Page | 1 A STUDY ON ‘WORKING CAPITAL

MANAGEMENT’

INTRODUCTION
Working Capital Management is the controlling nerve of all organizations. It
is a managerial accounting strategy focusing on maintaining efficient levels
of both components of Working Capital, current assets and current liabilities,
in respect to each other. Management of Working Capital ensures a company
has sufficient cash flow in order to meet its operating expenses.

The term Current assets refer to the assets, which in the ordinary course of
business will be converted into cash within one year without undergoing any
diminution in value and un-interruption of the operations of the business.

The main current assets are cash, marketable securities, accounts

receivables and inventory. Current liabilities are the liabilities, which are
intended at their inception, to be paid in the ordinary course of business,
within a year, out of the current assets or earnings of the business. The basic
current liabilities are accounts payable, bills payable, bank overdraft and
expenses payable.

Each of the current assets should be managed with efficiency in order to

maintain the liquidity of the business, while not keeping any of the items of
the current assets at a high level. Each of the short-term finance items
coming under current liabilities should be continuously managed to ensure
that they are obtained and used in the best possible manner.

Decisions relating to working capital and short term financing are referred
to as working capital management. These involve managing the
relationship between a firm’s short-term assets and its short-term liabilities.
The goal of a working capital management is to ensure that the firm is able
to continue its
o p e Pr aa gt ieo n| s2 and that is has sufficient cash flow to satisfy both maturing
short- term debt and upcoming expenses.

PURPOSE OF STUDY

Proper working capital management, effective controls and

cost reduction strategies are the most important methods to improve the
profitability of the company. The liquidity of the organization may be much
affective by the policy of purchasing bulk quantity and storing them for a
longer period. The company is maintaining a good turnover and the only
problem areas where the management has to give extra importance are the
credit policy, inventory holding policy and cash inflow and out flow.

Working capital represented by current assets constitutes a dominant

segment of the total capital invested, so a business concern has to ensure its
optimum utilization. A company can incur loss due to sub-optimal utilization
of resources, excessive investments in inventories and unsound collection
policies etc. Imprudent management of working capital either make the firm
incur loss or does not allow the firm to earn high rate of return.

In the current study, an attempt will be made to study the present state
affairs of working capital and its components of SHARQ AL MANAR
INDUSTRIAL & OILFIELD SUPPLIES LLC. By definitions, working capital
management entails short term decisions generally, relating to the next one
year period – which is “reversible”. These decisions are thereof not taken on
the same basis as capital investment decisions (NPV or related, as above)
rather they will be based on cash flows and / or profitability.

OBJECTIVE AND SCOPE OF THE STUDY

SIGPNaIgFeIC| 3ANCE OF THE STUDY

Many organizations that are profitable on paper are forced to cease trading
due to an inability to meet short-term debts when they fall due. In order to
maintain in business it is essential that an organization successfully manages
its working capital. Too often however, this is an area which is ignored. This
article will look at the items which compromise working capital, and using
live examples will consider the level of working capital required by
businesses operating in different industries. We will also look at the problems
faced by small businesses before reviewing some of the ways in which an
organization can improve its management of working capital.

A review of the previous studies on “Working capital management” is

necessary to know the areas already covered. The earlier studies made on
working capital management are briefly reviewed here.

OBJECTIVES OF THE STUDY

➢ To analyze and interpret the working capital position.

➢ To examine solvency and liquidity position of the company.
➢ To analyze how effectively they utilize the working capital.
➢ To study the relation between working capital and the cash conversion
cycle.
➢ To study the importance in Optimizing Working Capital Management.
➢ To analyze how they adopt the theoretical aspects of working capital
management in practical.
➢ The main objective of the study is to find out solution for increasing the
liquidity of the business and to reduce the carrying cost of the items
traded.

