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WORKING CAPITAL MANAGEMENT INTRODUCTION:
Working Capital is the key difference between the long term financial management and short term financial management in terms of the timing of cash. Long term finance involves the cash flow over the extended period of time i.e. 5 to 15 years, while short term financial decisions involve cash flow within a year or within operating cycle. Working capital management is a short term financial management. Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities & the inter relationship that exists between them. The current assets refer to those assets which can be easily converted into cash in ordinary course of business, without disrupting the operations of the firm.
Composition of working capital
Major Current Assets 1) Cash 2) Accounts Receivables 3) Inventory 4) Marketable Securities Major Current Liabilities 1) Bank Overdraft 2) Outstanding Expenses 3) Accounts Payable 4) Bills Payable
G.H.Raisoni College of Engg and Management, Pune
The Goal of Capital Management is to manage the firm s current assets & liabilities, so that the satisfactory level of working capital is maintained. If the firm can not maintain the satisfactory level of working capital, it is likely to become insolvent & may be forced into bankruptcy. To maintain the margin of safety current asset should be large enough to cover its current assets. Main theme of the theory of working capital management is interaction between the current assets & current liabilities.
WHAT IS WORKING CAPITAL?
Working capital refers to the investment by the company in short terms assets such as cash, marketable securities. Net current assets or net working capital refers to the current assets less current liabilities. Symbolically, it means,
Net Current Assets = Current Assets -Current Liabilities DEFINITIONS OF WORKING CAPITAL:
The following are the most important definitions of Working capital:
Working capital is the difference between the inflow and outflow of funds. Working capital represents the total of all current assets. In other words it
In other words it is the net cash inflow.
is the Gross working capital, it is also known as Circulating capital or Current capital for current assets are rotating in their nature.
Working capital is defined as the excess of current assets over current
liabilities and provisions. In other words it is the Net Current Assets or Net Working Capital.
G.H.Raisoni College of Engg and Management, Pune
IMPORTANCE OF WORKING CAPITAL
Working capital may be regarded as the lifeblood of the business. Without insufficient working capital, any business organization cannot run smoothly or successfully. In the business the Working capital is comparable to the blood of the human body. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business. The inadequacy or mismanagement of working capital is the leading cause of business failures. To meet the current requirements of a business enterprise such as the purchases of services, raw materials etc. working capital is essential. It is also pointed out that working capital is nothing but one segment of the capital structure of a business. In short, the cash and credit in the business, is comparable to the blood in the human body like finance s life and strength i.e. profit of solvency to the business enterprise. Financial management is called upon to maintain always the right cash balance so that flow of fund is maintained at a desirable speed not allowing slow down. Thus enterprise can have a balance between liquidity and profitability. Therefore the management of working capital is essential in each and every activity.
CONCEPT OF WORKING CAPITAL:
There are 2 concepts: Gross Working Capital Net Working Capital
Gross working capital: It is referred as total current assets. Focuses on, Optimum investment in current assets: Excessive investments impair firm s profitability, as idle investment earns nothing. Inadequate working capital can threaten solvency of the firm because of its
G.H.Raisoni College of Engg and Management, Pune
it will be necessary to maintain current assets at level adequate to cover current liabilities that are there must be NWC.Raisoni College of Engg and Management. But where the cash inflows are uncertain.inability to meet its current obligations. If surplus funds are available they should be invested in short term securities. More predictable the cash inflows are the less NWC will be required. The term risk is defined as the profitability that a firm will become technically insolvent so G. • • Difference between current assets and current liabilities Net working capital is that portion of current assets which is financed with long term funds. Implications of Net Working Capital: Net working capital is necessary because the cash outflows and inflows do not coincide. an important consideration is trade off between probability and risk. In general the cash outflows resulting from payments of current liability are relatively predictable. The term profitability is measured by profits after expenses. Net working capital: . They are not components of working capital but outcome of working capital. Pune 3 . NET WORKING CAPITAL = CURRENT ASSETS –CURRENTLIABILITIES If the working capital is efficiently managed then liquidity and profitability both will improve. Therefore there should be adequate investment in current assets.(NWC) defined by 2 ways. Financing of current assets: Whenever the need for working capital funds arises. For evaluating NWC position. The cash inflows are however difficult to predict. Working capital is basically related with the question of profitability versus liquidity & related aspects of risk.H. agreement should be made quickly.
If the firm wants to increase profitability.H. its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost. The risk of becoming technically insolvent is measured by NWC. debtors and inventories. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. marketable securities. larger is the requirement of working capital. OPERATING CYCLE OR CIRCULATING CASH FORMAT: Working Capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash. debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on.that it will not be able to meet its obligations when they become due for payment. Funds thus invested in current assets keep revolving fast and being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence it is also known as revolving or circulating capital. the profitability will decrease. Pune 3 . The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle.Raisoni College of Engg and Management. conversion of finished stocks into sales. The cycle starts with the purchase of raw material and other resources and ends with the realization of cash from the sales of finished goods. the risk will definitely increase. If firm wants to reduce the risk. G. It involves purchase of raw material and stores.
Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period G.H. Pune 3 .Receivable conversion period (RCP) (RMSCP) Cash Received from Debtors and paid suppliers Of Raw material Raw material storage conversion period Sales of finished Goods Raw materials introduced into process Finished Goods Produced Finished goods conversion process Period (FGCP) Work Conversion Period (WIPCP) in The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods.Raisoni College of Engg and Management. RMCP = Raw Material Conversion Period WIPCP = Work –in. Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP Where. Thus.
net operating cycle period can be calculated as below: Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period Further.However.H. Pune 3 . In that case. • Raw Material Conversion Period = Average Stock of Raw Material Raw Material Consumption per day • Work in process Conversion Period = Average Stock of Work-in-Progress Total Cost of Production per day • Finished Goods Conversion Period = Average Stock of Finished Goods Total Cost of Goods Sold per day • Receivables Conversion Period = Average Accounts Receivables Net Credit Sales per day • Payable Deferral Period = Average Payable Net Credit Purchase per day G. following formula can be used to determine the conversion periods. a firm may acquire some resources on credit and thus defer payments for certain period.Raisoni College of Engg and Management.
