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WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment and to
carry out its day- to-day operations. Long terms funds are required to create p
roduction facilities through purchase of fixed assets such as p&m, land, buildin
g, furniture, etc. Investments in these assets represent that part of firm s capit
al which is blocked on permanent or fixed basis and is called fixed capital. Fun
ds are also needed for short-term purposes for the purchase of raw material, pay
ment of wages and other day to- day expenses etc.

These funds are known as working capital. In simple words, working capital refer
s to that part of the firm s capital which is required for financing short- term o
r current assets such as cash, marketable securities, debtors & inventories. Fun
ds, thus, invested in current assts keep revolving fast and are being constantly
converted in to cash and this cash flows out again in exchange for other curren
t assets. Hence, it is also known as revolving or circulating capital or short t
erm capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital
2. Net working capital
The gross working capital is the capital invested in the total current assets of
the enterprises current assets are those
Assets which can convert in to cash within a short period normally one accountin
g year.
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods

6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net worki
ng capital is the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.
Net working capital can be positive or negative. When the current assets exceeds
the current liabilities are more than the current assets. Current liabilities a
re those liabilities, which are intended to be paid in the ordinary course of bu
siness within a short period of normally one accounting year out of the current
assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation , if it does not amt. to app. Of profit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas
net working capital is an accounting concept of working capital. Both the concep
ts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for t
he following reasons:
1. It enables the enterprise to provide correct amount of working capital at
correct time.
2. Every management is more interested in total current assets with which it
has to operate then the source from where it is made available.
3. It take into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.
4. This concept is also useful in determining the rate of return on investme
nts in working capital. The net working capital concept, however, is also import
ant for following reasons:
· It is qualitative concept, which indicates the firm s ability to meet to it
s operating expenses and short-term liabilities.

This minimum level of current a ssts is called permanent or fixed working capital as this part of working is per manently blocked in current assets. . · It is an indicator of the financial soundness of enterprises. etc. Variable work ing capital can further be classified as seasonal working capital and special wo rking capital. And some special al is the amount of working capital which is required to meet t he seasonal sets. finished goods and cash balance.· IT indicates the margin of protection available to the short term credito rs. Ø Temporary or variable working capital PERMANENT OR FIXED WORKING CAPITAL Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation o f current assets. On the basis of concept working capital can be classified as gross working capit al and net working capital. Every firm has to maintain a minimum level of raw material. o On the basis of time. CLASSIFICATION OF WORKING CAPITAL Working capital may be classified in to ways: o On the basis of concept. · It suggests the need of financing a part of working capital requirement o ut of the permanent sources of funds. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. TEMPORARY OR VARIABLE WORKING CAPITAL Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL Ø SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the s olvency of the business by providing uninterrupted of production. As the business grow the requirements of wor king capital also increases due to increase in current assets. Ø Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill. Temporary working capital differs from permanent working capital in the sense th at is required for short periods and cannot be permanently employed gainfully in the business. working capital may be classif ied as: Ø Permanent or fixed working capital. Special working capital is that part of work ing capital which is required to meet special exigencies such as launching of ex tensive marketing for conducting research.in-process. wo rk. On the basis of time.

high morale which results in overall efficiency in a business. Ø High Morale: Adequate working capital brings an environment of securities. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. Due to lower rate of return n investments. If a firm is having excessive working capital then the relations with ban ks and other financial institution may not be maintained. 5. the values of shares may also fall. 3. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments. It may reduce the overall efficiency of the business. The redundant working capital gives rise to speculative transactions DISADVANTAGES OF INADEQUATE WORKING CAPITAL . Wages And Other Day TO Day Commitments: It lead s to the satisfaction of the employees and raises the morale of its employees. Ø Exploitation Of Favorable Market Conditions: If a firm is having adequate w orking capital then it can exploit the favorable market conditions such as purch asing its requirements in bulk when the prices are lower and holdings its invent ories for higher prices. Redundant working capital leads to unnecessary purchasing and accumulatio n of inventories. Ø Regular Payment Of Salaries.Ø Easy loans: Adequate working capital leads to high solvency and credit stand ing can arrange loans from banks and other on easy and favorable terms. 2. Ø Regular Supply of Raw Material: Sufficient working capital ensures regular s upply of raw material and continuous production. Ø Ability To Face Crises: A concern can face the situation during the depressi on. DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL 1. 7. Ø Cash Discounts: Adequate working capital also enables a concern to avail cas h discounts on the purchases and hence reduces cost. Both excess as well as short w orking capital positions are bad for any business. c onfidence. i ncreases their efficiency. 4. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. However. reduces wastage and costs and enhances production and profits. EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate amount of working capital to run its business operations. 6. it is the inadequate working capital which is more dangerous from the point of view of the firm. Ø Quick And Regular Return On Investments: Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confi dence of the investors and can raise more funds in future.

