1.

INTRODUCTION

The financial management of business firms involves the management of

long term assets, fixed assets, management of capital and management of short term
assets and liabilities. The first of three functions is the capital budgeting, the second
is the management of capital structure and the last but not the least is the
management of working capital.

Working capital is one of the most fundamental measures of a firm's

financial strength. If a firm possesses a significant value of liquid assets, it can
easily fund its day to day business obligations.

Working capital, also known as net working capital or NWC, is a financial

metric which represents operating liquidity available to a business. Along with
fixed assets such as plant and equipment, working capital is considered a part of
operating capital. It is calculated as current assets minus current liabilities. If
current assets are less than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit.

Working Capital = Current Assets − Current Liabilities

A company can be endowed with assets and profitability but short of liquidity if its
assets cannot readily be converted into cash. Positive working capital is required to
ensure that a firm is able to continue its operations and that it has sufficient funds to
satisfy both maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts receivable
and payable and cash

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 1.1 Management of working capital

Guided by the above criteria, management will use a combination of policies

and techniques for the management of working capital. The policies aim at
managing the current assets (generally cash and cash equivalents, inventories and
debtors) and the short-term financing, such that cash flows and returns are
acceptable.

Cash management. Identify the cash balance which allows for the business
to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials—and
minimizes reordering costs—and hence increases cash flow. Besides this, the
lead times in production should be lowered to reduce Work in Process (WIP)
and similarly, the Finished Goods should be kept on as low level as possible to
avoid over production—see Supply chain management; Just In Time (JIT);
Economic order quantity (EOQ); Economic quantity.

Debtors management. Identify the appropriate credit policy, i.e. credit terms
which will attract customers, such that any impact on cash flows and the cash
conversion cycle will be offset by increased revenue and hence Return on
Capital (or vice versa); see Discounts and allowances.

Short-term financing. Identify the appropriate source of financing, given

the cash conversion cycle: the inventory is ideally financed by credit granted by
the supplier; however, it may be necessary to utilize a bank loan (or overdraft),
or to "convert debtors to cash" through "factoring".

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 1.2 Meaning & Definition

Working capital management is the process of planning and controlling the level
and mix of the current assets of the firm as well as financing these assets.

1) “The portion of firm’s current assets which are financed with

long term funds”
: - L.G.Gitmann

Working capital is defined as the excess of current assets over the current
liabilities and provisions. That is, the amounts of surplus of current assets, which
remain after deducting current liabilities from, total current assets. This amount is equal
to the amount invested in working capital.

2) “Working Capital is the amount of funds necessary for the cost of

operating the enterprise.”
: - Shubin

In simple terms, working capital refers to the cash a firm requires in order to
finance its day-to-day business operations. In other words, working capital refers to the
amount of capital, which is readily available to an organization.

3) “Working Capital is the difference between the inflow and

outflow of fund. In other words it is the net cash inflow”.

4) “Working capital represents the total of all current assets.in

other words it is the “Gross working capital”, it is also known as
“Circulating capital” or “Current capital” for current assets if
rotating in their nature.

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 2 .COMPANY PROFILES

Badve Engineering Limited is the largest manufacturer of exhaust system for motor cycle
& 4wheeler, also manufacturing chassis, frame assembly, plastic moulded, painted parts
& assemblies for motor cycle, auto rickshaw & home appliances. & today we have 19
units in allover India, in different states.

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 Badve Group of Engineering is founded by Mr. SHANKAR BADVE in 1987 as
Shreya Enterprises Ltd. to manufacture nut bolts at waluj D-39. Earlier name of
Badve Engineering pvt ltd. was Shreeyash Enterprises. in 2000. In 1987-89 our
sales turnover was two lakhs rupees, in previous year our sales turnover is 1642
Crores rupees, now till date they have near about 1700 crores rupees. In following
chart I have mention sales turnover milestones

SALES TURNOVER IN CRORES

1800
1642
1600 1485

1400 1273
1200
1009
1000

800 696
554
600
462
400 324
200 112
0.02 1.16 7.02 59
0
1987- 1990- 1996- 1999- 2002- 2005- 2006- 2007- 2009- 2009- 2011- 2012- 2013-
1988 1991 1997 2000 2003 2006 2007 2009 2010 2010 2012 2013 2014

The Badve Group is the leading Component manufacturer in Automotive & Home
Appliances sector.

Specialist in manufacturing of ……

 Exhaust Systems for Motorcycles & 4-W Goods Carriers

 Chassis & Frame Assembly for Auto Rickshaws, 4-W Goods Carriers &
Motorcycles
 Plastic Molded, Painted Parts & Assemblies for Motorcycles, Auto
Rickshaws & Home Appliances

Joint Venture with M/s VEMAR – Italy for Helmet Manufacturing & exports.

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 2.1CHAIRMAN'S MESSAGE
“TODAY, we are an established and accomplished company, ONE OF THE
TOP Suppliers of Automotive Components and Aggregates. We manufacture Sheet
Metal, Fabricated, Plastic Moulded Components, etc. having facilities including
Robotics and multiple Surface Treatments.
In retrospect, we started as a small enterprise manufacturing small sheet metal parts.
But with relentless hard-work, responsible risk-taking, an ever-eagerness to grab
opportunities and with our Core Value of Excellence, we have grown into an
enviable position.
Today, we have our Plants and Facilities all over India – Aurangabad, Waluj,
Ranjangaon and Chakan (Pune) in Western India, Dharwad, Banglore & Chennai in
Southern India, Pantnagar and Bhiwadi in Northern India and Indore in Central
India. In manufacturing, we have adopted progressive systems. We have
implemented SAP, World’s Leading Systems Software, integrating all our Plants at
various locations. Systems of INTERNATIONAL ORGANISATION for
STANDARDISATION (ISO); ISO 9001 Quality Systems, ISO 14001
Environmental Management Systems, ISO / TS 16949 Total Quality Management
Systems as Applicable to the Automotive Sector have also been implemented at all
our Plants and strict adherence to these standards is maintained.
The world renowned and recognized as ‘tough to implement and continue ‘, the
Japanese innovated "TOTAL PRODUCTIVE MAINTENANCE (TPM) SYSTEM"
is enthusiastically and seriously followed in words and spirit in all our Plants
achieving SYNCHRONISED MANUFACTURING FLOW. To work in systems
and scale higher and higher Peaks of Achievements is now incorporated in our
blood.
The efforts of our organizations are praised and recognized through the various
awards we have received at the hands of The President and Prime Minister of India,
from Bajaj Auto and other Organizations from time to time for highest
achievements in the fields of RESEARCH and DEVEOLPMENT, QUALITY,
MANUFACTURING EXCELLENCE, TPM and others.
Our People are our strength. We shall never forget Social Aspects and Clean
Environment. We will continue our directional good work with INNOVATIONS,
TRANSPARANCY, and dedicating to EXCELLENCE and SPEED, this is our
Unquenchable Thirst.
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 2.2MD’S WORDS
RETROSPECTION

As a Graduate Engineer, I wanted to do something

different than to just follow the foot prints of the
conventional path. In fact, as an Entrepreneur I always
wanted to take the untrodden path. I dreamt differently and
have taken relentless efforts to fulfill these dreams.
Overcoming the initial hurdles to start an engineering
enterprise in terms of Finance, Space, Market, Machinery
and Equipments was challenging; after establishing the
business, I could earn a good name as a COMMITTED,
ADVENTUROUS AND QUALITY SUPPLIER, earning
a position among the TOP SUPPLIERS to the AUTOMOTIVE SECTOR.
In the process, expansion and diversification was achieved. Facilities for manufacturing
were added from conventional Mechanical Presses, Welding Equipment, and Nickel
Chrome Plating to Automation, Robotics, State of the art Surface Treatment Plants of
Autophoretic, Plastic Injection Moulding and Painting of Plastics. Our Manufacturing
Facilities are spread across India at different locations.
TODAY

We grew from a Supplier and Manufacturer of Automotive Exhaust Systems,

Two and Three Wheeler Chassis and Aggregates to a Manufacturer of diversified
products inclusive of Four Wheeler Components, Chassis and Aggregates. With Goods
Components and Aggregates, we have JOINT VENTURES with RENOWNED
INTERNATIONAL MANUFACTURERS for various products like Helmets, Security
and Hardware.

The Global Slowdowns of yesteryears did not dampen our spirit and growth. We always try
to achieve INEXORABLE GROWTH to scale new peaks of achievements. Our
performance speaks for us; now we have made our way into in the 1000 Crores ($200
Million) Turnover Club. We have own various Awards, outperforming in fields of Research
and Development, Quality and TPM. These awards are significant but, the pats from THE
PRESIDENT and PRIME MINISTER OF INDIA do make us feel proud.
We never let ourselves be stagnant and are driven by Value Engineering, Lean Systems
and Six Sigma Techniques and Processes, having adopted ISO/TS 16949 Quality
Management Systems, Environmental Management Systems, OHSAS Systems. Our
Green Policy will fulfill Social Obligations has also been a priority.

We are committed to improve the Standard of Living by creating wealth and sharing
with all Stakeholders.