PERMANENT OR FIXED WORKING CAPITAL: Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. 2. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations. The classification is important from the point of view of the financial manager.CLASSIFICATION OR KIND OF WORKING CAPITAL: \Working capital may be classified in two ways: • • On the basis of concept On the basis of time Om the basis of concept.H. G. On the basis of time. Pune 3 . working capital may be classified as: • • Permanent or Fixed working capital Temporary or Variable working capital. Variables working capital can be further classified as second working capital and special working capital. TEMPRORAY 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. 1. working capital is classified as gross working capital and net working capital.Raisoni College of Engg and Management.
No business can run successfully without an adequate amount of working capital. There is an operating cycle G. The need of working capital arises due to the time gap between production and realization of cash from sales. Every business needs some amount of working capital. Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL: Working capital is the life blood and nerve centre of a business. The main advantages of maintaining adequate amount of working capital are as follows: • • • • • • • • • • Solvency of the Business Goodwill Easy Loans Cash discounts Regular supply of Raw Materials Regular payments of salaries. working capital is very essential to maintain the smooth running of a business. Just a circulation of a blood is essential in the human body for maintaining life. Exploitation of favorable market conditions Ability of crisis Quick and regular return on investments High morals THE NEED OR OBJECTS OF WORKING CAPITAL: The need for working capital cannot be emphasized. wages & other day to day commitments.The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital.H.Raisoni College of Engg and Management. Pune 3 .
stores office expenses etc. To maintain the inventories of raw materials. And sales. However the following are the important factors generally influencing the working capital requirements.progress. While a manufacturing industry has a long cycle of operation of the working capital. the characteristics of their operations. There are time gaps in purchase of raw materials and production. power and To meet the selling costs as packing.H. Pune 3 . thus. the same would be short in an enterprises involve in providing services. production and sales. working capital is needed for the following purposes: • • • For the purchase of raw materials . advertising etc.involved in the sales and realization of cash. the length of production cycle. NATURE OR CHARACTERSTICS OF A BUSINESS: The nature and the working capital requirement of enterprises are interlinked. the rate of stock turnover and the state of economic situation. and realization of cash. The amount required also varies as per the nature.Raisoni College of Engg and Management. FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT: The working capital requirements of a concern depend upon a large number of factors such as nature and size of the business. G. an enterprises involved in production would required more working capital then a service sector enterprise. To provide credit facilities to the customers. components and spaces To pay wages and salaries To incur day to day expenses and overhead costs such as fuel. work –in. • • • and spares and finished stock.
The working capital needs of such business may increase considerably during the busy season and decrease during the MARKET CONDITION: If there is a high competition in the chosen project category then one shall need to offer sops like credit. MANAFACTURE PRODUCTION POLICY: Each enterprises in the manufacturing sector has its own production policy. some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. GROWTH AND EXAPNSION: Growth and Expansions in the volume of business result in enhancement of the working capital requirements. On other hand if raw material is not readily available then a large inventory stocks need to be maintained.Raisoni College of Engg and Management. immediate delivery of goods etc for which the working capital requirement will be high. Normally the needs for increased working capital funds processed growth in business activities. AVABILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock. Pune 3 . there by calling for substantial investment in the same. OPERATIONS: The requirement of working capital fluctuates for seasonal business. Accordingly the working capital requirements vary for both of them. As business growth and expands it needs a larger amount of the working capital. G.H. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low.
With increasing prices. depending on its level of completion. If the manufacturing cycle involves a longer period the need for working capital would be more. The basis for assigning value to each component is given below: COMPONENTS OF WORKING CAPITAL Stock of Raw Material Stock of Work -in. The factors discussed above influence the quantum of working capital in the business.Raisoni College of Engg and Management. Thereafter proper value is assigned to the respective current assets.Process Stock of finished Goods Debtors Cash BASIS OF VALUATION Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales Value Working Expenses Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The assessment of the working capital requirement is made keeping this factor in view.H. PRICE LEVEL CHANGES : Generally raising price level requires a higher investment in the working capital. MANAFACTURING CYCLE: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. The total of all such valuation becomes the total estimated working capital requirement. Pune 3 . At time business needs to estimate the requirement of working capital in advance for proper control and management. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated. the same levels of current assets needs enhanced investments. G. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above.
therefore. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY): Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. can affect the day-today operations severely. An inaccurate assessment of the working capital may cause either under-assessment or overassessment of the working capital and both of them are dangerous.Raisoni College of Engg and Management.The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Larger investment in current Assets with less dependence G. Negligence in proper assessment of the working capital. PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY: The following are the general principles of a sound working capital management policy: PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY PRINCIPLE S OF RISK PRINCIPLES OF COST OF PRINCIPLES OF EQUITY PRINCIPLES OF MATURITY OF 1.H. Pune 3 . It may lead to cash crisis and ultimately to liquidation.
