Professional Documents
Culture Documents
A Project Report On Working Capital Management at Hero Honda PVT LTD
A Project Report On Working Capital Management at Hero Honda PVT LTD
INTRODUCTION
1
INTRODUCTION
Working Capital is the amount of Capital that a Business has available to meet the day-to-
day
cash requirements of its operations Working Capital is the difference between resources in
cash or readily convertible into cash (Current Assets) and organizational commitments for
which cash will soon be required (Current Liabilities) .It refers to the amount of Current
Assets that exceeds Current Liabilities (i.e. CA - CL) Working Capital refers to that part of
the firm’s Capital, which is required for Financing Short-Term or Current Assets such as
Cash, Marketable Securities, Debtors and Inventories.
Working capital management is the decision relating to working capital and short term
financing, and this includes managing the relationship between the company’s short-term
assets and its short-term liabilities. This enables the company to continue operations and to
have enough cash flow at its disposal to satisfy both maturing short-term debt and upcoming
operational expenses, which is the major objective of working capital management.
The basic objective of working capital management is to put current assets to optimum use
for overall profitability of a business enterprise. If the firm can't maintain a satisfactory level
of working capital it is likely to become insolvent and may even be forced to bankruptcy.
The effective management of working capital requires both medium term planning and
intermediate reactions to changes in forecast and conditions.
The current assets should be managed in such a way that it should cover its current liabilities
in order to ensure a reasonable margin of safety. Therefore the interaction, between the
current assets and current liabilities is the main theme of the theory of working capital
management. It improves the operating performance of the business concern and it helps to
meet the short-term liquidity.
2
Definitions
Working capital is the money needed to fund the normal, day to day operations of your
business. It ensures you have enough cash to pay your debts and expenses as they fall due,
particularly during your start-up period.
“The sum of the current assets is the working capital of the business” —J.S.Mill
According to Weston & Brigham - “Working capital refers to a firm’s investment in short
term assets, such as cash amounts receivables, inventories etc
1) The scope of the study is identified after and during the study is conducted.
2) The study of working capital is based on tools like trend Analysis, Ratio Analysis,
working capital leverage, operating cycle etc.
3) Further the study is based on last 5 years Annual Reports of Gayatri Projects Ltd.
2. To study the financial leverage ratios through various working capital related
Ratios.
3
.
Working Capital is an essential part of the business concern. Every business concern
must maintain certain amount of Working Capital for their day-to-day requirements and
meet the short-term obligations. Working Capital is needed for the following purposes.
1. Purchase of raw materials and spares The basic part of manufacturing process is, raw
materials. It should purchase frequently according to the needs of the business concern.
Hence, every business concern maintains certain amount as Working Capital to purchase raw
materials, components, spares, etc.
2. Payment of wages and salary The next part of Working Capital is payment of wages and
salaries to labor and employees. Periodical payment facilities make employees perfect in
their work. So a business concern maintains adequate the amount of working capital to make
the payment of wages and salaries
3. Day-to-day expenses A business concern has to meet various expenditures regarding the
operations at daily basis like fuel, power, office expenses, etc.
facilities to the customer and meet the short-term obligation. So the concern must
4
CHAPTER-2
INDUSTRY PROFILE
5
residential construction constitute about 5 per cent each. The majority of the investment in
the construction sector (about 70 per cent) comes from public sources, while the private
sector contributes only about 30 per cent
Infrastructure growth is visible throughout the country in the form of new highways,
roads, ports, railways and airports; power plants; urban and rural infrastructure, including
water supply, sewerage, and drainage; irrigation and agriculture systems.
The Government of India’s focus and sustained increased budgetary allocation and
increased funding by international and multilateral development finance institutions for
infrastructure development in India has resulted in or is expected to result in several large
infrastructure projects in this region. Overall the construction sector has a positive outlook
on account of growing infra-structure demand and the emphasis of the Government on
catering to this demand.
Road Sector
The Indian road system has been the first area within infrastructure to gain serious
attention from the government. Road connectivity, while linking the regions of demand and
supply, forms the very basis of economic and social development, a fact recognized by the
government and reflected in its spending.
Currently, at 3.3 million km, India’s road network is the second largest in the world. The
network is divided into three categories – national highways, state roads including state
highways and district roads and rural roads. National highways span a length of 70,548 km,
state highways 131,899 km, major district roads 467,763 km and rural roads 2,650,000 km.
Despite the importance of roads to the Indian economy, the road network in India is grossly
6
inadequate in capacity. Only 14 per cent of national highways and one per cent of state
highways are four-lane. Further, about 59 per cent of the national and 22 per cent of state
highways are double-lane.
The biggest initiative in the national highways sector is the NHDP which began in
December 1999. The massive programme aims at development of about 50,000 km of
national highways in seven phases by December 2015 at an investment of over Rs. 3,100
billion. The golden Quadrilateral, which is a part of the first phase and involves provision of
four-lane connectivity to the four metros, is about 98 per cent complete and the North-
South-East-West corridor, which is a part of Phase II, is around 58 per cent complete.
Further, projects under the third, fifth, sixth and seventh phases are under implementation.
The entire project has targeted deadline 2015-16. The Centrally-sponsored project aims at
developing 369,386 km in rural areas at an estimated cost of Rs. 1,320 billion.
Irrigation Sector
Irrigation is the most important input for agriculture and vital for food security.
Therefore, large investments were made in successive Plans for expansion of irrigation
facilities. The Investments in the irrigation sector are likely to increase by 2x to INR 2,231
billion in the Eleventh Plan compared with the Tenth Plan.T he Indian government plans to
complete 24 large and medium irrigation projects and 753 minor irrigation projects with
additional irrigation potential of 500,000 hectares.
