Directorate of Distance Education

Swami Vivekanand Subharti University

A Project Report on

Working Capital Management

Directorate of Distance Education
Swami Vivekanand Subharti University
Meerut

Submitted for partial fulfillment for award of the degree in

Master in Business Administration

BY STUDENT Under the Supervision

Name- Salman Khan Dr. Siraj Ahmad

Enrollment No- A1620999634260 University of Lucknow

Batch- A 2016-17 Lucknow

1
 Directorate of Distance Education

Swami Vivekanand Subharti University

Certificate

This is to Certify that SALMAN KHAN has carried out the Project work presented in
this entitled “WORKING CAPITAL MANAGEMENT ” under my supervision and
merits the award of Master in Business Administration from Swami Vivekanand
Subharti University. The Project embodies result of original work and studies carried
out by Student himself/herself and the contents of the Project do not form the basis for
the award of any other degree to the candidate or to anyone else.

Signature of the Student Signature of the Guide

Name- Salman Khan Dr. Siraj Ahmad

Enrollment No- A1620999634260 University of Lucknow

Batch- A 2016-17 Lucknow

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 ACKNOWLEDGEMENT

Any research works is never an individual effort. It is a contribution of effort of many

hearts, heads. It is my pleasure to express from the depth of my heart, the gratitude and thanks

to all those who whole – heartedly supported and helped me in the completion of my project.

To being with I feel to express my deep gratitude and sincere thanks to my Academic

project guide Dr. Siraj Ahmad, Lucknow University, Lucknow and thanks to Swami

Vivekanand Subharti University, Meerut for his priceless and valuable guidance,

encouragement for completion of work.

SALMAN KHAN

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 DECLARATION

I Salman Khan a student of Swami Vivekanand Subharti University, Meerut here by

declare that the project entitled WORKING CAPITAL MANAGEMENT or part there of has

not been previously submitted by me for any other degree or diploma of any university or

scientific organization. The project is the result of my Bonafide work and the sources of

literature used and all assistance received during the course of investigations have been duly

acknowledged.

Lucknow: Signature of student

Date: SALMAN KHAN

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 TABLE OF CONTENT
Chapter 1. INTRODUCTION

- Introduction

Chapter 2. INTRODUCTION OF COMPANY

- Company Profile

- Mission and Vision

- Employee benefits and services

- Social welfare

- Overview of company

- Products of company

Chapter 3. WORKING CAPITAL MANAGEMENT

- Introduction

- Determinants of working capital

- Inadequate or excess working capital

- Need for working capital

- Estimation of working capital

- Operating cycle

- Time and money concept in working capital

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 - Types of working capital

- Sources of working capital

- Statement of working capital and its analysis

Chapter 4. RATIO ANALYSIS

- Introduction to ratios

- Types of ratio analysis

Chapter 5. CONCLUSION, FINDINGS

BIBLIOGRAPHY

6
INTRODUCTION

7
 INTRODUCTION

HISTORY OF BANKING

Banking is nearly as old as civilization. The history of banking could be said to have started with
the appearance of money. The first record of minted metal coins was in Mesopotamia in about
2500B.C. the first European banknotes, which was handwritten appeared in1661, in Sweden.
cheque and printed paper money appeared in the 1700’s and 1800’s, with many banks created to
deal with increasing trade.

The history of banking in each country runs in lines with the development of trade and industry,
and with the level of political confidence and stability. The ancient Romans developed an
advanced banking system to serve their vast trade network, which extended throughout Europe,
Asia and Africa.

Modern banking began in Venice. The word bank comes from the Italian word “ban co”,
meaning bench, because moneylenders worked on benches in market places. The bank of Venice
was established in 1171 to help the government raise finance for a war.

At the same time, in England merchant started to ask goldsmiths to hold gold and silver in their
safes in return for a fee. Receipts given to the Merchant were sometimes used to buy or sell, with
the metal itself staying under lock and key. The goldsmith realized that they could lend out some
of the gold and silver that they had and charge interest, as not all of the merchants would ask for
the gold and silver back at the same time. Eventually, instead of charging the merchants, the
goldsmiths paid them to deposit their gold and silver.

The bank of England was formed in 1694 to borrow money from the public for the government
to finance the war of Augsburg against France. By 1709, goldsmith were using bank of England
notes of their own receipts.

8
New technology transformed the banking industry in the 1900’s round the world, banks merged
into larger and fewer groups and expanded into other country.

BANKING STRUCTURE IN INDIA

In today’s dynamic world banks are inevitable for the development of a country. Banks play a
pivotal role in enhancing each and every sector. They have helped bring a draw of development
on the world’s horizon and developing country like India is no exception.

Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for moving
finance from those who have surplus money to (however temporarily) those who have deficit. In
everyday branch terms the banks channel funds from depositors whose accounts are in credit to
borrowers who are in debit.

Without the intermediary of the banks both their depositors and their borrowers would have to
contact each other directly. This can and does happen of course. This is what has lead to the very
foundation of financial institution like banks.

Before few decades there existed some influential people who used to land money. But a
substantially high rate of interest was charged which made borrowing of money out of the reach
of the majority of the people so there arose a need for a financial intermediate.

The Bank have developed their roles to such an extent that a direct contact between the
depositors and borrowers in now known as disintermediation.
Banking industry has always revolved around the traditional function of taking deposits, money
transfer and making advances. Those three are closely related to each other, the objective being
to lend money, which is the profitable activity of the three. Taking deposits generates funds for
lending and money transfer services are necessary for the attention of deposits. The Bank have
introduced progressively more sophisticated versions of these services and have diversified
introduction in numerable areas of activity not directly relating to this tradition .
9
 INDIAN BANKING SYSTEM

Reserve Bank of India

Schedule Banks Non-Schedule Banks

Central co-op
State co-op Commercial Banks and Commercial Banks
Banks Banks Primary Cr.
Societies

Indian Foreign

Public Sector
Banks Private Sector HDFC,
Banks ICICI etc.

State Bank of India Other Nationalized Regional Rural

and its Subsidiaries Banks Banks

10
 INDIAN BANKING INDUSTRY ANALYSIS

The banking scenario in India has been changing at fast pace from being just the borrowers and
lenders traditionally, the focus has shifted to more differentiated and customized product/service
provider from regulation to liberalization in the year 1991, from planned economy to market.

Economy, from licensing to integration with Global Economics, the changes have been swift. All
most all the sector operating in the economy was affected and banking sector is no exception to
this. Thus the whole of the banking system in the country has undergone a radical change. Let us
see how banking has evolved in the past 57 years of independence.

After independence in 1947 and proclamation in 1950 the country set about drawing its road map
for the future public ownership of banks was seen inevitable and SBI was created in 1955 to
spearhead the expansion of banking into rural India and speed up the process of magnetization.
Political compulsion’s brought about nationalization of bank in 1969 and lobbying by bank
employees and their unions added to the list of nationalized banks a few years later.

