A DISSERTATION REPORT

ON
WORKING CAPITAL MANGEMENT
Submitted to Utkal University
in partial fulfillment for the award of
degree of
MASTER OF FINANCE AND CONTROL

2012-2014
SUBMITTED BY
AMRITA MAHAPATRA
UNIVERSITY ROLL NO.- 13771U124003

UNDER THE GUIDANCE OF

MR. RASMI RANJAN MISHRA,
COURSE COORDINATOR MFC, KIIMS
 CERTIFICATE

This is to be certified that the Dessertation report entitled, “WORKING

CAPITAL MANAGEMENT” Submitted to Utkal University in partial fulfillment of
the requirement for the award of Master of Finance and Control(MFC), is a
record of original research work done by AMRITA MAHAPATRA during the
period of her study (2012-14) in the department of MFC, KUSHAGRA INSTITUTE
OF INFORMATION AND SCIENCE, affiliated to Utkal University under my
supervision & that the dissertation report has not formed the basis for award
of any degree/ diploma/associate ship/fellowship/any other similar title.

Date: Rasmi Ranjan Mishra

Place:

Course Co-Ordinator
Department Of MFC,
KIIMS
 CERTIFICATE

This is to be certified that the Dissertation report entitled, “WORKING

CAPITAL MANAGEMENT” Submitted to Utkal University in partial fulfillment of
the requirement for the award of Master of Finance and Control(MFC), is a
record of original research work done by AMRITA MAHAPATRA during the
period of her study (2012-14) at the Department of MFC, KUSHAGRA
INSTITUTE OF INFORMATION AND SCIENCE, Utkal University under my
supervision & guidance & that the dissertation report has not formed the basis
for award of any degree/ diploma/associate ship/fellowship/any other similar
title.

Rasmi Ranjan Mishra

Date Internal guide

Place Faculty of MFC,

KIIMS
 DECLARATION

I do hereby declare that the Dissertation report entitled, “WORKING CAPITAL

MANAGEMENT” Submitted to Utkal University in partial fulfillment of the
requirement for the award of Master of Finance and Control(MFC), is a record
of original research work done by Amrita Mahapatra during the period of her
study (2012-14) at the department of MFC, KUSHAGRA INSTITUTE OF
INFORMATION AND SCIENCE, Utkal University under the supervision &
guidance of Mr. Rasmi Ranjan Mishra & that the dissertation report has not
formed the basis for award of any degree/ diploma/associate
ship/fellowship/any other similar title .

Date: - Signature of student

Place:-
 ACKNOWLEDGEMENT

It is with profound gratitude that I express my sincere thanks to Mr. J.B. Padhi,
the Secretary, KIIMS and all other faculty members of our college for their
constant encouragement during the course of my study.

I would like to express my profound gratitude to my Internal guide and

Course co-ordinator Mr. Rasmi Ranjan Mishra, KIIMS who gave his valuable
time and was able to guide my project work in WORKING CAPITAL
MANAGEMENT. His simplicity, self affecting humility and genuine affection for
student community have been an inspiration.

I am indebted to all my friends for their encouragement and support

rendered for their successful completion of the project. Lastly no words can
express my debt gratitude to my parents for their cooperation and
encouragement .

Signature of student
 CONTENTS
1. OBJECTIVE OF THE STUDY
2. RESEARCH METHODOLOGY
2.1. Introduction
2.2. Types of Research
2.3. Scope and Limitations

3. WORKING CAPITAL MANAGEMENT

3.1. Introduction
3.2. Need of working capital management
3.3. Concept of working capital management
3.4. Types of working capital
3.5. Determinants of working capital

4. WORKING CAPITAL FINANCE

4.1. Introduction
4.2. Sources of working capital finance

5. WORKING CAPITAL LEVEL AND ANALYSIS

5.1. Working capital level
5.2. Working capital trend analysis
5.3. Changes in working capital
5.4. Operating cycle

6. COMPONENTS OF WORKING CAPITAL

6.1. Inventory management
6.2. Cash management
6.3. Receivables management
FINDINGS AND CONCLUSION
BIBLIOGRAPHY
CHAPTER I

Objectives of the study

The present study was taken as a part of finance curriculum for the
project report in the form of off the job training with the following
objectives
To know how the business concerns manage their funds for the
following purpose –
CASH PURPOSE

 For the purchase of raw materials, components and spares

 To pay wages and salaries
 To incur day-to-day expenses and overhead costs such as fuel,
power and office expenses, etc.
RECEIVABLE PURPOSE

 To meet the selling costs as packing, advertising, etc.

 To provide credit facilities to the customers.
INVENTORY PURPOSE

 To maintain the inventories of raw material, work-in-progress,

stores and spares and finished stock

From the above discussion we can easily figure it out that WC is a

very important and is an integral part of every business concern. So I
am very much interested in knowing how companies manage their
WC.
 CHAPTER II

RESEARCH METHODOLOGY
Introduction

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying now research is done systematically. In that various steps,
those are generally adopted by a researcher in studying his problem along with the logic
behind them.