of worki ng capital along with fixed investments. 2. components and spares. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progress ive increment of labor and service costs before the final product is obtained. Ther e are time gaps in purchase of raw material and production. a firm requires lar ger working capital than in slack season. FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS 1. 5. These expe nses are called preliminary expenses and are capitalized. and no funds are tied up i n inventories and receivables. SEASONALS VARIATIONS: Generally. work-in-progress. · To maintain the inventories of the raw material. one has to study the bus iness under varying circumstances such as a new concern requires a lot of funds to meet its initial requirements such as promotion and formation etc.Every business needs some amounts of working capital. production and sales . The amount needed for working capital depends upon the size of the company and ambitions of its promot ers. and realization of cash. There is an operating cycle involved in sales and realization of cash. etc. during the busy season. generally larger will be the require ments of the working capital. · To meet the selling costs as packing. · To pay wages and salaries · To incur day-to-day expenses and overload costs such as office expenses. stores and spares and finished stock. For studying the need of working capital in a business. · To provide credit facilities to the customer. Greater the size of the business unit. greater is the requi rement of working capital. PRODUCTION POLICY: If the policy is to keep production steady by accumulatin g inventories it will require higher working capital. advertising. S o working capital is directly proportional to the length of the manufacturing pr ocess. Thus working capital is needed for the following purposes: · For the purpose of raw material. The requirement of the working capital goes on increasing with the growth and ex pensing of the business till it gains maturity. 4. The need for working capit al arises due to the time gap between production and realization of cash from sa les. . On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. There are others factors also influence the need of working capital in a busines s. water supply and railways because they o ffer cash sale only and supply services not products. At maturity the amount of workin g capital required is called normal working capital. 3. NATURE OF BUSINESS: The requirements of working is very limited in public ut ility undertakings such as electricity. SIZE OF THE BUSINESS: Greater the size of the business.

of working capital. when the business is prosperous. of working capital. the business contracts. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the q uestion of working capital and the velocity or speed with which the sales are af fected. ü Management ability. of working capital due to rise in sales. ü Import policy. of working capital and v ice-versa. optimistic expansion of business. rise in prices . 11. etc. monopoly conditions. 10. ü Asset structure. A firm maintaining a steady high rate of cash dividend irrespective of its profits nee ds working capital than the firm that retains larger part of its profits and doe s not pay so high rate of cash dividend. etc. RATE OF GROWTH OF BUSINESS: In faster growing concern. BUSINESS CYCLE: In period of boom. 12. On the contrary in time of depression. A firm having a high rate of stock turnover wuill needs lower amt. of wo rking capital as compared to a firm having a low rate of turnover. Longer the cycle larger is the requirement of working capital. Such firm s may generate cash profits from operations and contribute to their working capi tal. difficulties are faced in collection from debtor and the firm may have a large amt. ü Banking facilities. ü Importance of labor. PRICE LEVEL CHANGES: Changes in the price level also affect the working capi tal requirements. Generally rise in prices leads to increase in working capital. etc. ü Irregularities of supply.6. 8. . sales decline. Others FACTORS: These are: ü Operating efficiency. DEBTORS CASH FINISHED GOODS RAW MATERIAL WORK IN PROGRESS 7. there is need for larger amt. we shall require larg e amt. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products. 9. The dividend policy also affects the requirement of working capital. CREDIT POLICY: A concern that purchases its requirements on credit and sa les its product / services on cash requires lesser amt.