Slowly the unions grew in strength, while bank management stagnated. The casualty was to the
customer service declined, complaints increased and bank management was unable to item the
rot.

In the meantime, technology was becoming a global phenomenon lacking a vision of the future
and the banks erred badly in opposing the technology up gradation of banks. They mistakenly
believed the technology would lead to retrenchment and eventually the marginalization of
unions.

The problem faced by the banking industry soon surfaced in their balance sheets. But the
prevailing accounting practices unable banks to dodge the issue.

The rules of the game under which banks operated changed in 1993. Norms or income
Recognition, Assets classification and loan loss provisioning were put in place and capital

11
adequacy ratio become mandatory. The cumulative impact of all these changes has been on the
concept of state ownership in banks. It is increasingly becoming clear that the state ownership in
bank is no longer sustainable.

The amendment of banking regulation act in 1993 saw the entry of new private sector banks and
foreign banks.

MAJOR PLAYER IN INDIA

1. HDFC BANK LTD

2. ICICI BANK LTD
3. STATE BANK OF INDIA LTD
4. PUNJAB NATOINAL BANK LTD
5. BANK OF BARODA LTD
6. FEDERAL BANK LTD
7. AXIS BANK LTD
8. ING VYSYA BANK LTD
9. IDBI BANK LTD
10. INDUSIND BANK LTD
11. YES BANK LTD

12
COMPANY PROFILE

13
 COMPANY PROFILE

HDFC is India's premier housing finance company and enjoys an impeccable track record
in India as well as in international markets. Since its inception in 1977, the Corporation has
maintained a consistent and healthy growth in its operations to remain the market leader in
mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has
developed significant expertise in retail mortgage loans to different market segments and also
has a large corporate client base for its housing related credit facilities. With its experience
in the financial markets, a strong market reputation, large shareholder base and unique
consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.

HDFC Bank began operations in 1995 with a simple mission : to be a “ World Class Indian
Bank.” They realized that only a single minded focus on product quality and service
excellence would help us get there. Today, we are proud to say that we are well on our
way towards that goal.

HDFC Ltd has the objective to enhance residential housing stock and promote home ownership.
Their offerings range from hassle-free home loans and deposit products, to property related
services and a training facility. They also offer specialized financial services to the customer
base through partnerships with some of the best financial institutions worldwide.
HDFC Bank is a young and dynamic bank, with a youthful and enthusiastic team determined to
accomplish the vision of becoming a world-class Indian bank.

Our business philosophy is based on four core values - Customer Focus, Operational Excellence,
Product Leadership and People. We believe that the ultimate identity and success of our bank
will reside in the exceptional quality of our people and their extraordinary efforts. For this
reason, we are committed to hiring, developing, motivating and retaining the best people in the
industry.

14
HDFC Bank specializes in the provision of banking and other financial services to corporate and
institutional clients. The companys services include commercial, transactional and electronic
banking products. It also provides treasury services, retail banking and capital markets
infrastructure. The company primarily operates in India. HDFC Bank is headquartered in
Mumbai, India and employs about 14,900 people. The company recorded revenues of
INR124,928 million (approximately $3,131.9 million) during the fiscal year ended March 2009,
an increase of 51.9% over 2009. The net profit was INR15901.8 million (approximately $398.7
million) in fiscal year 2009, an increase of 39.3% over 2009.

15
 Snapshot
Company Background
Industry Finance - Banks - Private Sector.
Business Group HDFC Group
Incorporation Date 31/12/1994
Public Issue Date 31/12/1995
Face Value 10.0000

Company/Business Registration No INE040A01018

Key Officials CEO Aditya puri

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 HISTORY

HDFC Bank was incorporated in the year of 1994 by Housing Development Finance Corporation
Limited (HDFC), India's premier housing finance company. It was among the first companies to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector. The Bank commenced its operations as a Scheduled Commercial Bank in January
1995 with the help of RBI's liberalization policies.

In a milestone transaction in the Indian banking industry, Times Bank Limited (promoted by
Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., in 2000. This was
the first merger of two private banks in India. As per the scheme of amalgamation approved by
the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank
received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

In 2009 HDFC Bank acquired Centurian bank of Punjab taking its total branches to more than
1,000. The amalgamated bank emerged with a strong deposit base of around Rs. 1,22,000 crore
and net advances of around Rs. 89,000 crore. The balance sheet size of the combined entity is
over Rs. 1,63,000 crore. The amalgamation added significant value to HDFC Bank in terms of
increased branch network, geographic reach, and customer base, and a bigger pool of skilled
manpower.
HDFC is India's premier housing finance company and enjoys an impeccable track record in
India as well as in international markets. Since its inception in 1977, the Corporation has
maintained a consistent and healthy growth in its operations to remain the market leader in
mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has
developed significant expertise in retail mortgage loans to different market segments and also
has a large corporate client base for its housing related credit facilities. With its experience in the
financial markets, a strong market reputation, large shareholder base and unique consumer
franchise, HDFC was ideally positioned to promote a bank in the Indian environment.

17
VISION

“Become the undisputed market lender in providing housing related finances, to realize the
dream of shelter for all in Sri lanka ”

MISSION

To customer- provide a caring service by anticipating their requirement and innovatively

satisfying them beyond expectations.

To our staff-we identify their multi-faceted talents, develop, motivate, recognize, and reward
them towards fulfillment of the institutional and national housing vision.

To the national economy and the industry regulator –we are the key driver and thought
leaders shaping and financing the national housing policy.

To our shareholder- we focus on optimizing returns.

To our natural environment-we enforce sustainable practices across all our activities.

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 ORGANIZATIONAL STRUCTURE

HOD

LEGAL

&

SECRETERIAL

MD & CEO
GM GM
GM
HOD FINANCE HOD OPERATIONS
SALES
IT & HR &
& MARKETING
ACTURIAL UNDERWRITING
BUSINESS

HEAD ACCOUNTS OPERATION

NORTH

ZONAL
7
MEDICAL UNDERWRITING
MANAGER

BUSINESS

HEAD
ACTURIAL
SOUTH

ZONAL

MANAGER

HOD

INSTITUTIONAL SALES

HODCHANNEL
DEVELOPMENT

& SALES TRAINING

HOD

MARKETING

HOD
19

BUSINESS PROCESS &

RESEARCH
 ABOUT THE BANK

HDFC Bank is a young and dynamic bank, with a youthful and enthusiastic team
determined to accomplish the vision of becoming a world-class Indian bank.
HDFC’s business philosophy is based on four core values - Customer Focus, Operational
Excellence, Product Leadership and People. They believe that the ultimate identity and
success of bank will reside in the exceptional quality of people and their extraordinary
efforts. For this reason, they are committed to hiring, developing, motivating and retaining
the best people in the industry.

Why HDFC is better …?