On the other hand less investments in current assets with greater dependence on short term borrowings.Raisoni College of Engg and Management. In other words there is a definite inverse relationship between the degree of risk and profitability. increase liquidity. Pune 3 . a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Current assets as a percentage of total sales While deciding about the composition of current assets. 3. higher and risk however the risk lower is the cost and lower the risk higher is the cost. Generally. reduces liquidity and increase profitability.H. A sound working capital management should always try to achieve a proper balance between these two. The level of current assets may be measured with the help of two ratios: 1. 4. Maturity pattern of various current obligations is an important factor in G. However. According to this principle. PRINCIPLES OF COST OF CAPITAL: The various source of raising working capital finance have different cost of capital and the degree of risk involved. In other words. the goal of management should be to establish a suitable trade off between profitability and risk. the financial manager may consider the relevant industrial averages. PRINCIPLES OF MATURITY OF PAYMENT: The principle is concerned with planning the source of finance for working capital. 2.on short term borrowings. PRINCIPLE OF EQUITY POSITION: The principle is concerned with planning the total investments in current assets. reduces risk and thereby decreases the opportunity for gain or loss. Current assets as a percentage of total assets and 2. the amount of working capital invested in each component should be adequately justified by a firm’s equity position. According to the principles. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. Every rupee invested in current assets should contribute to the net worth of the firm. there is a definite inverse relationship between the risk and profitability.
Now availability of stocks due to non availability of funds may result in production stoppage. non availability of the working capital. Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows.Raisoni College of Engg and Management. CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL: Excess of working capital may result in UN necessary accumulation of inventories. the greater the inability to meet its obligations in time. Optimum capacity utilization of fixed assets may not be achieved due to undertake profitable projects due to non availability of working capital. Both the situation would affect profitable adversely. While underassessment of working capital has disastrous implications on business overassesments of working capital also has its own dangerous. It may become difficult for the enterprises to Implementations of operating plans may brome difficult and consequently Cash crisis may emerge due to paucity of working funds. CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL: • • • • Growth may be stunted. In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts. G. The business may fail to honor its commitment in time thereby adversely affecting its creditability. The business may be compelled to by raw materials on credit and sell finished goods on cash.H. This situation may lead to business closure. the profit goals may not be achieved.risk assumptions and risk assessments. Pune 3 .
The level of inventory should be such that the G. It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management. It may make management complacent leading to its inefficiency. Working Capital is very essential for success of business & therefore needs efficient management and control.Raisoni College of Engg and Management. For effective working capital management. Over investment in working capital makes capital less productive and may reduce return on investment. inventory needs to be managed effectively. INVENTORY MANAGEMNT: Inventory includes all type of stocks. Each of the components of working capital needs proper management to optimize profit. Pune 3 .H.
every business would prefer selling its produce on cash basis. Investment in the type of current assets needs proper and effective management as. Pune 3 . RECEIVABLE MANAGEMENT: Given a choice.H.Raisoni College of Engg and Management.total cost of ordering and holding inventory is the least. However. prevailing market conditions etc. due to factors like trade policies . In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating current assets in the form of debtors or account receivables. Simultaneously stock out costs should be minimized. it gives rise to costs such as: • • Cost of carrying receivables Cost of bad debts losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more then the costs G. Business are compelled to sells their goods on credit. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient.
A business should continuously try to monitor the credit days and see that the average. activities may get squeezed. weeks or even a daily basis. Cash inflows 2. This may lead to cash crisis. which influence the working capital requirement.Raisoni College of Engg and Management. Effective cash management is facilated if the cash budget is further broken down into months. From this it would be possible to find out the average credit days using the above given formula. Cash outflows The main source for theses flows are given here under: 1. a half or a quarter year. Each business should therefore try to find out coverage credit extends to its clients using the below given formula: Average Credit = Total amount of receivable (Extend in days) Average credit sale per day Each business should project expected sales and expected investments in receivable based on various factor.H. CASH BUDGET: Cash budget basically incorporates estimates of future inflow and outflows of cash cover a projected short period of time which may usually be a year. Cash Sales 2. Pune 3 . An effective control of receivables Help a great deal in properly managing it. There are two components of cash budget are: 1. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result. Cash received from debtors G.incurred for the receivables and the gap between benefit and costs increased resulting in increase profits.
Repayments of Loan etc. Cash payment for assets creation 5. CHAPTER II COMPANY PROFILE G.H. Cash payment for other revenue expenditure 4. 4. Cash received from Loans. Cash received from sale of investment or assets. taxes.Raisoni College of Engg and Management. Cash Purchase 2. 6. Cash payments for withdrawals. CASH OUTFLOWS: 1. deposits etc.3. Cash payments to Creditors 3. Pune 3 . Cash receipts other revenue income 5.
was converted into a Public Limited Comp. 1992. on the 1st December.T. Viraj Alloys Limited [VAL] was incorporated as a Private Limited Company on the 10th July. 1992 & December. Kochhar (Right) & Shri Nitan Chhatwal (Left) G. between March. The Induction Furnace has a capacity of 27. The AOD convertor has a capacity of 25. M/s. Maharashtra at Bombay. The addition of Concast Machine shall not result in any addition to capacity. Pune 3 . The Comp.H. 1992. with the main object of setting up a mini-steel plant for producing special steel items. Subsequently. Tarapur.T. 1992. The Comp. and Maharashtra. 1990 with the Registrar of Companies.000 M. the Company also set up facilities for manufacture of Stainless Steel by installing Argon Oxygen Decarburize [AOD] Converter & single electrode DC Ladle Refining Furnace [LRFs]. Figure 1 Shri Neeraj R. Kochhar & Shri Nitan Chhatwal. resulting in higher realization & reduction in manufacturing cost. was originally promoted by Shri Vinod Goel & Shri Pawan Kumar Jain.500 M. started implementation of its Steel Project in 1991 & went into commercial production of Mild Steel Ingots in February. They were joined in 1991 by Shri Neeraj R. The Comp. The Concast Machine is in an advanced stage of erection which will result in better quality & yield. The daily capacity of LRF is in excess of total requirement.Viraj Profiles Ltd. who had experience in trading of steel items.Raisoni College of Engg and Management. under the name & style of Viraj Alloys Private Limited for manufacture of Alloy Steel & Stainless Steel products at MIDC Industrial Area.