su ch as: 1. It concerned with the formulation of policies with regard to profitabilit y. it is neither adequate nor excessive as both the situations are bad for a ny firm. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. Quick ratio 3.MANAGEMENT OF WORKING CAPITAL Management of working capital is concerned with the problem that arises in attem pting to manage the current assets. And the most important part is the efficient management of working capital in right time. liquidity and structural health of the organization. 3. The following ratios can be calculated for these pu rposes: 1. liquidity and risk. RATIO ANALYSIS A ratio is a simple arithmetical expression one number to another. Ratio analysis. Budgeting. Absolute liquid ratio . a study of changes in the uses and sourc es of working capital is necessary to evaluate the efficiency with which the wor king capital is employed in a business. Adequ ate amount of working capital is very much essential for the smooth running of t he business. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its proba bility. 2. There should be no shortage of funds and also no working capital should be ideal. This involves the need of working capita l analysis. The basic goal of worki ng capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained . It is concerned with the decision about the composition and level of curr ent assets. Current ratio.e. It is concerned with the decision about the composition and level of curr ent liabilities. The analysis of working capital can be conducted through a number of devices. 1. So working capital management is three dimensional in nature as 1. 2. WORKING CAPITAL ANALYSIS As we know working capital is the life blood and the centre of a business. Fund flow analysis. i. 3. So. The liquidity position of the firm is totally effected by the management of working capital. current liabilities. 2.

The fund flow analysis consists of: a. Working capital turnover ratio. it is important proper balance in regard to the liquidity of the firm. and to ensure effective utilization of these resources. WORKING CAPITAL BUDGET A budget is a financial and / or quantitative expression of business plans and p olices to be pursued in the future period time. Ratio of current liabilities to tangible net worth. 3. 7. 2. Th erefore. inventories and receivables etc. 6. if any. Working capital leverage 9. and the n comparing the budgeted figures with actual performance for calculating the var iances. creditors. The successful implementation o f working capital budget involves the preparing of separate budget for each elem ent of working capital. such as. Two types of ratios can be calculated for measuring short-term financial positio n or short-term solvency position of the firm. the smooth functioning of the firm and the e fficient use of fixed assets the liquid position of the firm must be strong.4. Statement of sources and application of funds. FUND FLOW ANALYSIS Fund flow analysis is a technical device designated to the study the source from which additional funds were derived and the use to which these sources were put . Receivables turnover. Preparing schedule of changes of working capital b. cash. . Working capital budget as a part of the total budge ting process of a business is prepared estimating future lon g term and short term working capital needs and sources to finance them. It is an effective management tool to study the changes in financial position (w orking capital) business enterprise between beginning and ending of the financia l dates. So to with the confidence of investors. 5. ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF LIQUIDITY The short term creditors of a company such as suppliers of goods of credit and co mmercial banks short-term loans are primarily interested to know the ability of a firm to meet its obligations in time. Payable turnover ratio. 8. But a very high degree of liquidity of the firm being tied up in current assets. Inventory turnover. so that corrective actions may be taken in future. He objective working capital budget is to ensure availability of funds as and needed. The short term obligations of a firm can be met in time only when it is having sufficient liquid assets.

QUICK RATIO 3. To measure the liquidity of a firm. The current assets should either be liquid or near about liquidity. Current assets movements ratios. ABSOLUTE LIQUID RATIO 1. CALCULATION OF CURRENT RATIO . marketable securities.e. bill payable. also known as working capital ratio is a measure of general liqui dity and its most widely used to make the analysis of short-term financial posit ion or liquidity of a firm. if the current liabilities cannot be met out of the current assets then the liquidity position is bad. If curren t assets can pay off the current liabilities then the liquidity position is sati sfactory. the following ratios can be calculated: 1. sundry deb tors. Liquidity ratios. Current liabilities include outstandin g expenses. It is defined as the relation between current assets and current liabilities. A ratio equal or near to the rule of thumb of 2:1 i. 2. The sufficiency or insufficiency of current as sets should be assessed by comparing them with short-term liabilities. On the hand a low current r atio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A) LIQUIDITY RATIOS Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. inventories and work-in-progresses. These should be convertible in cash for paying obligations of short-term nature. current assets double the current liabilities is considered to be satisfactory. The short-term obligations are met by realizing amounts from current. CURRENT RATIO 2. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. CURRENT RATIO Current Ratio. CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITES The two components of this ratio are: 1) CURRENT ASSETS 2) CURRENT LIABILITES Current assets include cash.1. On the other hand. dividend payable etc. floating or circulating assts. Thus. bill receivables.