1. Investment returns: investment returns and business growth provided by HDFC is
validated by bajaj Capital report. HDFC pacify the need of invertors up to healthy level
and make the strong relationship with them.
2. Financial Background and Experience: HDFC existing in the market since 1977. It has
a very handsome experience in the field of finance because it completely involved in
finance Sector only where as the others are running in many other field also like Reliance
(Petroleum, Textile, Telecom etc.)
3. Ethics and Values: HDFC is an ethical and cultural organization which prevents the
false selling and prohibit the false commitment to the customer.
4. Sales Force: Properly trend licensed and Educated People are the strength of the
company. So that they could give the best customer service.
5. Huge branch network HDFC is having 450 branches in all over the country.
6. Online accessibility : It makes the process faster and make the customer delighted.

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MISSION AND BUSINESS STRATEGY:-

Mission of HDFC is to be "a World Class Indian Bank", benchmarking themselves against
international standards and best practices in terms of product offerings, technology, service
levels, risk management and audit & compliance. The objective is to build sound customer
franchises across distinct businesses so as to be a preferred provider of banking services for
target retail and wholesale customer segments, and to achieve a healthy growth in profitability,
consistent with the Bank's risk appetite. They are committed to do this while ensuring the highest
levels of ethical standards, professional integrity, corporate governance and regulatory
compliance.

Business strategy of HDFC emphasizes the following:

 Increase market share in India’s expanding banking and financial services industry by
following a disciplined growth strategy focusing on quality and not on quantity and
delivering high quality customer service.

 Leverage technology platform and open scalable systems to deliver more products to
more customers and to control operating costs.

 Maintain the current high standards for asset quality through disciplined credit risk
management.

 Develop innovative products and services that attract targeted customers and address
inefficiencies in the Indian financial sector.

 Continue to develop products and services that reduce cost of funds

 Focus on high earnings growth with low volatility.

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 BOARD OF DIRECTORS

PERSON DESIGNATION
Mr. Jagdish Capoor Vice President
Mr. Aditya Puri Managing Director
Mr. Paresh Sukthankar Executive Director
Mr. Harish Engineer Executive Director
Mr. Keki M. Mistry Director
Mr. Ashim Samanta Director
Mr. Arvind Pande Director
Mrs. Renu Karnad Director
Mr. C M Vasudev Director
Mr. Gautam Divan Director
Dr. Pandit Palande Director

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 TOP MANAGEMENT

Abhay Aima Equities & Private Banking and NRI Business

Anil Jaggia Information Technology and Legal
Ashish Parthasarth Treasury
Bharat Shah Merchant SeRvices
G Subramanian Audit & Compliance
Kaizad Maneck Credit & Market Risk
Mandeep Maitra H.R, Admin & Infrastructure
Navin Puri Branch Banking
Pralay Mondal Assets & CREDIT CARDS

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 BUSINESS HEADS

A Asokan Emerging Enterprise Group

Amit Kumar Retail Branch Banking-West 1
Anil Nath Business Banking - Working Capital & Retail Agri
Arup Rakshit Treasury
Ashima Khanna Bhat Emerging Corporate Group
Ashok Khanna Retail Assets – TW
Bhavesh Chandulal Wholesale Operations

Biju Pillai Retail Assets - EL,PL,LAS & GOLD

Birendra Sahu retail Operations
Deepak Maheshwari Credit and Market Risk
Gsv Surya Prasad Information Technology
Harpreet Singh NRI Business
Jimmy M Tata Corporate Banking
Munish Mittal Information Technology
Nandkishor Laxman Financial Institution Group
Nitin Subramanya Equities and Private Banking
Parag Rao Credit Cards
Rajender Sehgal Financial Institution Group
Rohit Gaurav Marketing
Sanjay B Dongre Legal
Sanjeev Patel Direct Banking Channel
Tarini Vaidya Treasury

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 OPERTING CYCLE

The working capital requirement of a firm depends, to a great extent upon the operating cycle of
the firm. The operating cycle may be defined as the time duration starting from the procurement
of goods or raw material and ending with the sales of realization.

The length and nature of the operating cycle may differ from one firm to another depending upon
the size and nature of the firm. In a trading concern, there is a series of activities starting from
procurement of goods (saleable goods) and ending with the realization of sales revenue (at the
time of sale itself in the case of cash sales and at the time of debtors realization in case of credit
sales).similarly in case of manufacturing concern, this series starts from the procurement of raw
materials and ending with the sales realization of finished goods. In both the cases, however,
there is a time gap between the happening of the first event and the happening of the last event.
This time gap is called the operating cycle.

Thus, the operating cycle of a firm consists of the time required for the completion of the
chronological sequences of some or all of the following:

1. Procurement of raw material and services.

2. Conversion of raw material into work-in-progress.

3. Conversion of work-in-progress into finished goods.

4. Sale of finished goods (cash or credit)

5. Conversion of receivable into cash.

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 Operating cycle period

 The length of time duration of the operating cycle of any firm can be defined as the sum of
its inventory conversion period and the receivable conversion period.

1. Inventory conversion period:

It is the time required for the conversion of raw material into finished goods sales. In a
manufacturing firm the inventory conversion period is consisting of raw material
conversion period (RMCP), work-in-progress conversion period (WPCP) and finished
goods conversion period (FGCP).

 Raw material conversion period refers to the period for which the raw material is
generally kept in stores before it is issued to the production department.

 The work-in-progress conversion period (WPCP) refers to the period for which the raw
material remains in the production process before it is taken out as finished units.

 The finished goods conversion period refers to the period for which finished units
remains in stores before being sold a customer.

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2. Receivable conversion period (RCP):

It is the time required to convert the credit sales into cash realization. It refers to the period
between the occurrence of credit sales and collection from debtors. The total of Inventory
conversion period (ICP) and Receivable conversion period (RCP) is also known as total
operating cycle period (TOCP).the firm might be getting some credit facilities from
supplier of raw material, wages earners etc.This period for which the payment to these
parties are deferred or delayed is known as deferred period (DP).the net operating cycle
(NOC) of the firm is arrived at by deducting the DP from TOCP.

NOC =TOCP-DP

=ICP+RCP-DP

For calculating total operating cycle period (TOCP) and net operating cycle (NOC), the
following formula is being used:

RMCP = Average Raw material stock × 365

Total Raw material consumption

WPCP = Average Work-in-progress × 365

Total cost of production

FGCP = Average Finished Goods × 365

Total Cost of goods sold

RCP = Average Receivable × 365

Total Credit sales

DP = Average Creditors × 365

Total Credit purchase

27
 Average Raw Material \ Raw Material Conversion Period

2009______________

Average raw material = opening stock of raw material + closing stock of raw material \ 2

= 14,317.94 + 10,226.30 \ 2..

