17) . An enlightened management should. the firm faces tight credit terms. 4) Fixed assets aren’t efficiently utilized for the lack of working capital funds thus the profitability would deteriorate. As a result. 5) It may not be able to take advantage of cash discount 6) The firm loses its reputation when it is not in position to honor its short-term obligation.3) Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitment. therefore maintain a right amount of Working Capital on continuous basis only them a proper functioning if business operations will be ensured.

The problem related to whether efficient management of working capital is necessary or not? Working Capital is necessary for business but excessive working capital result in block of funds on the contrary inadequate working capital disturbed the day-to-day operation of business. (18) . So. satisfactory level of working capital is necessary for business for this purpose management of working capital can be necessary.

These studies a part of my MBA. aim at analyzing the working capital management of CauveSoft Technologies.  To study the operating cycle of company. inventory and cash. The following are the main objective of study:  To know how to manage current assets and current liabilities so that satisfactory level of working capital is maintained.  To suggest. (19) .  To know how to manage receivable.  To look at possible remedial measures if any on the basis of which tied-up funds in working capital could be used effectively and efficiently.  To study the different sources of financing working capital. if possible on the basis of conclusion some modification to meet the situation.  To study the liquidity position of company.

 There are controversies related to correctness of current assets and current liabilities that enters in to the domain of working capital management. (20) .Following are limitation of the study:  The study fully depends on financial data collected from the published financial statement (Annual Report) of company. Thus study incorporates all the limitations that are inherent in the considered financial statement. The data collected from above the sources are not of detailed nature.

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(22) . In the absence of proper and effective management of working capital. analyses of working capital of company through:  Inventory management  Receivable management  Cash management  Ratio analysis All these are analyzed subsequently in this part. it would be difficult to achieve the basic objective of its operational efficiency. As major sale is on credit basis and not on cash mode. The Himson group of Industry mainly producing textile machineries at lowest possible cost so that they are enable to sale it in profitable manner.Introduction: It has already been discussed that working capital acts as lifeblood to an organization. For the efficient management of Working Capital. working capital is of immense significance for efficiently carried out its dayto-day operation.

WORKING CAPITAL ASSEMBLY (Figures in thousands) YEARS 2001-02 2002-03 350.086.039 4413 459.429 124.777 17.465 627.358 1.285 28.327.596 300.547 224.025 409.705 37.942 27.724 504.452 519.872 929.324 231.189 408.797 528.193 192.502 1.698 771.099 Particulars Current Assets 1) Inventories 2) Sundry Debtors 3) Cash & Bank Balance 4) Loans & Advances 5) Other current Assets Total Current Assets (A) Current Liabilities 1) Current Liabilities 2) Provision Total Current Liabilities (B) Net Working Capital (A-B) 2000-01 339.670 232.413 556.440 1.274 (Table-2) (23) .615 369.596 321.726 455.586 68.I.

18 (Here year 1999-00 taken as 100%) (Table-3 Growth in Gross W. GROSS WORKING CAPITAL The amount of gross working capital during last three years is given in following table. Year 2000-01 2001-02 2002-03 (Rs. 25 Growth (%) 22.189 0.726 16.C.C.18 16.II.) Growth (%) 929.797 22.11 2000-01 2000-01 2001-02 2002-03 2001-02 Year 2002-03 (Graph-1 Growth in Gross Working Capital) (24) . (Rs.94 1.327. in thousands) Gross W.11 1.94 20 15 10 5 0 0.086.C.) Growth in Gross W.

5 0.53 11. (Rs.46 11.69 2000-01 2001-02 2002-03 Ratio 2002-03 (Graph 2: -Net working capital to Net asset Ratio) (25) .6 0.22.III.724 771.84.7 0. Year 2000-01 2001-02 2002-03 Net W.) Ratio (in times) 11.53 0.274 519.099 (Rs.161 0.410 0.3 0.) 627. This ration measure firm’s potential reservoir funds relate to net assets.2 0.542 0.1 0 2000-01 2001-02 Year 0.C.69 (Table-4) 0.34.46 0.8 0. in thousands) Net Assets (Rs.4 0. NET WORKING CAPITAL TO NET ASSETS RATIO Net Working Capital is difference between current assets and current liabilities.