48 Current Ratio 2.58 33. (R upees in crore) e. An asset is said to be liquid if it can be converted into cas h with a short period without loss of value. A high ratio is an indication that the firm is liquid and has the ability to mee t its current liabilities in time and on the other hand a low quick ratio repres ents that the firms liquidity position is not good.57 Current Liabilities 27. 2. QUICK RATIO Quick ratio is a more rigorous test of liquidity than current ratio. QUICK RATIO = QUICK ASSETS CURRENT LIABILITES Where Quick Assets are: 1) Marketable Securities 2) Cash in hand and Cash at bank. Its current assets are more than its current liab ilities.96:1 4.42 20. 3) Debtors.29 83. It measures the firms capacity to pa y off current obligations immediately. Year 2006 2007 2008 Current Assets 81. The current ratio of company is more than the ideal ratio.08:1 Interpretation:- As we know that ideal current ratio for any firm is 2:1. As a rule of thumb ratio of 1:1 is considered satisfactory. This depicts that compan y s liquidity position is sound.12 13. Quick ratio may be defined as the relationship between quick/liquid assets and current or l iquid liabilities.g.03:1 4. It is generally thou ght that if quick assets are equal to the current liabilities then the concern m . If we see the current r atio of the company for last three years it has increased from 2006 to 2008.6.

However. (Rupees in Crore) Year 2006 2007 2008 . yet there may be doubts regarding their realization into cash imm ediately or in time. Compa ny s quick ratio is more than ideal ratio.g. So absolute liquid ratio should be calculated together with current ratio and acid test ratio so as to exclude even receivables from the cu rrent assets and find out the absolute liquid assets.43 61.58 33. Absolute Liquid Assets inc ludes : Absolute liquid ratio = absolute liquid assets CURRENT LIABILITES Absolute liquid assets = cash & bank balances.ay be able to meet its short-term obligations. debtors and bills receivable are generally more liquid tha n inventories.48 Quick Ratio 1. absolute liquid ratio Although receivables.3 : 1 1.6 : 1 2.8 : 1 Interpretation : A quick ratio is an indication that the firm is liquid and has the abilit y to meet its current liabilities in time.g.42 20.14 47. This shows company has no liquidity pro blem. a firm having a low liquidity position if it has fast mo ving inventories. (Rupees in Cro re) Year 2006 2007 2008 Quick Assets 44.55 Current Liabilities 27. CALCULATION OF QUICK RATIO e. a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debt ors. The ideal quick ratio is 1:1. On the other hand. 3. e.

Working Capital Turnover Ratio The current ratio and quick ratio give misleading results if current assets incl ude high amount of debtors due to slow credit collections and moreover if the as sets include high amount of slow moving inventories.69 1.42 20. Current assets movement ratios measure the efficiency with which a firm manag es its resources. inventory turnover ratio = cost of good sold Average inventory Inventory turnover ratio measures the speed with which the stock is converted in to sales.79 5.15 : 1 Interpretation : These ratio shows that company carries a small amount of cash. Creditors Turnover Ratio 4. Depending u pon the purpose. bor rowing power & long term investment. firms have credit limits sanction ed from banks and can easily draw cash.58 33.06 Current Liabilities 27. 1. But the level of inventory should nei ther be too high nor too low. The better the management of assets. Inventory Turnover or Stock Turnover Ratio : Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. These are : 1. Inventory Turnover Ratio 2. Debtors Turnover Ratio 3. Because it is harmful to hold more inventory as so me amount of capital is blocked in it and some cost is involved in it. In India. The efficiency with which assets are managed directly affects the volume of sal es. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. it is important to calculate the turnover ratio. It will t herefore be advisable to dispose the inventory as soon as possible. B) current assets movement ratios Funds are invested in various assets in business to make sales and earn profits.09 : 1 . a number of turnover ratios can be calculated. But there is nothing to be worried about the lack of cash because company has reserve.48 Absolute Liquid Ratio . As both the ratios ignore t he movement of current assets. large is the amount of sales and profit s.Absolute Liquid Assets 4.17 : 1 . Usually a high inventory ratio indicates an efficient management of in .