=12272.12

Raw material Consumption = 63198.04 \ 365 = 173

RMCP = 12272.12 \ 173

= 70 day

2008 ______________________

Average raw material = opening stock of raw material + closing stock of raw material\ 2

= 10226.30 + 6784.72 \ 2

= 8505.5

Raw material consumption = 55196.12 \ 365 = 151

RMCP = 8505.5 \ 151

= 56 day

Average Work in Progress \ Cost of Production Per Day

2009__________________

Average work in progress = op. Stock of work in progress + clo. Stock of work in progress \ 2

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 = 12,282.45 + 21,378.85 \ 2

= 16830.65

Cost of pro. Per day = sales - transaction cost

= 86,538.48 - 158.40 = 86380.08

WICP =16830.65 \ 86380.08 *365

= 71 day

2008__________________________

Average work in progress = op. Stock of work in progress + closing Stock of work in progress \
2

= 8136.52 + 12282.45 \ 2

= 10209.48

Cost of pro. Per day = sales - transaction cost

= 83,209.29 - 174.04 = 83035.25

WICP = 10206.48 \ 83035.25*365

= 45 day

Avg. finish good inventory \ cost of goods sold

2009____________________________

Avg. finish good inventory = op. stock of finish stock + closing Stock of finish stock \ 2

= 2,758.11 + 1,304.87 \ 2

= 2031.47

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Cost of goods sold = 57981.11

FGCP = 2031.47 \ 57981.11 * 365

= 13 days

2008______________

Average finish good inventory = opening stock of finish stock + closing Stock of finish stock \ 2

= 1304.87 + 740.80 \ 2

= 1022.84

Cost of goods sold = 66995.33

FGCP = 1022.87 \ 66995.33 * 365

= 6 days

Average Debtors \ Credit Sales

2009______________

Avg. debtors = 47,173.58 +49231.61 \ 2

= 48202.59

Credit sale = 78961.32

BDCP = 48202.59 \ 78961.32 * 365

= 222 day

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 2008______________

Avg. debtors = 49,231.61 + 38198.60 \ 2

= 43715.10

Credit sale = 73067.57

BDCP = 43715.10 \ 73067.57 *365

= 218 day

Average Creditor’s \ Credit Purchase

2009_______________

Average Creditors = 28,167.81 + 27526.23 \ 2

=27847.02

Credit purchase = 73747.68

CCP = 27847.02 \ 73747.68 * 365

= 135 days

31
 2008______________

Average Creditors =27,526.23 + 20,395.53 \ 2

=23960.88

Credit purchase =59906.12

CCP =23960.88 \ 59906.12 * 365

=145 days

32
 Time and Money concept in Working Capital Cycle

Each component of working capital (namely inventory, receivables and payables) has two
dimensions .TIME and MONEY, when it comes to managing working capital.

Time is Money:

If we can get money to move faster around the cycle (e.g. collect money due from debtors more
quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales),
the business will generate more cash or it will need to borrow less money to fund working
capital. As a consequence, we can reduce the cost of bank interest or will have additional free
money available to support additional sales growth or investment. Similarly, we can also
negotiate the improved terms with suppliers.

E.g. get longer credit or an increased credit limit; we effectively create free finance to help future
sales.

IF WE THEN
Collect receivables (debtors) faster We release cash from cycle
Collect receivables(debtors) faster Our receivables soak up cash
Get better credit(in terms of duration or We increase our cash resources
amount from suppliers)
Shift inventory(stocks)faster We free up cash
Move inventory(stocks) slower We consume more cash

33
 TYPE OF WORKING CAPITAL

On the basis of Concept

1. Gross working capital: the gross working capital refers to the firm’s investment in all the
assets taken together. The total of investment in all the individual current assets is the gross
working capital.

For example: if a firm has a cash balance of Rs. 50,000 ,debtors of Rs.70,000 and
inventory of raw material and finished goods has been assessed at Rs.1,00,000,then the
gross working capital of the firm is Rs.2,20,000 (i.e. ,Rs 50,000+Rs.70,000+Rs.1,00,000).

2. Net working capital: the term net working capital may be defined as the excess of total
current assets over total current liabilities. Current liabilities refer to those liabilities which
are payable within a period of 1 year. The net working capital may either be positive or
negative. If the total current assets are more than total current liabilities, then the difference

34
 is known as positive net working capital, otherwise the difference is known as negative net
working capital. The net working capital measures the firm’s liquidity. The greater the
margin, the better will be the liquidity of the firm.

Net working capital= total current assets – total current liabilities

WORKING CAPITAL

A financial manager must consider both (gross and net working capital) because they provide
different interpretation. The gross working capital denotes the total working capital or the total
investment in current assets. This will help avoiding 1.the unnecessarily stoppage of work or
chance of liquidation due to insufficient working capital, and 2.effects on profitability (over
flowing working capital implies cost).The gross working capital also gives an idea of total funds
required for maintaining current assets.

On the other hand, net working capital refers to the amount of funds that must be

Invested by firm, more or less are regularly in current assets. The net working capital also
denotes the net liquidity being maintained by the firm.

On the basis of time

1. Permanent /fixed working capital: Permanent working capital may be defined as the
minimum level of current assets, which is required by a firm to carry on its business
operations. Every firm has to maintain a minimum level of raw materials, work-in-
progress, finished goods and cash balances.

For example-extra inventory of finished goods will have to be maintained to support the
peak periods of sale. Permanent working capital is permanently needed for the business
and therefore, it should be financed out of long term funds.

2. Fluctuating /variable working capital: It is the extra working capital needed to support
the changing production and sales activities of the firm. The amount of temporary working
capital keeps on fluctuating on time to time on the basis of business activity. Both kind of
working capital – permanent and fluctuating (temporary) are necessary to facilitate
production and sales through the operating cycle. The amount over and above permanent
working capital is temporarily variable or fluctuating.

35
 SOURCES OF WORKING CAPITAL

The company can choose to finance its current assets by

1. Long term sources

2. Short term sources

3. A combination of them.

Long term sources of permanent working capital include equity and preference shares,
retained earnings, debentures and other long term debts from public deposits and financial
institution. The long term working capital needs should meet through long term means of
financing. Financing through long term means provides stability, reduces risk or payment.
And increases liquidity of the business concern. Various types of long term sources of
working capital are summarized as follow:

1. Issue of shares:

It is the primary and most important sources of regular or permanent working capital.
Issuing equity shares as it does not create and burden on the income of the concern. Nor
the concern is obliged to refund capital should preferably raise permanent working capital.

2. Retained earnings:

Retain earning accumulated profits are a permanent sources of regular working capital. It is
regular and cheapest. It creates not charge on future profits of the enterprises.

3. Issue of debentures:

It creates a fixed charge on future earnings of the company. Company is obliged to pay
interest. Management should make wise choice in procuring funds by issue of debentures.

4. Long term debt:

Company can raise fund from accepting public deposits, debts from financial institution
like banks, corporations etc. the cost is higher than the other financial tools.

36
5. Other sources:

Sale of idle fixed assets, securities received from employees and customers are examples
of other sources of finance.

Short term sources of temporary working capital

Temporary working capital is required to meet the day to day business expenditures. The
variable working capital would finance from short term sources of funds. And only the period
needed. It has the benefits of, low cost and establishes closer relationships with banker. Some
sources of temporary working capital are given below:

1. Commercial bank:

A commercial bank constitutes significant sources for short term or temporary working
capital. This will be in the form of short term loans, cash credit, and overdraft and though
discounting the bills of exchanges.