SCOPE OF THE STUDY

The study is conducted on the financial data of the business including the
inventory of the business carried from year to year. The analysis of the
inventory according to their importance as to financial commitment in each
category of items is to be looked into.
A stPuadgey |o4f the financial data of the company reveals the inadequacy of
a proper working capital management. The problems inherent in the
working
capital management and suggestions to overcome it are the main features
of this study report.

The study is divided into the problems, procedures and solutions

of different items of the Net Working Capital so as to maintain and manage a
satisfactory level of the Working Capital.

Along with the inventory management, the management of

the cash, debtors and creditors of the organization is to be made in order to
optimize the working capital’s synchronized function to harmonize the
business objective is to be adopted.

LIMITATIONS OF THE STUDY

1. The entire study is based on the financial statements provided by the

company. So the authenticity of the study depends on the accuracy of
the financial statement.
2. Since the firm is in a monopoly situation, inter firm comparison is not
possible.
3. The entire study is based on the data collected for five years i.e. from
the period of 31st December 2008 to 31st December 2012.
4. Only the financial health of the company was studied. The other
aspects like the managerial efficiency, labor efficiency, market
effectiveness etc has not been analyzed.

INDUSTRY PROFILE

OVERVIEW AND

HISTORY

Sharq Al Manar Industrial & Oilfield Supplies L.L.C (commonly known as

SAMIOUS) was established in the year 1983 in Abu Dhabi to cater the needs
of oil and petrochemical industry in UAE. Since then SAMIOUS had developed
a good report in the market and has become one of the most trusted and
leading suppliers of bulk piping and flow line materials, valves, hoses and
a c c eP as gs eo r|i e5 s for oil, petrochemical, power generation and water and
general engineering industry.

CREDENTIALS

SAMIOUS has its main office and warehouse facilities in the Mussafah
Industrial area of Abu Dhabi which is the main oil hub of UAE with similar
facilities in Jebal Ali Free Zone (Dubai) and Sharjah which has a total area of
4,00,000 Square Feet of which 50% is Covered warehouse. This Facilitated
into expanding their business activities throughout Middle East and the Asian
Continent.

ACTIVITIES

SAMIOUS acts as an agent in UAE for a wide range of products from reputed
manufacturers all over the world. The company specializes principally in
valves and pipeline systems and equipments. It also stocks a wide range of
spares and equipments to cater to the needs of its clients which include well
known oil & engineering companies in the Arabian Gulf.

QUALITY ASSURANCE

SAMIOUS is managed by a team of experienced professionals which coupled

with its mission to keep abreast of the latest technological innovation
worldwide and is adequately geared towards meeting the needs of its clients
in the years to come. The Company operates in Strict Accordance with
International Organization for Standardization 9001:2008.

MISSION

To provide quality services at optimum cost to their customers,

demonstrated through employing qualified and trained sales and service
engineers who are providing prompt and efficient services. More valuable is
a d dPeadg et o| t6heir services by diversifying their activities and also by
introducing world-renowned manufacturers /service providers to the UAE
markets.

SAMIOUS is committed to meet the ultimate satisfaction of their clients in the

energy sector by providing a cost-effective and top quality service in a timely
manner. It is committed to a clean environment in keeping with the Arab
tradition of living in balance with wildlife and respecting nature. Company is
also committed to conform the health, safety and environmental
international standards and administrating with practical precautions and the
greatest of care.

ACHIEVEMENTS

Even though the company has attained several contracts and improved by
leaps and bounds, SAMIOUS considers their biggest achievement is the
“Confidence and Trust of the customers that they were able to congregate
within a short period of time”.

TEAMS

The philosophy of SAMIOUS is “The Employees are the most valuable assets
of the company”. Hence they employ qualified and experienced personnel
who are dedicated to their work and who fulfils their duties promptly and
accurately.

HYPOTHESIS FORMULATION

The concepts of working capital management in a practical situation can be

interpreted with certain concepts and the hypothesis of the study depends
on these concepts.

a) Logistics Chain

The primary objective of a business organization is to get its goods to the

customers in the right quantity at the right time. The problem is
comPpaogeun| d7e d as today’s customers expect a larger number of
deliveries of smaller quantities at a time with protracted credit facilities
with a view to
optimize their working capital.