8 times 1. In 2007 the company has high inventory turnover ratio but in 2008 i t has reduced to 1. A low inventory turnover implies over investment in inventories. poor quality of goods.g.59 36. This shows that the company s inventory management te chnique is less efficient as compare to last year. Inventory conversion period: Inventory conversion period = 365 (net working days) inventory turnover ratio e.6 103. average stock = opening stock + closing stock 2 (Rupees in Crore) Year 2006 2007 2008 Cost of Goods sold 110.42 55. dull business. the lesser amount of money is required to finance the inventory.35 Inventory Turnover Ratio 1.75 times Interpretation : These ratio shows how rapidly the inventory is turning into receivable th rough sales.8 Average Stock 73. stock acc umulations and slow moving goods and low profits as compared to total investment . Year 2006 2007 2008 Days 365 365 365 Inventory Turnover Ratio .5 times 2. Where as low inventory turnover ratio ind icates the inefficient management of inventory.2 96.ventory because more frequently the stocks are sold .75 times. 2.

a) Debtors Turnover Ratio b) Average Collection Period Debtors Turnover Ratio = Total Sales (Credit) Average Debtors Debtor s velocity indicates the number of times the debtors are turned over during a year. 1. So liquidity positio n of a concern also depends upon the quality of trade debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liqu id debtors. In the company inventory conversio n period is decreasing.5 169.8 Inventory Conversion Period 243 days 130 days 202 days Interpretation : Inventory conversion period shows that how many days inventories takes to convert from raw material to finished goods. Two types of rati o can be calculated to evaluate the quality of debtors.8 1.5 2. debtors turnover ratio : A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit policy may result in tying up substantial funds of a firm i n the form of trade debtors. Trade debtors are expected to be converted into cas h within a short period and are included in current assets. 3. Generally higher the value of debtor s turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. average debtors= opening debtor+closing debtor 2 e. Year 2006 2007 2008 Sales 166.0 151.g. This shows the efficiency of management to convert the i nventory into cash. This ratio should be compared with ratios of other firms doing the s ame business and a trend may be found to make a better interpretation of the rat io.5 .

The higher the values or turnover into sales.3 7. Generally. the more efficient is the management of credit.5 times Interpretation : This ratio indicates the speed with which debtors are being converted or turnover into sales.19 22.50 Debtor Turnover Ratio 9. shorter the average collection period the better is the quality of debtors as a short collection period implies quick paym ent by debtors and vice-versa.5 Average Collection Period 38 days 44 days 49 days Interpretation : The average collection period measures the quality of debtors and it h . Bu t in the company the debtor turnover ratio is decreasing year to year.6 times 8. of Working Days Debtors Turnover Ratio The average collection period ratio represents the average number of days for wh ich a firm has to wait before its receivables are converted into cash.Average Debtors 17. This show s that company is not utilizing its debtors efficiency.6 8. 4. Average Collection Period = 365 (Net Working Days) Debtors Turnover Ratio Year 2006 2007 2008 Days 365 365 365 Debtor Turnover Ratio 9.33 18. The higher th e values of debtors turnover.3 times 7. average collection period : Average Collection Period = No. It measur es the quality of debtors. Now their credit policy become liberal as compare to previous year.