Shrikant Badve

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 2.3 INDUSTRIAL PROFILE
Welcome on Board

It gives me immense pleasure to welcome you to the Badve engineering ltd.

Plant-V family. We are excited to have you join our family, and we are sure that you
will enjoy working with us.
We at BEL-V understand how exciting and daunting it is to commence a new
role in a new organization until you “find your feet”. To assist you and familiarize you
with your new life at BEL-V, we have prepared this joining and induction kit which
will help you during your initial weeks to learn about your new environment and its
expectations. You will also meet people with whom you will work and also learn about
your roles and functions. his kit is designed as an accompaniment to the induction
program conducted by the company. This kit is not a replacement for the formal and in
formal induction and staff development activities that already take place.
This kit also consists of different types of forms that are required to be filled at
the time of joining and general guidelines to help you settle in your new environment.
On the first day of joining we shall be conducting an induction program which
will provide you with an opportunity to meet all HOD, top management authority as
well as to gain important information about the company’s vision, mission, and
employee related policies & its different functions etc.

Wishing you all success and a bright career ahead at BEL-V.

With warm regards

V.S. kasture
Plant Head- BEL-V

Core Values

EXCELLENCE
INNOVATION
TEAM
NOW

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 2.4 COMPANY VISION & MISSION

The quest to stay a head in a rapidly evolving market has made Badve constantly
develop new products and upgrade its manufacturing the highest quality standards, each
new component made for our customers is an inspiration that drives us further to make
Badve globally a recognized and leading automotive component partner.

Vision:-

TO GLOBALLY OFFER
ENGINEERING PRODUCTS
THROUGH INEXORABLE
MARCH OF NEW
TECHNOLOGY, THUS
BECOMING A TRUSTED
BRAND THROUGH CUSTOMER
DELIGHT.

Mission:-

TO BE A LEADING GLOBAL
ORGANISATION FOR THE SUPPLY OF
WORLD CLASS PRODUCTS…..THERE
BY MEETING CUSTOMER SCHEDULES
OF DEVELOPMENT, VALIDATION AND
SUPPLY OF EVERY PRODUCT ON
ORDER…..THROUGH RELENTLESS
AND CONTINUOUS IMPROVEMENTS
WHILE PARTNERING WITH ALL
STAKEHOLDERS.

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 2.5 FOCUS AREA

It is the dream to become not only a globally competitive automotive component

supplier, but also to make Badve known for supply of component of the best quality
and at most competitive prices.

TPM:-
TPM (Total productive maintenance) has been adopted by Badve as a tool to
achieve operational excellence in all the plants. This will help Badve in its endeavor to offer
to its customers the best quality products at the most competitive prices with Focus on
Productivity, Quality, Cost, Delivery, Safety & Morale and mostly focus on “Quality”.

Technology:-

This includes both strong in house R & D for all Badve production, as well as
getting the best foreign collaborations for Badve.

Strong vendor partnership:-

Badve is in the process of selecting the best vendor this all stake holders in
grooming of vendors in terms of “QCD” with right attitude.

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 Customer focus:-

Badve must grow with existing customer, including its major customer BAJAJ
AUTO LTD, and focus of trust earned through world class products adhering to Quality
& Schedules.

People:-
In this competitive environment, the most important focus for our organization
is its people. It is the quality and capability of Badve people, which will help Badve to
achieve its goals.

Major competitors:-

In following competitors are mention as per manufacturing section:-

1. Molding :- Varoc, Metal Man

2. Helmets :- Royal Enfilade
3. Fabrication: - Metal Man, Yashasri, Laxmi Metal, S.M.Auto.
4. Printing: - Varoc, ABS, Metal Man.

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 2.6 POLICIES IMPLEMENTED IN BADVE ARE

QUALITY POLICY

Quality is the way of our life

QUALITY POLICY

WE ALL AT BADVE GROUP, COMMIT TO PRODUCE AND SUPPLY

QUALITY PRODUCTS FULFILLING CUSTOMER REQUIREMENTS.
WE SHALL STRIVE TO ENHANCE CUSTOMER SATISFACTION
THROUGH CONTINUAL IMPROVEMENT, INVOLVING ALL OF US
TO ACHIEVE MARKET LEADERSHIP OF OUR PRODUCT.

SHRIKANT BADVE Date: 1st March 2002

MANAGING DIRECTOR

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 TPM POLICY

TPM is our culture

TPM POLICY

WE AT BADVE GROUP ADOPT “TOTAL PRODUCTIVE

MAINTENANCE” AS A MEANS OF CREATING SAFE AND
PARTICIPATIVE WORK ENVIRONMENT IN WHICH ALL
EMPLOYEES TARGET THE ELIMINATION OF LOSSES IN
ORDER TO CONTINOUSLY ENHANCE THE CAPACITY OF ITS
PROCESSES, LEADING TO HIGHER EMPOLYEE MORALE AND
GREATER ORGANISATIONAL AND CUSTOMER
PROFITABILITY.

SHRIKANT BADVE Date: 1st March 2002

MANAGING DIRECTOR

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 ENVIRONMENT, OCCUPATIONAL HEALTH & SAFETY POLICY

Badve Engineering Ltd.

Environment, Occupational Health & Safety Policy

We. Badve Engineering Ltd., Manufacturer of automotive components. Are committed
for continual improvement in safty. Occupational health & environmental performance
and compliance with applicable safty. Occupational health. Environmental legistation,
regulations and other requirements.
To meet these objectives Badve Engineering Ltd.will:

 Provide and maintain facility, equipments, operations & conditions which are
safe for employees and contractors in our quest towords achieving our goal of
becoming “Zero Accident” Company.

 Minimise the generation of waste and conserve natural resources by adopting

better technologyand practices for prevention of pollution.

 Ensure safe handling, storage, use and disposal of all substances & materials
which are classified as hazardous for health & environment.

 Create awareness in employees by providing appropriate training and

information’s so as to create individual sense of duty, responsibility &
participations & an institutionlize culture of continual improvement in safty,
occupational health and environment matters.

 Use relevent techniques and methods, such as safety audit, risk assessment for
periodical assessment of the status on the health, safety & environment and
taking all the remedial matters .

 Take into accountthe health and safety performace of individuals at different

levels while considering their career advancement.

 Review annually ENVIRONMENT, OCCUPATIONAL HELTH & SAFETY

POLICYunder the chairmanship of the occupir.
We shall communicate this policy to all persons working for and on behalf of the
organization and also make it available to the public on request.

Revision No:01 Shrikant Badve,

th
Managing Director

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 2.7 MANAGEMENT TEAM

A) Board of Directors
Mr. Shrikant Shankar Badve
Mr. Govindswami Sambandha Moorthy
Mr. Ashok Vishnu Tagare
Mrs. Supriya Shrikant Badve

B) Senior Management
NAME DESIGNATION DEPARTMENT
V.S.KASTURE AVP OPERATIONS

A.K.UPADHYAY AGM PAINT PRODUCTION & PPC

S.S. DAPHANE AGM HR & ADMIN

V.S.PATAY Sr. MANAGER PROCESS ENGINEERING
M.N.DHARME Sr. MANAGER PAINT SHOP QC
D.N.PATIL Sr. MANAGER MOULD SHOP PRODUCTION
M.K. CHORGE Sr. MANAGER MOULD SHOP QC

N.P.WADGAONKAR Sr. MANAGER MATERIAL

P.B.SHRIRAMWAR Sr. MANAGER ACCOUNT
S.N. JAGTAP Sr. MANAGER PPC
S.K.BHOSALE DY.MANAGER EXCISE

M.N. PANDE ASST. MANAGER STORES

C) Corporation Communication
Mr. Rajiv Savarkar
(Director)
Emai rajivsavarkar@badvegroup.com
l: Badve Engneering Ltd.
Addr
Gut No. 63-64, Near Green Gold
ess :
Seeds, Narayanpur, Aurangabad
- 431 133. Maharashtra, India

Phone 9881150575
No: corporate_mktg@badvegroup.com
Email www.badvegroup.com
:
Web
Site:
 2.8 ORGANIZATION CHART

MANAGING DIRECTOR
(Shrikant Badve)

DIRECTOR
(Rajiv Savarkar)

PRESIDENT

PLANT HEAD BUSINESS PROJECTS

1) Mr. V.S.Kasture DEVELOPMENT Mr.V.C.Gujrati
2) Mr. S.R.Pankey 1)Mr.M.A.Chengta
3)Mr.M.S.Ambtpure 2)Mr.J.S.Lomte
4)Mr. N.M.Bhate 3)Mr.S.Ganpalliwar
5)Mr. D.T.Rane FINANCE
6)Mr. A.G.Gawli 4)Mr.S.N.Patil Mr.R.S.Ganu
7)Mr. R.B.Bhutada 5)Mr.H.A.Abhyankar
8)Mr.R.S.Bhatnagar
9)Mr. D.R.Mehtre

INFORMATIO PURCHASE HR & ADMIN

TECHNOLOGY
Mr.M.K.Yadav Mr.V V
Mr.S.V.DIXIT Kulkarni
 2.9 ORGANISATION STRUCTURE

Plant Head
(V.S.Kasture)

Quality & Assurance Process Development

Production
(M.N.Dharme) Engineering (D.N.Patil)
(A.K.Upadhayay)
(N.K.Chorge) (V.S.Pathe)

Tool Room Materials & Stores Maintenance PPC/Dispatch

(S.L.Mistari) (A.D.Kalaskar) (S.V.Selke) (S.N.Jagtap)
(S.K.Bhosle)

HR & Admin Accounts & Excise Purchase

(S.S.Dhaphane) (P.B.Shriramwar) (N.P.Wadgaonkar)
(S.K.Bhosle)
 3. OBJECTIVE OF THE STUDY

1) To review the history, growth and development of Badve Engineering

Ltd., Aurangabad

2) To examine the pattern of management of working capital and to analyze

the working capital trends.