2. Public deposits:

Most of the companies in recent years depend on this source to meet their short term
working capital requirements ranging from six month to three years.

3. Various credits:

Trade credit, business credit papers and customer credit are other sources of short term
working capital. Credit from suppliers, advances from customers, bills of exchanges, etc
helps to raise temporary working capital.

4. Reserves and other funds:

37
 Various funds of the company like depreciation fund. Provision for tax and other
provisions kept with the company can be used as temporary working capital. The company
should meet its working capital needs through both long term and short term funds.

It will be appropriate to meet at least 2/3 of the permanent working capital equipments
form long term sources, whereas the variables working capital should be financed from
short term sources. The working capital financing mix should be designed in such a way
that the overall cost of working capital is the lowest, and the funds are available on time
and for the period they are really required.

SOURCES OF ADDITIONAL WORKING CAPITAL

Sources of additional working capital include the following-

1. Existing cash reserves

2. Profits (when you secure it as cash)

3. Payables (credit from suppliers)

4. New equity or loans from shareholder

5. Bank overdrafts line of credit

6. Long term loans

If we have insufficient working capital and try to increase sales, we can easily over stretch the
financial resources of the business. This is called overtrading. Early warning signs include

1. Pressure on existing cash

2. Exceptional cash generating activities. Offering high discounts for clear cash payment

3. Bank overdraft exceeds authorized limit

4. Seeking greater overdrafts or lines of credit

5. Part paying suppliers or there creditor.

6. Management pre occupation with surviving rather than managing.

38
 TRADE OFF BETWEEN PROFITABILITY AND RISK

In evaluating the firm’s working capital position an important consideration is the trade-off
between profitability and risk. In other words, the level of NWC has a bearing on
profitability and risk. The term profitability used in this context is measured by profit after
expenses.

The term risk is defined as the profitability that a firm will become technically insolvent so
that it will not be able to meet its obligation when they become due for payment. It is
assured that greater amount of NWC, the less risk prone the firm is, or greater the NWC,
the more liquid is the firm, and therefore the less likely it is to become technically
insolvent. Conversely lower level of NWC and liquidity are associated with increasing
level of risk.

A firm must have adequate WC. It should neither be excessive nor inadequate. Excessive
WC means the firms has idle funds, which are in no profit for the firm. This situation
decreases both risk and profitability of the firm. Inadequate WC means the firm doesn’t
have sufficient funds for running its operation which ultimately results in production
interruption, and lowering down the profitability.

The Lower level of WC increases the risk but has the potentiality of increasing the
profitability also.

The above principle is based on the following assumption:

1. There is direct relationship between profitability and risk.

2. Current assets are less profitable than fixed assets

3. Short term funds are less expensive than long term funds.

Effect of level of CA on Profitability-Risk Trade Off

The effect of level of CA’s on profitability risk trade-off can be shown using the ratio of CA to
TA. This ratio indicates the percentages of TA’s that are in form of CAs. An increase in the ratio
will lead to decline in profitability because CAs is less profitable than FAs. It would also
increase risk of technical insolvency because increase in CA assuming no change in CL will
increase NWC. Conversely a decrease in ratio will result in increase in profitability as well as
risk.

39
 Effect of level of CL on risk profitability trade-off:

The effect of CL can be demonstrated by using the ratio of CL to TAs. This portion of the short
term financing is which is less expensive as compared to long term financing. These will
therefore, be a decline in cost and corresponding rise in profitability.

The increased ratio will also increase risk because assuming no change in CA, this would
decrease in NWC. The consequence of decrease in the ratio is exactly opposite to the result of an
increase. Thus it will lead to decrease in profitability and risk.

STATEMENT SHOWING WORKING CAPITAL REQUIREMENT

(RS IN lacs)
PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

CURRENT ASSETS,
LOANS AND ADVANCES

(A) Current Assets :

(I) Stock of Stores, Loose Tools, Dies 1,461.36 1,272.71 1,185.70 760.21 577.14
Mechanical, Electrical and Electronic
Spares (as taken, valued and certified
by the Management) at lower of cost
or net realizable value

(II) Stock-in-Trade (as taken, valued

and
Certified by the Management)

(i) Raw Materials (at lower of 14,317.94 10,226.30 6,784.72 6,784.72 4,732.51
cost or net realisable value)

(ii) Semi-Finished Goods (at lower of 21,378.85 12,282.45 8,136.52 5,980.13 5,152.96
cost or net realisable value)

(iii) Finished Goods (at lower of 2,758.11 1,304.87 740.80 1,926.75 994.98
cost or net realisable value)

40
(iv) Goods-in-Transit (at Cost) 158.40 174.04 48.00 1,080.36 537.96

(v) Land as Stock in Trade (For Wind ---------- --------- --------- ----------- ---------
Mill)

(III) Sundry Debtors (Unsecured,

Considered Good) :

(i) Outstanding for a period 11,959.53 13,965.12 6,312.86 3,714.84 3,162.09

Exceeding six month

(ii) Others 35,214.05 35,266.49 32,485.74 17,702.75 8,234.66

(IV) Cash and Bank Balances

(a) Cash on Hand 5.40 7.48 7.19 7.30 7.83

(b) Balance with Scheduled Banks:

(1) In Current Account 745.24 468.52 532.18 563.10 544.17

(2) Bank Deposit 5,322.64 255.68 717.00 1,890.00 285.59

(3) Unpaid Dividend Bank Account 32.59 20.56 19.53 10.29 9 .59

(B) Loans and Advances

(Unsecured Considered Good)

(1) Loans to Staff 11.47 17.08 15.73 14.86 8.82

(2) Advances recoverable in Cash or 4,503.31 3,671.86 3117.02 2255.11 2014.95

in
Kind or for value
to be received

(3) Balance with Collector of Custom, 1,938.34 1,834.06 830.88 792.41 516.81
Port Trust, Excise etc.

(4) Advance Payment of Income Tax 1,038.67 196.48 ------------ -------------- --------------
(Net of Provision)

TOTAL (A) 100,845.9 80,963.70 60,871.21 43,341.26 36,780.06

41
CURRENT LIABILITIES
AND PROVISIONS

(A) Current Liabilities

(1) Sundry Creditors 28,167.81 27,526.23 20,395.53 15,281.09 10,369.10

(2) Advance from Customer 12,569.49 5,185.15 4,544.00 5,874.94 4,951.02

(3) Dividend Warrants issued 32.59 20.56 19.53 11.56 9.59

but not encashed (Unpaid)

(4) Interest accrued but not due 97.16 162.85 57.19 55.27 62.15

(B) Provisions

(1)Provision for Gratuity 680.58 479.20 ----------- 98.06 287.61

(2)Proposed Dividend 1,392.92 1,392.92 4 63.86 306.52 141.19

(3)Tax on Proposed Dividend 236.73 236.73 78.83 42.99 19.80

TOTAL (B) 43,177.28 35,003.64 25,558.94 21,670.43 15,840.46

W.C required (A-B) 57,668.62 45,960.06 35,312.27 21,670.83 10939.60

42
 INTERPRETATION:

 Working capital is the funding that a company needs to support its accounts receivable and
inventory, and is offset by the amount of funding it obtains from its suppliers through
accounts payable.