These c hanges in policy are due to competitor s credit policy. the reciprocal of this ratio (1/1. 1 the company requires 60 paisa as working capital. Year 2006 2007 2008 Sales 166. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale. But a very hig h working capital turnover is not a good situation for any firm.09 Working Capital Turnover 3. This ratio indicates the number of times the working capital is tur ned over in the course of the year.609) shows that for sales of Rs .elps in analyzing the efficiency of collection efforts.52 103. Working Capital Turnover Ratio = Cost of Sales Net Working Capital Working Capital Turnover = Sales Networking Capital e.87 62.64 Interpretation : This ratio indicates low much net working capital requires for sales. in Crores) . Working capital turnover ratio : Working capital turnover ratio indicates the velocity of utilization of net work ing capital. Inventories (Rs. It also helps to analysi s the credit policy adopted by company. In the firm average collection period in creasing year to year.g. In 2008.5 Networking Capital 53. It shows that the firm has Liberal Credit policy.0 151. A higher ratio indicates efficient ut ilization of working capital and a low ratio indicates otherwise.4 1.64 = . This ratio measures the efficiency with whic h the working capital is used by the firm. 5.08 2.5 169.

in 2006-2007 is 43% and i n 2007-2008 is 54% of their current assets. it has to manage its inventories efficientl y.69 75.79.05 Interpretation : Cash is basic input or component of working capital.15 35. in Crores) Year 2005-2006 2006-2007 2007-2008 Cash Bank Balance 4. 5.94 Interpretation : .33 19. So the organization should have s ufficient cash to meet various requirements.Year 2005-2006 2006-2007 2007-2008 Inventories 37.69 1. In 2008.05 25. Cash bnak balance : (Rs. The company should try to reduce the inventory upto 10% or 20% of current assets. So in 2008. The graph shows that inventory in 2005-2006 is 45%. The above graph is indicate that in 2006 the cash is 4. The result of that it disturb the firms manufacturing operations. debtors : (Rs. in Crores) Year 2005-2006 2006-2007 2007-2008 Debtors 17. the company has no problem for meeting its requirement as compare to 2007.01 Interpretation : Inventories is a major part of current assets. it is increased up to approx.1% cash balance. Cash is needed to ke ep the business running on a continuous basis.79 5. If any company wants to ma nage its working capital efficiency.69 crores but in 2007 it has decrease to 1.

net wokring capital : (Rs. 50% increase in inventories. Incre ase in current assets shows the liquidity soundness of company.15 136. The reason for increasing credit is competition and company liberal credit policy. The above graph is depict that ther e is increase in debtors. in Crores) Year 2005-2006 2006-2007 2007-2008 Current Assets 81. In 2 008 the current liabilities of the company increased. In Indi a it constitute one third of current assets.58 33.57 Interpretation : This graph shows that there is 64% increase in current assets in 2008. in Crores) Year 2005-2006 2006-2007 2007-2008 Current Liability 27.29 83. current liability : (Rs. Th is increase is arise because there is approx.42 20.48 Interpretation : Current liabilities shows company short term debts pay to outsiders. It represents an extension of credit to customers. But still increase in curr ent assets are more than its current liabilities. current assets : (Rs. Debtors constitute a substantial portion of total current assets. in Crores) Year 2005-2006 .

which basical ly analyze critically financial position of to the organization: I. COMMON-SIZE BALANCE SHEET III. In the company there is increase in working capital. I sincerely hope. the organization would be able to conquer its in efficiencies a nd makes the desired changes. I have adopted for my study is the various tools. The increa se in working capital arises because the company has expanded its business. By critical analysis wit h the help of different tools. ANALYSIS OF FINANCIAL STATEMENTS FINANCIAL STATEMENTS: Financial statement is a collection of data organized according to logical and c onsistent accounting procedure to convey an under-standing of some financial asp ects of a business firm.09 Interpretation : Working capital is required to finance day to day operations of a firm.87 62. COMMON-SIZE P/L A/C II. With the evaluation of each component.53 103. the recommendation are made which would suggest the organization in formulati on of a healthy and strong position financially with proper management system. It may show position at a moment in time. as in the cas . TREND ANALYSIS VI. T here should be an optimum level of working capital. it becomes clear how the financial manager handle s the finance matters in profitable manner in the critical challenging atmospher e. RESEARCH METHODOLOGY The methodology. ratios and compa rative analysis. It should not be too less or not too excess. the financial position from different angles is tried to be presented in well and systematic manner. COMPARTIVE P/L A/C IV. RATIO ANALYSIS The above parameters are used for critical analysis of financial position. through the evaluation of various percentage. 2006-2007 2007-2008 Net Working Capital 53. COMPARTIVE BALANCE SHEET V.