120933. Year 2000-01 = = Year 2001-02 = = Year 2002-03 = = W= Work-in-progress period = Average Work-in-progress inventory ----------------------------------------------Average cost of production per day (26) .IV.5 --------------2349. 275028 -----------4044. CALCULATION OF OPERATING CYCLE OF COMPANY Operating cycle of a company computed with the help of following formula: - O=R+W+F+D-C R= Raw material storage period = Average Stock of Raw material -----------------------------------------------------Average raw material consumption per day 124833 -----------1927.60 65 days.83 68 days.31 52 days.

Year 2001-02 = = Year 2002-03 = = F= Finished Stock Storage period = Average finished stock inventory ----------------------------------------------Average cost of goods sold per day 17823. 191456 --------------2807.96 22 days. (27) Year 2000-01 = = Year 2001-02 = = . 125521 -----------4658.33 27 days.95 5 days.08 68 days.5 -----------4316.Year 2000-01 = = 49819 -----------2305. 13283 --------------2294.75 6 days.

D= Debtors collection period = Year 2000-01 = = Year 2001-02 = = Year 2002-03 = = C= Creditors payment period = Average creditors ------------------------------------------Average credit purchase per day (28) . 335007.5 -----------3350.48 56 days.5 -----------6150.13 4 days.5 --------------3465. Average debtors ---------------------------------Average credit sales per day 287156 -----------2898. 345376.Year 2002-03 = = 12514.23 99 days.99 97 days.

33 170 days. Operating Cycle (Figure in Days) Particulars Inventory Storage period Raw material Work-in-progress Finished Stock Debtor Collection Period Total (A) Creditors Payment Period (B) Operating Cycle Period (A-B) 2000-01 65 22 05 99 191 170 21 YEARS 2001-02 52 68 06 97 223 140 83 2002-03 68 27 04 56 155 108 47 Year 2001-02 = = Year 2002-03 = = (Table-5a) Operating Cycle Period Year 2000-01 Operating Cycle Period 21 (29) . 371553 -----------3441. 301568 --------------2147.96 108 days.Year 2000-01 = = 327468 -----------1924.15 140 days.

2001-02 2002-03 (Table-5b) 83 47 90 80 70 60 50 40 30 20 10 0 83 Days 47 21 2000-01 2001-02 2002-03 2000-01 2001-02 Year 2002-03 (Graph-3 Operating Cycle of Company) (30) .

MANAGEMENT OF INVENTORY Inventory constitute major portion of current asset of public Ltd. As the raw material used in the company is pig iron. The ratios for last three years have been worked out and compared. (1) To facilitate smooth production and sales operation (Transaction motive) (2) To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary Motive) (3) To take advantage of price fluctuations. There are at least three motives for holding inventories. proper planning and handling is required for the purpose of achieving the right quality of output.The manufacturing companies hold inventories in the form of Raw material. (31) . The various figures are given in the table. work-in-process and finish good. Companies in India . (Speculative Motive) Inventories represent investment of a firms funds and that is why management of inventory is necessary for the maximization of the value of the firm.V.  EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE: Ratio analysis has been used for making evaluation of Inventory management performance. The firm should therefore consider (a) Costs (b) Return (c) Risk Factors in establishing its inventory policy.

(Rs.31 158 (Table 6) Inventory Turnover 4 3.5 1 0.5 Inventory Turnover 3 2.31 3.67 99 158 136 99 2000-01 2001-02 Year 2001-02 2002-03 2002-03 (Graph 4) (Graph 5) (32) .35 2.31 Inventory Turnover 2.69 136 2002-03 414866 1327797 15207147 0. in thousand) ITEM (1) Average Inventory (2) Total Current Assets (3) Cost of Good Sold a) Inventory to Gross Working Capital (1/2) b) Inventory Turnover (3/1) c) Inventory Conversion Period (365/b) days 2000-01 329550.INVENTORY MANAGEMENT IN HIMSON PVT LTD.5 1086729 891349 0.30 2.5 929189 760872 Ratio (%) 0.67 Inventory Conversion Period (days) 180 160 140 120 100 80 60 40 20 0 2001-02 331822.5 0 2000-01 2001-02 Year 2000-01 2001-02 2002-03 2000-01 2002-03 2.5 2 1.69 3.