At the same time. Looking at where Viraj started only 13 years ago. the decision was soon made to move into stainless steels and in 1996 the first bright bars and flanges were produced. because they are a particularly cost efficient producer and their pricing has mistakenly been at risk to antidumping legislation in the past. In order to does so Viraj Group implementing an investment programmer that will lift there melt capacity from 100. Viraj currently exports to some 80 countries with new countries being added regularly.000 tones to no less than 250. South East Asia.H. They carry an extensive product portfolio that makes VIRAJ a true stainless steel supermarket player. Pune 3 . This leaves no less than 60 to 70 per cent to be distributed to other geographical areas such as the Middle East. It is not only tonnage though that matters to Viraj. Back in 1992 when the company begun manufacturing it only produced flat rolled chrome steel products for the domestic market. a truly remarkable percentage for any company in business today.000 tonnes per annum. However. Today. This country has rapidly become one of the major centers of stainless steel production. Take India for example. The most important regions are Europe and North America with both a share of 15 to 20 per cent. Viraj try to distribute our products as widely as possible as this makes us less dependent on a limited number of markets and therefore less vulnerable.At the start of the new millennium the directors of Viraj got together to decide on a strategy for the coming decade. Viraj moved away from the domestic market and the core of its business became exporting their products worldwide. The Viraj Group. In connection to this they also have to take antidumping regulations into consideration. Initially more and more suppliers from outside the traditional stainless steel breeding grounds of Europe and the USA are making a significant impact on the stainless steel market. For some one this is going to be future that India will be hub stainless steel long products but for Viraj Group it is reality. no less than 98 per cent of the company’s sales are generated outside of India. Australasia and South America to name just a few. a young and ambitious company. one of India’s leading producers of stainless steel long products. the growth of the company has been remarkable.Raisoni College of Engg and Management. So VIRAJ management formed their own department G. All in all Viraj want to be the largest producer of long products in the world with the most complete product portfolio. they are continuously looking for products that can compliment their portfolio. Moreover.
dedicated to this issue which has meant we have been able to successfully consolidate their geographical markets. The next step is being implemented now with Viraj’s three step 200 million USD investment programmer. Phase I is been realized and a new wire rod mill is been installed which was commissioned in September 2005. This new mill marks Viraj’s entry into the wire rod market and has the capacity to produce rods with diameters of 5.5 to 34 mm. Together with the installation of the wire rod mill Viraj is expanding its melt capacity to 250,000 tonnes (per year) which will make the company number one in the world for long products. Following on from Phase I Viraj plans to add a slab caster. The slab caster will offer Viraj a unique flexibility for supplying a variety of products to the market and is also a response to the great demand. Finally, in phase III, Viraj is planning to further expand its melt capacity by 150000 tones per annum. This is a significant addition to its already impressive capacity. Few years before, Viraj add new products to our portfolio. For instance will be I-bar and fastener production and seamless pipe has also caught our eye as a possible range to which we should allocate resources. It can supply round bars from 2 to 16 inch. Other products supplied by Viraj’s Bright Bars Division include round, hexagonal and square bars, again in a particularly wide range of sizes. Viraj Forgings is at present the third largest manufacturer of stainless steel flanges in the world and also supplies pipe fittings, forged bars, butt-weld fittings to name just a few. VSL (Viraj Smelting Limited) Wires supplies stainless steel wires and ribbed bars. Sizes range from 0.07 to 12mm for wire, 10 to 20mm for ribbed wire and 0.07 to 0.7mm for fine wire. Finally, it’s Angle and Flats Division supplies flats and angles in an extensive size range. In case of Quality, Viraj management maintain quality standard as per customer requirement. Stringent quality testing gives ISO 9001:2000, AD Merkblatt 2000, PED (Pressure Equipment Directive) 97/23/EC and CSA B-51-97 quality certification
Recent acquisition of Flangenwerk Bebitz GmbH (German company) and Tubinox, Bucharest, Romania (stainless steel tubes and pipes) gives Viraj Group a global appearance.
G.H.Raisoni College of Engg and Management, Pune
Figure 2 Dhruv Kochhar (MD) (Bebitz Forging) Flangenwerk Bebitz GmbH is managed by Mr. Dhruv Kochhar. “One of the reasons why we chose for Bebitz was the well-established image the company enjoys as a high quality producer of flanges. Moreover, Bebitz through the years had acquired a very impressive number of approvals from end user companies. It was this combination that made the company so attractive and so far I can only say it has been a very positive experience,” “Mr. Dhruv Kochhar”.
Even though now and then language problems may crop up this is by far made up for by Bebitz’s professional, dedicated and driven staff. Looking at the company itself it is the long-standing tradition and expertise that was gathered since its foundation in 1911 that puts it apart. Needless to say that experience and technical expertise are key to the company. Today the company produces around 20,000 tonnes of flanges of which approximately 20 per cent is made of stainless steels. These flanges mostly find their way to distributors in Germany, the rest of Europe and the USA. Bebitz’s customers comprise of stockholders, master distributors and projects. At present Bebitz is looking in to further optimizing production according to Mr. Kochhar. Therefore Bebitz Germany has a subsidiary plant in India, Bebitz Works Private Limited, that will start at the end of June.
G.H.Raisoni College of Engg and Management, Pune
Combine this with VIRAJ’S performance in delivering goods on time, to the highest quality standards and at the most competitive prices and you will recognise why Viraj’s export turnover has doubled every year since 1995.
“Virajians shall be innovative, entrepreneurial and empowered teams for continual growth and global bench marks.” “Virajians shall foster a culture of commitment. Trust and continual learning while remaining committed to the all stake- holders.”
“To be a world class professionally managed enterprise for value steel solutions committed to total customer satisfaction and enhancing values to society.”
• • • • Create a culture of continuous learning and change. Achieve world class status in services and products Reach the position of the most cost competitive steel producer. Establish industry leadership.