 Working capital can have a much greater impact on a company’s cash flows than the
results of its operations. One of the best ways to positively impact the amount of cash flow
that a company spins off is to take tight control of its working capital and eliminate much
of the investment in this area.

 After analysis the 5 year data we can conclude that the Working Capital requirement is
increasing year by year. We are looking increasing pattern in working capital.

 The company is managing working capital very precisely as we know that Hdfc bank
Engineering is high working capital oriented organization. The sale is increasing year by
year which results into increase in working capital requirement. Hdfc bank is getting new
order at regular interval as it gives importance to quality.

 Investment in the current asset is also increasing with increase in the span. On the other
hand there is also increase in the current liabilities. From the above statement we can say
that current assets and current liabilities go hand in hand.

43
 SALES

PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

MHE 37,490.13 30812.56 35102.13 15743.86 5810.2

Gear (Transmission Equipments) 36,132.05 35,873.70 28423.36 21017.08 18893.6

WTG & Electricity Generation 605.24 1,960.53 123.31 665 635.54

Export Sales 4,064.98 3,703.30 2430.7 2190.08 1629.17

Miscellaneous Sales 668.92 717.49 567.04 261.57 133.52

TOTAL SALES 78,961.32 73,067.58 66646.54 39877.59 27102.1

(Sources– annual reports of hdfc bank engineering

INTERPRETATION:

Here we have the sales figure of last 5 years. From the available data we can say that the
sale is increasing with increasing span.

There should Sales increasing by 47, 67, 9, and 8 % in each every consecutive year. By this growth we
can say that the company is growing very rapidly in engineering sector. With increasing sales the
company is trying to make a great presence in the market. Hdfc bank is also entering in new business
which results into increase in sales revenue.

44
 Material Handling Equipment Sales Industry wise

(Sources - Annual Report 2010)

Interpretation:

The sales of Material handling equipment from different industries, the highest sales in the Power sector
(55.83%), Steel (20.80%) and the lowest sales in wind mill (1.72%) industries.

GEAR SALES INDUSTRY WISE

45
 (Sources - Annual Report 2010)

Interpretation:

The sales in Gear with different industries, the highest sales in the material handling equipment (23%),
Steel Conversion (15%), Sugar (10%), and the lowest sales in the Chemical & Fertilizers industry (3%),
mining industry (3%).

46
 INVENTORIES

PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

(i) Raw Materials (at lower of
cost or net realizable value) 14,317.94 10,226.30 6,784.72 6,784.72 4,732.51

(ii) Semi-Finished Goods (at lower of

cost or net realizable value) 21,378.85 12,282.45 8,136.52 5,980.13 5,152.96

(iii) Finished Goods (at lower of

cost or net realizable value) 2,758.11 1,304.87 740.80 1,926.75 994.98

(iv) Goods-in-Transit (at Cost)

158.40 174.04 48.00 1,080.36 537.96
Total
38,613.29 23,987.66 15,710.40 15,627.39 11,418.41
Interpretation:

In the first category, raw materials, an inventory increase can be caused by over purchasing by a
company, the elimination of a finished good that used to require specific raw materials, or
deliberate over purchasing by a company because of a very low level of inventory accuracy that
requires a company to keep excessive stocks on hand in order to avoid stock-out problems.

By analyzing 5 year data we can about inventories we can say that the levels of inventories are
increasing year by year. There is an increasing trend in the inventory level. As compare d to last
year the level of inventory has been increased by 60 % which indicates the growth of the company
in engineering sector. It is fact that the company uses more inventories when there is demand in the
market and hdfc bank is having in great demand when quality comes first than other things. From
other point of view we can say that the liquidity of the firm is blocked in inventories but proper
inventory on other side is good due to uncertainty of availability of raw material in time.

47
 CURRENT ASSETS

PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

(I) Stock of Stores, Loose Tools, Dies
Mechanical, Electrical and Electronic
Spares (as taken, valued and certified
by the Management) at lower of cost 1,461.36 1,272.71 1,185.70 760.21 577.14
or net realizable value

(II) Stock-in-Trade (as taken, valued

and
Certified by the Management)

(i) Raw Materials (at lower of

cost or net realizable value) 14,317.94 10,226.30 6,784.72 6,784.72 4,732.51

(ii) Semi-Finished Goods (at lower of

cost or net realizable value) 21,378.85 12,282.45 8,136.52 5,980.13 5,152.96

(iii) Finished Goods (at lower of

cost or net realizable value) 2,758.11 1,304.87 740.80 1,926.75 994.98

(iv) Goods-in-Transit (at Cost) 158.40 174.04 48.00 1,080.36 537.96

(III) Sundry Debtors (Unsecured,

Considered Good) :

(i) Outstanding for a period 11,959.53 13,965.12 6,312.86 3,714.84 3,162.09

Exceeding six month

(ii) Others 35,214.05 35,266.49 32,485.74 17,702.75 8,234.66

(IV) Cash and Bank Balances

(a) Cash on Hand 5.40 7.48 7.19 7.30 7.83

(b) Balance with Scheduled Banks:

(1)In Current Account 745.24 468.52 532.18 563.10 544.17

(2) Bank Deposit 5,322.64 255.68 717.00 1,890.00 285.59

(3) Unpaid Dividend Bank Account 32.59 20.56 19.53 10.29 9 .59

Total 93,354.11 75,244.22 56970.24 40,279.88 24,239.48

Interpretation:

48
 Current assets are important to businesses because they are the assets that
are used to fund day-to-day operations and pay ongoing expenses and depending on the nature of the
business.

From the above table of 5 year current assets we can say that there is increasing
trend in current assets as the business is of such nature there is increase in blockage of money in current
assets more as compared to fixed assets. The level of current assets has been increased by 24% as
compared to last year which is a good symptom of growth.

49
 SUNDARY DEBTORS

PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

(I) Outstanding for a period 11,959.53 13,965.12 6,312.86 3,714.84 3,162.09

Exceeding six month

(ii) Others 35,214.05 35,266.49 32,485.74 17,702.75 8,234.66

Total 47,173.58 49,229.61 38,798.60 21,417.59 11,396.75

Interpretation:

In the above table five years debtors’ information is given I which we can see
that there is increase in debtors except last year. The change might be occurred due to change in
collection policy, credit policy and others.

A simple logic is that debtors increases only when sales increases. More and more
debtors higher the chances of bad debts. When sales are increases the profit also increases. If company
decreases the debtors they can use the spare money in many investment plans.

