Mysore Petrochemicals Ltd.

Management of Working Capital

Mcom Sem 4 Project Dev Shah
Page 1 of 5 Roll No – KSPMCAA012

What is Working Capital Management:

 Working capital management is a business strategy designed to ensure that a company operates
efficiently by monitoring and using its current assets and liabilities to their most effective use.

 The efficiency of working capital management can be quantified using ratio analysis.

 Working capital management requires monitoring a company's assets and liabilities to maintain
sufficient cash flow to meet its short-term operating costs and short-term debt obligations.

 Working capital management involves tracking various ratios, including the working capital ratio,
the collection ratio, and the inventory ratio.

 Working capital management can improve a company's cash flow management and earnings
quality by using its resources efficiently.

 The primary purpose of working capital management is to enable the company to maintain
sufficient cash flow to meet its short-term operating costs and short-term debt obligations. A
company's working capital is made up of its current assets minus its current liabilities.

 Current assets include anything that can be easily converted into cash within 12 months. These
are the company's highly liquid assets. Some current assets include cash, accounts receivable,
inventory, and short-term investments.

 Current liabilities are any obligations due within the following 12 months. These include accruals
for operating expenses and current portions of long-term debt payments.
Mysore Petrochemicals Ltd.
Management of Working Capital
Mcom Sem 4 Project Dev Shah
Page 2 of 5 Roll No – KSPMCAA012
Mysore Petrochemicals Ltd.
Management of Working Capital
Mcom Sem 4 Project Dev Shah
Page 3 of 5 Roll No – KSPMCAA012

Introduction:

Mysore Petro Chemicals Limited (“the Company”) CIN L24221KA1969PLC001799 a public limited
Company incorporated in India with its registered office at D/4, Jyothi Complex, 134/1, Infantry Road,
Bengaluru–560 001. It is engaged in trading of Phthalic Anhydride Maleic Anhydride and other
chemicals. The equity shares of the Company is listed on BSE and the scrip code No. is 506734. For
studying the management of working capital of the company, we have relied on the Annual report of the
company for the Financial year 2021-22.

Why Manage Working Capital:

 Working capital management helps maintain the smooth operation of the net operating cycle,
also known as the cash conversion cycle (CCC)—the minimum amount of time required to convert
net current assets and liabilities into cash.

 Working capital management can improve a company's cash flow management and earnings
quality through the efficient use of its resources. Management of working capital includes
inventory management as well as management of accounts receivable and accounts payable.

 Working capital management also involves the timing of accounts payable (i.e., paying suppliers).
A company can conserve cash by choosing to stretch the payment of suppliers and to make the
most of available credit or may spend cash by purchasing using cash—these choices also affect
working capital management.

 The objectives of working capital management, in addition to ensuring that the company has
enough cash to cover its expenses and debt, are minimizing the cost of money spent on working
capital, and maximizing the return on asset investments.

 Working capital management aims at more efficient use of a company's resources by monitoring
and optimizing the use of current assets and liabilities. The goal is to maintain sufficient cash flow
to meet its short-term operating costs and short-term debt obligations and maximize profitability.
Working capital management is key to the cash conversion cycle (CCC), or the amount of time a
firm uses to convert working capital into usable cash.

Extract of Audited Standalone Balance Sheet of Mysore Petrochemicals Ltd. as on 31 st

March 2022 (Amount is Rs. Lacs)

Particulars Note No. As at 31st As at 31st

March, 2022 March, 2021
Current Assets
Financial Assets
Investments 7 1,832.90 558.64
Trade Receivables 8 168.36 485.56
Cash and Cash Equivalents 9 56.30 144.46
Bank Balances other than Cash and Cash Equivalents 10 34.90 34.11
Other Financial Assets 11 58.36 1,681.96
Other Current Assets 12 38.41 2.87
TOTAL 2,189.23 2,907.60
Mysore Petrochemicals Ltd.
Management of Working Capital
Mcom Sem 4 Project Dev Shah
Page 4 of 5 Roll No – KSPMCAA012

Particulars Note No. As at 31st As at 31st

March, 2022 March, 2021
Current Liabilities
Financial Liabilities
Trade Payables 17
‘- Total Outstanding dues of micro enterprises and - -
small enterprises
‘- Total Outstanding dues of creditors other than micro 65.38 116.66
enterprises and small enterprises
Provisions 18 129.20 124.12
Other Current Liabilities 19 107.01 112.25
TOTAL 301.59 353.03

Working Capital Management Ratios: Three ratios that are important in working capital
management are the working capital ratio (or current ratio), the collection ratio, and the inventory
turnover ratio.