G.H.Raisoni College of Engg and Management, Pune
Raisoni College of Engg and Management. Cold heading & Electrode quality.Products and Segments of application The products manufactured at Viraj are of a high quality and value which is a direct reflection of the organisation’s beliefs and values in operating the business as a global leader in steel production. Viraj produces Austenitic. High tensile springs & G. Structural design. Austenitic-Ferritic (Duplex) stainless steel grades while supplying special grade stainless steel of Precipitation hardening. Pune 3 . Viraj’s products have wide applications across diverse industries including Petrochemical Plants. Ships.H. Oil Pipelines. Ferritic. Martensitic.
Liquid cargo ships and Surgical instruments to name a few. Liquid storage terminals. Boilers. CLIENTS AND CUSTOMERS G. Pune 3 .cables.Raisoni College of Engg and Management. Pressure vessels.H.
Steel Melting Shop: .H.Raisoni College of Engg and Management.(SMS-I. SMS-II) Viraj Forging Division: G. Pune 3 .
Organizational Structure of Viraj Profiles Limited G. Pune 3 .Raisoni College of Engg and Management.H.
H. Pune 3 .AWARDS AND RECOGNITION G.Raisoni College of Engg and Management.
This policy shall for the basis of establishing and reviewing the Quality Objectives and shall be communicated across the organization. The policy will be reviewed with business direction and to comply with all the requirements of the Quality Management Standard. Pune 3 . involving all our employees. Viraj Group shall constantly strive to improve the quality of life of the communities it serves through excellence in all facets of its activities. G. We are committed to create value for all our stakeholders by continually improving our systems and processes through innovation.QUALITY POLICY Consistent with the group purpose.Raisoni College of Engg and Management.H.
Human Resource: G.Raisoni College of Engg and Management.Quality Statement:“Viraj Profiles Ltd is committed to deliver the best quality products to its customer to their entire satisfaction by using modern technology with a motivated work force developed through training and team work. increasing service level expectation of customers.e. Pune 3 . innovation as a substitute to investment. commodity nature of steel. balancing the economies of scale in manufacturing and simultaneously servicing a fragmented domestic market.H.” Strategic challenge faces by VIRAJ PROFILES LIMITED Operational: Operational challenges include some of the following i.
empowering employees at lowest levels. likely appreciation of rupee against dollar Societal: Lack of understanding of industry and business. Business: Business challenges includes shareholders and promoters expectation of returns on par or better than equivalent opportunities. reducing trade barriers. upholding the ethical standards in current environment. witnessing the successful financial performance of the company CHAPTER III RESEARCH METHODOLOGY STATEMENT OF PROJECT Evaluation. balancing needs of all stakeholders. driven by WTO. emerging dominance of China.H. law and order situation in the local areas and increasing expectations of the community in an underdeveloped state. managing rising employee costs. Global: Consolidation in steel industry. developing employees for the future and improving the quality of life in the locations of operations. analysis & interpretation of working capital management of G.Raisoni College of Engg and Management.Human Resource challenges are attracting and retaining talent. Pune 3 .
Ratio analysis Operating cycle & cash cycle Cash flow analysis G. METHODS OF QUANTATIVE ANALYSIS Calculation of net working capital requirements. OBJECTIVE OF RESEARCH Estimation of working capital requirement Evaluation of working capital management Evaluation of Liquidity position & working capital utilization Analysis of relationship between working capital and profitability Analysis & sources of working capital Analyzing the level of current assets with relation to current liabilities. COLLECTION OF DATA: Data has been collected from various sources like: Annual reports of last three years Manual of concerned departments Consultants and personnel of United Engineering Services.Raisoni College of Engg and Management. Suggesting ways to improve its working capital utilization.H. Pune 3 .United Engineering Services.
CHAPTER IV DATA ANALYSIS WORKING CAPITAL ESTIMATION G.Raisoni College of Engg and Management. Pune 3 .H. Determining the Financing mix Statistical tools like graphical presentation ASSUMPTIONS Year is taken of 365 days All purchases have been taken as credit purchases and all sales have been taken as credit sales. In the absence of relevant data the data from internet site is taken as the relevant information.
87 4563.88 3249.1 20901.23 362.12 5225.01 -5272.52 8647.21 7.82 258.8 11109.43 FY 08-09 3748.55 32.5 30898.13 7402.12 5090.14 217.05 342.89 FY 07-08 1589.34 31.13 14835.Raisoni College of Engg and Management.04 35.73 20944.58 1810.04 3694.14 1027.33 174.Current assets Loans & advances Currents assets i)Inventories stock in trade work in progress raw materials stores and spare parts Total Inventories ii) Debtors iii) Cash & Bank balances (subtracting FCCB issue unutilized money as it amounts to long term liability) iv)loans and advances Net current assets Current Liabilities i) Sundry Creditors ii)Creditors for capital expenditure iii)other liabilities iv) unclaimed dividend v) sundry deposits vi) advances from customers vii) interest accrued but not due on loan Net current liabilities FY 06-07 FY 07-08 FY 08-09 223.64 645.96 1131.57 365. G.72 14211.05 3244.1 662.26 21.76 8145.94 2528.H.66 73.08 INVENTORIES In the context of Viraj Profiles Ltd.4 621.85 8714.29 321.12 -6910.1 5516.6 8042.56 9242.4 7224.37 1463.46 1176.66 229.404 7529.37 1456.1 43755.44 FY 06-07 1476. Services the major increase in the present three financial years has been of the inventory. Pune 3 .59 20.
G.Raisoni College of Engg and Management. before hand to be used in the checking the machinery & the newly installed production capacity. • The increased inventory to produce more goods so as to utilize the new plant set up.H.INVENTORIES 25000 20000 stock in trade 15000 10000 5000 0 FY 06-07 FY 07-08 FY 08-09 work in progress raw materials stores and spare parts Total Inventories Reasons: • The pile up of inventory that is used in trial run. DEBTORS AND AVERAGE RECEIVABLES The debtors are increasing heavily in the financial year 08-09 because of a sales boom that has accounted for huge accounts receivables increase. Pune 3 .