50
 LOANS AND ADVANCES

PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

(1) Loans to Staff 11.47 17.08 15.73 14.86 8.82

(2) Advances recoverable in Cash or 4,503.31 3,671.86 3117.02 2255.11 2014.95

in
Kind or for value
to be received

(3) Balance with Collector of Custom, 1,938.34 1,834.06 830.88 792.41 516.81
Port Trust, Excise etc.

(4) Advance Payment of Income Tax 1,038.67 196.48 ------------ -------------- --------------
(Net of Provision)

Total 7,491.79 5,719.48 3963.63 3,062.38 2,540.58

Interpretation:

If we analyze the above table we can say that there is increase in loans and advances in more or less
percentage.

The company is providing loans to staff which is good symptoms. Most of the advances are given
to the government for the purpose of taxes and other duties. From the above table we can say that
company is sincere in paying taxes and duties. The advances recoverable are high which is good for
the company. In the year 2018-19 the loans and advances are increased by 30 % as compared to
previous year which contribute highly to the current assets.

51
 CURRENT LAIBILITIES

PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

(1)Sundry Creditors 28,167.81 27,526.23 20,395.53 15,281.09 10,369.10

(2)Advance from Customer 12,569.49 5,185.15 4,544.00 5,874.94 4,951.02

(3) Dividend Warrants issued 32.59 20.56 19.53 11.56 9.59

but not encashed (Unpaid)

(4) Interest accrued but not due 97.16 162.85 57.19 55.27 62.15

TOTAL 40,867.05 32,894.79 25,016.25 21,222.86 15391.86

Interpretation:

The obligations are such as deferred dividend, trade credit, and unpaid taxes, arising in the
normal course of a business and due for payment within a year.

If we analyze the above table we can say that each and every item in the current liabilities
reveals uneven trend. But at aggregate level it shows an increasing trend hdfc bank is
charging 50 % of advance from the customer which increases the current liabilities of the
company. In 2018-19 current liabilities has been increased by 24% the main reason behind
that is increase in advances from the customer. It indicates change in sales policy .While in
2017-18 current liabilities has been increased because of increase in other liabilities by
32%. The company having minimum liability has good prestige in the market.

52
 PROVISIONS

PARTICULARS 2018-19 2017-18 2016-17 2015-16 2014-15

(1)Provision for Gratuity 680.58 479.20 ----------- 98.06 287.61

(2)Proposed Dividend 1,392.92 1,392.92 4 63.86 306.52 141.19

(3)Tax on Proposed Dividend 236.73 236.73 78.83 42.99 19.80

TOTAL 2,310.23 2,108.85 542.69 447.57 448.60

Interpretation:

Above table indicates that company is making provision of only 3 things i.e. gratuity, dividend
and dividend tax. Company is continuously paying dividend to its shareholders each and every
year. Company is also providing more emphasis on paying gratuity to their employees it shows
company‘s awareness.

The provisions increases with increases in time span. The provisions are increased by 10% in
2018-19 while it increased by nearly 300% which indicates the company’s presence in the market
by providing regular dividend.

53
 WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre 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. This involves the need of working capital analysis.

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

1. RATIO ANALYSIS

2. FUND FLOW STATEMENT

3. BUDGETING

54
 RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis
can be employed for measuring short-term liquidity or working capital position of a firm. The
following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from which additional
funds were derived and the use to which these sources were put.

The fund flow analysis consists of:

 Preparing schedule of changes of working capital

 Statement of sources and application of funds.

55
It is an effective management tool to study the changes in financial position (working capital)
business enterprise between beginning and ending of the financial dates.

WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be

pursued in the future period time. Working capital budget as a part of the total budge ting process
of a business is prepared estimating future long term and short term working capital needs and
sources to finance them, and then comparing the budgeted figures with actual performance for
calculating the variances, if any, so that corrective actions may be taken in future. He objective
working capital budget is to ensure availability of funds as and needed, and to ensure effective
utilization of these resources.

The successful implementation of working capital budget involves the preparing of separate
budget for each element of working capital, such as, cash, inventories and receivables etc.

 ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF

LIQUIDITY

- The short –term creditors of a company such as suppliers of goods of credit and
commercial banks short-term loans are primarily interested to know the ability of a firm to
meet its obligations in time.

- The short term obligations of a firm can be met in time only when it is having sufficient
liquid assets. So to with the confidence of investors, creditors, the smooth functioning of
the firm and the efficient use of fixed assets the liquid position of the firm must be strong
but a very high degree of liquidity of the firm being tied – up in current assets.

- Therefore, it is important proper balance in regard to the liquidity of the firm. Two types of
ratios can be calculated for measuring short-term financial position or short-term solvency
position of the firm.
56
1. Liquidity ratios.

2. Current assets movements ‘ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and when these
become due. The short-term obligations are met by realizing amounts from current,
floating or circulating assts. The current assets should either be liquid or near about
liquidity. These should be convertible in cash for paying obligations of short-term nature.
The sufficiency or insufficiency of current assets should be assessed by comparing them
with short-term liabilities. If current assets can pay off the current liabilities then the
liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met
out of the current assets then the liquidity position is bad. To measure the liquidity of a
firm, the following ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity and its
most widely used to make the analysis of short-term financial position or liquidity of a
firm. It is defined as the relation between current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

57
The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories
and work-in-progresses. Current liabilities include outstanding expenses, bill payable, dividend
payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its
current obligations in time. On the hand a low current ratio represents that the liquidity position
of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio
equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is
considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in lacs)

YEAR 2009 2008 2007 2006 2005

CURRENT 100,845.90 80,963.70 60,871.21 43,341.26 36,780.06
ASSETS
CURRENT 43,177.28 35,003.64 25,558.94 21,670.43 15,840.46
LIABILITIES
CURRENT 2.33 2.31 2.38 2.00 2.32
RATIO

58
 (Sources: Annual Report 2005 - 2009)

Interpretation:-

A conventional rule is that a current ratio of 2:1 or more is considered satisfactory. The current
ratio of Hdfc bank is more than 2:1.So it is sufficient and good for Hdfc bank.

It has more current asset then current claim so unit is able to meet current obligation in full and it
can be said that its liquidity position is sound.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be
defined as the relationship between quick/liquid assets and current or liquid liabilities. An
asset is said to be liquid if it can be converted into cash with a short period without loss
of value. It measures the firms’ capacity to pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS / CURRENT LIABILITES

59
Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities
in time and on the other hand a low quick ratio represents that the firms’ liquidity position is not
good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick
assets are equal to the current liabilities then the concern may be able to meet its short-term
obligations.

However, a firm having high quick ratio may not have a satisfactory liquidity position if it has
slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast
moving inventories.