Airports
Acceleration in traffic growth Air traffic in India has witnessed substantial growth in
the recent past. The Center of Asia Pacific Aviation expects domestic traffic to grow at 25-
30% and international traffic at 15% until FY10. Currently, 45% of the traffic is based out of
Delhi and Mumbai and around 70% out of the top five airports. This has led to inadequate
parking, runway and terminal capacity problems. Hence, there is a pressing need to develop
regional hubs and modernize existing airports. The Indian government has stated that the
total funds requirement for the modernization program of airports is INR408 billion by
2011, out of which around INR300 billion will be invested by private players.
7
Gayatri Projects Limited Share In Construction Industry
Gayatri Projects Ltd. is the flagship company of the esteemed and well diversified Gayatri
Group that has interests in infrastructure, power, hospitality, real estate and industry. With an
annual turnover of Rs. 1801.90 crores, net worth of Rs. 512 crores and assets of Rs. 2404
crore on a Standalone basis in FY12, it is one of India’s leading infrastructure players.
Gayatri Projects has been one of the strong foundations for the Group’s growth and its
approach to business. Today, the company is one of the largest construction companies in
India and has been associated with the country’s prized landmarks, having cutting edge in
capabilities in every discipline of construction - civil, mechanical, electrical, and
instrumentation.
The company has a strong presence in the EPC (Engineering Procurement and Construction)
construction of road, irrigation and industrial projects across India. Over the last 5 decades,
the company has executed projects comprising over 6,700 kms of roads, 1,200 kms of
irrigation canals and several industrial projects and has a current order book of nearly Rs.
8000 crores. Gayatri Projects currently owns 7 road assets under a subsidiary, Gayatri Infra
Ventures Ltd. (GIVL) and 3 power projects amounting to nearly 5000 MW under another
subsidiary, Gayatri Energy Ventures Ltd. (GEVL).
8
COMPANY PROFILE
INTRODUCTION
GPL is an ISO 9001 – 2000 engaged in execution of major Civil Works including
Concrete/Masonry Dams, Earth Filling Dams, National Highways, Bridges, Canals,
Aqueducts, Ports, etc. The firm was awarded "GOLD MEDAL" by the then Prime
Minister Mrs.Indira Gandhi for its outstanding performance and successful completion of
the "NAGARJUNA SAGAR DAM" work.
9
Management Details
Chairperson-T.IndiraSubbaramiReddy
MD-TV.SandeepKumarReddy
Directors - Archana Niranjan Hingorani, C H Hari
Vittal Rao, C S I Vlakshmi, Ch Hari Vittal Rao, G Siva
Kumar Reddy, Hari Vitthal Rao, I V Lakshmi, J Brij
Mohan Reddy, S M A A Jinnah, T Indira, T Indira
Reddy, T Indira Subbarami Reddy, T V Sandeep Kumar
Reddy, V L Moorthy
Vision / Mission
1) We at Gayatri try to do our best to construct the highest quality works. This is our True
Spirit.
2) The attitude of trying to meet all customer needs and solve any problem in advance is
Customer Satisfaction.
3) The work of the Company is to serve in the Building of a Nation. This is our Service.
4) Putting more emphasis on the value gained by a customer rather than on the company’s
self- benefit is our Value Creation.
10
Milestones
1989-90
Incorporation of the Company as “Andhra Coastal Construction Private Limited”
on September 15, 1989 in the state of Andhra Pradesh
1993-94
Name of the Company changed to Gayatri Projects Private Limited with effect
from March 31, 1994
1994-95
Converted into a Public limited company with effect from December 2,
1994·Investment by Videocon Appliances Limited and Videocon International Limited into
shares of the Company at a premium of Rs. 97/-.The Company took over all the assets and
liabilities of Gayatri Engineering Company.
1996-97
Completed construction of ‘S’ Bund and Platforms at Kakinada Port Project
funded by ADB.Successfully completed filling of 50.00 Lakh cum. In a record time of 8
months at Reliance Petroleum Limited Project, Jamnagar. The registered office of the
company was shifted from Andhra Pradesh to Maharashtra.
1997-98
Formed a Joint Venture with IJM Corporation Berhad, Malaysia
2005-06
Took 40% interest in the equity of Western UP Toll way Limited a SPV created to
execute a BOT project awarded by NHAI. This will be the FIRST BOT project for our
Company. Awarded ISO 9001:2000 and Q9001-2000 Quality Certificate by American
Quality Assurance International, LLC, USA
2006-07
Awarded 2 contracts on annuity basis by NHAI in Uttar Pradesh in Joint Venture
2007
Gayatri Projects secures five new ordersGayatri Projects Ltd has bagged two orders
along with Maytas Infra Ltd under the consortium (Maytas-Gayatri Consortium) with a total
projects cost of Rs 880 crore.
2008
Gayatri Projects Ltd has informed that the Company and M/s. DLF Ltd,along with
associates have signed an MOU on January 17, 2008 for the purpose of construction of Road
projects on BOT basis.
2009
Company has secured two new orders along with Ratna Infrastructure Projects Pvt.
Ltd under Joint Venture namely (GAYATRI - RATNA JOINT VENTURE) with a total
11
projects cost of Rs 2,131.62 crores.Company has recommended dividend of 40% (Rs 4/- per
equity share of
Rs 10/-) on the paid up capital of the Company.
2010
Declared an interim dividend of Rs. 2.50/- per share (@ 25% of Rs.10/- per share)
on1, 11, 04,761 equity shares of Rs. 10/- each. Company has secured a new order under
BOT (Toll) with a total project cost of Rs. 602.00 crores.