3) To evaluate inventory management in Badve Engineering Ltd.,

Aurangabad.

4) To analyze receivable management in Badve Engineering Ltd.,

Aurangabad.

5) To examine cash management practice in Badve Engineering Ltd.,

Aurangabad.

6) To evaluate efficiency and liquidity of working capital management in

Badve Engineering Ltd., Aurangabad.
 4. SCOPE OF THE STUDY

For the sake of convenience of the study, the scope of the project is restricted as
followed

4.1 Temporal Scope:-

The scope of the study broadly covers the period from 2006-07to 2008-09.
However, while studying the history of the organization the period from 1987 i.e. the
period since the date of formation of the organization is also covered.

4.2 Functional Scope:-

There are various managerial aspects of Bosch Autocom Ltd, Aurangabad such
as marketing, sales, human resource management are available for study. Considering
the requirement of the course and significance of subject only aspect of Working
Capital Management of the organization is selected for the study.

4.3 Geographical Scope:-

There are various organizations working in Aurangabad area. It is not possible

to study Working Capital Management of all such organization within a period of two
month, so only Badve Technologies Ltd. is selected for study.
 5. RESURCHE & MATHADOLOGY

There are mainly two sources of data and information i.e.

5.1 Primary Sources:-

There are various methods of collecting the primary data i.e. Interview Method,
Questionnaire Method, Observation Method etc. In this case it is the study of a single
organization, so personal interview method is used for collecting the necessary
information and data.

For this purpose, the necessary information is collected from the personal
interview of the Secretary, finance executives , Accounts Officers are taken, through
which points like requirement of working capital, sources of working capital, history of
organization etc. and other relevant issues are discussed and the required information is
collected and inserted at appropriate places in this project report.

5.2 Secondary Sources:-

This study is based on facts and figures for which secondary sources are also
used for collecting the data and information for this project. The secondary sources of
data consists of – Organizational Annual Reports, Theoretical base regarding working
capital management in various books
METHOD OF STUDY:

Observation:-
There are various type documents invoices, purchase order (PO), cash vouchers
Balance sheet and also organization was observed. There every department is connected
with work.

Interview:-
I interacted with HR & ACCOUNT Department with every employees and
workers and managers, questions were asked by me as per their work in company.

This study is useful to the various factors as under –

To Directors:-
The members of Board of Directors will be able to study the details regarding
management of working capital in the organization. They will study the trends of
working capital during the last three years.

To the Staff:-
The officers and employees working in the organization use the study for
implementing the financial policies and making optimum use of financial sources.

To Students and Researchers:-

The persons who are interested in studying the management of working capital
in Badve Autocom Ltd, Aurangabad can refer the data and information included in this
project report and the conclusions and suggestions made in the study.

To Government Departments:-
The personnel for government departments may also get valuable information
from this report while framing the schemes and plans related with such organizations.
 6. STUDY OF LITERATURE

6.1 CONCEPT OF WORKING CAPITAL MANAGEMENT

There are two concept of working capital viz. quantitative and qualitative. Some
people also define the two concepts as gross concept and net concept. According to
quantitative concept, the amount of working capital refers to ‘total of current assets’.
What we call current assets? Smith called, ‘circulating capital’. Current assets are
considered to be gross working capital in this concept.

The qualitative concept gives an idea regarding source of financing capital.

According to qualitative concept the amount of working capital refers to “excess of current
assets over current assets over current liabilities.” L.J.Guthmann defined Working capital as
“the portion of a firm’s current assets which are financed from long-term fund.”

The excess of current assets over current assets over current liabilities is termed
as ‘Net working capital’. In this concept “Net working capital” represents the amount of
current assets which would remain if all current liabilities were paid. Both the concept
of working capital have their own points of importance. “If the objectives is to measure
the size and extent to which current assets are being used, ‘gross concept’ is useful;
where as in evaluating the liquidity position of an undertaking ‘net concept’ becomes
pertinent and preferable.

It is necessary to understand the meaning of current assets and current liabilities

for learning the meaning of working capital which is explained below.
6.1.1 Current Assets-
It is rightly observed that “current assets have a short life span. These types of
assets are engaged in current operation of a business and normally used for short-term
operations of the firm during an according period i.e. within twelve months. The two
important characteristics of such assets are,

Short life span, and

Swift transformation

Into other form of assets. Cash balance may be held idle for a week or two,
account receivable may have a life span of 30 to 60 days, and inventories may be held
for 30 to 100 days.”

Fitzgerald defined current assets as, “cash and other assets which are expected to
be converted in to cash in the ordinary course of business within one year or within
such longer period as constitutes the normal operating cycle of a business.”

6.1.2 Current Liabilities-

The firm creates a current liability towards creditors (sellers) form whom it has
purchased raw material on credit. This liability is also known as accounts payable and
shown in the balance sheet till the payment has been made to the creditors.

The claims or obligations which are normally expected to mature for payment
within an according cycle are known as current liabilities. These can be defined as
“those liabilities where liquidation is reasonably expected to require the use of existing
resources properly classifiable as current assets, or the creation of other current assets,
or the creation of other current liabilities.”

6.1.3 Circulating capital-

Working capital is also known as ‘circulating capital or current capital.’ “the

use of the term circulating capital instead of working capital indicates that its flow is
circular in nature.”
6.1.4 Structure of Working Capital-

The different elements or components of current assets and current liabilities

constitute the structure of working capital which can be illustrated in the shape of a
chart as follows:

Structure of Current Assets and Current Liabilities

Current Liabilities Current Assets

Bank Overdraft Cash and Bank Balance

Creditors Inventories: Raw-Materials,

Work-in-progress, Finished Goods
Outstanding Expenses Spare Parts

Bills Payable Accounts Receivables

Short-Term Loans Bills Receivables

Proposed Dividends Accrued Income

Provision for Taxation, etc. Prepaid Expenses Short-Term

Investments
 6.2 CONCEPTS

The concept of working capital has been a matter of great controversy among
the financial experts. There are two concepts of working capital i.e.

a) Gross Concept b) Net Concept

6.2.1 Gross Concept-

The Gross concept of working capital deals with firm's current assets. The sum
total of current assets of firm is termed as working capital. From the perspective of
working capital needs, Gross concept of working capital is - the investment in
circulating assets or in inventory and accounts receivables, comprising the operating
cycle of a manufacturing firm. Investments in assets which be converted in cash within
an accounting year, which includes cash, short term securities, debtor, bills receivable
and inventories. In short, according to gross concept working capital refers to the sum
total of all current assets of the firm employed in the business process.

6.2.2Net Concept-
Net concept of working capital refers to current assets less current liabilities.
That means, working capital is the difference between resources in cash or readily
convertible into cash i.e. current assets and organizational commitments for which cash
will soon be required i.e. current liabilities. Thus:-

1) Formula of Working Capital-

Working capital = Current Assets – Current Liability

Current liabilities are those claims of outsiders which are expected to mature for
payment within an accounting year and include creditors, bills payable, bank overdrafts
and outstanding expenses. Thus, according to net concept of working capital represents
excess of current assets over current liabilities. So, there is no universal concept of
working capital that is accepted widely. Some have made it quite simple stating it is the

difference between current assets and current liabilities. Others consider it as being
equal to the total of current assets.
 6.3 IMPORTANCE

The management of working capital plays an important role in the maintaining

the financial health of the firm during the normal course of business. A study of
working capital is of major importance of internal and external analysis because of its
relationship with the current day to day operations of business. The study of
management of working capital covers areas like cash management, Accounts
receivables, inventory and other concerned areas. Thus, working capital is of paramount
importance to a firm's financial performance.

Working capital is significant because of:

1. Adequate working capital is required to continue uninterrupted business

operations.