To provide reliable financial information about economic resources and obliga tion of a business firm. during the life of a concern. The value of assets decreases with the passage of time current pric e changes are not taken into account. The existence of contingent assets and liabilities also make the statements imprecis e. 4. The balance sheet is prepared on t he presumption of a going concern. the term financial statements ge nerally refers to the two statements (1) The position statement or Balance sheet. LIMITATIONS OF FINANCIAL STATEMENTS: Though financial statements are relevant and useful for a concern. The concern is expected to continue in future . ther e are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are shown in the balance sheets. So financial statement are at the most interim reports rather than the final picture of the firm. The statement are not prepared with the ke . The data gi ven in these statements is only approximate. To provide other needed information about charges in such economic resources and obligation. OBJECTIVES OF FINANCIAL STATEMENTS: According to accounting Principal Board of America (APB) states The following objectives of financial statements: - 1. still they do not present a final picture a final picture of a concern. The financial statements are prepared on the basis of historical costs Or ori ginal costs. (2) The income statement or the profit and loss Account. So fixed assets are shown at cost less accumulated deprecation. 2. The allocation o f expenses and income depends upon the personal judgment of the accountant. so they appear to g ive final and accurate position. Moreover.e of balance sheet or may reveal a series of activities over a given period of t ime. To provide financial information that assets in estimating the learning poten tial of the business. gen erally one year. 4. Thus. 3. The costs and incomes are apporti oned to different periods with a view to determine profits etc. 3. 2. as in the case of an income statement. The utility of these statements is dependent upon a number of factors. The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount wh ich will be required to replace these assets. Financial statements do not given a final picture of the concern. The financial statements are expressed in monetary value. The analysis and interpretatio n of these statements must be done carefully otherwise misleading conclusion may be drawn. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities. Financial statements suffer from the following limitations: - 1. Financial statements have been prepared for different accounting periods. The actual value can only be determ ined when the business is sold or liquidated.

profit & loss A /c is that they do not give all the information regarding the financial operatio n of the firm. There are certain factors which have a bearing on the financial position and operating result of the business but they do not become a part of these statemen ts because they cannot be measured in monetary terms. the balance sheet loses the significance of being an index of current economics realities. 3499/. These are:- · Profit & Loss account ratios · Balance Sheet ratios · Composite ratios Project Description : Title : Working Capital Management of ____________ Pages : 73 Category : Project Report for MBA We made this project of various companies like Reliance Industries. mail us at this id : bkm @allprojectreports. 5. CLASSIFICATION OF RATIOS Ratios can be classified in to different categories depending upon the basis of classification The traditional classification has been on the basis of the financial statement to which the determination of ratios belongs. The basic limitation of th e traditional financial statements comprising the balance sheet. The analysis is done CALCULATIONS OF RATIOS Ratios are relationship expressed in mathematical terms between figures. the profitability s hown by the income statements may be represent the earning capacity of the conce rn. FINANCIAL STATEMENT ANALYSIS It is the process of identifying the financial strength and weakness of a firm f rom the available accounting data and financial statements.. Similarly. liabilities etc. which a re connected with each other in some manner.com . Nevertheless. and the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained and cost incurred during the year.only without Synopsis and R s.eping in view the economic conditions. Thus. Grasim Indus tries. its cost is Rs. the financial position and operation of the firm.only with synopsis. they provide some extremely useful information to t he extent the balance sheet mirrors the financial position on a particular data in lines of the structure of assets. 3999/. If you need this project. Dabur India Ltd. etc.

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