It is important for researcher to know not only the research method but also know
methodology. ‘The procedures by which researchers go about their work of describing,
explaining and predicting phenomenon is called methodology.” Methods comprise the
procedures used for generating, collecting and evaluating data. All this means that it is
necessary for the researcher to design his methodology for his problem as the same may
differ from problem to problem.

Data collection is important step in any project and success of any project will be largely
depend upon how much accurate you will be able to collect and how much time, money and
effort will be required to collect that necessary data, this is also an important step.

Data collection plays an important role in research work. Without proper data available for
analysis you cannot do the research work accurately.

Type of Research

This research is based on descriptive method and it is analytical in nature. In this research we
collect data to analyze the company’s financial position. There are two types of data
collection methods are available.

A] Primary data collection

B] Secondary data collection

A] Primary data
The Primary data is that data which is collected fresh or first hand, and for first time which is
original in nature. Primary data can be collected through personal interview, questionnaire
etc. to support the secondary data.

B] Secondary data

The secondary data are those which are already collected and stored. Secondary data can be
easily collected from records, journals, annual reports of the company etc. It will save the
time, money and efforts to collect the data. Secondary data is also made available through
trade magazines, balance sheets, books etc.

This project is based on secondary data, information is collected through five years annual
report of the company, supported by various books and internet sites. The data collection was
aimed at the study of working capital management of the company.

Scope & Limitations of Study

Scope:-

The scope of the study is identified after and during the study is conducted. The study of
working capital is based on tools like Trend Analysis, Ratio Analysis, Operating cycle etc.
And even factors like competitor’s analysis, industry analysis were not considered while
preparing this project.

Limitations:-

 There were limitations in collection of primary data because of confidentiality.

The project is completed with the help of annual reports only i.e. secondary data.
 Conclusions and recommendations are made on the basis of last five years annual
reports. The trend of last five years may or may not reflect the real working capital
position of the company.
 Industry figure and competitors actual financial position was difficult to get.
 CHAPTER III

WORKING CAPITAL MANAGEMENT

3.1] Introduction
Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the inter relationship that exist between
them. The term current assets refers to those assets which in ordinary course of business can
be, or, will be, turned in to cash within one year without undergoing a decrease in value and
without disrupting the operation of the firm. The major current assets are cash,
marketable securities, account receivable and inventory. Current liabilities ware those
liabilities which intended at their inception to be paid in ordinary course of business, within a
year, out of the current assets or earnings of the concern. The basic current liabilities are
account payable, bill payable, bank over-draft, and outstanding expenses.

The goal of working capital management is to manage the firm’s current assets and current
liabilities in such a way that the satisfactory level of working capital is maintained. The
current assets should be large enough to cover its current liabilities in order to ensure a
reasonable margin of safety.

The primary objective of working capital management is to ensure that sufficient cash is
available to:-

 Meet day to day cash flow needs.

 Pay wages and salaries when they fall due
 Pay creditors to ensure continued supplies of goods and services.
 Pay government taxation and provider of capital – dividends and
 Ensure the long term survival of the business entity.

Definition:-

According to Park & Gladson :-

“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over
current items owned to employees and others (such as salaries & wages payable, accounts
payable, taxes owned to government)”.

According to Guttmann & Dougall :-

“Excess of current assets over current liabilities”.

3.2] Need of working capital management

The need for working capital gross or current assets cannot be over emphasized. As already
observed, the objective of financial decision making is to maximize the shareholders wealth.
To achieve this, it is necessary to generate sufficient profits can be earned will naturally
depend upon the magnitude of the sales among other things but sales cannot convert into
cash. There is a need for working capital in the form of current assets to deal with the
problem arising out of lack of immediate realization of cash against goods sold. Therefore
sufficient working capital is necessary to sustain sales activity. Technically this term is refers
to operating or cash cycle. If the company has certain amount of cash, it will be required for
purchasing the raw material may be available on credit basis. Then the company has to spend
some amount for labor and factory overhead to convert the raw material in work in progress,
and ultimately finished goods. These finished goods convert in to sales on credit basis in the
form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period.
Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry
debtors and day to day cash requirements. However some part of current assets may be
financed by the current liabilities also. The amount required to be invested in this current
assets is always higher than the funds available from current liabilities. This is the precise
reason why the needs for working capital arise.

3.3] Concept of working capital

There are two concepts of working capital management

1. Gross working capital.
2. Net working capital.

Gross working capital

This concept says that total investment in current assets is the working capital of the company
Current assets are the assets which can be converted into cash within a year includes cash,
very short term securities, debtors, bills receivable and inventory. This concept does not
consider current liabilities at all. Reasons given for the concept.

 When we consider fixed capital as the amount invested in fixed assets. Then the
amount invested in current assets should be considered as working capital.

 Current asset whatever may be the sources of acquisition, are used in activities related
to day to day operations and their forms keep on changing. Therefore they should be
considered as working capital.

Net working capital

It is narrow concept of working capital and according to this, current assets minus current
liabilities forms working capital. The excess of current assets over current liabilities is called
as working capital. This concept lays emphasis on qualitative aspect. Which indicates the
liquidity position of the concern/enterprise? The reasons for the net working capital method
are:

 The material thing in the long run is the surplus of current assets over current liability.
  Financial health can easily be judged by with this concept particularly from the view
point of creditors and investors.
 Excess of current assets over current liabilities represents’ the amount which is not
liable to be returned and which can be relied upon to meet any contingency.
 Intercompany comparison of financial position may be correctly done particularly
when both the companies have the same amount of current assets.