2. It is essential to run the day-to-day business operations.

3. Greater volume of working capital required investing in current assets for the
success of sales activities.

4. To ensure the maximizing the wealth of a firm.

5. To increase the rate of return on investment.

6. To meet the short-term obligations of a business enterprise.

7. To make the optimum utilization of resources.

 6.4 OPERATING CYCLE

Working capital is that part of a firm’s capital which is required to hold current
assets of the firm. Example – Current assets are raw material, semi-finished goods,
finish goods, debtors, bills receivables, prepaid expenses, cash at bank and cash in
hand. The firm requires cash to pay various expenses like wages, salary, rent,
advertising etc. current assets have a short life span. They are swiftly transformed into
other current-assets forms and ultimately in cash. In other words, funds invested in
current- assets are constantly converted in to cash. This cash again flows out in
exchange for other current assets. There is an operating cycle. Cash is use to buy raw
material. Various manufacturing expenses are incurred to convert raw material into
semi finished goods and then into the finished goods. On sale of finished goods on
credit, trade debtors or bills receivable results. On receipt of payment, trade debtor’s
bills receivable are converting in to cash and a cycle of working capital is completed. In
case of cash sale, finished goods will directly be converted in to cash. The operating
cycle consists of the following events which continues throughout the life of business-

Conversion of cash into raw materials;

 Conversion of raw materials into work in progress;

 Conversion of work in progress into finished products;
 Conversion of finished products into account receivables through sales;
 Conversion of account receivables into cash;

6.4.1 Operating Cycle of Working Capital-

Thus there is complete cycle form cash to cash wherein cash gets converted into
raw materials, work-in-progress, finished products, debtors and finally into cash again.
The operating cycle of working capital will repeat again and again over the period
depending upon the nature of business.
 Cash

Raw material

Trade Debtors and bills

Finish goods
receivables

Credit sale
Semi-finished goods or
work-in-progress
Finished good

Capital required for a business can be classified in two main categories-

1) Fixed capital-

2) Working capital-

Every business need fund for two purposes for establishment and to carry out its
day-to-day operations, long-term funds are required to create production facilities.

Through purchase of fixed assets such as plant and machinery, land, building,
furniture, etc. investment in these assets represent that part of firm’s capital which is
blocked on permanent or fixed basis and is called fixed capital. Fund are also needed,
for short-term purpose for the purchase of raw material, payment of wages and other
day-to-day expenses, etc. these funds are known working capital. In simple word,
working capital refers to that part of the firm’s capital, which is required for financing
short-term or current assets such, marketable securities, debtors and inventories. fund
thus invested, in current assets keep revolving fast and are being constantly convert into
cash and this cash flows out again in exchange for other current assets. Hence, it is also
known as revolving or circulating capital or short-term capital.
6.4.2 Adequacy of Working Capital-

Working capital should be adequate for the following reasons:

It product a business from the adverse effects of shrinkage in the values of

current assets.

It is possible to pay all the current obligations promptly and to take advantage
of cash discounts.

It ensures to a greater extant the maintenance of a company’s credit standing

and provides for such emergencies as strikes, floods, fires etc.

It permits the carrying of inventories at a level that would enable a business

to serve satisfactorily the need of its customers.

It enables a company to extend favorable credit terms to customers.

It enables a company to operate its business more efficiently because there is

no delay in obtaining materials etc. because of credit difficulties.

It enables a business to withstand period of depression smoothly.

Current funds may be invested in non-current assets.

6.4.3 Dangers of excessive or inadequate Working Capital-

a) When Working capital is inadequate, a company faces the following problems:

It is not possible for it to utilize production facilities for the want of

working capital.

A company may not able to take advantage of cash discount facilities.

The credit worthiness of the company is likely to be jeopardized because

of lack of liquidity.

A company may not be able to take advantage of profitable business

opportunities.

The modernization of equipment and even routine repairs and

maintenance facilities may be difficult to administer.

A company may not be able to pay dividends because of the non

availability of the funds.

A company may have to borrow funds at exorbitant rates of interest.

b) When Working capital is Excessive, a company faces the following problems:

A company may be tempted to overtrade and lose heavily.

A company may keep very big inventories and tie up its funds
unnecessarily.

There may be an imbalance between liquidity and profitability.

A company may enjoy high liquidity and at the same time suffer from
low profitability.

A company may invest heavily in its fixed equipment which may not be
justified by actual sales or production. This may provide a fertile ground
for later over-capitalization.
 6.5 TYPES OF WORKING CAPITAL

TYPES OF WORKING CAPITAL

Net Gross Permanent Temporary Balance Cash

working working working or variable sheet working
capital capital capital working Working capital
capital capital

6.5.1 Net Working Capital -

The term net working capital refers to excess of total current assets over total
current liabilities. The concept of net working capital enables a firm to determine how
much amount is left for operational requirements.

6.5.2 Gross Working Capital -

The gross working capital refers to investment in all the current assets taken
together. The total of investments in all current assets is known as gross working
capital. This concept has the following advantages:

(a) Gross working capital provides the correct amount of working capital
at the right time.

(b) It enables a firm to realize the greatest return on its investment.

(c) It helps in the fixation of various areas of financial responsibility.

6.5.3 Permanent Working Capital -

It also refers to hard core working capital. It is that minimum level of investment
in the current assets that is carried by the business at all the times to carry over
minimum level of its activities.

6.5.4 Temporary or variable Working Capital -

It refers to that part of working capital, which is required by a business over &
above permanent working capital. It is also called variable working capital. Since the
volume of temporary working capital keeps on fluctuating from time to time according
to business activities it may be financed from short-term sources.

The management has to provide for both kind of working capital – permanent
working capital and temporary working capital. But the period for which temporary
working capital is required is rather short and the amount is also fluctuating whereas the
amount of permanent working capital is stable as it is permanently needed. The
following figure shows these facts:-

Total
Workin
Amount
g
of
Capital
working
capital
C
Working
Temporary capital D
A

B
Permanent
Working Capital
O
TIME
 OA is the amount of permanent working capital. Straight line AB shows that the
amount remains the same over a period of time. Curve CD shows the the total working
capital requirement which varies from time because temporary working capital goes on
changing. Requirement over and above the permanent working capital requirement is
the temporary working capital requirement and has been market as such in the figure.

It should be noted that as the business of firm grows, the amount of its
permanent working capital will also increase. Thus for a growing business firm, the
difference between permanent working capital and temporary working capital may
appear as follows :-

Total working
capital

Amount of C
working
capital Temporary Working Capital D
A B

Time

6.5.5 Balance Sheet working Capital:

The Balance Sheet working capital is one which is calculated from the items
appearing in the balance sheet .Net working capital which is represented by the excess of
current assets over current liabilities; are example of the balance sheet working capital.

6.5.6 Cash working capital:

Cash working capital is one which is calculated from the items appearing in the
profit and loss account. It shows the real flow of money or value at a particular time and
is considered to be the most realistic approach in working capital management. It is on
the basis of operation cycle concept.
6.6 FACTORS DETERMINANTS OF WORKING CAPITAL

Nature of enterprise

DemandCashrequirementsofindustry

Manufacturing time

Volume of sale

Terms of purchase & sales

Inventory turnover

Current assets

Production cycle
Factors affecting
working capital Credit control

Inflation

Seasonal fluctuation

Cash reserves

Liquidity and profitability

Operational efficiency

Size of the firm

Business cycle
6.6.1 Nature of Industry:

The composition of an asset is a function of the size of a business and the

industry to which it belongs. Small companies have smaller proportions of cash,
receivables and inventory than large corporations. Needs for working capital are thus
determine by the nature of an enterprise.

6.6.2 Demand of Industry:

Creditors are interested in the security of loans. They want their obligations to
be sufficiently covered. They want the amount of security in assets which are greater
than the liability.

6.6.3 Cash Requirements:

Cash is one of the current assets which is essential for successful operations of
the production cycle. Cash should be adequate and properly utilized. It would be
wasteful to hold excessive cash. A minimum level of cash is always required to keen
the operations going. Adequate cash is also required to maintain good credit relations.

6.6.4 Manufacturing Time:

The level of working capital depends upon the time required to manufacture
goods. If the time is longer, the size of working capital is great. Moreover, the amount
of working capital depends upon inventory turnover and the unit cost of the goods that
are sold. The greater this cost, the bigger is the amount of working capital.

6.6.5 Volume of Sales:

This is the most important factor affecting the size and components of working
capital. The volume of sales and the size of working capital are directly related to each
cast of operations, in inventories and in receivables.

6.6.6 Term of Purchases and Sales:

If the credit terms of purchases are more favorable and those of sales less liberal,
less cash will be invested in inventory. A firm gets more time for payment to creditors or
suppliers. A firm which enjoys greater credit with banks needs less working capital.
6.6.7 Inventory Turnover:

If the inventory turnover is high, the working capital requirements will be low.
With a better inventory control, a firm is able to reduce its working capital requirements.

6.6.8 Value of Current Assets:

A decrease in the real value of current assets as compare to their book value
reduces the size of the working capital. If the real value of current assets increases,
there is an increase in working capital.

6.6.9 Receivable Turnover:

It is necessary to have an effective control of receivables. A prompt collection

of receivables and good facilities selling payables result into low working capital
requirements.

6.6.10 Production Cycle:

The time taken to convert raw material into finished products is referred to as
the production cycle or operating cycle. The longer the production cycle, the greater is
the requirement of working capital. Utmost care should be taken to shorter the period of
the production cycle in order to minimize working capital requirements.

6.6.11 Credit Control:

Credit control includes such factors as the volume of credit sales, the
term of credit sales, the collection policy etc. with a sound credit control policy; it is
possible for a firm to improve its cash inflow.

6.6.12 Inflation:

As a result of inflation, size of the working capital is increased in order to make

it easier for a firm to achieve a better cash flow. This factor may be compensated by the
rise in the selling price during inflation.
6.6.13 Cash Reserve:

It would be necessary for a firm to maintain some cash reserves to enable it to

meet contingent disbursements. This would provide a buffer against abrupt shortages in
cash inflow.