2011
Company has bagged new order under Civil Engineering works for Rs. 68.09
Crores.
PROMOTERS
Dr. T. SUBBARAMI REDDY, whose name has now become the byword for leadership and
quality in the construction industry in India, entered into the construction business nearly
three decades ago. He was involved in the construction of major Irrigation Projects in the
State of Andhra Pradesh. In the year 1967, the Prime Minister of India Late. Mrs. Indira
Gandhi awarded him a “Gold Medal”, in recognition of his outstanding performance in the
construction of the World’s largest and prestigious masonry dam “Nagarjuna Sagar” in
Andhra Pradesh State.
In the year 1975, Dr. Reddy diversified into other fields of specialized Civil Construction
such as site grading, Reservoirs, Ash Ponds, Industrial Plant constructions, Harbors and
Railway bridges, tunnels and major highway road projects. Currently the Company is being
controlled by a well mix of independent and promoter directors with varied experience in
12
25 irrigation projects amounting to Rs. 1000 Cr, 9 projects for construction of dams and
reservoir amounting to Rs. 500 Crs.
ROAD PROJECTS
We executed our first road project, funded by ADB in 1989. And since then we’ve honed our
skills and expertise further. We have laid more than 644 kms of roads / highway, the top 5
major assignments being:
Widening to 4/6-lanes and upgrading of the existing 2-lane Road in Andhra Pradesh
from Km.291 to Km.358 (Ongole–Chilakaluripet) Section of NH 5 (Contract
Package AP-13; Contract Value Rs. 231.17 crores)
13
Widening and strengthening of Warangal–Khammam Road and Khammam–Tallada
Road (Contract Value Rs 136.20 crores)
IRRIGATION PROJECTS
The Company is traditionally strong in the irrigation works and has also been awarded the
Gold Medal by the then Prime Minister Smt. Indira Gandhi for outstanding contribution to
the construction of the world’s largest earth dam Nagarjuna Sagar Project in Andhra
Pradesh. The top 5 major assignments are
Narmada Main Canal Reach Km.188 to Km.198 (Contract Value Rs. 39.47 crores).
14
Earthwork Excavation and Cement Concrete Lining including Construction of
Structures from Km.150.650 to Km.170.000 of K.C. Canal (Contract Value Rs. 32.81
crores).
Industrial Projects
GPL has executed many industrial projects for reputed Indian companies, both in the public
and private sector. Some of our major projects in the industrial, railways and ports segments
are
Civil Works for Coke Oven-2 (Contract Value Rs. 9.78 crores).
15
Construction of New BG Railway line in 3 sections i.e. KR-51, KR-55 & KR-57 for
Koraput-Rayagada Lane. (Contract Value Rs. 14.21 crores).
Area grading/filling & leveling of entire area of power (2X250 MW) and
construction of retaining wall in the premises of Power House at Korba East
(Contract Value Rs. 23.86 crores).
Leveling and Grading work in Group-I for Simhadri Thermal Power Project
(Contract Value Rs. 16.36 crores).
16
Site grading and construction of roads, drains and ponds at Reliance Petroleum Ltd.
Project site, Jamnagar (Contract Value Rs. 13.65 crores)
Area Grading Roads, drains for NFCL phase-II, Kakinada (Contract Value Rs. 7.79
crores).
IJM-Gayatri JV
17
and / or structural works including Earth works, National and / or State Highways, Bridges,
Dams, Reservoirs, Airports, Roads and Buildings within India.
RNS-GPL Joint Venture has been formed on May 7, 2005 in the ratio of 50:50
for tendering and execution of work consisting of construction and completion of widening
and strengthening of roads from Ramanathapuram to Tuticorn with a total length of 118 kms
of State Highways in Tamilnadu.
Gayatri and B.C. Biyani Projects Private Limited has entered joint venture
on 19th January 2008 for execution of work of Indira Sagar main canal from RD 130.935 Km
to 155.00 Km including distribution work at Madya Pradesh.
The Gayatri JMC Joint Venture has awarded the work of “Widening and
Strengthening of Chittoor- Puttur Road from Km 3/200 to Km 64/00”and the work order
value is Rs.113.08 Crores. The GPL will execute 75% the work on back to back basis.
18
DLF- Gayatri Consortium
Gayatri have entered into MOU with DLF Limited on 17th January, 2008,
which is the largest real estate developer in India to jointly apply for the all future road
works as a consortium. The DLF is in the business of planned urban infrastructure
development with a track record of six decades. The joint venture with DLF will benefit the
company in qualifying for large scale works being announced by NHAI and to procuring
more number of orders on combined strengths and improves prospects of bidding.
Heavy earth moving machines such as hydraulic excavators, loaders, dozers, earth
compacters, etc.
Concreting plants such as batching plants, concrete mixers, transit mixers, concrete
pavers, etc.
19
Quarry equipment like wagon drills, jack hammers, air compressors, etc.
Transportation equipment such as cars and jeeps, tippers, tractors, water tankers,
trailers, etc.
Fabrication and erection plant such as welding generators, gas cuttings sets, work
shop equipment, cranes, generators and other miscellaneous equipment.
Competition
Organizational Structure
20
administration, mechanical, quality, stores and materials and accounts and finance headed by
senior executives.