It is used to measure liquidity of the receivables or to find out period over. I. Credit creates receivables.VI. A firm grants credit to its customers so that its sales are its customers so that its sales are not lost to competitors. III. which should be carefully analyzed. white the seller expects an equivalent value to be received later on. payments are received immediately and therefore no receivables are created. Account receivable constitutes a significant portion of the total current assets of the business after inventories. (33) . A firm sells goods on credit and cash basis. It is an essential marketing tool in modern business trade. book debts are created in firms A/c debtors expected to converted in to cash over short period and thus included in current assets. It is based on economic value. MANAGEMENT OF RECEIVABLE When firm sell goods for cash. It involves an element of risk. The receivables arising out of credit has three characteristics. which receivables remain uncollected. When firm extends credit to its customers. which the firm is expected to collect in near future. payments are received only at a future date and receivables are created. II. It implies futurity.  DEBTORS TURN-OVER RATIO: This is also called “Debtors velocity” or “Receivable Turnover”. The customers from whom receivables have to collected in future are called debtors and represents the firm’s claim or asset. the economic value goods or services pass immediately at the time of sale. However when a firm sells goods or services on credit. To the buyer.

5 (Table 7) Ratio 3.72 6.72 6.63 3.41 Debtors Turnover Ratio 120 100 80 60 40 20 0 Debt Collection Period 100 98 57 2000-01 2001-02 Year 2002-03 2000-01 2001-02 2002-03 (Graph 6) (Graph 7) (34) .63 3.5 345376. Debtors 287156 335007.Receivable turnover Ratio = Debt collection period = 365 -----------------------------------Receivable turnover ratio Total Sales ----------------------Average Debtors Receivable Management in Company Year 2000-01 2001-02 2002-03 Sales 1042284 1247759 2214174 Avg.41 Collection Period 100 98 57 Debtors Turnover Ratio 7 Debtors Turnover Ratio 6 5 4 3 2 1 0 2000-01 2001-02 Year 2000-01 2001-02 2002-03 2002-03 3.

Cash is required to meet a firm’s transactions and precautionary needs.  EVALUATION OF CASH MANAGEMENT PERFORMANCE: The following ratios have been used to evaluate different aspects of cash management. Cash shortage will disrupt the firm’s manufacturing operation while excessive cash will simply remain idle.VII. II. Thus. The firm should keep sufficient cash. IV. Cash is the basic input needed to keep the business running on continuos basis. neither more or less. It keeps additional funds to meet any emergency situation. Some firms maintain cash for taking advantages of speculative changes in price of input and output. (1) (2) Cash to Current Assets Ratio. without contributing anything towards firm’s profitability. (35) . Controlling cash in flows Controlling cash outflows Optimum utilization of surplus cash. a major function of the financial managers is to maintain a sound financial position. Cash management involves following four factors: I. Cash turnover Ration. A firm needs cash to make payment for acquisition of resources and services for the normal conduct of business. Ascertainment of the minimum cash balance and controlling the levels of cash. it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. MANAGEMENT OF CASH: Cash in the important current assets for the operations of the business. III.