6.6.14 Size of the Firm:

A firm size either in terms of its assets or sales affects its need for working
capital. Bigger firms with many sources of funds may need less working capital as
compare to their total sales.

6.6.15 Business Cycle:

Business expands during period of prosperity and declines during the period of
depression. More working capital is required during the period of prosperity and less
during the period of depression.
 6.7 DATA ANALYSIS OF WORKING CAPITAL

As we know working capital is the life blood and the center of a business.
Adequate amount of working capital is very much essential for the smooth running of
the business. And the most important part is the efficient management of working
capital in right time. The liquidity position of the firm is totally effected by the
management of working capital. So, a study of changes in the uses and sources of
working capital is necessary to evaluate the efficiency with which the working capital is
employed in a business. These involve the need of working capital analysis.

The analysis of working capital can be conducted through a number of devices,

such as:-

1. Analysis of fund flow statement-

2. Analysis of cash flow statement-

3. Accounting ratio analysis-

1. FUND FLOW STATMENT

Accounting standards has made fund flow statement obsolete. Hence, the
following description is meant only for those who may, for some reasons, still be
required to prepare a funds flow statement.
Fund flow statement widely use tools in the hands of financial executives ’for
analyzing the financial performance of a concern. The term flow means change. Fund
of flow means change in working capital. In the sense tem fund refers to money values
in whatever form it may exist and include MEN, MATERIAL, and METHOD,
MACHINARY, MONEY etc.
Fund means the net working capital that is, current assets minus current liability.
Fund flow statement is a statement which listed first the entire source of funds and then
all the applications of funds that have taken place in a business enterprise during the
particular period of time for which the statement has been prepared. The statement
finally shows the net increase or net decreased in the working capital that has taken
place over the period of time. This statement is also called “statement of sources and
application funds” or “How to come where gone statement”.
 Usually along with fund flow statement a “statement showing change in
working capital” also called “working capital statement” is also prepared for the
same period for which fund flow statement is prepared. In this statement, all the
individuals’ current assets and current liabilities in the beginning as well as at the end of
the period are first noted. Then increase or decrease in working capital due to increase
or decrease in each such item is recoded. Finally the overall net increase or decrease in
working capital over the period is found out.

2. CASH FLOW STATEMENT

Income statement and balance sheet are the financial statement most sought after.
But many of those who study these statements are, for different reasons, also outflow of
cash or working capital. For example, the creditor may be interested in this information to
assess the short term ability of the enterprise to pay to its creditors. Hence, many companies
presented along with the final accounts, a statement called fund flow statement showing
changes in financial position. In June, 1981 the institute of chartered accounts of India
issued accounting standards -3: change in financial positions. These accounting standards
dealt with the financial statements that summarized, for the period converted by it, the
change in financial position showing the sources from which funds were obtained by the
enterprise and the specific uses to which fund were applied. Funds were defined as cash or
cash equivalents or working capital that is current assets minus current liability. But fund
flow statement suffered from certain limitations. A fund flow statement showed flow of
working capital which included items like stoke of goods and prepaid expenses which did
not contribute to the short term ability of enterprise to pay its debts. Flows were not
classified under the heads of operating, financial and investing activities. There was no
standards format of statement. There was the need of a cash flow statement in a standard
format classifying flow from different activities. In June, 1995 the securities and exchange
board of India (SEBI) amended clause 32 of the listing agreement requiring every listed
company to give along with its balance sheet and profit and loss account, a cash flow
statement prepared in the prescribed format, showing separately cash flow from operating
activity, investing activities and financing activities.

52
Definition:-
Cash flow statement is a statement which shows inflows (receipts) and outflow
(payments) of cash and its equivalents in an enterprise during a specified period of time.
According to the revised accounting standards 3, an enterprise should prepare a cash
flow statement and should present it for each period for which financial statements are
presented. In this context, the terms cash, cash equivalents and cash flow means the
following definitions:-

1) Cash comprises cash on hand and demand deposits with bank. A demand
deposit with a bank is a deposit which is repayable by bank on demand by
depositor.

2) Cash flow is inflow and outflow of cash and cash equivalents. An inflow
increases the total cash and cash equivalents at the disposal of the
enterprise whereas an outflow decreases them. The difference between the
cash inflows and cash outflows is known as net cash flow which can be
either a net cash inflow or a net cash outflow. Cash flow exclude
movements between items that constitute cash or cash equivalents because
this components are part of the cash management of an enterprise rather
than part of its operating, investing and financing activities. Cash
management includes the investments of excess cash in cash equivalents.
3. RATIO ANALYSIS

Introduction
Any successful business owner is constantly evaluating the performance of his
or her company, comparing it with the company's historical figures, with its industry
competitors, and even with successful businesses from other industries. To complete a
thorough examination of your company's effectiveness, however, you Need to look at
more than just easily attainable numbers like sales, profits, and total assets. You must be
Able to read between the lines of your financial statements and make the seemingly
inconsequential numbers accessible and comprehensible.
This massive data overload could seem staggering. Luckily, there are many
well-tested ratios out there that make the task a bit less daunting. Comparative ratio
analysis helps you identify and quantify your company's strengths and weaknesses,
evaluate its financial position, and understand the risks you may be taking.
As with any other form of analysis, comparative ratio techniques aren't
definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet
factors can play a role in the success or failure of a company. But, when used in concert
with various other business evaluation processes, comparative ratios are invaluable.
This discussion contains descriptions and examples of the eight major types of
ratios used in financial analysis: Income, Profitability, Liquidity, Working Capital,
Bankruptcy, Long-Term Analysis, Coverage, and Leverage.

Definition:-
The study of the significance of financial ratios for a company. Ratio analysis
is very important in fundamental analysis, which investigates the financial health of
companies. An example of ratio analysis is the comparison of price-earnings ratios of
different companies. This helps analysts determine which companies' share prices
properly reflect their performances and therefore what investments are most likely to
be the most profitable.
Explanation of ratio analysis
Ratio analysis is a widely used tool of financial analysis. It is defined as the
systematic use of ratio to interpret the financial statements so that the strength and
weaknesses of a firm as well as its historical performance and current financial
condition can be determined. The term ratio refers to the numerical or quantitative
relationship between two variables.

Significance or Importance of ratio analysis:

It helps in evaluating the firms performance:
With the help of ratio analysis conclusion can be drawn regarding several
aspects such as financial health, profitability and operational efficiency of the
undertaking. Ratio points out the operating efficiency of the firm i.e. whether the
management has utilized the firm's assets correctly, to increase the investor's wealth. It
ensures a fair return to its owners and secures optimum utilization of firms assets.

It helps in inter-firm comparison:

Ratio analysis helps in inter-firm comparison by providing necessary data. An
inter firm comparison indicates relative position. It provides the relevant data for the
comparison of the performance of different departments. If comparison shows a
variance, the possible reasons of variations may be identified and if results are negative,
the action may be initiated immediately to bring them in line.

It simplifies financial statement:

The information given in the basic financial statements serves no useful Purpose
unless it s interrupted and analyzed in some comparable terms. The ratio analysis is one
of the tools in the hands of those who want to know something more from the financial
statements in the simplified manner.
Advantages

Financial ratio analysis is a useful tool for users of financial statement. It has
following advantages:

It simplifies the financial statements.

It helps in comparing companies of different size with each other.
It helps in trend analysis which involves comparing a single company over a
period.
It highlights important information in simple form quickly. A user can judge
a company by just looking at few numbers instead of reading the whole financial
statements.

Limitations

Despite usefulness, financial ratio analysis has some disadvantages. Some key
demerits of financial ratio analysis are:

Different companies operate in different industries each having different

environmental conditions such as regulation, market structure, etc. Such factors are so
significant that a comparison of two companies from different industries might be
misleading.
Financial accounting information is affected by estimates and assumptions.
Accounting standards allow different accounting policies, which impairs comparability
and hence ratio analysis is less useful in such situations.
Ratio analysis explains relationships between past information while users are
more concerned about current and future information.

1. Analyzing financial ratio

Purposes and Considerations of Ratios and Ratio Analysis :

Ratios are highly important profit tools in financial analysis that help
financial analysts implement plans that improve profitability, liquidity, financial
structure, reordering, leverage, and interest coverage. Although ratios report mostly on
past performances, they can be predictive too, and provide lead indications of potential
problem areas.
 Ratio analysis is primarily used to compare a company's financial figures over a
period of time, a method sometimes called trend analysis. Through trend analysis, you
can identify trends, good and bad, and adjust your business practices accordingly. You
can also see how your ratios stack up against other businesses, both in and out of your
industry.
There are several considerations you must be aware of when comparing ratios
from one financial period to another or when comparing the financial ratios of two or
more companies.

o If you are making a comparative analysis of a company's financial

statements over a certain period of time, make an appropriate allowance for any
changes in accounting policies that occurred during the same time span.

o When comparing your business with others in your industry, allow for any
material differences in accounting policies between your company and industry norms.

o When comparing ratios from various fiscal periods or companies, inquire

about the types of accounting policies used. Different accounting methods can result in
a wide variety of reported figures.

o Determine whether ratios were calculated before or after adjustments

were made to the balance sheet or income statement, such as non-recurring items and
inventory or pro forma adjustments. In many cases, these adjustments can significantly
affect the ratios.
o Carefully examine any departures from industry norms.