If the current assets are higher than current liability it is considered the financial position of
the company is sound. If both current assets and liabilities are equal, the company has
resorted to short term funds for financing the working capital and long term sources of funds
have been used to finance the acquisition of fixed assets. It doesn’t indicate the financial
soundness for the company. If the current assets are lesser than current liabilities there is
negative working capital which indicates financial crisis.

Net working capital concept is more reasonable than the gross working capital concepts. The
balance sheet of the company includes group of liabilities such as bank overdraft, creditors,
bills payables, outstanding expenses etc. if it is not deduct from current assets, the concern
may consider itself quite secured: while the reality is may be that the concern has very little
working capital or has no working capital, therefore it is reasonable to define working capital
as the excess of current assets over current liabilities.

3.4] Types of working capital

The operating cycle creates the need for current assets (working capital). However the need
does not come to an end after the cycle is completed to explain this continuing need of
current assets a destination should be drawn between permanent and temporary working
capital.

1) Permanent working capital

The need for current assets arises, as already observed, because of the cash cycle. To carry on
business certain minimum level of working capital is necessary on continues and
uninterrupted basis. For all practical purpose, this requirement will have to be met permanent
as with other fixed assets. This requirement refers to as permanent or fixed working capital.

2) Temporary working capital

Any amount over and above the permanent level of working capital is temporary, fluctuating
or variable, working capital. This portion of the required working capital is needed to meet
fluctuation in demand consequent upon changes in production and sales as result of seasonal
changes

Amount of
Working

Capital Temporary

Permanent

Time

Graph shows that the permanent level is fairly castanet; while temporary working capital is
fluctuating in the case of an expanding firm the permanent working capital line may not be
horizontal. This may be because of changes in demand for permanent current assets might be
increasing to support a rising level of activity.

3.5] Determinants of Working Capital

Working capital requirements of a concern depends on a number of factors, each of which

should be considered carefully for determining the proper amount of working capital. It may
be however be added that these factors affect differently to the different units and these keeps
varying from time to time. In general, the determinants of working capital which is common
to all organization’s can be summarized as under:

Nature of business:-

Need for working capital is highly depends on what type of business, the firm in. there are
trading firms, which needs to invest a lot in stocks, bills receivables, liquid cash etc. public
utilities like railways, electricity, etc., need much less inventories and cash. Manufacturing
concerns stands in between these two extends. Working capital requirement for
manufacturing concerns depends on various factors like the products, technologies, marketing
policies.

Production policies:-

Production policy of an organization affects working capital requirements very highly.

Seasonal industries, which produces only in specific season requires more working capital.
Some industries which produces round the year but sale mainly done in some special seasons
are also need to keep more working capital.

Size and growth of business:-

In very small company the working capital requirement is quite high due to high overhead,
higher buying and selling cost etc. as such medium size business positively has edge over the
small companies. But if the business start growing after certain limit, the working capital
requirements may adversely affect by the increasing size.

Length of production cycle:-

In some business like machine tools industry, the time gap between the acquisition of raw
material till the end of final production of finished products itself is quite high. As such
amount may be blocked either in raw material or work in progress or finished goods or even
in debtors. Naturally there need of working capital is high.

Business/ Trade cycle:-

If the company is the operating in the time of boom, the working capital requirement may be
more as the company may like to buy more raw material, may increase the production and
sales to take the benefit of favorable market, due to increase in the sales, there may more and
more amount of funds blocked in stock and debtors etc. similarly in the case of depressions
also, working capital may be high as the sales terms of value and quantity may be reducing,
there may be unnecessary piling up of stack without getting sold, the receivable may not be
recovered in time etc.

Fluctuations of supply and seasonal variations:-

Some companies need to keep large amount of working capital due to their irregular sales and
irregular supply. Similarly companies using bulky materials also maintain large reserves’ of
raw material inventory. This increases the need of working capital. Some companies
manufacture and sell goods only during certain seasons. Working capital requirements of
such industries will be higher during certain season of such industries period.

Profitability:-

The profitability of the business may be vary in each and every individual case, which is in
turn its depend on numerous factors, but high profitability will positively reduce the strain on
working capital requirement of the company, because the profits to the extent that they
earned in cash may be used to meet the working capital requirement of the company.