To meet this objective the business supplying the goods might get the right
quantities at the right time at right terms. All these activities which are
performed by several persons in various departments have to be carried out
in an efficient and integrated manner. This is usually referred to as the
logistic chain, which is to be managed efficiently to enhance the profitability.
Today the logistics in every business has come to play an important part in
the company’s profitability. At the core of this vital function of physical
distribution is the store. The management of inventory and store should be
peak to enhance the profitability of the business.

b) Time Management

Conventional Management theories project the four resources- Men, Money,

Machines, and Materials-available to a manager to manage his work. The
manager is expected to optimize the productivity of these resources while
converting these resources known as input to output.

In the modern management concept optimization of inputs into outputs, in

addition to the four ‘M’s, emphasis is to be given to the resource of time.
Time has no separate existence and no physical form.

The theorem is that compression of time automatically increases the

productivity, which results in profitability. This is especially true in the case
of Goods for trading because nearly 70% of a company’s expenditure relates to
purchases only. Therefore we can state that time is money. The cycle of
operation of a business has three components Goods Purchased, Goods Sold
and Money Received. We start with investing money for purchase of goods,
which in turn we convert back to money by selling them. Our profit lies in the
last segment. The faster the cycle the greater our profit, which means the
compression of the time in the cycle of money to money.
 cP)agVea| lu8 e of Cost

Due to the liberalization of the economy throughout the World, the market is
characterized by new technologies and severe competition.

The Policies have changed the equation of revenue from

Cost + Profit = Revenue to

Revenue – Cost = Profit.

This means that a buyer’s market has developed and every organization has
to cut down the cost to survive in the market. One of the methods to reduce
the cost is breaking up all the elements of cost in a commodity and find out
whether the cost creates any real value in the product sold. If value of the
cost is not reflected in the revenue, then that cost is either eliminated or
reduced to a maximum extent.

If a cost produces a value, it should be examined, whether the same Value

can be produced with a lesser cost or whether greater value can be produced
with the same cost. In this manner, all costs are scrutinized with reference to
their value producing capabilities.

In the case of Integrated Medical Services, if we examine all the costs that
are incurred in a store incidental to receipt, storage, and issue of materials
such as costs of transportation (both inwards & outwards) receipt, inspection,
materials handling, cost of storage and of inventories, costs arising out of
obsolete and surplus materials and damages caused by accidents or
deterioration, it can be found out that none of these costs produce any value
whatsoever.

Those costs are usually called cost on materials, after we have paid their
basic price. Hence it can be said, that all costs incurred by the company in
procuring, carrying, and distributing the stock comes from the company’s
profit.
FORPaMgUe L| A9 TING THE RESEARCH PROBLEM

There are two types of research problems, viz., those which relate to the
status of nature and those which relate to relationships between variables.
First the researcher must decide the general area of interest or aspect of a
subject matter that he would like to inquire into. Initially the problem may be
stated in broad general ways and then the ambiguities, if any, relating to the
problem be resolved. Then, the feasibility of a particular solution has to be
considered before a working formulation of a problem can be set up.

DEVELOPMENT OF WORKING HYPOTHESIS

After extensive literature survey the researcher should state in clear terms
the working hypothesis. Working hypothesis is tentative assumption made
in order to draw out and test its logical or empirical consequences. As such
the manner in which hypothesis are developed is particularly important
since they provide the focal point of the research. The role of hypothesis
is to guide the researcher by delimiting the area of research and to keep
him on the right track.