2. Types of Ratios

Income
Profitability
Liquidity
Working capital
Long-Term Analysis
1. Income Ratios-

a) Turnover of Total Operating Assets

Net sale
Turnover of Total Operating Assets =
Total operating assets

Obviously, an increase in sales will necessitate more operating assets at some

point (sales may rise without additional investment within a given range, however);
conversely, an inadequate sales volume may call for reduced investment. Turnover of
Total Operating Assets or sales to investment in total operating assets tracks over-
investment in operating assets.

Total operating assets = total assets – (long-term investments + intangible assets

Note: This ratio does not measure profitability. Remember, over-investment may
result in a lack of adequate profits.

b) Net Sales to Tangible Net Worth

Net Sales
Net Sales to Tangible Net worth Ratio = __________________________

Tangible Net Worth*

This ratio indicates whether your investment in the business is adequately

proportionate to your sales volume. It may also uncover potential credit or management
problems, usually called "overtrading" and "under trading."
Overtrading, or excessive sales volume transacted on a thin margin of
investment, presents a potential problem with creditors. Overtrading can come from
considerable management skill, but outside creditors must furnish more funds to carry
on daily operations.
 Under trading is usually caused by management's poor use of investment money
and their general lack of ingenuity, skill or aggressiveness.

*Tangible Net Worth = owner's equity - intangible assets

c) Gross Margin on Net Sales

Gross Margin*
Gross Margin on Net Sales Ratio =

Net Sales

By analyzing changes in this figure over several years, you can identify whether
it is necessary to examine company policies relating to credit extension, markups (or
markdowns), purchasing, or general merchandising (where applicable).

*Gross Margin = net sales - cost of goods sold

Note: An increase in gross margin may result from higher sales, lower cost of
goods sold, an increase in the

Proportionate volume of higher margin products or any combination of these

variables.

d) Operating Income to Net Sales Ratio

Operating Income
Operating Income to Net Sales Ratio=
Net Sales

This ratio reveals the profitability of sales resulting from regular business as
well as buying, selling, and manufacturing operations.
 Note: Operating income derives from ordinary business operations and excludes
other revenue (losses),

Extra ordinary items, interest on long-term obligations, and income taxes.

e) Acceptance Index

Application Accepted
Acceptance Index =
Applications Submitted

Obviously, a high sales volume that comes from just two or three major
accounts is much riskier than the same volume coming from a large number of
customers. Losing one out of three major accounts is disastrous, while losing one out of
150 is routine. A growing firm should try to spread this risk of dependency through
active sales, promotion, and credit departments. Although the quality of customers
stems from your general management policy, the quantity of newly opened accounts is
a direct reflection on your sales and credit efforts.

Note: This index of effectiveness does not apply to every type of business.

2. Profitability Ratios-

Closely linked with income ratios are profitability ratios, which shed light upon
the overall effectiveness of management regarding the returns generated on sales and
investment.
a) Gross Profit on Net Sales

Net Sales - Cost of Good sale

Gross Profit on Net Sales Ratio =
Net Sales

Does your average markup on goods normally cover your expenses, and
therefore result in a profit? This ratio will tell you. If your gross profit rate is
continually lower than your average margin, something is wrong!
 Be on the lookout for downward trends in your gross profit rate. This is a sign of
future problems for your bottom line.

Note: This percentage rate can — and will — vary greatly from business to
business, even those within the same industry. Sales, location, size of operations, and
intensity of comate gross profit rate.

3. Liquidity Ratios

While liquidity ratios are most helpful for short-term creditors/suppliers and
bankers, they are also important to financial managers who must meet obligations to
suppliers of credit and various government agencies. A complete liquidity ratio analysis
can help uncover weaknesses in the financial position of your business.

Different authors have defined liquidity differently. According to Herbert Mayo:

“Liquidity is the ease with assets may be converted into cash without loss.” James C.
Van defined it as: “Technical solvency related to the ability of a given business unit to
meet its currently maturing obligations.” It is a special class of solvency defined by
time interval of one year.

A sound liquid position is of primary concern to management from the point of

view of meeting current liabilities as and when they mature as well as for answering
continuity of operations. Thus liquidity is the base of continuous business operations. The
importance of adequate liquidity in the sense of the ability of a firm to meet current or
short-term obligations when they become due for payment can hardly be over stressed. In
fact liquidity is a pre-requisite for the very survival of a firm. A proper balance between the
two conflicting requirements i.e. liquidity and profitability is required for efficient financial
management. The liquidity ratios measure the ability of a firm to meet its short-term
obligations and reflect the short-term financial strength of a firm.

a) Current Ratio

The most widely used measure of liquid position of a firm is the current ratio.
This ratio is also known as the ratio of current assets to current liabilities or working
capital ratio. The current ratio is computed by dividing current assets by current
liabilities. Current assets include cash and these assets, which can be converted into
cash within a year, such as marketable securities, debtors, and inventories etc.
 The current ratio gives the analyst a general picture of the adequacy of the
working capital of a company and of the company's ability to meet its day-to-day
payment obligations. It likewise, measures the margin of safety provided for paying
current debts in the event of a reduction in the value of current assets. The current ratio
can be computed as follows:

Current Assets*
Current Ratio =
Current Liabilities*

A relatively high value of the current ratio is considered as an indication that

The firm is liquid and has the ability to pay its bills. On the other hand, a relatively low
value of the current ratio is considered as an indication that the firm will find difficulty in
paying its bills. As a conventional rule a current ratio of 2:1 or more is considered to be
satisfactory.

Popular since the turn of the century, this test of solvency balances your current
assets against your current liabilities. The current ratio will disclose balance sheet
changes that net working capital will not.

*Current Assets = net of contingent liabilities on notes receivable

*Current Liabilities = all debt due within one year of statement data

Note: The current ratio reveals your business's ability to meet its current
obligations. It should be supplemented with the other ratios listed below, however.

b) Quick Ratio

The quick ratio is another widely used device for judging the short-term debts
repaying ability of the business in the near future. The ratio is designed to show the amount
of cash available for meeting immediate payments. The quick ratio is also called as
Solvency Ratio, Acid Test Ratio. The quick ratio is the ratio between quick assets and quick
liabilities and it is calculated by dividing the quick assets by the quick liabilities. The term
quick assets refer to current assets, which can be converted into, cash
immediately or at a short notice without diminution of value. It includes cash and bank
balance, marketable securities and debtors.

Generally a quick ratio of 1 to 1 is considered to represent a satisfactory current

financial position. When it is not it implies that the quick assets do not cover current
liabilities, and therefore steps should be taken for additional cash. The fundamental
object of calculating this ratio is to enable the finance officer to ascertain as to what
would happen if the current creditors pressed for immediate payment.

Quick assets
Quick Ratio = ______________________________

Quick Liabilities

Quick assets = current assets – stock and prepaid

Quick Liabilities = current liability – bank overdraft

Also known as the "acid test," this ratio specifies whether your current assets
that could be quickly converted into cash are sufficient to cover current liabilities. Until
recently, a Current Ratio of 2:1 was considered standard. A firm that had additional
sufficient quick assets available to creditors was believed to be in sound financial
condition.
Note: The Quick Ratio assumes that all assets are of equal liquidity. Receivables
are one step closer to liquidity than inventory. However, sales are not complete until the
money is in hand.

c) Absolute Liquidity Ratio

Cash + Marketable Securities

Absolute Liquidity Ratio = _________________________________________

Current Liabilities

A subsequent innovation in ratio analysis, the Absolute Liquidity Ratio

eliminates any unknowns surrounding receivables.
 Note: The Absolute Liquidity Ratio only tests short-term liquidity in terms of
cash and marketable securities.

d) Basic Defense Interval

(Cash + Receivables + Marketable Securities)

Basic Defense Interval =
(Operating Expenses + Interest + Income Taxes) / 365

If for some reason all of your revenues were to suddenly cease, the Basic Defense
Interval would help determine the number of days your company can cover its cash
expenses without the aid of additional financing.

e) Receivables Turnover

The accounts receivables turnover ratio shows the relationship between net sales
and average accounts receivables of a company.

Total Credit Sales

Receivables Turnover Ratio =
Average Receivables Owing

Net sales consist of gross sales minus returns, if any, from customers. Average
receivables are the simple average of receivables at the beginning and at the end of the
year. The receivables turnover ratio shows the efficiency achieved in using the funds
invested in receivables. An increase in the volume of receivables, without
corresponding increase the total current assets, may imply decrease in the volume of
investment in other components of current assets.

A high ratio is indicative of shorter time lag between credit sales and cash
collection. A low ratio shows that debts are not being collected rapidly. The objective if
the comparison of the accounts receivables turnover ratio is to judge how old the
accounts and to know how fast cash will low from collections.
 Another indicator of liquidity, Receivables Turnover Ratio can also indicate
management's efficiency in employing those funds invested in receivables. Net credit
sales, while preferable, may be replaced in the formula with net total sales for an
industry-wide comparison.