Other factors:-

Effective coordination between production and distribution can reduce the need for working
capital. Transportation and communication means if developed, helps to reduce the working
capital requirement.
 CHAPTER IV
WORKING CAPITAL FINANCE
4.1] Introduction

Funds available for period of one year or less is called short term finance. In India short term
finance are used as working capital finance. Two most significant short term sources of
finance for working capital are trade credit and bank borrowing. Trade credit ratio of current
assets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grown
faster than the growth in sales. Bank borrowing is the next source of working capital finance.
The relative importance of this varies from time to time depending on the prevailing
environment. In India the primary source of working capital financing are trade credit and
short term bank credit. After determine the level of working capital, a firm has to consider
how it will finance. Following are sources of working capital finance:-

4.2] Sources of working Capital Finance

 Trade credit
 Bank Finance
 Letter of credit

Trade Credit:-

Trade credit refers to the credit that a customer gets from suppliers of goods in the normal
course of business. The buying firms do not have to pay cash immediately for the purchase
made. This deferral of payments is a short term financing called trade credit. It is major
source of financing for firm. Particularly small firms are heavily depend on trade credit as a
source of finance since they find it difficult to raised funds from banks or other sources in the
capital market. Trade credit is mostly an informal arrangement, and it granted on an open
account basis. A supplier sends goods to the buyers accept, and thus, in effect, agrees to pay
the amount due as per sales terms in the invoice. Trade credit may take the form of bills
payable. Credit terms refer to the condition under which the supplier sells on credit to the
buyer, and the buyer required to repay the credit. Trade credit is the natural source of the
financing. As the volume of the firm’s purchase increase trade credit also expand. It appears
to be cost free since it does not involve explicit interest charges, but in practice, it involves
implicit cost. The cost of credit may be transferred to the buyer via the increased price of
goods supplied by him.

Bank Finance:-

Banks are main institutional source of working capital finance in India. After trade credit,
bank credit is the most important source of financing working capital in India. A banks
considers a firms sales and production plane and desirable levels of current assets in
determining its working capital requirements. The amount approved by bank for the firm’s
working capital is called credit limit. Credit limit is the maximum funds which a firm can
obtain from the banking system. In practice banks do not lend 100% credit limit; they deduct
margin money.

Forms of Bank Finance:-

 Overdraft
 Cash Credit
 Purchase or Discounting of Bills

1) Overdraft:-

In this case, the company is allowed to withdraw in excess of the balance standing in its Bank
account. However, a fixed limit is stipulated by the Bank beyond which the company will not
able to overdraw the account. Legally, overdraft is a demand assistance given by the bank i.e.
bank can ask repayment at any point of time.

2) Cash Credit:-

In practice, the operations in cash credit facility are similar to those of those of overdraft
facility except the fact that the company need not have a formal current account. Here also a
fixed limit is stipulated beyond which the company is not able to withdraw the amount.

3) Purchase or Discounting of Bills:-

This form of assistance is comparatively of recent origin. This facility enables the company
to get the immediate payment against the credit bills/invoice raised by the company. The
banks hold the bills as a security till the payment is made by the customer. The entire amount
of bill is not paid to the company. The company gets only the present worth of amount of bill
from of discount charges. On maturity, bank collects the full amount of bill from the
customer.

Letter Of Credit:-

In this case the exporter and the importer are unknown to each other. Under these
circumstances, exporter is worried about getting the payment from the importer and importer
is worried as to whether he will get goods or not. In this case, the importer applies to his bank
in his country to open a letter of credit in favor of the exporter whereby the importers bank
undertakes to pay the exporter or accept the bills or draft drawn by the exporter on the
exporter fulfilling the terms and conditions specified in the letter of credit. Banks have been
certain norms in granting working capital finance to companies. These norms have been
greatly influenced by the recommendation of various committees appointed by the Reserve
Bank of India from time to time. The norms of working capital finance followed by bank
since mid-70 were mainly based on the recommendations of the Tondon committee. The
Chore committee made further recommendations to strengthen the procedure and norms for
working capital finance by banks.

CHAPTER V
WORKING CAPITAL LEVEL AND ANALYSIS
5.1] Working Capital Level

The consideration of the level investment in current assets should avoid two danger points
excessive and inadequate investment in current assets. Investment in current assets should be
just adequate, not more or less, to the need of the business firms. Excessive investment in
current assets should be avoided because it impairs the firm’s profitability, as idle investment
earns nothing. On the other hand inadequate amount of working capital can be threatened
solvency of the firms because of its inability to meet its current obligation. It should be
realized that the working capital need of the firms may be fluctuating with changing business
activity. This may cause excess or shortage of working capital frequently. The management
should be prompt to initiate an action and correct imbalance.

Size of Working Capital (Rs. In lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

A)Current assets
Inventories 16604.4 13481.1 15863.8 22872.89 26226.41
Sundry debtors 4760.91 3028.22 3583.81 5402.52 8214.21
Cash and Bank balances 6340.04 4101.42 1366.88 1014.87 3913.66
Loan and advances 3633.33 4021.88 4725.55 6056.24 6203.75
Total of A 31338.71 24632.53 25540.03 35355.52 44558.03
B)Current liabilities
Current liabilities 4877.80 5555.41 7793.13 6603.49 22875.75
Provisions 2142.94 1847.83 1859.83 1885.39 2427.27
Total of B 7020.74 7403.24 9652.96 8488.88 25303.02
Net W.C.(A – B) 24317.97 17229.29 15887.07 26866.64 19255.01

5.2] Working capital trend analysis

In working capital analysis the direction of changes over a period of time is of crucial
importance. Working capital is one of the important fields of management. It is therefore very
essential for an analyst to make a study about the trend and direction of working capital over
a period of time. Such analysis enables us to study the upward and downward trend in current
assets and current liabilities and its effect on the working capital position.
In the words of S.P. Gupta “The term trend is very commonly used in day-today conversion
trend, also called secular or long term need is the basic tendency of population, sales, income,
current assets, and current liabilities to grow or decline over a period of time”

According to R.C. Galeziem “The trend is defined as smooth irreversible movement in the
series. It can be increasing or decreasing.”