Alternative Hypothesis

1. The working capital of the company is utilized effectively.

2. Working capital and cash conversion cycle are related.

Null Hypothesis

1. The working capital of the company is not utilized effectively.

2. There is no relation between working capital and cash conversion
cycle.

RESEARCH METHODOLOGY

Research in common refers to a search for knowledge. It is a careful inquiry

or examination to discover new information or relationship and to expand or
v e Pr iaf gy e e| x1i s0t i n g knowledge. Research is the solution of the problem,
whether created or already generated.

Characteristics that define Research Methodology:

I. Research follows a specific plan of procedure.

II. Research requires a clear articulation of a goal.

III. Research originates with a question or a problem.

IV. Research is cyclic by nature or more exactly spiral or helical.

V. Research involves the search for answers to unsolved

problems. Methodology – Definition
Defined as the

1. Analysis of the principles of methods, rules and postulates employed by a

discipline

2. Systematic study of methods that are, can be, or have been applied within
a discipline

3. Particular procedure or set of procedures.

STEPS OF RESEARCH

In order to study problem in education, the research works have to undertake

several steps in well-regulated order. Failing in any one of these steps may
lead to an artificial lapse in the whole attempt ends in unsatisfactory results.

1. Establishing a research question.

2. Finding background information
3. Planning and conducting a specific research method.
4. Collecting and studying data.
5. Analyzing the data.
6. Formulating and establishing a conclusion.

RESEARCH DESIGN
Throughout the study an attempt has been made to arrive at the conclusions
with help of economic reasoning, experience derived from secondary
markets from the lessons of the economic history. The assets, which the
coPrpagoera|ti1o1n has inherited, have deep roots and justify full discussion
in its historical perspective.

Important concepts relating to Research Design

1. Experimental and non-experimental hypothesis-testing research

2. Dependent and independent variables.
3. Experimental and control groups.
4. Extraneous variable
5. Research hypothesis
6. Treatments
7. Experiment
8. Control

The design may be specific presentation of the various steps in the process
of research. These steps include:

• The selection and presentation of a research problem

• The formulation and testing of the hypothesis

• The survey of literature and documentation

DETERMINING SAMPLE DESIGN

All the items under consideration in any field of inquiry constitute a universe
or population. A complete enumeration of all the items in the population is
known as a census inquiry. The researcher must decide the way of selecting
a sample or what is popularly known as the sample design. A sample design
is a definite plan determined before any data are actually collected for
obtaining a sample from a given population.

Collecting the data

In dealing with the real life problem it is often found that data at hand are
inadequate, and hence, it becomes necessary to collect data that are
appropriate. The task of collecting the data begins after a research problem
has been defined and research design or plan chalked out. While deciding
about the method of data collection to be used for the study, the researcher
shPoauglde |k1e2ep in mind two types of data viz., primary and secondary.
The researcher usually makes use of the secondary data because it gives
him a
starting point and they are readily available.

PRIMARY DATA

The primary data are those which are collected afresh and for the first time,
and thus happens to be original in character. They are the actual information,
which are received by researcher for study from the actual field of research.
The data for the study is collected through structured interview. It can also
be obtained by means of Questionnaire and in schedules. In some fields
primary data were obtained through administrating Questionnaire designed
especially for the study.

METHODS OF DATA COLLECTION

• Questionnaire

• Observation

• Personal Interview

• Telephone Interview

• Schedules

SECONDARY DATA
Secondary data means data that are already available i.e., they refer to the
data which have already been collected and analyzed by some else. They are
the information, which are attained indirectly. The researcher does not attain
them himself or directly. Such as data are attained generally from published
and are attained generally from published and unpublished material.
Secondary data are gathers from information’s collected from the individual
and institution throughout personal diaries, letters and survey document.
Source of Data: The data required for the study was readily available with
the Manager and the Chief Accountant and with the concurrence of the
owner copies of the same was handed over for the study. The study required
s o mP a eg e q| u1 e3 r i e s to be answered and the same was given as questions
regarding the procedural aspects of the inventory, receivables, cash, and
payables which constitute the net working capital. The interviews were and
answer to the questions was obtained from the Manager, Chief Accountant
and other clerical staff who were carrying out the main business activities.