Note: Closely monitoring this ratio on a monthly or quarterly basis can quickly
underscore any change in collections.

f) Average Collection Period

The average collection period ratio measures the quality of debtors since it
indicated the rapidity or slowness of their collectible.

According to P. L. Ercites: “The average collection period is a significant

measure of the collection activity and the quality of accounts receivable.” The shorter
the collection period the better the quality of receivables management since a short
collection period means that the firm's Customers are prompt payers. On the hand, high
collection period indicates a slow collection process and low liquidity of trade credit. It
is calculated as under-

(Accounts + Notes Receivable)

Average Collection Period = ___________________________

(Annual Net Credit Sales) / 365

The Average Collection Period (ACP) is another litmus test for the quality of
your receivables business, giving you the average length of the collection period. As a
rule, outstanding receivables should not exceed credit terms by 10-15 days. If you allow
various types of credit transactions, such as a retail outlet selling both on open credit
and installment, then the ACP must be calculated separately for each category.

Note: Discounted notes which create contingent liabilities must be added back
into receivables.
 g) Inventory Turnover

Inventory turnover ratio is also known as stock turnover ratio. It establishes a

relationship between the cost of goods sold during a period and the average amount of
inventory. It is one method of reviewing performance and controlling inventories
periodically to check the inventory turnover of each type of raw material supply and
finished goods.

Cost of Goods Sold

Inventory Turnover Ratio =
Average Inventory

Inventory turnover ratio acts as an indicator of the liquidity of the inventory. In

other words, this ratio helps in determining the liquidity of a concern in as much as it
gives the rate at which inventories are converted into sales rather than into cash. More
the ratio, greater the efficiency of the inventory management. A low inventory turnover
ratio suggests poor inventory management.

Rule of Thumb: Multiply your inventory turnover by your gross margin percentage.
If the result is 100 percent or greater, your average inventory is not too high.

4. Working Capital Ratios

Many believe increased sales can solve any business problem. Often, they are
correct. However, sales must be built upon sound policies concerning other current
assets and should be supported by sufficient working capital.
There are two types of working capital: gross working capital, which is all
current assets, and net working capital, which is a current asset less current liabilities.
Moody's Investors Service has listed net working capital since 1922.
If you find that you have inadequate working capital, you can correct it by
lowering sales or by increasing current assets through either internal savings (retained
earnings) or external savings (sale of stock). Following are ratios you can use to
evaluate your business's net working capital.
 Working Capital Ratio

Use "Current Ratio" in the section on "Liquidity Ratios."

This ratio is particularly valuable in determining your business's ability to meet

current liabilities.

a) Working Capital Turnover

Working capital turnover ratio is calculated by dividing the amount of net sales
by the amount of net working capital. A close relationship exists between sales and net
working capital. With any increase in sales volume there is a corresponding increase in
the working capital. Therefore, a good amount of net working capital may be needed to
support the increase in sales. In the words of J. Batty: “The ratio shows the efficiency
with which the working capital is employed.” In other words, the ratio helps to assess
the degree of efficiency in the use of short term funds for generating sales.

The larger the net sales as compared to net working capital, the less favorable is
the situation likely to be if the resultant turnover of working capital has been made
possible by use of an excess amount of current credit. This ratio reflects the extent to
which a business is operating or a small or large amount or wording capital in relation
to sales.

A very high ratio may be result of over-trading. On the other hand a very low
ratio is indication of under-trading. Such results of analysis of turnover of working
capital ratio should be meaningful in evaluating business efficiency.

Net Sales
Working Capital Turnover Ratio = ________________________________
Net Working Capital

This ratio helps you ascertain whether your business is top-heavy in fixed or
slow assets, and complements Net Sales to Tangible Net Worth (see "Income Ratios").
A high ratio could signal overtrading.
 Note: A high ratio may also indicate that your business requires additional funds
to support its financial structure, top-heavy with fixed investments.al merchandising
(where applicable).

b) Current Debt to Net Worth

Current Liabilities
Current Debt to Net worth Ratio =
Tangible Net Worth

Your business should not have debt that exceeds your invested capital. This ratio
measures the proportion of funds that current creditors contribute to your operations.

Note: For small businesses a ratio of 60 percent or above usually spells trouble.
Larger firms should start to worry at about 75 percent.

c) Funded Debt to Net Working Capital

Long-Term Debt
Funded Debt to Net Working Capital Ratio =
Net Working Capital

Funded debt (long-term liabilities) = all obligations due more than one
year from the balance sheet date

Note: Long-term liabilities should not exceed net working capital.

5. Long-Term Analysis-

a) Current Assets to Total Debt

Current Assets
Current Assets to Total Debt Ratio =
Current + Long-Term Debt

This ratio determines the degree of protection linked to short- and long-term debt.
More net working capital protects short-term creditors.
Note: A high ratio (significantly above 100 percent) shows that if liquidation
losses on current assets are not excessive, long-range debtors can be paid in full out of
working capital.

b) Stockholders' Equity Ratio

Stockholders' Equity
Stockholders' Equity Ratio =
Total Assets

Relative financial strength and long-run liquidity are approximated with this
calculation. A low ratio points to trouble, while a high ratio suggests you will have less
difficulty meeting fixed interest charges and maturing debt obligations.

c) Total Debt to Net Worth

Current + Deferred Debt

Total Debt to Net worth Ratio =
Tangible Net Worth

Rarely should your business's total liabilities exceed its tangible net worth. If it
does, creditors assume more risk than stockholders. A business handicapped with heavy
interest charges will likely lose out to its better financed competitors.
 Calculations of Working Capital

Example: -
On the basis of the following balance sheet of Badve technologies Pvt. Ltd. As
at 31st Mach, 2014 and additional information provided thereafter, prepare:
Balance sheet of BADVE Engineering Ltd
st
As on 31 March, 2018

Note Amount Amount

Sr. As on As on
Particulars No
No. . 31.03.2017 31.03.2018
I. EQUITY AND LIABILITIES
1 Shareholders’ Funds:
(a) reserves and Surplus 01 35,82,28,743 47,45,96,818
2 Share Application Money
Pending Allotment

3 Non-Current Liabilities:
(a) Long-Term Borrowings 02 7,18,56,656 1,50,35,514
(b) Deferred Tax Liabilities (Net) 03 2,51,66,338 2,42,36,829
(c) Other Long Term Liabilities 04 2,94,57,188 2,40,80,036

4 Current Liabilities:
(a) Trade Payables 05 4,45,83,224 8,98,79,537
(b) Other Current Liabilities 06 3,75,94,943 3,14,98,158
(c) Short-Term provisions 07 3,02,96,720 3,65,19,467

Total 59,71,83,812 6,95,846,359

II ASSETS
1 Non- Current Assets:
(a) Fixed Assets
(i) Tangible assets 08 15,08,13,012 13,65,17,472
(b) Long-Term Loans and Advances 09 56,08,775 87,04,076

2 Current Assets:
(a) Inventories 10 3,18,56,156 2,90,19,059
(b) Trade Receivables 11 24,44,90,779 26,10,51,774
(c) Cash and Cash Equivalents 12 27,50,391 37,10,780
(d) Long-Term Loans and Advances 13 15,04,15,619 24,67,08,767
(e) Other Current Assets 14 81,53,779 1,32,29,732

Total 59,71,83,812 6,95,846,359

 Statement showing charges in working capital

Particular Amount Amount Increase Decrease

2017 2018 Amount Amount
Current Assets:

Inventories 3,18,56,156 2,90,19,059 - 28,37,097

Trade Receivables 24,44,90,779 26,10,51,774 1,65,60,995 -

Cash and Cash Equivalents 27,50,391 37,10,780 9,60,389 -

Short-Term Loans and Advances 15,04,15,619 24,67,08,767 9,62,93,148 -

Other Current Assets 81,53,779 1,32,29,732 50,75,953 -

(A) 43,76,66,724 55,37,20,112

Current Liabilities:

(a) Trade Payables 4,45,83,224 8,98,79,537 - 4,52,96,313

(b) Other Current Liabilities 3,75,94,943 3,14,98,158 60,96,785 -

(c) Short-Term provisions 3,02,96,720 3,65,19,467 - 62,22,747

(B) 11,24,74,887 15,78,97,162

(A-B)
32,51,91,837 39,58,22,950
Decrease in working capital 7,06,31,113 - - 7,06,31,113

Total 39,58,22,950 39,58,22,950 12,49,87,270 12,49,87,270

 Ratio Analysis
Example: -
On the basis of the following balance sheet of Badve technologies Pvt. Ltd. As
at 31st Mach, 2014 and additional information provided thereafter, prepare:
Balance sheet of BADVE Pvt. Ltd
st
As on 31 March, 2018

Note Amount Amount

Sr. As on As on
Particulars No
No. . 31.03.2017 31.03.2018
I. EQUITY AND LIABILITIES
1 Shareholders’ Funds:
(a) reserves and Surplus 01 35,82,28,743 47,45,96,818
2 Share Application Money
Pending Allotment

3 Non-Current Liabilities:
(a) Long-Term Borrowings 02 7,18,56,656 1,50,35,514
(b) Deferred Tax Liabilities (Net) 03 2,51,66,338 2,42,36,829
(c) Other Long Term Liabilities 04 2,94,57,188 2,40,80,036