Working Capital Size (Rs. In Lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

Net W.C.(A-B) 24317.97 17229.29 15887.07 26866.69 19255.01

W.C. Indices 100.00 70.85 65.33 110.48 79.18

Working Capital Indices

120

100

80

60

40

20

0
2007-08 2008-09 2009-10 2010-11 2011-12

Observations

The above table shows that from year 2007-08 to 2009-10, the WC is continuously
decreasing. This makes the WC ratio stable i.e. around 5, but suddenly the WC of the firm
increases in the year 2010-11 due to encashment of deposits in that year. As a result WCR
comes down to 3.83%, which was a negative indication for the company. Further in 2011-12
they take some corrective measures due to which there WCR increased up to 9.97%, which is
a positive indicator for the company.
From the above analysis we can conclude that there is heavy fluctuation in WCR, so the
company must take some actions to make it more stable.

Current assets

Total assets are basically classified in two parts as fixed assets and current assets. Fixed
assets are in the nature of long term or life time for the organization. Current assets convert in
the cash in the period of one year. It means that current assets are liquid assets or assets
which can convert in to cash within a year.

Current Assets size (Rs. In Lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

Inventories 16604.40 13481.10 15863.79 22872.89 26226.41

Sundry Debtors 4760.91 3028.22 3583.81 5402.52 8214.21

Cash & bank bal. 6340.04 4101.42 1366.88 1014.87 3913.66

Loans & 3633.36 4021.88 4725.55 6065.24 6203.75

advances
Total C.A. 31338.71 24632.53 25540.03 35355.52 44558.03

C.A. Indices 100.00 78.60 81.50 112.81 142.18

Current Assets Indices

160

140

120

100

80

60

40

20

0
2007-08 2008-09 2009-10 2010-11 2011-12
Composition of current assets

Analysis of current assets components enable one to examine in which components the
working capital fund has locked. A large tie up of funds in inventories affects the profitability
of the business or the major portion of current assets is made up of cash alone, the
profitability will be decreased because cash is non earning asset.

Composition of current Assets (No in %)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12
Inventories 52.98 54.72 62.11 64.69 58.85
Sundry debtors 15.19 12.29 14.03 15.28 18.43
Cash & bank 20.23 16.65 5.35 2.87 8.78
balance
Loans 11.59 16.32 18.50 17.15 13.92
&advances
Total of C.A. 100.00 100.00 100.00 100.00 100.00

Components of Current Assets (No. in %)

70

60 Inventories

50
Sundry
Debtors
40

30 Cash & Bank

balances
20
Loans &
10 Advance
0
2007-08 2008-09 2009-10 2010-11 2011-12

Observations

It was observed that current assets have been increased year by year it was decreased in 2008-
09 by 24632.53 because of recession. The excess of current assets is showing positive
liquidity position of the firm but it is not always good because excess current assets then
required, it may adversely affects on profitability. Current assets components indicate
inventories as a major part in current assets, which indicates that company is expanding its
business.

Current liabilities
Current liabilities mean the liabilities which have to pay in current year. It includes sundry
creditor’s means supplier whose payment is due but not paid yet, thus creditors called as
current liabilities. Current liabilities also include short term loan and provision as tax
provision. Current liabilities also includes bank overdraft. For some current assets like bank
overdrafts and short term loan, company has to pay interest thus the management of current
liabilities has importance.

Current liabilities size (Rs. In lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

Current 4877.80 5555.41 7793.13 6603.49 22875.75

Liabilities
Provisions 2142.94 1847.83 1859.83 1885.39 2427.27

Total C.L. 7020.74 7403.24 9652.96 8488.88 25303.02

C.L. Indices 100.00 105.45 137.50 120.91 360.40

Current Liability Indices

400

350

300

250

200

150

100

50

0
2007-08 2008-09 2009-10 2010-11 2011-12

Observations

The above bar diagram shows that current liability (CL) is increasing year by year. It gives an
indication of a good credit worthiness of the company during the period. As the company can
easily get credit from the outside to run their day to day operations so there is no need to
maintain a standard working capital.

In the year 2011-12 CL increased dramatically by 360.40%. further the over debtness of the
company may involve a big amount of indirect cost for taking credit from suppliers which
may also be consider by the company.

5.3] Changes in working capital

There are so many reasons to changes in working capital as follow

 Changes in sales and operating expenses

 Policy changes
 Technology changes
Changes in sales and operating expenses:-

The changes in sales and operating expenses may be due to Following three reasons:-

1. There may be long run trend of change e.g. the price of raw material say oil may constantly
raise necessity the holding of large inventory.

2. Cyclical changes in economy dealing to ups and downs in business activity will influence
the level of working capital both permanent and temporary.