SAMPLING

A section of the population selected in such a way that they are

representatives of the universe. Such a section of the population selected is
called a sample. It is a smaller representation of a large as whole. A single
member of the population is referred to as population element. When some
of the elements are selected with the intention of finding out something
about the population from which they are taken, that group of element is
referred as sample and process of selection is called sampling.

A single member of a population is referred to as a population element.

Sampling may be defined as “the selection of part of an aggregate or totality
on the basis of which a judgment or interference about the aggregate or
totality is made”.

METHODS OF SAMPLING

 Systematic sampling
 Stratified sampling
 Cluster sampling

SAMPLING METHOD USED FOR THE STUDY

The researcher has used Convenience Sampling. This method is the only
feasible one particularly for students or others with time and resources
provided its limitations and clearly understood.

The probable sample size is 10 for this particular study. The sample size is
selected based on the limited number of financial experts available in the
company.
T h Pea gi en t| e1r 4v i e w method will be used to collect the required data for
the analysis.

Convenience Sampling

Convenience Sampling refers to the collection of information from members

of the population who are conveniently available to provide it. It chooses the
individual that are easiest to reach or sampling that is done easily. It does
not represent the entire population so it is considered by us.

STATISTICAL TOOLS USED FOR ANALYSIS

The main tools used for analysis are Ratio Analysis, Comparative statement,
Trend Analysis, SWOT Analysis, Correlation Analysis and Fund Flow Analysis.

RATIO ANALYSIS:

It is a powerful tool for the analysis of the financial performance. It is

an important technique of financial analysis. In financial analysis and
performance of a firm, a ratio helps the analyst to make judgment
about the firm’s financial position and performance. In simple
language, ratio is one expressed in terms of another and can be
worked out by dividing one number into the other. In this study the
ratio analysis is used to calculate the profitability, liquidity, solvency
and working capital position of the firm.

CLASSIFICATION OF WORKING CAPITAL RATIOS

1. Liquidity Ratio
2. Leverage Ratio
3. Activity Ratio
4. Profitability Ratio

Types of Ratios:

1. Liquidity ratio: They indicate the firm’s ability to meet its current
obligation out of current resources. It includes the following:
 Page |
Current Ratio: It is one of the best known measures of financial
15
strength.
 Quick Ratio: It is also called the Acid-Test ratio and is also one of
the best measures of liquidity.
2. Leverage Ratio: This ratio discloses the firm’s ability to meet the
interest costs regularly and long term solvency of the firm. This
Debt/Worth or Leverage Ratio indicates the extent to which the
business is reliant on debt financing.
 Debt Equity Ratio
 Debt to total fund ratio
 Proprietary ratio
3. Activity ration or turnover ratio: They indicate the rapidity with which
the resources available to the concern are being used to produce sales.
 Stock turnover ratio
 Debtors turnover ratio
 Average collection period
 Creditors Turnover ratio
4. Profitability ratios or Income Ratios: The main objective of every
business concern is to earn profits. A business must be able to earn
adequate profit in relation to the risk and capital invested in it,
 Gross Profit ratio
 Net Profit ratio
 Operating ratio
 Earnings Per Share
 Dividend per share
 Dividend payout ratio

FUND FLOW STATEMENTS:

A Fund Flow Statement is a valuable aid to the financial manager or a

creditor in evaluating the uses of funds by a firm and in determining
how these are financed. Such a statement provides an efficient method
for the financial manager to assess the growth of the firm and its
resulting financial needs and to determine the best way of financing
those needs. In the nutshell, fund statements are very useful in
planning intermediate and long-term financing. It is an important tool
of working capital analysis also.
SWPaOgTe |A1N6ALYSIS:

SWOT analysis is a tool for auditing an organization and its

environment. It is the first stage of planning and helps marketers to
focus on key issues .SWOT stands for strengths, Weakness,
Opportunities and Treats. Strengths and Weakness are internal factors.