4 Current Liabilities:
(a) Trade Payables 05 4,45,83,224 8,98,79,537
(b) Other Current Liabilities 06 3,75,94,943 3,14,98,158
(c) Short-Term provisions 07 3,02,96,720 3,65,19,467

Total 59,71,83,812 6,95,846,359

II ASSETS
1 Non- Current Assets:
(a) Fixed Assets
(i) Tangible assets 08 15,08,13,012 13,65,17,472
(b) Long-Term Loans and Advances 09 56,08,775 87,04,076

2 Current Assets:
(a) Inventories 10 3,18,56,156 2,90,19,059
(b) Trade Receivables 11 24,44,90,779 26,10,51,774
(c) Cash and Cash Equivalents 12 27,50,391 37,10,780
(d) Long-Term Loans and Advances 13 15,04,15,619 24,67,08,767
(e) Other Current Assets 14 81,53,779 1,32,29,732

Total 59,71,83,812 6,95,846,359

 Statement showing charges in working capital

Particular Amount Amount Increase Decrease

2017 2018 Amount Amount
Current Assets:

Inventories 3,18,56,156 2,90,19,059 - 28,37,097

Trade Receivables 24,44,90,779 26,10,51,774 1,65,60,995 -

Cash and Cash Equivalents 27,50,391 37,10,780 9,60,389 -

Short-Term Loans and Advances 15,04,15,619 24,67,08,767 9,62,93,148 -

Other Current Assets 81,53,779 1,32,29,732 50,75,953 -

(A) 43,76,66,724 55,37,20,112

Current Liabilities:

(a) Trade Payables 4,45,83,224 8,98,79,537 - 4,52,96,313

(b) Other Current Liabilities 3,75,94,943 3,14,98,158 60,96,785 -

(c) Short-Term provisions 3,02,96,720 3,65,19,467 - 62,22,747

(B) 11,24,74,887 15,78,97,162

(A-B)
32,51,91,837 39,58,22,950
Decrease in working capital 7,06,31,113 - - 7,06,31,113

Total 39,58,22,950 39,58,22,950 12,49,87,270 12,49,87,270

Current ratio-

Current Assets
Current Ratio =
Current Liabilities*

43, 76, 66,724

2017- Current Ratio = =

Current Ratio =
11, 24, 3.8:1
74,887

55, 37,
20,112
Current Ratio =
2018- Current Ratio = =
3.5:1
15, 78,
97,162

4
3.9
3.8
3.8
3.7
3.6 2013
3.5 2014
3.5
3.4
3.3
3.2
Quick ratio

Quick assets
Quick Ratio = __________________
Quick Liabilities

Quick assets = current assets – stock and prepaid

Quick Liabilities = current liability – bank overdraft

2017-

A) Quick assets = current assets – stock and prepaid

= 43,76,66,724 – 3,18,56,156

Quick assets = 40, 58, 10,568

B) Quick Liabilities = current liability – bank

overdraft =11,24,74,887 - 00,000

Quick Liabilities = 11, 24, 74,887

40,58,10,568 Quick Ratio = 3.6:1

Quick Ratio =
11,24,74,887
2018-

A) Quick assets = current assets – stock and prepaid

=55,37,20,112 – 2,90,19,059

Quick assets = 52,47,01,053

B) Quick Liabilities = current liability – bank overdraft

= 15,78,97,162 – 00,000

Quick Liabilities =15, 78, 97,162

52,47,01,053 Quick Ratio = 3.3:1

Quick Ratio =
15, 78, 97,162

4
3.6

3.3
3.5
3
2.5
2013
2
2014
1.5
1

0.5
0
Working capital ratio-

Working capital ratio = Current assets – Current liability

2017-

Working capital ratio = 43,76,66,724 –11,24,74,887

Working capital ratio = 32,51,91,837

2018-

Working capital ratio = 55,37,20,112 - 15,78,97,162

Working capital ratio = 39,58,22,950

500000000
39,58,22,950
400000000
32,51,91,837

300000000 2013
200000000 2014

100000000

0
 FINDINGS & SUGGESTION

It can be said that overall financial position of the company is good, but it is
required to be improved from the point of view of profitability.

Net operating cycle is increasing that means there is a need to make

improvements in receivables and debtors management.

Company should stretch the credit period given by the suppliers.

Company should not rely on long-term debts.

Company should try to increase Volume based sales so as to stand in the

competition.
 9. LIMITATIONS OF THE STUDY

Even attempts are made to make a detailed and critical study of the
working capital management of the Badve Engineering Ltd. Aurangabad; there
are obvious limitations to the study encountered. The limitations are as under –

1. The project report is prepared for the postgraduate level course of the
university; study is carried out according to that level only.

2. The study is to be completed within a period of two months, so the scope

of study is determined in such a way that it will be completed successfully in such time
limit.

3. The study is limited only to working capital management aspect of the

Badve Engineering Ltd. Aurangabad

4. The information and data, which is made available by the personnel

working in the organization is only used for this study.
 10. SWAT ANALYSIS OF ORGANASATION
Strengths
State of art paint shop
Competent manpower
Customer loyalty/relationships
Increasing awareness about
achieving zero defect
Single source
Competent management team
Opportunities
Addition of new customer base (4
wheeler)
Technological advances
Ability to cater to small batch sizes
Additional Business opportunity
for the existing customer.
Weaknesses
Output/labor low.
Poor output quality (High
Rework)
Low R&D efforts
Technically sound, but need inputs
& guidance in financial
management & cost effectiveness.
High rate of interest of loans
No tailor made trainings by
institution
Employee attitude
Customer complaints
High breakdown, defects,
accidents.
Plant capacity utilization
High capital cost for expansion
Threats
Increase in raw materials cost
(import, polymer, paint, solvents).
Quality improvement and sustenance
Auto giants in & out side the cluster
alternatively looking for global out
sourcing
Market Fluctuations
LPG/Diesel/Power rate hike YOY
 11. CONCLUSION

After working on this project and analyzing the observation and findings, the
following Conclusions can be drawn:-

A change in working capital position is the result of global recession and

recovery of the market.

Current ratio and Quick ratio shows that company is having well
maintained liquidity position.

Study of opportunity of the company and is general financial position

shows that company is having bright future.

In this project they haven't provided current year balance sheet because of
audit. In this organization not completed their audit procedure, than they made
balance sheet. In current year they get many type fluctuation In figures.
 12. BIBLOGHRAPHY

Following sources have been referred and used for the completion
of my Project Report:-

BOOKS AND NOTES

“ADVANCED ACCOUNTS” Authored by M.C. SHUKLA, T.S.

GREWAL, S.C. GUPTA. From college Library.

Company related accounting data means, how to used working capital

management, and how to affected on financial situation and also company
reputation, this all Important information and some notes are provided to me ‘Mr.
MADHAV DARADE SIR (HR Department ) and ‘MR. PRAVIN SHRIRAMWAR
SIR’ (head of the finance department).

And my Accounting teacher ‘MR. ADNAN ZAIDI SIR’ also helped to me

how to calculate Working capital and which methods are used for this
calculations.

My Project guide & college teacher ‘Mrs.MANISHA FIRKE MAM’ is

suggesting me how to arrange the project.

WEB SITES

www.BADVEgroup.com

www.google.com

www.wikipedia.com
 ANNEXURE

On the basis of the following balance sheet of Badve technologies Pvt. Ltd. As
at 31st Mach, 2014 and additional information provided thereafter, prepare:
Balance sheet of BADVE Engineering Ltd
st
As on 31 March, 2018

Note Amount Amount

Sr. As on As on
Particulars No
No. . 31.03.2017 31.03.2018
I. EQUITY AND LIABILITIES
1 Shareholders’ Funds:
(a) reserves and Surplus 01 35,82,28,743 47,45,96,818

2 Share Application Money

Pending Allotment

3 Non-Current Liabilities:
(a) Long-Term Borrowings 02 7,18,56,656 1,50,35,514
(b) Deferred Tax Liabilities (Net) 03 2,51,66,338 2,42,36,829
(c) Other Long Term Liabilities 04 2,94,57,188 2,40,80,036

4 Current Liabilities:
(a) Trade Payables 05 4,45,83,224 8,98,79,537
(b) Other Current Liabilities 06 3,75,94,943 3,14,98,158
(c) Short-Term provisions 07 3,02,96,720 3,65,19,467

Total 59,71,83,812 6,95,846,359

II ASSETS
1 Non- Current Assets:
(a) Fixed Assets
(i) Tangible assets 08 15,08,13,012 13,65,17,472
(b) Long-Term Loans and Advances 09 56,08,775 87,04,076

2 Current Assets:
(a) Inventories 10 3,18,56,156 2,90,19,059
(b) Trade Receivables 11 24,44,90,779 26,10,51,774
(c) Cash and Cash Equivalents 12 27,50,391 37,10,780
(d) Long-Term Loans and Advances 13 15,04,15,619 24,67,08,767
(e) Other Current Assets 14 81,53,779 1,32,29,732

Total 59,71,83,812 6,95,846,359