In ‘000’s) ITEM (1) Cash & Bank Balance (2) Total Current Assets (3) Total Current Liabilities a) Cash to Current Asset Ratio (1/2) b) Cash Turnover Ratio (3/1) c) Average age of cash (365/b) days Cash Turnover Ratio 7 Cash turnover (%) 6 5 4 3 2 1 0 2000-01 2001-02 Year 2000-01 2001-02 2002-03 2000-01 2002-03 3. (Rs. Ltd. total current assets and current liabilities for the year 2000-01to 2002-03 are given in the table.46 3.34 5. Age of Cash Avg.(3) Average age of Cash. The figures of cash and Bank Balance.65 100 2002-03 231670 1327797 528285 17.99 61 (Table 8) 2001-02 124547 1086729 455039 11.99 160 100 61 2000-01 2001-02 Year 2001-02 2002-03 2002-03 (Graph 8) (Graph 9) (36) .28 160 Avg.28 180 160 140 120 100 80 60 40 20 0 2000-01 68193 929189 408440 Ratio (%) 7.45 2. Cash Management in Himson Pvt. Age of Cash (days) 5.65 2.

” It expresses relationship between current assets & current liabilities. A. for each aspect of analysis certain ratios are computed and then results are compared with standard ratio or industry average. Current Ratio: - It is most common measure for measuring liquidity.VIII. This ratio helpful for both short-term creditors and internal management of the firm. The following are the important ratios to measure the efficiency of working capital: - 1. The following are types of ratios relating to liquidity of working capital. Ratios relating to liquidity of working capital: Liquidity ratios are used to measure the ability of firm to pay its maturing obligation in time. In this technique. It is also called “Working Capital Ratio. The ratio analysis provides guides and clues especially in sporting trends towards better or poorer performance and in finding out significant deviation for any average or relatively applicable standards. ANALYSIS THROUGH WORKING CAPITAL RATIOS A study of the causes of changes in uses and sources of Working Capital is necessary to observe that whether working capital is serving the purpose for which it has been created or not. Current Assets ---------------------Current Liabilities Current Ratio = (37) .

593 736.51:1 The acceptable norms for this ratio is 2:1 considering this it can be said that company has maintained sound ratio over three year B.62 1. Composition of Gross working capital: - (38) .440 455. in ‘000’s) Year 2000-01 2001-02 2002-03 Quick Assets 589. It is more useful in knowing the liquidity of firm than current ratio.086.44 1.189 1.039 528. in ‘000’s) Year 2000-01 2001-02 2002-03 Current Assets 929.285 (Table 10) Ratio (times) 1. (Rs.56 The acceptable norm for this ratio is 1:1 but the company as already maintained it above the norms. Quick Ratio: - It is also known as liquid ratio or acid test ration.39:1 2.(Rs.27:1 2.111 823.440 455. Quick Ratio = Quick Assets ---------------------Current Liabilities A quick asset means current assets excluding stock and prepaid expenses.285 (Table 9) Ratio (times) 2.039 528.327.201 Current Liabilities 408.797 Current Liabilities 408.726 1. It is a relation between quick assets and quick liabilities. 2. which indicate sound financial position.

The structure of gross working capital is evaluated by finding out the ratio of each component of current assets with the total current assets.17 0. It is circulated as: Circulation of Gross Working Capital = Net Sales --------------------------Total Gross W. 929. These ratios indicate in which components of current assets.C.32 0.284 Total Gross W.07 0.02 100 (Table 11) 2001-02 0.34 0.37 0. excess funds have been invested to that extent.11 0.21 0. Component Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Other Current Assets Total 2000-01 0.189 (39) Ratio (times) 1.38 0. It is commonly used to know turnover of working capital and the turnover of its components to indicate the efficiency of working capital management. Ratios relating to Circulation or Productivity of Working Capital: This ratio highlighted the efficiency with which working capital is being utilized.042. C.22 0.02 100 2002-03 0. in ‘000’s) Year 2000-01 Net Sales 1. (Rs.12 .24 0. Circulation of Gross Working Capital: The method is used to examine the effectiveness of gross working capital.03 100 3. A.17 0.32 0.