Board of Director
Safety Officer
21
Organization Structure
CHAPTER-3
REVIEW OF LITERATURE
22
INTRODUCTION
Working capital management involves the relationship between a firm's short-term assets
and its short-term liabilities. The goal of working capital management is to ensure that a firm
is able to continue its operations and that it has sufficient ability to satisfy both maturing
short-term debt and upcoming operational expenses. The management of working capital
involves managing inventories. Ratio Analysis is a form of Financial Statement Analysis that
is used to obtain a quick indication of a firm's financial performance in several key areas.
Ratio Analysis as a tool possesses several important features. The data, which are provided
by financial statements, are readily available. The computation of ratios facilitates the
comparison of firms which differ in size. Ratios can be used to compare a firm's financial
performance with industry averages. In addition, ratios can be used in a form of trend
analysis to identify areas where performance has improved or deteriorated over time.
23
Capital of the concern may be divided into two major headings.
CAPITAL
Fixed capital means that capital, which is used for long-term investment of the business
concern. For example, purchase of permanent assets. Normally it consists of non-recurring
in nature. Working Capital is another part of the capital which is needed for meeting day to
day requirement of the business concern. For example, payment to creditors, salary paid to
workers, purchase of raw materials etc., normally it consists of recurring in nature. It can be
easily converted into cash. Hence, it is also known as short-term capital. Working capital
includes the current assets and current liabilities areas of the balance sheet. Working capital can be
called by its alternative name "Net Current Assets".
Working capital is the life blood and the centre of business. Just as circulation of blood is
essential in the human body for maintain the smooth running of a business. No business can
run without an adequate amount of working capital as follows.
Solvency of Business
Adequate working capital helps in maintaining solvency of the business by providing
uninterrupted flow of production.
Cash Discounts
Adequate working capital also enables a concern to obtain cash discounts on the
purchases and hence is reducing costs.
24
Quick and regular return on investments
Easy investor wants a quick and regular return on his investment. Sufficient working
capital enables a concern to its investor as there may not be much pressure to plough
back profits.
Easy Loans
A concern having adequate working capital high solvency and good credit standing can
arrange loans from banks and other on easy and favorable terms.
Goodwill
Sufficient working capital enables a business concern to make prompt Payments and
hence helps in creating and maintaining good will.
Working capital can be classified or understood with the help of the following two important
concepts
Gross Working Capital is the general concept which determines the working capital concept.
Thus, the gross working capital is the capital invested in total current assets of the business
concern.
Gross Working Capital is simply called as the total current assets of the concern.
25
GWC = CA
Net Working Capital is the specific concept, which considers both current assets and current
liability of the concern.Net Working Capital is the excess of current assets over the current
liability of the concern during a particular period. If the current assets exceed the current
liabilities it is said to be positive working Capital; it is reverse, it is said to be Negative
working capital.
NWC = C A – CL
Every business needs adequate liquid resources in order to maintain day- to- day Cash flow. It
needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its
workforce and ensure its supplies. Maintaining adequate working capital is not just important in the
short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in
the long- term as well. Even a profitable business may fail it does not have adequate cash flow to
meet its liabilities as they fall due Therefore, when businesses make investment decisions they must
not only consider the financial outlay involved with acquiring the new machine or the new
building, etc, but must also take account of the additional current assets that are usually involved
with any expansion of activity.
Working capital constitutes various current assets and current liabilities. This can be
illustrated by the following chart Working Capital
Current assets are defined as either cash or those assets that can be converted into
cash within the current year. The major components of these current assets are inventories, account
receivables and advances.
Cash
It is most liquid current assets and includes cash in hand and cash at bank it
provides in start liquidity and can be used to meet obligations / acquire assets without delay
Cash sales
Inventories
Raw Material Currently consumed in the production of goods and services to be available
for sale
27
Account Receivables
These are short- term debts owed by company arising from credit and sales made to
customers of the firms.
Advances
These represent amount paid for which the goods and services have not yet been rendered,
including advances given to suppliers and employees
Current Liabilities
This is second major content of the balance sheet is liabilities defined as the claims of
outside against the form alternatively they represent the amount that the form owes to
outside that is other than owners. The assets have to be financed by different sources.
One source of funds is borrowing long term as well as short term. The firms can borrow
on a long term basis from financial institution / banks or through bonds / mortgage /
debentures
Working Capital may be classified into three important types on the basis of time
It is also known as Fixed Working Capital. It is the capital; the business concern must
maintain certain amount of capital at minimum level at all times. The level of Permanent
28
Capital depends upon the nature of the business. Permanent or Fixed Working Capital will
not change irrespective of time or volume of sales
Amount of working
capital
Time
Amount of
Working Capital
Time
Certain amount of Working Capital is in the field level up to a certain stage and after that it
will increase depending upon the change of sales or time.
29
Semi Variable working capital
Amount of working
Capital
Time
A business concern must maintain a sound Working Capital position to improve the
efficiency of business operation and efficient management of finance. Both excessive and
inadequate. Working Capital leads to some problems in the business concern.
30
FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS
Internal factors
External factors
Internal Factors
a) Nature of business
Working Capital of the business concerns largely depend upon the nature of the
business. If the business concerns follow rigid credit policy and sells goods only for
cash, they can maintain lesser amount of Working Capital .A transport company
maintains lesser amount of Working Capital while a construction company maintains
larger amount of Working Capital
b) Size of Business
The working capital requirements of a concern are directly influenced by the size of its
business, which may be measured in terms of scale of operations Greater the size of a business
unit, generally large will be the requirements of working capital.
c) Production cycle
Amount of Working Capital depends upon the length of the production cycle. If the
production cycle length is small they need to maintain lesser amount of Working
Capital. If it is not, they have to maintain large amount of working capital
d) Business cycle
Business fluctuations lead to cyclical and seasonal changes in business condition and it
will affect the requirements of the Working Capital. In the booming conditions,
the Working Capital requirement is larger and in the depression
condition, requirement of Working Capital will reduce. Better business
results lead to increase the Working Capital requirements.