This discrepancy can be attributed to the G.DEBTORS AND AVERAGE RECEIVABLES 16000 14000 12000 10000 8000 6000 4000 2000 0 FY 06-07 FY 07-08 FY 08-09 Debtors CASH AND BANK BALANCES Cash and bank balance as per the balance sheet it is seen to be increasing but from the above chart it is seen to be decreasing.H.Raisoni College of Engg and Management. Pune 3 .
Thus the actual figures are distorted because the money from FCCB issue has to be returned and it is a kind of long term loan which the company has sought for expansion purpose.12 Cash & Bank balances FY 06-07 0 2000 4000 6000 8000 10000 LOANS AND ADVANCES Loans & advances are increasing on the part of increased advances that are given to pile up inventory when the company went for the expansion mode G.fact that balance sheet figures carry additional cash balance of unutilized FCCB issue proceeds which amount to long term liability as well. Pune 3 .H. Also we should take note of the fact that the FCCB money can only be used for expansion purpose and not as money for usual application of working capital.1 8042.01 FY 07-08 1027. CASH & BANK BALANCE FY 08-09 5225. As a result to find the actual outlay of cash the unutilized money has been subtracted.Raisoni College of Engg and Management.
Raisoni College of Engg and Management. sundry G. bills receivables. Pune 3 .LOANS AND ADVANCES FY 06-07 17% FY 08-09 44% FY 07-08 39% FY 06-07 FY 07-08 FY 08-09 CURRENT ASSETS includes cash & those assets which can be easily converted into cash within a short period generally one year such as marketable securities .H.
The total current assets are the sum of below contingency i. inventories. work in progress.Raisoni College of Engg and Management. Pune 3 . Current Assets = Stock + Sundry Debtors + Advances + Cash and bank balances + other current assets CURRENT ASSETS loans and advances Cash & Bank balances Debtors FY 07-08 Total Inventories stores and spare parts raw materials FY 06-07 work in progress stock in trade 0 5000 10000 15000 20000 25000 FY 08-09 NET CURRENT ASSETS FY 06-07 22% FY 08-09 46% FY07-08 32% G.H.debtors. prepaid expenses etc .e.
sundry creditors.Raisoni College of Engg and Management. CURRENT LAIBILITIES These are those obligations which are payable within a short period of generally one year and includes outstanding expenses. bills payable. has increased except in year 2008-09.H. income tax payable.Conclusions: The trend of the current assets in Viraj Profiles Ltd. accrued expenses. short term advances. Pune 3 . Services throughout the period from 2006-09 are shown in the pie-chart . bank overdraft.it is evident from the table that the current assets in Viraj Profiles Ltd. G.
TOTAL CURRENT LAIBILITIES Sundry Creditors 4000 3500 3000 2500 2000 1500 1000 500 0 FY 06-07 FY07-08 FY 08-09 unclaimed dividend sundry deposits advances from customers interest accrued but not due on loan Creditors for capital expenditure other liabilities NET CURRENT LAIBILITIES 6000 5000 4000 3000 2000 1000 0 FY 06-07 FY07-08 FY 08-09 Net current liabilities Conclusion: The trend of Current Liabilities of Viraj Profiles Ltd. Services throughout the period from 2006-2009 are shown in the table.Raisoni College of Engg and Management.H. It is evident from the table that it shows G. Pune 3 .
Raisoni College of Engg and Management.increasing trends in the year 2006 to 2009. Services has stability in trends of Current Liabilities. It shows that the Viraj Profiles Ltd. CREDITORS AND CREDITORS OF CAPITAL EXPENDITURE Creditors of Viraj Profiles Ltd. Services limited are increasing from 70 Cr (FY 06-07) to 18 Cr (FY 07-08) to 12 Cr (FY 08-09). The main reason for the increase in can be attributed to the heavy purchase of the inventory for stocking it up for trial run & use before the expansion mode. Z CREDITORS FOR CAPITAL EXPENDITURE 1600 1400 1200 1000 800 600 400 200 0 Creditors for capital expenditure FY 06-07 FY07-08 FY 08-09 G.e. from 18 Cr (FY 07-08) to 12 Cr (FY 08-09) which is in sync with the fact that the expansion work that has been in process and all preparations for that are coming to an end.H. Pune 3 . Creditors for capital expenditure seem to be decreasing over the three years i.
H. Pune 3 .Raisoni College of Engg and Management.G.
1 40565.6 27364.Particulars Current assets current liabilities quick assets quick liabilities Net turnover (sales) working capital average inventory (average of opening & closing stock of year) cost of goods sold = cost of sales total assets total annual expenses -(depreciation +debt expenses) average gross income PROFIT before interest and taxes Total interest Net Profit after tax (NPAT) capital employed (FA+CA-CL ) investment (FA+CA) Fixed assets FY 06-07 29843.16 2653.59 LIQUIDITY RATIOS CURRENT RATIO G.93 53951.95 14530.31 67855.465 22666.32 7611.08 8594.75 3893.8 4115 89529.12 67297.72 6597.46 6597.1 66351.4 81786.71 111772.89 5998 747.06 63633.12 138465.16 97754.44 45503 22232.65 51858 14612.68 97141.56 106917.37 23898.6 FY 07-08 47163.37 8120.615 37398 87666 37313.92 5214. Pune 3 .64 7459.Raisoni College of Engg and Management.49 7459.52 7611.4 124436.66 119232.7 113515.83 47018.77 FY 08-09 61410.77 7383.95 52527.94 57821.09 14476.4 20880.H.44 12759.