Strengths:

Every organization has some strength. In some cases this is obvious, for
example, dominant market shares. In other cases, it is a matter of
perspective, for instance, a company is very small and hence have the ability
to move fast. It is important to note that companies that are in a bad position
also have strengths. Whether these strengths are adequate is an issue for
analysis.

Weakness:

Every organization also has some weakness. In some cases, this is obvious;
say for example, a stricter regulatory environment. In other cases, it is a
matter of perspective, for example, a company has 99% market share and is
open to attack from every new player. It is important to note that companies
that are extremely competent in what they do, also have weakness. How
badly these weakness will affect the company is a matter of analysis.

Opportunities:

All organizations have some opportunities that they can gain from. These
could range from diversification to sale of operations. Identifying hidden
opportunities is the mark of an astute analyst.

Threats:

No organization is immune to threats. These could be internal, such as falling

productivity or they could be external, such as lower priced international
competition.
 Page | 17

Financial Data Analysis

Data do not, however, “speak for themselves”. They reveal what the analyst
can detect. This calls for a researcher to go in for data analysis. Analysis of
data is a process of inspecting, cleaning, transforming, and modeling data
with the goal of highlighting useful information, suggesting conclusions, and
supporting decision making. Data analysis has multiple facets and
approaches, encompassing diverse techniques under a variety of names, in
different business, science, and social science domains.

Data cleaning is an important procedure during which the data are

inspected, and erroneous data are—if necessary, preferable, and possible—
corrected. Data cleaning can be done during the stage of data entry.
However, as information should always be cumulatively retrievable. In other
words, it should always be possible to undo any data set alterations.
Therefore, it is important not to throw information away at any stage in the
data cleaning phase. All information should be saved (i.e., when altering
variables, both the original values and the new values should be kept, either
in a duplicate data set or under a different variable name), and all alterations
to the data set should carefully and clearly documented, for instance in a
syntax or a log. Then the initial data analysis needs to be done. The most
important distinction between the initial data analysis phase and the main
analysis phase, is that during initial data analysis one refrains from any
analysis that are aimed at answering the original research question. In the
main analysis phase analyses aimed at answering the research question are
performed as well as any other relevant analysis needed to write the first
draft of the research report.

In the main analysis phase either an exploratory or confirmatory approach

can be adopted. Usually the approach is decided before data is collected. In
an exploratory analysis no clear hypothesis is stated before analyzing the
data, and the data is searched for models that describe the data well. In a
confirmatory analysis clear hypotheses about the data are tested.

For my present study after collecting my data, I need to filter it out to

confine the facts to my topic – working capital management. I need to get
correct accounting figures affecting the working capital of the company. I
need to analyze it by using techniques of ratio analysis and comparative
statements. My project being more on the recorded facts and historical
figures, and as is
of Pmagoere| 1a8nalytical and exploratory in nature, I stick to exploratory
analysis. I make no hypothesis and instead analyze the collected data to
arrive at the position of the company with regard to its working capital
position. I will also present it in pictorial forms so as to help ready and better
understanding. I try to make use of graphs and diagrams to present my data
and also to present my analysis and findings.

CONCLUSION

The study titled “A Study on the Working Capital Management” of SHARQ

AL MANAR INDUSTRIAL AND OIL FIELD SUPPLIES LLC has been conducted to
analyze the financial strength and weakness of the firm.

The needs to issue debenture capital or long term borrowed funds to meet
the long term obligations will also be analyzed. The issue of debenture
capital helps the company to achieve the advantage of high leverage which
enables the company to yield maximum earnings to the owners of the firm,
because the fixed rate of interest is lower than the general rate of earnings
of the company.

The researcher also will try to find out whether company should provide
incentives to its creditors by way of early payment discounts which will have
a positive impact on working capital.

It may be concluded that the study will be conducted successfully keeping

the objective in mind.