31
It is also one of the factors which affect the Working Capital requirement of the business
concern. If the company maintains the continues production policy, there is a need of
regular Working Capital. If the production policy of the company depends upon the
situation or conditions, Working Capital requirement will depend upon the conditions
laid down by the company.
f) Credit Policy
The credit policy of firm also influences magnitude of working capital. If the company
maintains liberal credit policy to collect the payments from its customers, they have to
maintain more Working Capital. If the company pays the dues on the last date it will
create the cash maintenance in hand and bank.
The depreciation policy influences the level of working capital by affecting tax liability and
retained earnings of the enterprise. Since depreciation is tax deductible expenses items, higher
amount of depreciation results in lower tax liability and greater profitability.
i) Operating efficiency of firm
k) Earning capacity
32
If the business concern consists of high level of earning capacity, they can generate
more Working Capital, with the help of cash from operation. Earning capacity is also one
of the factors which determines the Working Capital requirements of the business
concern
External Factors
A) Business Fluctuations
Technology development in the area of production can have shape effects on the need for working
capital. If a firm switches over to new manufacturing process and installs new equipments with
which it is able to cut period involved in converting raw materials into finished goods, permanent
working capital requirements of the firm will decrease If the new machine
Based on the past experience between Sales and Working Capital requirements, a
ratio can be determined for estimating the Working Capital requirement in future. It is the
simple and tradition method to estimate the Working Capital requirements. Under this
33
method, first we have to find out the sales to Working Capital ratio and based on that we
have to estimate Working Capital requirements. This method also expresses the relationship
between the Sales and Working Capital.
C. Operating cycle
Working Capital requirements depend upon the operating cycle of the business. The
operating cycle begins with the acquisition of raw material and ends with the collection of
receivables.
Production process
In the production process there should not be any time lag from the time of
actually receiving the raw materials and the starting of production process. This
means as soon as the materials arrive they should be introduced in the production
process.
Finished goods
The goods once produced should be held in the company’s possession as the
company’s capital would be locked up in these goods. Thus it is essential that the
company sell all these finished goods as soon as possible so as to allow the company
reacquires its capital employed in the operating cycle.
Receipt of sales
The receipts of the money from the debtors as soon as possible so as to
regain the money along with the profits.
34
This is how the operating cycle operates along with how it can be improved so as to
enable the company to regain the money invested in the production of the goods being
produced.
Formula
OC = R +W+F+D-C
The need of time, which elapses between the point at which, cash beings to be expended on the
production of a product and the collection of cash from a customer.
The diagram below illustrates the working capital cycle for a construction firm:
35
The upper portion of the diagram above shows in a simplified form the chain of events in a
manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank
through which funds flow.
These tanks, which are concerned with day_ to_ day activities, have funds constantly flowing into
and out of them.
The chain starts with the firm buying all input materials on credit.
In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firm's work in progress (WIP)
Work will continue on the WIP until it eventually emerges as the finished product
As production progresses, labor costs and overheads will need to be met
Of course at some stage trade creditors will need to be paid
When the finished goods are sold on credit, debtors are increased
36
They will eventually pay, so that cash will be injected into the firm
Each of the areas_ stocks (raw materials, work in progress and finished goods), trade
debtors, cash (positive 0r negative) and trade creditors_ can be viewed as tanks into and from which
funds flow.
This is also calculated the same of above model. In this to pay future on sales than to
reserve some amount for the purpose.
37
(2) Advance from Creditors
The types of methods are the source of working capital. These are out of the firm. These are
depending a performance of company. These relative importance’s of these vary from
country to country and from time to time depending upon the prevailing environment. In
India, the primary sources for Financing Working Capital trade credit. And short-term bank
credit. To obtain short-term bank credit Working Capital requirements have to be estimated
by the borrowers and the banks are approached with the necessary supporting data. The
banks determine the maximum credit based on the margin requirements of the security. The
margin represents a percentage of the value to the assets offered as security by the borrowed.
Forms of Credit
After getting the overall credit limit sanctioned by the bankers, the borrower draws
funds periodically. The following form of credit is available to the borrower.
a) Loan Arrangement
Under the arrangement the entire amount of loan is credit by the bank to the
borrower’s account. In case the loan is repaid in investments, interests in payable of actual
outstanding.
Under these arrangements, certain facilities are available to the borrowers, which are
not available under the loan arrangement with the overdraft arrangement the borrower is
allowed to over draw on his current account with the bank up to a stipulated limit. Within
this limit any number of drawing are permitted. Repayments can be made whenever desired
during the period. The interest liability of the borrowed is determined on the basis of the
actual amount utilized.
c) Cash Credit arrangement
This form of Credit is operated in the same way as the over draft arrangement. The
38
borrower can draw up to stipulated limit based on the security margin. He has to pay 1% as
commitment charges on the underutilized balanced during the period.
It is another regular working capital can also be procured by the issue of debentures
and bonds. If anybody wants mobilize working capital in the form of debentures they can
get easily permission from SEBI and Ministry of Industry.
c) Sale of fixed assets
If there any ideal fixed asset in the firm it can be sold out and the proceeds may be
utilization finance of working capital requirements.
d) Term loans
Midterm and long term loans for a period above five years provide important source
of working capital.
Certain Companies requiring a Security Deposits from their employees before given
the employment under the term of service contracts.