H.4 CURRENT RATIO 3. Pune 3 . Current ratio is the ratio of current assets to current liabilities. Current Ratio: The Current ratio is calculated by dividing current assets by current liabilities: Current ratio = Current Assets /Current Liabilities FIANANCIAL YEAR FY 2006-2007 FY 2007-2008 FY2008-2009 CURRENT ASSETS 29843.72 61410. It is a measure of general liquidity & is most widely used to make the analysis of short term financial position of a firm. On the other hand a low current ratio indicates that the Liquidity position of the firm is not good and shall not be able to pay its current liabilities in time.52 47163.95 7459. A relatively higher ratio is an indication that the firm is liquid and has the ability to pay its current obligations on time.14 8.44 6597.92 7.23 G.Current ratio is defined as the relationship between current assets and current liabilities.49 CURRENT LAIBILITIES 7611.Raisoni College of Engg and Management.
95 7459.67 2.Raisoni College of Engg and Management.CURRENT RATIO 20% 43% FY 2006-2007 FY 2007-2008 FY2008-2009 37% FIANANCIAL YEAR FY 2006-2007 FY 2007-2008 FY2008-2009 QUICK ASSETS QUICKLIABILITITE S 12759.78 G. Pune 3 .32 14530.46 20880.4 1.H.2 2.44 6597.64 CURRENT LAIBILITIES QUICK RATIO 7611.
QUICK RATIO: Quick ratio or liquid ratio is a more rigorous test of liquidity than the current ratio.H. QUICK RATIO 25% 42% FY 2006-2007 FY 2007-2008 FY2008-2009 33% G. Pune 3 .Raisoni College of Engg and Management. Inventories & prepaid expenses are not termed as liquid assets because they cannot be converted into cash immediately without a loss of value. Liquid assets include all the current assets excluding inventories & prepaid expenses. The term liquidity refers to the ability of the firm to pay short term obligations as and when they become due. Quick ratio may be defined as ration of quick assets to quick liabilities. Liquid liabilities mean all liabilities excluding bank overdraft.
The sharp rise of current ratio from 20% (FY 06-07) to 37% (FY 07-08) to 43 %( FY 08-09) Can be attributed to • Higher pile up of inventory which was to be used up for trial run in producing new products from the new plant set up. As a result it is bound to have higher current ratio and quick ratio as compared to other industries. Pune 3 . Services is a manufacturing concern. • Higher prepaid expenses related to advances given so as to pile up the inventory so that when the inventory is needed for trial run. • An increase in average receivables which was in sync with increased capacity of production and also increased sales.Raisoni College of Engg and Management. An important point to note here is that an excess of cash balance arising out of idle money coming out of FCCB issue expense has been deducted as correspondingly it accounts for long term liability (debentures) which have no effect on working capital management.H.CURRENT SCENERIO INTERPRETATION While interpreting the figures of both the above ratios we should keep in mind the following one point Viraj Profiles Ltd. G. Since it is manufacturing concern the an excess of inventory as compared to other industry models such as the services sector is an integral fact. it’s available.
• • • Sales to working capital ratio Inventory turnover ratio Current assets turnover ratio.The quick ratio is a more important indicator of liquid position of Viraj Profiles Ltd.Raisoni College of Engg and Management. EFFICIENCY RATIO From the perspective of working capital management we would be discussing three important ratios they are. Obviously the effect of inventories has been negated. Pune 3 .H. Services as it hardly varies from 25% (FY 07-08) to 33% (FY 08-09). G.
H.51595 G. Pune 3 . A relative amount of working capital is needed. working capital should be adequate & thus this ratio helps management to maintain the adequate level of working capital Financial Year Sales to working capital ratio FY 06-07 2.Raisoni College of Engg and Management.046727 FY 07-08 1. This ratio helps to measure efficiency of the utilization of net working capital. It signifies that for an amount of sales. If any increase in sales in contemplated.SALES TO WORKING CAPITAL RATIO This ratio is computed by dividing working capital by sales.294863 FY 08-09 1.
Raisoni College of Engg and Management.5 2 1.29 in (FY 07-08) and then increased to 1. This ratio is again indicative of the G.29486264 1.5 0 FY 06-07 FY 07-08 FY08-09 1.5 1 0.515946 Sales to working capital ratio CURRENT SCENERIO INTERPRETATION As seen from the above table the ratio has decreased from 2 (FY 06-07) to 1.SALES TO WORKING CAPITAL RATIO 2.H.5 (FY 08-09).046727 2. Pune 3 .
INVENTORY TURNOVER RATIO This ration indicates the effectiveness and efficiency of inventory management.H.9936 INVENTORY TURNOVER RATIO FY08-09 FY 07-08 inventory turnover ratio/ stock velocity FY 06-07 0 1 2 3 4 5 G. This ratio is calculated as cost of goods sold: average inventory shows how speedily the inventory is turned into accounts receivables through sales.351329 FY 07-08 3. The slight increase from 1.fact that the year in which the expansion took place the sales did not match up with the scale of expansion.29 to 1. Otherwise it would have remained intact and not decreased. Pune 3 . The higher the inventory turnover ratio (also called stock velocity) the more the efficient inventory management.Raisoni College of Engg and Management.51 is indicative of the fact that the full impact of expansion is being slowly realized & sales are slowly increasing.2479138 FY08-09 2. Financial Year inventory turnover ratio/ stock velocity FY 06-07 4.
331807 G. Financial Year current assets turnover ratio FY 06-07 1.99 (FY 08-09) which shows inefficiency on the part of inventory management.H. Pune 3 .Raisoni College of Engg and Management.CURRENT SCENERIO INTERPRETATION The stock velocity is decreasing subsequently from 4.52472 FY 07-08 1. CURRENT ASSETS TURNOVER RATIO This ratio is indicated by sales upon current assets.11371834 FY08-09 1. a high turnover rate indicates reduced lock up of funds in current assets.35 (FY 07-08) to 2. This ratio indicates the efficiency with which the current assets turn into sales & higher current assets turnover ratio implies by & large a more efficient use of funds in current assets. Thus. An analysis of this ratio over a period reflects working capital management of the firm. Partly the reason for the fall can be attributed to stocking up of inventory for the trail run & using them in testing the expansion mode machinery.