(40) .40 2.759 2. 4. Cash Position Ratio: This ratio is variation of quick ratio.724 771. Other Ratio: A.66 2.214.C.274 519. It measures the relationship between cash and near cash it’s on the one had.174 1. in ‘000’s) Year 2000-01 2001-02 2002-03 Sales 1. (Rs.797 (Table 12) 1.284 1.042. and immediately maturing obligations on the other.086. B. to calculate this ratio. Circulation of Net Working Capital: The method used to measure the effectiveness of net working capital is to divide net sales by net working capital.214.726 1. The inventory and debtors are excluded from current assets.15 1.327.247.87 This ratio tells whether three is an improvement in the utilization of net working capital or not.759 2.67 This ratio tells us the relative efficiency with which the business organization utilizes the short-term resources to generate output.2001-02 2002-03 1. The ratio is computed as follows: Net Sales Circulation of Net Working Capital = -----------Net W.247.099 (Table 13) Ratio (times) 1.174 Net Working Capital 627.

507 4. It can be calculated as Net profit after tax -----------------------Net fixed assets Return on Fixed Assets = × 100 (Rs.440 455.670 Current Liabilities 408.600 (Table 15) Ratio (%) 5.60 12.92 (41) .44 Year 2000-01 2001-02 2002-03 Cash 68.85.Cash Position Raito = Cash + Marketable Securities ----------------------------------Current Liabilities (Rs.285 (Table 14) Generally 0. in ‘000’s) Year 2000-01 2001-02 2002-03 Net profit after tax 31.25:1 ratio is recommended to ensure liquidity.347 59.547 231.17 0.193 124. Return on Fixed Assets : - This ratio indicates a return on fixed assets.310 84.22 18.59.152 Net Fixed Assets 5.28 0.039 528.44. in ‘000’s) Ratio (times) 0.820 4. B.

893. it means that company is able to earn higher return on investment in business than the investment made in the outside deposit.From the above calculation it is cleared that return on fixed assets increasing year by year. Current Liabilities to Total Assets Ratio: - This ratio shows the relationship between current liability and total assets [Net Fixed Assets + Investment + Current Assets] Current Liabilities ---------------------Total Assets (Rs. The ratio brings out the percentage of current assets to total net assets of the business.29 Current Liabilities to Total Assets Ratio = D.039 1. This ratio indicates the extent of liquidity nature of assets required in comparison with total net assets.285 1.509 (Table 16) Current Assets to Total Assets Ratio: Ratio (times) 0.885 455.761.440 1.703. in ‘000’s) Year 2000-01 2001-02 2002-03 Current Liabilities Total Assets 408. C. The formal for ratio is given below.816 528. Current Assets to Total Assets Ratio = Current Assets ---------------------Total Assets (42) .26 0.24 0.

885 1.(Rs.189 1.327.62 0.703.726 1.816 1. in ‘000’s) Year 2000-01 2001-02 2002-03 Current Assets 929.70 (43) .797 Total Assets 1.55 0.761.086.509 (Table 17) Ratio (times) 0.893.

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35 0.53 0.26 0. Age of Cash (days) 10) Current ratio 11) Quick Ratio 12) Circulation of Gross Working Capital 13) Circulation of Net Avg.46 0.59 85 12.40 0. 8) Cash Turnover Ratio 9) Avg.62 Working Capital 14) Cash Position 15) Return on fixed Assets 16) Current liabilities to Total Assets 17) Current Assets to Total Assets The following are the findings of the analysis: (a) Gross working capital: - (45) .70 Ratio 1) Net W.(A) Findings: Working Capital Ratios 2000-01 2001-02 2002-03 0.C.92 107 2.28 12.30 12.41 57 17.45 2.12 1.56 0.44 18.72 98 11.44 1.34 5.51 1.31 0.24 0.69 0.87 0. 3) Inventory Turnover 4) Inventory Conversion period (days) 5) Debtors Turnover 6) Debt collection Period (days) 7) Cash to Current Assets.15 2.08 11. C.32 2.39 1.22 0.65 100 2.31 2.56 1.54 1.31 2.99 61 2.60 0.26 0.92 0.28 160 2.39 1.31 2.25 0.66 0. of Ratio 0.89 131 4.69 3.62 (Table 18) 6.67 2.67 158 136 99 3.27 1.62 1.63 100 7.46 3.29 0.17 5.55 3.30 0. to Net Assets 2) Inventory to Gross W.