 Current Ratio (Working Capital Ratio) - The working capital ratio or current ratio is
calculated as current assets divided by current liabilities. It is a key indicator of a company's
financial health as it demonstrates its ability to meet its short-term financial obligations.
Although numbers vary by industry, a working capital ratio below 1.0 generally indicates that a
company is having trouble meeting its short-term obligations. That is, the company's debts due in
the upcoming year would not be covered by its liquid assets. In this case, the company may have
to resort to selling off assets, securing long-term debt, or using other financing options to cover its
short-term debt obligations. Working capital ratios of 1.2 to 2.0 are considered desirable, but a
ratio higher than 2.0 may suggest that the company is not effectively using its assets to increase
revenues. A high ratio may indicate that the company is not managing its working capital
efficiently.

The current ratio of the company for the year ended 31 st March 2022 and 31st March
2021 is 7.26 and 8.24 respectively. It is observed that the company’s current ratio
also known as the working capital ratio is very good and the company has liquidity
and will be able to meet it’s short-term obligations with great ease and the
company’s finances are also not in danger in the short run. Further, it is also
observed that the company is investing it’s excess short term funds in Mutual Funds
and Debentures

 Collection Ratio (Days Sales Outstanding) - The collection ratio, also known as days sales
outstanding (DSO), is a measure of how efficiently a company manages its accounts receivable.
The collection ratio is calculated as the product of the number of days in an accounting period
multiplied by the average amount of outstanding accounts receivable divided by the total amount
of net credit sales during the accounting period. The collection ratio calculation provides the
average number of days it takes a company to receive payment after a sales transaction on credit.
If a company's billing department is effective at collections attempts and customers pay their bills
on time, the collection ratio will be lower. The lower a company's collection ratio, the more
quickly it turns receivables into cash.

The trade receivable turnover ratio of the company for the year ended 31 st March
2022 and 31st March 2021 is 6.39 and 8.18 respectively. The reason for the same is
Mysore Petrochemicals Ltd.
Management of Working Capital
Mcom Sem 4 Project Dev Shah
Page 5 of 5 Roll No – KSPMCAA012

due to a few debtors only being there and mutual understanding with each of the
parties and entire sales are credit sales.

 Inventory Turnover Ratio - Another essential element of working capital management is

inventory management. To operate with maximum efficiency and maintain a comfortably high
level of working capital, a company must keep sufficient inventory on hand to meet customers'
needs while avoiding unnecessary inventory that ties up working capital. Companies typically
measure how efficiently that balance is maintained by monitoring the inventory turnover ratio.
The inventory turnover ratio, calculated as cost of goods sold divided by average balance sheet
inventory, reveals how rapidly a company's inventory is being used in sales and replaced. A
relatively low ratio compared to industry peers indicates a risk that inventory levels are
excessively high, while a relatively high ratio may indicate inadequate inventory levels.

As per the information and explanation given by the management in the annual
report, the company does not hold any inventory as it is in the business of trading of
petrochemicals and hence once purchase is received, the same is immediately
dispatched as a sale and hence the Inventory Turnover ratio of the company for the
year ended 31st March 2022 and 31st March 2021 is N/A and N/A respectively.

Importance of Ratios:

 Current ratio:- The current ratio (also known as the working capital ratio) indicates how well a
firm is able to meet its short-term obligations, and it's a measure of liquidity. If a company has a
current ratio of less than 1.00, this means that short-term debts and bills exceed current assets, a
signal that the company's finances may be in danger in the short run.

 Collection ratio:- The collection ratio, or days sales outstanding (DSO), is a measure of how
efficiently a company can collect on its accounts receivable. If it takes a long time to collect, it can
be a signal that there will not be enough cash on hand to meet near-term obligations. Working
capital management tries to improve the collection speed of receivables.

 Inventory ratio:- The inventory turnover ratio shows how efficiently a company sells its stock
of inventory. A relatively low ratio compared to industry peers indicates a risk that inventory
levels are excessively high, while a relatively high ratio may indicate inadequate inventory levels.

The Annual report of the Company for reference is attached herewith:-