8 0.331807 CURRENT SCENERIO INTERPRETATION The ratio is slightly decreasing from 1. The reason can be well attributed to the piling up of trial stock and not full use of the expanded production capacity.H.Raisoni College of Engg and Management.2 1 0.CURRENT ASSETS TURNOVER RATIO 1.4 1.4 0. Pune 3 .11 (FY 07-08) & then increasing to 1.2 0 FY 06-07 FY 07-08 FY08-09 current assets turnover ratio 1. G.6 1. Services .6 0.11371834 1.52 (FY 06-07) to 1.52472 1.33 (FY 08-09) which shows that sales increase is not matched by the increase in current assets in the expansion phase of Viraj Profiles Ltd.
381701 FY 07-08 0.Raisoni College of Engg and Management. whereas a ratio above 1 reflects the company's inability to do so.460848 G.OPERATING RATIOS • • Working ratio Interest coverage ratios WORKING RATIO A ratio used to measure a company's ability to recover operating costs from annual revenue. Financial Year working ratio FY 06-07 0.H. Pune 3 . A working ratio below 1 implies that the company is able to recover operating costs. This ratio is calculated by taking the company's total annual expenses (excluding depreciation and debt-related expenses) and dividing it by the annual gross income.43002689 FY08-09 0.
Pune 3 .4 0.2 0.5 CURRENT SCENERIO INTERPRETATION The ratio consistently has been below 1 which means company can very well take out its operating costs. G.3 0. Services.Raisoni College of Engg and Management.1 0.43002689 working ratio FY 06-07 0.WORKING RATIO FY08-09 0. though the margin of comfort is slightly decreasing because of the increase in expenses of the Viraj Profiles Ltd.460848 FY 07-08 0.381701 0 0.H.
H. Pune 3 . • • The current ratio of Viraj Profiles Ltd.CHAPTER V SUGGESTIONS AND FINDINGS Suggestions After the study of financial statement analysis in VIRAJ PROFILES LTD. following suggestion and recommendations are made based on the data analysis and interpretation of VIRAJ PROFILES LTD. So they should increase their net profit volume.Raisoni College of Engg and Management. G. The ideal ratio is 1:1 that is the liquid asset to liquid liabilities. Financial statements are most significant part of a company because financial statement analysis involves a comparison of a firm’s performance with that of other firms in the same line of business. net incomes were earned for each taka of sales is lower than the industry average. is more than asset so they can decrease it by increasing current liability. Getting reducing because their liability Company has excess investment in liquid asset than needed so they have to decrease their high investment in liquid asset. which usually identified by the firm’s industry classification. Here is our recommendations about this company are as follows: • • Company can cover its expenses like administrative by increasing its gross profit ratio. • Company has high reserve and Surplus they can use it for repayment of loan to decrease interest burden which positive effect in Net Profit. The net profit margins suggest that Viraj Profiles Ltd. The analysis is used to determine the firm’s financial position so as to identify its current strength and weakness and to suggest actions the firm might pursue to take advantage of the strengths and correct any weakness.
H. • The company should maintain an optimum level of cash in the business in order to maintain a proper liquidity in the business. G. • The company should administrate their credit on the basis of certain well recognized and established principle of credit administration.FINDINGS • Making available just adequate quantum of working capital. Some of the existing machinery is new with absolute equipments requiring modernization and rebuilding.Raisoni College of Engg and Management. Pune 3 .
• Data has been recalculated & regrouped wherever necessary. Pune 3 .Raisoni College of Engg and Management. • For the purpose of data analysis figures of some heads are not exactly found that time some assumption are needed to be consider.H. • Availability of the financial data was very limited which is not disclosed due to the confidentiality of the data to be maintained by the company. • Busy schedule of the employees of the company as they had to cater to the need of the administrative work which meant full devotion of their time towards company. G. • The data is mostly secondary in nature.CHAPTER VI LIMITATIONS • There may be limitations to this study because the study duration (summer placement) is very short and it’s not possible to observe every aspect of working capital management practices. • In the absence of sufficient data in-depth study of cash receivables and inventory management was not possible.
Both excess as well as short working capital positions are bad for any business. Pune 3 . it is noted that working capital is a means to run business smoothly and profitability. inventory optimization and also better working capital management. Every business concern should have adequate working capital to run its business operation. Thus.H. Working capital policies of a firm have a great effect on its profitability. Good management of working capital is part of good finance management effective use of working capital will contribute to the operational efficiency of a department optimum use will help to generate maximum return. G. the concept of working capital has its own important in a going concern.CHAPTER VII CONCLUSION Working capital management is an important aspect of any business. Every concern should have neither redundant of excess working capital nor inadequate or shortage of working capital. liquidity and structured health of the organization. So. If a finance manager maintains these three elements of working capital management properly means the concern will get dramatic improvement in their sales volume and also in business.Raisoni College of Engg and Management. Every concern should adopt some new trade management strategies that will help in greater productivity. The three elements of working capital management are cash management receivable management and inventory management.
2001 REPORTS Annual reports of Viraj Profiles Ltd. vikas publishing house pvt.P.Raisoni College of Engg and Management.16anna. Rustogi .CHAPTER VIII BIBLIGRAPHY BOOKS Pandey.virajprofiles. R. I.com www. “Financial Management”.H.co. INTERNET www.in G. Pune 3 . “Fundamentals of Financial Management” ltd . for year 2006 and 2007 and 2008.M.