It was 0. (1) Net working capital to Net asset Ratio: The average ratio is 0.67 in 2002-03. It shows that firm has improved its inventory management.31 in 200001 to 3. (3) Inventory Turnover: This ratio has been increased over the three years from 2. It means there is a reserve of Rs. (5) Debtors Turnover Ratio: - (46) .100 (2) Inventory to Gross Working Capital Ratio: This ratio is decreasing as compared to year 2000-01 from 0.35 to 0.e.56 on an average from net asset of Rs. This will help in reducing accumulation of inventories.Gross working capitals of company i.18 in 2002-03 so there is increased of 22.07% (b) Operating cycle: The period for conversion of material in to finished & finished good in to sales &sales in cash for a period of study are respectively 21.11% in 2000-01 and increased to 22. There has been a continuous decreasing in conversion period.56 for period under study. current asset are increasing over a period of study. So it can be said that company has take steps to increase the inventory-turn over ratio.31 in 2002-03. (4) Inventory Conversion Period: It refers to the period when manufacturing unit takes to clear a lot of stock.83 and 47 days on average there is 50 days required to collect money and again repeat cycle.

So serious steps should be taken to reduce the collection period though sales increase. (6) Debt Collection Period: It is the time period required by company to recollect its payment. The ratio is continuously decreasing indicating there is ideal cash balance.27 to 2.e.This ratio shows the period of which receivable remain uncollective. (10) Current Ratio: It is a quick measure of the firm’s liquidity. Company has made speedy collection in 2003 as compared 2000-01 by collecting in nearly half period i.2:1 so company has sufficient liquidity to meet short-term obligation. It means there is lack of cash management. The ratio is doubled in 2002-03 as compared to 2000-01. (11) Quick Ratio: (47) . which remained between 2.51 through out the period understudy.e. There is an increase in the ratio over the three years. (8)Cash Turnover: It indicates no. It was increased by 10% in 2002-03 compared to 2000-01. It is over the acceptable norm i. 57 days compared to 100 days in 200001. (9) Average age of cash: It indicates the period for which the cash remains unused. of times cash is flowed out for payment to creditors.This increase will lower the profitability of the company. Average collection period over 3 years is 85 days (7) Cash to Current Asset Ratio: This ratio indicates the extent to which the current assets are represented by cash&bank balance. There is continuous increased in period.

which means there is an improvement in utilization of Net Working Capital during the period. (13) Circulation of Net Working Capital: The ratio shows an increasing trend over 3 years. It means there is lower investment in current asset as compared to sales.This ratio is above the standard norm of 1:1 through out study period so it can be said that it has satisfactory liquidity position. (12) Circulation of Gross Working Capital: The ratio shows upward trend over the three-year period. (48) . Some say that there is an improvement in working capital utilization.

The company should try to reduce investment in inventory. So the company should try to increase this ratio as much as possible.  The company should additional funds in business rather than investing in fixed deposit because company able to earn higher rate of return on investment in fixed assets as compare to fixed deposit. which might help them in improving management of working capital:  The Gross working capital is increasing over three years but the major proportion of current assets comprise of inventories in each year. This will help in reducing inventory costs.  There is an increase in debt collection period over three years and at present (2002-03) it is near by two months which as per the textile industry norm but this is possible due to increase in debtor’s turn over ratio. I have some suggestion for company.  The company should give more importance to inventory management and try to reduce inventory to gross working capital ratio. (49) .(B) SUGGESTIONS: From the analysis of working capital ratios.

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J. Pramanik Working Capital Management Financial Management Publication Financial Management McGrawhill Financial Management T. Pandy Vikash    B. S. Shah  Himalaya  (51) .BIBLIOGRAPHY Name of Book Working Capital Management Author P. M. Mohanrao Publisher Deep & Deep  & Alok K. Rana & Naresh Jain Management Accounting Annual Reports of Company Bhagwati & Pillai Khan & Jain Tata  Hrishikes Bhattacharya PrenticeHall I.

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