Two important aims of working capital management are
a. Profitability and
b. Solvency i.e., the firm’s continuous ability to meet maturing obligations.
Liquidity Vs Profitability
39
To ensure solvency the firm should be very liquid, means larger current assets
holdings. But a considerable amount of the firm’s funds will be died up in current assets,
and to the extent this investment is idle, the firm’s profitability will suffer. To have higher
profitability, the firm may sacrifice solvency and maintain a relatively low level of current
assets but its solvency would be threatened and would be exposed to greater risk of cash
shortages and stock outs.
Principles of Working Capital Management
Second, the large holding of current assets, especially cash, strengthens firm’s
liquidity position and reduces riskiness, but it also reduces the overall profitability.
Third, levels of fixed as well as current assets depend upon expected sales, but it is
only current assets which can be adjusted with sales fluctuations in the short-run.can utilize
less expenses raw materials, the inventory needs may be reduced.
40
6. Apply a global approach to working capital management; incorporating major foreign
subsidiaries into your system value added conversion work in progress.
Even profitable companies fail if they have inadequate cash flow. Liabilities are
settled with cash not profits. The primary objective of working capital management is to
ensure that sufficient cash is available to
A. Meet day - to- day cash flow needs
B. Pay wages and salaries when they fall due
C. Pay creditors to ensure continued supplies of good and services
D. Pay government taxation and providers of capital- dividends and
E. Ensure the long- term survival of the business entity
Current ratio is the ratio of total current assets (CA) total current liabilities
(CL). A satisfactory current ratio is 2:1 would enable a firm to meet its obligations the
standard ratio must be maintain that is current assets should be twice of current liabilities as
if the ratio is less than two than difficulty may be experienced in the payment of current
liabilities and if it is higher than two it is very comfortable for the creditor but for the
business concern it is an indicator of idle funds and a lack of enthusiasm for work. It can be
calculated as follows.
Current assets
Current liabilities
Current assets= inventories+ sundry debtors+ cash & bank balances + loans & advances
The quick or acid test ratio takes into consideration the differences in the
liquidity of the components of current assets. It represents the ratio between quick or liquid
assets (assets which can be easily converted into cash within a short period without loss of
41
value) and the total current liabilities. It is superior to the current ratio between; both these
ratios should be used ad completely to each other to analyze the liquidity position of a firm.
The standard ratio is 1:1 it can be calculated as under.
Liquid Assets
Current liabilities
Liquid assets= Sundry debtors+ cash & bank balances+ loans & advances.
This ratio, also known as stock turnover ratio establishes the relationship
between cost of goods sold during a given period and the average amount of inventory held
during that period. It indicates the number of times inventory is placed during the year or
how quickly the goods are sold. It is a test of efficient inventory us management. Higher the
ratio, the better it is because it shows that finished stock is rapidly turned-over. On the other
head, a low stock turnover ratio is not desirable because it reveals the accumulation of
obsolete stock, or the carrying too much stock. This ratio is calculated as follows
Average stock
Cost of goods sold = opening stock+ purchase+ manufacturing expenses- closing stock
42
are expected to be converted into cash over a short period. To a great extent, the amount and
quickly of debtors determine the liquidity position of the firm. Debtor’s turnover or
receivables turnover is calculated by dividing credit sales by average debtors. This ratio
indicates the number of times, on an average the debtors. This ratio indicates the number of
times, on an average the debtors or receivables turnover each year. Generally, the higher the
value of debtor’s turnover, the more efficiency is the management of assets. Sometimes, data
relating to credit sales, opening balance and closing balance of debtors may not be available.
Then debtor’s turnover can be calculated by dividing total sales by closing balance of
debtors.
Credit sales
Average debtors
(Or)
Total sales
Closing debtors
This is the ratio used to the relation between the working capital and net sales. This ratio
calculated by dividing the working capital with the net sales. This shows the how much
working capital is in organization at how many times to the net sales.
43
This ratio is calculated as under
Net sales
Working Capital
Accounts receivable are a legally enforceable claim for payment to a business by its
customer/ clients for goods supplied and/or services rendered in execution of the customer’s
order. These are generally in the form of invoices raised by the business and delivered to the
customer for payment within an agreed time frame. Accounts receivable are shown in the
balance sheet as asset. Accounts receivable is money owed to you by your customers for
goods or services that have been delivered or used, but not yet paid for.
Accounts receivable are created when a customer purchases your goods or services
but does not pay for them at the time of purchase. In other words, a sale has been made but
you have not yet collected payment from your customer. Businesses with accounts
receivable typically issue invoices for their products or services at a later date. The invoice
represents a legal obligation for the customer to pay for the goods and services based on the
terms agreed upon at the time of the sale.
The objective of receivables management is to have a trade-off between the benefits and
costs associated with the extension of credit. The benefits are increased sales and associated
increased profits or marginal contribution. The major categories of cost of accounts
receivables are collection costs, capital costs, delinquency costs and default costs. A firm’s
investment in accounts receivables depends on volume of credit sales and collection period.
The financial manager can influence volume of credit sales and collection period through
credit policy.
Credit policy includes credit standards, credit terms and collection efforts. Credit standards
are criteria to decide to whom credit sales can be made and how much. If the firm has soft
44
standards and sells to almost all customers, its sales may increase but its costs in the form of
bad-debt losses and credit administration will also increase. The conditions for extending
credit sales are called credit terms and they include the credit period and cash discount.
Cash discounts are given for receiving payments before than the normal credit period. All
customers don’t pay within the credit period.