3. Changes in seasonality in sales activities.

Policy changes:-

The second major case of changes in the level of working capital is because of policy
changes initiated by management. The term current assets policy may be defined as the
relationship between current assets and sales volume;

Technology changes:-

The third major point if changes in working capital are changes in technology because
changes in technology to install that technology in our business more working capital is
required.
A change in operating expenses rise or full will have similar effects on the levels of working
following working capital statement is prepared on the base of balance sheet of last two year.

Statement of Changes in Working Capital (Rs. In Lakhs)

Particulars 2010-11 2011-12 Change in Working Capital
Increase Decrease
A) Current assets
Inventories 22872.89 26226.41 3353.52
Sundry debtors 5402.52 8214.21 2811.69
Cash and Bank balances 1014.87 3913.66 2898.79
Loans & advances 6065.24 6203.75 138.51
Total of A 35355.52 44558.03
B) Current liabilities
Current liabilities 6603.49 22875.75 16272.26
Provisions 1885.39 2427.27 541.88
Total of B 8488.88 25303.02
W.C.(Total of A – Total 26866.64 19255.01
of B)
Net Decrease in W.C. 7611.63 7611.63
Total
Cash
26866.64 26866.64 16814.14 16814.14
5.4] Operating Cycle The need of working capital arrived because of time gap between
production of

Sale Purchase of
raw material
goods and their
actual realization
after sale. This time
gap is called
“Operating
Cycle” or
Finished Work in
“Working
goods progres Capital Cycle”.
The operating cycle
of a company consist of time period between procurement of inventory and the collection of
cash from receivables. The operating cycle is the length of time between the company’s
outlay on raw materials, wages and other expanses and inflow of cash from sales of goods.
Operating cycle is an important concept in management of cash and management of cash
working capital. The operating cycle reveals the time that elapses between outlays of cash
and inflow of cash. Quicker the operating cycle less amount of investment in working capital
is needed and it improves profitability. The duration of the operating cycle depends on nature
of industries and efficiency in working capital management.
 CHAPTER VI
WORKING CAPITAL COMPONENTS

Inventory Management
 Cash Management

Receivables Management

6.1] Inventory Management

Inventories constitute the most significant part of current assets of a large majority of
companies. On an average, inventories are approximately 60% of current assets. Because of
large size, it requires a considerable amount of fund. The inventory means and includes the
goods and services being sold by the firm and the raw material or other components being
used in the manufacturing of such goods and services.

Nature of Inventory

The common type of inventories for most of the business firms may be classified as raw-
material, work-in-progress, finished goods.

Raw material:-

It is basic inputs that are converted into finished products through the manufacturing process.
Raw materials inventories are those units which have been purchased and stored for future
productions.

Work–in–process:-
Work-in-process is semi manufactured products. They represent products that need more
work before they become finished products for sale.

Finished goods:-

These are completely manufactured products which are ready for sale. Stocks of raw
materials and work-in-process facilitate production, while stock of finished goods is required
for smooth marketing operations. Thus inventories serve as a link between the production and
consumption of goods. The levels of three kinds of inventories for a firm depend on the
nature of business. A manufacturing firm will have substantially high levels of all the three
kinds of inventories. While retail or wholesale firm will have a very high level of finished
goods inventories and no raw material and work-in-process inventories.

Objectives of inventory management:-

The aim of inventory management should be to avoid excessive and inadequate levels of
inventories and to maintain sufficient inventory for smooth production and sales operations.

An effective inventory management should:

 To ensure a continuous supply of raw material to facilitate uninterrupted production.

 To maintain sufficient stocks of raw materials in the periods of short supply and
anticipate price changes.
 To maintain sufficient finished goods inventory for smooth sales operation, and
efficient customers service.
 To Minimize the carrying cost and time ,and
 To Control investment in inventories and keep it at an optimum level.

Effect of Excess or Inadequate inventory

If too much inventory is held, the organization wastes money through a variety of factors:-

 Money is held up in stock when it could be put to better use.

 There are superfluous warehousing and storage costs.
 Inventory may depreciate.
 There is potentially greater risk of theft.

On the other hand, too little inventory can lead to stock-out which can:-

 Halt activity.
 Lose income.
 Cause discomfort or distress to Clint.
Size of Inventory (Rs. In lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

Raw materials 10667.07 7721.94 8207.91 9630.61 6271.36
 Work-in 55.40 97.17 222.14 174.71 403.51
progress
Finished goods 5368.61 4860.77 5822.73 10120.44 14641.63

Other 513.32 801.14 1611.01 2947.13 4909.91

inventories
Total 16604.40 13481.01 15863.79 22872.89 26226.41
Indices 100.00 81.12 95.54 137.75 157.95

Inventories Indices
 180

160

140

120

100

80

60

40

20

0
2007-08 2008-09 2009-10 2010-11 2011-12

Inventory components

The manufacturing firm’s inventory consists following components:-

 Raw material
 Work- in-progress
 Finished goods

To analyze the level of raw material inventory and work in progress inventory held by the
firm on an average it is necessary to examine the efficiency with which the firm converts raw
material inventory and work in progress into finished goods.

Components of inventories

Raw Material Work In Progress 14641.63

Finished Goods Other Inventories
10667.07 10120.44
9630.61
7721.94 8207.91
5822.73 6271.36
5368.61 4860.77 4909.91
2947.13
1611.01
513.32 801.14 222.14 174.71 403.51
55.4 97.17
2007-08 2008-09 2009-10 2010-11 2011-12

Inventory holding period

The reciprocal of inventory turnover gives average inventory holding in percentage term.
When the numbers of days in year are divided by inventory turnover, we obtain days of
inventory holding.
 Inventory holding period Inventory holding period (In days)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

Inventory TOR 11.64 12.64 10.45 11.53 24.14
Days of Inventory 31 29 35 32 15
holding

40

35

30

25

20

15

10

0
2007-08 2008-09 2009-10 2010-11 2011-12

Observations

The inventory turnover ratio shows how rapidly the inventory is turning into receivables
through sales. This ratio has been increased in FY 2011-12 compared to the 2011-12 by
24.14. A high inventory turnover indicates the efficient management of inventory because
more frequently the stocks are sold, the holding period of an inventory is fluctuating every
year but in 2011-12 it shows 15 days i.e. decreased as compared to previous years because of
increase in inventory ratio and sales. So we can say that enterprises have a very good
turnover ratio.

6.2] Cash Management

Cash is common purchasing power or medium of exchange. As such, it forms the most
important component of working capital. The term cash with reference to cash management
is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted
equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of
cash also induce hear- cash assets, such as marketable sense as marketable securities and time
deposits in banks. The main characteristics of this deposits that they can be really sold and
convert in to cash in short term. They also provide short term investment outlet for excess
and are also useful for meeting planned outflow of funds. We employ the term cash
management in the broader sense. Irrespective of the form in which it is held, a distinguishing
feature of cash as assets is that it was no earning power. Company have to always maintain
the cash balance to fulfill the daily requirement of expenses. There are four primary motive
for maintain the cash as follow

Motive of holding cash

There are four motives for holding cash as follow:-
 Transaction motive
 Precautionary motive
 Speculative motive
 Compensating motive

Transaction motive

Cash balance is necessary to meet day-to-day transaction for carrying on with the operation
of firms. Ordinarily, these transactions include payment for material, wages, expenses,
dividends, taxation etc. there is a regular inflow of cash from operating sources, thus in case
of GPIL there will be two-way flow of cash- receipts and payments. But since they do not
perfectly synchronize, a minimum cash balance is necessary to uphold the operations for the
firm if cash payments exceed receipts. Always a major part of transaction balances is held in
cash, a part may be held in the form of marketable securities whose maturity conforms to the
timing of anticipated payments of certain items, such as taxation, dividend etc.

Precautionary Motive

Cash flows are somewhat unpredictable, with the degree of predictability varying among
firms and industries. Unexpected cash needs at short notice may also be the result of
following:
 Uncontrollable circumstances such as strike and natural calamities.
 Unexpected delay in collection of trade dues.
 Cancellation of some order for goods due unsatisfactory quality.
 Increase in cost of raw material, rise in wages, etc.
The higher the predictability of firm’s cash flows, the lower will be the necessity of holding
this balance and vice versa. The need for holding the precautionary cash balance is also
influenced by the firm’s capacity to have short term borrowed funds and also to convert short
term marketable securities into cash.

Speculative motive

Speculative cash balances may be defined as cash balances that are held to enable the firm to
take advantages of any bargain purchases that might arise. While the precautionary motive is
defensive in nature, the speculative motive is aggressive in approach. However, as with
precautionary balances, firms today are more likely to rely on reserve borrowing power and
on marketable securities portfolios than on actual cash holdings for speculative purposes.

Advantages of cash management

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither
profit nor losses but without cash, profit remains meaningless for an enterprise owner.
 A sufficient of cash can sustain an unsuccessful firm going despite losses.
  An efficient cash management through a relevant and timely cash budget may enable
a firm to obtain optimum working capital and ease the strains of cash shortage,
fascinating temporary investment of cash and providing funds normal growth.

 Cash management involves balance sheet changes and other cash flow that do not
appear in the profit and loss account such as capital expenditure.

Size and Indices of Cash in GPIL

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

Cash & Bank 6340.04 4101.42 1366.88 1014.87 3913.66
balances
Indices 100 64.70 21.56 16.01 61.73

Cash Indices

120

100

80

60

40

20

0
2007-08 2008-09 2009-10 2010-11 2011-12

Cash cycle

One of the distinguishing features of the fund employed as working capital is that constantly
changes its form to drive ‘business wheel’. It is also known as ‘circulating capital’ which
means current assets of the company, which are changed in ordinary course of business from
one form to another, as for example, from cash to inventories, inventories to receivables and
receivables to cash.

Basically cash management strategies are essentially related to the cash cycle together with
the cash turnover. The cash cycle refers to the process by which cash is used to purchase the
raw material from which are produced goods, which are then send to the customers, who later
pay bills. The cash turnover means the number of time firms cash is used during each year.

Cash

Purchase of
Sale Raw
material

Finished Work in
goods progres

6.3] Receivables Management

Receivables or debtors are the one of the most important parts of the current assets which is
created if the company sells the finished goods to the customer but not receive the cash for
the same immediately. Trade credit arises when firm sells its products and services on credit
and does not receive cash immediately. It is essential marketing tool, acting as bridge for the
movement of goods through production and distribution stages to customers. Trade credit
creates receivables or book debts which the firm is expected to collect in the near future. The
receivables include three characteristics:-

 It involve element of risk which should be carefully analysis.