Therefore, this firm has to make efforts to collect payments from customers. Collection
efforts of the firm aim at accelerating collections from slow payers and reducing bad-debt
losses. The firm should in fact thoroughly investigate each account before extending credit.
It should gather information about each customer, analyze it and then determine the credit
limit. Depending on the financial condition and past experience with a customer, the firm
should decide about its collection tactics and procedures.
MANAGEMENT OF INVENTORY
Inventories constitute the most significant part of current assets of a large majority of
companies in India. On an average, inventories are approximately 60% of current assets in
public limited companies in India. Because of the large size of inventories maintained by
firms, a considerable amount of funds is required to be committed in them. It is, therefore,
absolutely imperative to manage inventories efficiently and effectively in order to avoid
unnecessary investments in them.
The term inventory refers to the stockpile of the product a firm is offering for sale and the
components that make up the product.
Raw materials
Finished goods.
The raw material inventory contains items that are purchased by the firm from other and are
converted into finished goods through the manufacturing (production) process. They are an
important input of the final product.
45
The work-in-process inventory consists of items currently being use in the production
process. They are normally partially or semi-finished goods that are at various stages of
production in a multi-stage production process.
Finished goods represent final or completed products which are available for sale. The
inventory of such goods consists of items that have been produced but are yet to be sold.
Stocks of raw materials and work-in-process facilitate production, while stock of finished
goods is required for smooth marketing operations. Thus inventories serve as a link between
the production and consumption of goods.
CHAPTER-4
Research Methodology
46
Introduction
It is important for research to know not only the research method but
also know methodology. The procedures by which researcher go about their work of
describing, explaining and predicting phenomenon are called methodology. Methods
comprise the procedures used for generating, collecting and evaluating data. All this means
that it is necessary for the researcher to design his methodology for his problem as the
same may differ from problem to problem.
Data collection is important step in any project and success of any project
will be largely depend upon now much accurate you will be able to collect and how much
time, money and effort will be required to collect that necessary data, this is also important
step.
47
Data collection plays an important role in research work. Without proper data
RESEARCH DESIGN
It is an Descriptive in nature.
Discussions with the finance manager and other members of the finance department.
Secondary data is collected through annual reports and balance sheet and manual of the
company.
Project is based on
48
Limitation of the study
1) This project has completed with annual reports; it just constitutes one part of data
collection i.e. Secondary. There were limitations for primary data collection because of
confidentiality.
2) This project is based on five year annual reports. Conclusions and recommendations are
based on such limited data. The trend of last five year may or may not reflect the real
working capital position of the company.
3) Also it was difficult to collect the data regarding the competitors and their
financial information. Industry figures were also difficult to get
Research Sequence
This study consists of two sequences both of which serve the purpose of
Understanding the determinants of WCM and ultimately developing a conceptual
framework. Further, each sequence consists of multiple stages dealing with relevant
literatures and actual practices Scapens (2004) explained that working with case studies
requires a comprehensive research plan, specified research questions, and all evidence
should be recorded to ensure ‘procedural reliability’
49
Research Sequence 1
The research sequence 1 consists of three stages which will be briefly explained in this
section;
Stage 1
Stage 2
Stage 3
Using research instruments to collect relevant data by using multiple case studies. Semi-
structured interviews will be undertaken with key informants who are directly involved with
WCM. The interviews will be transcribed for analysis, and stored according to appropriate
ethical standards. Archival records will be accessed (also through appropriate ethical
process) to provide further insight. Data will be coded, categorized and themed for
theoretical constructs and narrative explanations.
50
Developing Conceptual Framework
The final output of this study is to develop a conceptual framework that explains the
determinants of WCM practices in the Malaysian context. Using the output from
research sequences one and two, a process of triangulation will be used to validate the
theoretical conjecture from the literature review with the multiple cases research
findings. This process will require a constant comparison of data to develop the
conceptual framework, in coherent manner.
CHAPTER-5
51
DATA ANALYSIS AND
INTERPRETATION
Current Asset is all of company's assets that can be used to pay off current liabilities within
current fiscal period or over next 12 months. Current Asset includes cash or cash
equivalents, accounts receivable, short-term investments, and the portion of prepaid
liabilities which will be paid within next 12 months. Because these assets are easily turned
into cash, they are sometimes referred to as liquid assets.
(Rs. in lakhs)
52
ries 1 1 51 79
53
200000
180000
160000
140000
120000
100000 Loans &Advances
80000 cash&bank bal
sundry debtor's
60000
inventories
40000
20000
0
Fig.5.1
54
1. TABLE SHOWING THE WORKING CAPITAL FOR THE YEAR
31-03-2008 to 31-3-2009
Table No. 5.2 (Rs. in lakhs)
INTERPRETATION
In 2008-2009 the Net Working Capital has decreased with the amount of Rs.2718.91.
55
Table No.5.3 (Rs. in lakhs)
A.CURRENT ASSETS
1 INVENTORIES 6043.48 6933.21 889.73 _
INTERPRETATION
In 2009-2010 the Net Working Capital has decreased with the amount of Rs.30618.41
56
31-03- 2010 to 31-03-2011
Table No.5.4 (Rs. in lakhs)
INTERPRETATION
In 2010-2011 the Net Working Capital has decreased with the amount of Rs.8061.95.
57
SNO. PARTICULARS YEAR CHANGES IN WORKING
CAPITAL
31-3-2011 31-3-2012 INCREASE DECREASE
A.CURRENT ASSETS
In 2011-2012 the Net Working Capital has decreased with the amount of Rs.13545.09.
58
31-3-2012 31-3-2013 INCREASE DECREASE
A.CURRENT ASSETS
INTERPRETATION
In 2012-2013 the Net Working Capital has decreased with the amount of Rs.66770.57.