 It is based on economic value. To the buyer, the economic value in goods or services
passes immediately at the time of sale, while seller expects an equivalent value to be
received later on.
 It implies futurity. The cash payment for goods or serves received by the buyer will be
made by him in a future period.

Objectives of Receivables Management

Thus, following are the main objectives of receivables management:-

 To minimize the cost of credits.

  To optimize investments in receivables.
 To optimize the credit sales.

Therefore, the main objective of receivable management is to establish a balance between

profitability and risk (cost). A business can afford to invest in its receivables unless the
marginal costs and marginal profits are the same. Although the level of receivables is affected
by various external factors like standards of industry, economic conditions, seasonal factors,
rate of competition etc, management can control its receivables. Though credit policies, credit
terms, credit standards and collection procedures.

Size of Receivables of GPIL (Rs. In lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12
Sundry debtors 4760.91 3028.22 3583.81 5402.52 8214.21
Indices 100.00 63.61 75.30 113.50 172.53

Debtors Indices (Rs. in lakhs)

200
180
160
140
120
100
80
60
40
20
0
2007-08 2008-09 2009-10 2010-11 2011-12

Average collection Period

The average collection period measures the quality of debtors since it indicate the speed of
their collection. The shorter the average collection period, the better the quality of the debtors
since a short collection period implies the prompt payment by debtors. The average collection
period should be compared against the firm’s credit terms and policy judges its credit and
collection efficiency. The collection period ratio thus helps an analyst in two respects.

 In determining the collectability of debtors and thus, the efficiency of collection

efforts.
 In ascertaining the firm’s comparative strength and advantages related to its credit
policy and performance.
The debtor’s turnover ratio can be transformed in to the number of days of holding of
debtors.

Average collection period

Particulars 2007-08 2008-09 2009-10 2010-11 2011-12

Gross sales 95690.06 116240.40 83239.39 102857.57 191953.53
Avg. Debtors 4760.91 3028.22 3583.81 5402.52 8214.21
Receivable 20.10 38.39 23.226 19.04 23.37
TOR
Avg. collection 18 10 13 19 16
period (days)

Average collection period (In days)

20
18
16
14
12
10
8
6
4
2
0
2007-08 2008-09 2009-10 2010-11 2011-12

Observations

The above figure indicates that the average collection period of a company is increasing year
by year which is good sign for the company. The normal collection period provided by
company is 15 days it clearly shows the effective collection period for a company.
 FINDINGS AND CONCLUSIONS

10.1] Conclusions
  The working capital of the company increase year to year. This may affect the
working of the company so they should try to maintain a stable working capital by
contributing own contribution in terms of equity etc .

 Positive working capital indicates that company has the ability of payments of short
term liabilities.

 Working capital turnover ratio indicates the efficiency of the firm in utilizing the
working capital in the business. The working capital turnover of a company increased
every year, excluding 2007-08.

 Average Collection Period is the relationship between no. of days in a year and debtor
turnover ratio. The company should try to reduce the collection period. Here we
conclude that the company is very much efficient in reducing the Average Collection
Period.

 The Receivable Turnover Ratio was highest (38.39 times) in 2008-09 but after that it
was decreasing. As the theory suggest More the number of times debtors' turnover,
better the liquidity position of the firm. So the company should try to improve its RTR
.

 The company has an adequate ITR during 2011-12. Hence we can say that the
company is efficiently managing its inventory by frequently selling its stocks.
The liquid ratio of the company was almost stable but in 2011-12 the liquid position
of the company is falling. So the company should maintain more liquid assets to
improve the QR up to the standard.

10.2] Findings

 Company is paying huge interest on working capital loan.

 Collection period is not effective enough in practical point of view.

 Company has a good inventory management system, but sometimes because of

maintaining huge stock company blocked their money into it.

 Current assets and Current liabilities of a company increases year by year. It means
that company is investing in current assets and expanding its business.

10.3] Suggestion
 Company should avoid the unnecessary blockage of money by adopting Just In Time
technique (JIT).

 Company should take control on debtors collection period which is a major part of
current assets.

 Company paid huge interest on working capital loan in FY 2008-09, it can reduced
through maintaining of good debtor collection period.

 Company should reduce their working capital limits by taking loan as corporate loan
etc because of working capital limits are all time in high usage.

 Company raise funds through short term sources for short term requirement of funds,
which is comparatively economical as compare to long term funds.

BIBLIOGRAPHY
Books Referred:-

1) Cost & Management Accounting , By:- Ravi M. Kishore, Publication:- Taxmann Allied
Services (P.) Ltd.

2) Financial Management, By :- I.M. Pandey, Publication:- Vikas publishing House Pvt.

limited

3) Financial Management, By :- Shashi K. Gupta, R.K Sharma, Neeti Gupt, Kalyani

Publishers

Websites Referred:-

1) www.google.com
2) www.investopedia.com
3) www.wikipedia.com
4) www.gpilindia.com