59
2008-2009 61959.86 31350.84 30609.02
2009-2010 99379.45 38152.02 61227.43
2010-2011 116194.87 46905.49 69289.38
2011-2012 138040 28323.86 109716.14
2012-2013 189103.5 28323.86 160779.64
200000
180000
160000
140000
120000
100000
CURRENT ASSETS
Ratio 80000
CURRENT LIABILITIES
60000
NET WORKING CAPITAL
40000
20000
0
Fig.5.2
INTERPRETATION
If the current assets were greater than the current liabilities it indicates the company’s good
financial position.
Current Ratio
Current Assets
Current Liabilities
60
Current assets
Current assets include cash and bank balances, marketable securities, inventory, debtors,
loans & advances and pre paid expenses.
Current liabilities
Current liabilities include loans and advances (taken), trade creditors, accrued expenses and
provisions.
3 2.6 2.5
2.4
2.5
1.9
2
1.3
Ratio 1.5
Year
1
0.5
0
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
Year
Fig.5.3
61
INTERPRETATION
By observing above table it can be known that firm’s current ratio is more than 1 in all the
years except in 2008-2009 and 2012-2013, were it is up to 2. It indicates that the firm is able
to meet its current obligations smoothly.Gayatri Projects Ltd., maintained a good liquidity in
all financial years of study. So comparativly the company is not having any liquidity
problem.
Quick Ratio
The acid test ratio is called quick ratio, is a fairly stringent measure of liquidity. It is based
on those current assets which are highly liquid inventories are inclueded from the numerator
of this ratio because inventories are deemed to be the least liquid component of current
assets.
Quick assets
Current liabilities
Quick assets
Current liabilities
Current liabilities include loans and advances (taken), trade creditors, accrued expenses and
provisions.
62
7
6 4.9
5 4.3
4
Ratio 2.4 2.3
3
1.7 Quick Ratio
2
1
0
2008-20092009-20102010-20112011-20122012-2013
Year
Fig.5.4
INTERPRETATION
The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It
measures the firm's capacity to pay off current obligations immediately and is more rigorous
test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio.
A quick ration of 1:1 is considered to represent a satisfactory current financial condition. It
means the company should maintain the quick ratio of 1:1 to get good results in future.
From the above table it is inferred that quick ratio in 2009 was 1.7 and increased to 2.4 in
2010 and then decreased to 2.3 in 2011 and has a continues increase in remaining years.
63
Total debt ratio = Total Assets - Total Equity
_____________________
Total Assets
0.78 0.78
0.78
0.76
0.74
0.71
0.72 0.7
0.7
Ratio 0.68
0.65
0.66 Total Debt Ratio
0.64
0.62
0.6
0.58
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
YEAR
Fig.5.5
INTERPRETAION
64
From the above table it is observed that total debt ratio is 0.65 in 2009 and increased
to 0.71 in 2010 and then continues increase in remaining years i.e., in 2012 and 2013 the
ratio is 0.78.
Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity. It
is a leverage ratio and it measures the degree to which the assets of the business are financed
by the debts and the shareholders' equity of a business.
Total Liabilities
Debt-to-Equity Ratio =
Shareholders' Equity
65
5 4.6 4.6
4.5
4
3.5
3
Ratio 2.5
2 1.4 Debt
1.3 to Equity1.3
Ratio
1.5
1
0.5
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
YEAR
Fig.5.6
INTERPRETAION
From the above table it is observed that debt equity ratio is 1.4 in 2009
and decreased to 1.3 in 2010 and 2011.then it increased to 4.6 in 2012 and 2013.
EQUITY MULTIPLIER
The ratio shows a company's total assets per dollar of stockholders' equity. A higher
equity multiplier indicates higher financial leverage, which means the company is relying
more on debt to finance its assets.
Total Assets
Equity Multiplier = _____________
Total Equity
66
YEARS TOTAL ASSETS TOTAL EQUITY EQUITY
MULTIPLIER
2008-2009 61959.86 21575.4 2.8
2009-2010 99379.45 28041.17 3.5
2010-2011 116194.87 33795.88 3.4
2011-2012 240462.82 51622.18 4.6
2012-2013 292911.38 62542.87 4.6
5 4.6 4.6
4.5
4 3.5 3.4
3.5
2.8
3
Ratio 2.5
2 Equity Multiplier
1.5
1
0.5
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
YEAR
Fig.5.7
INTERPRETAION
From the above table it is observed that Equity Multiplier is 2.8 in 2009 and
increased to 3.5 in 2010.Then decreased to 3.4 in 2011 and continues increase to 4.6 in 2012
and 2013.
67
CHAPTER-6
CONCLUSION
68
FINDINGS
The study reveals that Total debt ratio increase in 2009-2010 so that the company has
more leveraged and company has greater financial risk.
The debt equity ratio is fluctuating so that the company has more risky financial
position.
69
SUGGESTIONS
70
CONCLUSION
Working capital is an important liquidity indicator and historically it has been a major
benchmark for the profitability of construction contractors in infrastructure projects. A high
return on capital employed is an illusion if it is accompanied by inefficient or fraudulent
working capitalmanagement. The study on working capital management conducted in
GAYATRI Ltd. to analyze the financial position of the company. The company’sfinancial
position is analyzed by using the tool of annual reports from 2008-09 to 2012-13.The
financial status of GAYATRI PROJECTS Ltd. is good.
71
APPENDIX
72
BIBLIOGRAPHY
BOOKS
WEB SITES
WWW.GAYATRI.CO.IN
73