CALCULATION OF QUICK RATIO

(Rupees in lacs)

YEAR 2009 2008 2007 2006 2005

QUICK 60929.64 57055.93 45239.32 27738.15 15365.24
ASSETS
CURRENT 43,177.28 35,003.64 25,558.94 21,670.43 15,840.46
LIABILITIES
QUICK 1.41 1.63 1.77 1.28 0.97
RATIO

60
 (Sources: Annual Report 2005-2009)

Interpretation:

Generally quick – ratio of 1:1 is considered to represent a satisfactory to current financial condition and
this ratio is sufficient. Hdfc bank has ability to pay its current claim quickly. So, Hdfc bank has sufficient
current assets which convert in the cash immediately.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately or in
time. So absolute liquid ratio should be calculated together with current ratio and acid test
ratio so as to exclude even receivables from the current assets and find out the absolute
liquid assets. Absolute Liquid Assets includes:

61
 ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

(Rupees lacs)

YEAR 2009 2008 2007 2006 2005

ABSOLUTE 137150.42 100394.99 74262.88 52009.51 45975.075
LIQUID
ASSETS
CURRENT 100,845.90 80,963.70 60,871.21 43,341.26 36,780.06
LIABILITIES

ABSOLUTE 1.36 1.24 1.22 1.20 1.25

LIQUID
RATIO

(Source: annual reports 2005 to 2010)

62
B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. The
efficiency with which assets are managed directly affects the volume of sales. The better
the management of assets, large is the amount of sales and profits. Current assets
movement ratios measure the efficiency with which a firm manages its resources. These
ratios are called turnover ratios because they indicate the speed with which assets are
converted or turned over into sales. Depending upon the purpose, a number of turnover
ratios can be calculated.

These are:

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount of
debtors due to slow credit collections and moreover if the assets include high amount of slow
moving inventories. As both the ratios ignore the movement of current assets, it is important to
calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO:

Every firm has to maintain a certain amount of inventory of finished goods so as to meet
the requirements of the business. But the level of inventory should neither be too high nor
too low. Because it is harmful to hold more inventory as some amount of capital is blocked
in it and some cost is involved in it. It will therefore be advisable to dispose the inventory
as soon as possible.

63
INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the stock is converted into sales.
Usually a high inventory ratio indicates an efficient management of inventory because
more frequently the stocks are sold; the lesser amount of money is required to finance the
inventory. Whereas the low inventory turnover ratio indicates the inefficient management
of inventory. A low inventory turnover implies over investment in inventories, dull
business, poor quality of goods, stock accumulations and slow moving goods and low
profits as compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

(Rupees in lacs)

YEAR 2009 2008 2007 2006 2005

COGS 6397.72 5543.69 4903.67 2393.83 1763.28
AVERAGE 1367.035 1229.20 972.95 668.67 532.715
INVENTORY
INVENTORY 4.68 Times 4.51 Times 5.04 Times 3.58 Times 3.31 Times
TURNOVER
RATIO

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 (Sources: Annual Reports 2005 to 2009)

Interpretation:

This ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the company
has high inventory turnover ratio but in 2008 and 2009 it has reduced. This shows that the company’s
inventory management technique is less efficient as compare to last year.

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2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

YEAR 2009 2008 2007 2006 2005

DAYS 365 365 365 365 365
INVENTORY 4.68 4.51 5.04 3.58 3.31
TURNOVER
RATIO
INVENTORY 78 Days 81 Days 72 Days 102 Days 110 Days
CONVERSION
PERIOD

(Sources: Annual Report – 2005 to 2009)

Interpretation:

Inventory conversion period shows that how many days inventories takes to convert from raw
material to finished goods. In the company inventory conversion period is decreasing. This
shows the efficiency of management to convert the inventory into cash.

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3. DEBTORS TURNOVER RATIO:

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal
credit policy may result in tying up substantial funds of a firm in the form of trade debtors.
Trade debtors are expected to be converted into cash within a short period and are included
in current assets. So liquidity position of a concern also depends upon the quality of trade
debtors. Two types of ratio can be calculated to evaluate the quality of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

(A) DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtor’s velocity indicates the number of times the debtors are turned over during a year.
Generally higher the value of debtor’s turnover ratio the more efficient is the management
of debtors/sales or more liquid are the debtors. Where as a low debtors turnover ratio
indicates poor management of debtors/sales and less liquid debtors. This ratio should be
compared with ratios of other firms doing the same business and a trend may be found to
make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

YEAR 2009 2008 2007 2006 2005

SALES 283913.25 252646.67 136690.75 84496.92 47530.35

AVERAGE 48202.59 44015.10 30108.095 16407.17 11316.75

DEBTORS
DEBTORS 5.89 Times 5.74 Times 4.54 5.15 4.20
TURNOVER
Times Times Times
RATIO

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 Sources: Annual Reports 2005 -2009

Interpretation:

This ratio indicates the speed with which debtors are being converted or turnover into sales the
higher the values or turnover into sales. The higher the values of debtors turnover, the more
efficient is the management of credit. But in the company the debtor turnover ratio is decreasing
year to year. This shows that company is not utilizing its debtor’s efficiency. Now their credit
policy becomes liberal as compare to previous years.

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(B) AVERAGE COLLECTION PERIOD:

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of days for which a firm has to
wait before its receivables are converted into cash. It measures the quality of debtors. Generally,
shorter the average collection period the better is the quality of debtors as a short collection
period implies quick payment by debtors and vice-versa.

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

YEAR 2009 2008 2007 2006 2005

DAYS 365 365 365 365 365

DEBTORS 5.89 5.74 4.54 5.15 4.20

TURNOVER
RATIO
AVERAGE 62 Days 64 Days 80 Days 71 Days 87 Days
COLLECTION
PERIOD

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 (Sources: Annual Report 2005 to 2009)

Interpretation:

The average collection period measures the quality of debtors and it helps in analyzing the
efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In
the firm the average collection period is increasing year to year. It shows that the firm has Liberal
Credit policy. These changes in policy are due to competitor’s credit policy.

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2. CREDITOR TURNOVER RATIO:

Creditors are the businesses or people who provide goods and services in credit terms. That
is, they allow us time to pay rather than paying in cash.
There are good reasons why we allow people to pay on credit even though literally it
doesn't make sense! If we allow people time to pay their bills, they are more likely to buy
from your business than from another business that doesn't give credit. The length of credit
period allowed is also a factor that can help a potential customer deciding whether to buy
from your business or not: the longer the better, of course.

In spite of what we have just said, creditors will need to optimize their credit control
policies in exactly the same way that we did when we were assessing our debtors' turnover
ratio - after all, if you are my debtor I am your creditor.

The formula for this ratio is:

Creditors’ Turnover= Cost of Sales

Creditors

YEAR 2018-19 2017-18 2016-17 2015-16 2014-15

COST OF 73747.68 59906.12 49862.03 31281.65 18481.65

SALES

CREDITORS 28167.81 27526.23 20395.53 15281.09 10369.10

CREDITORS 2.62 2.18 2.44 2.05 1.78

TURNOVER
RATIO

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 (Sources: Annual Report 2005 - 2009)

Interpretation:

It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include
both sundry creditors and bills payable. Higher the payable period lower the working capital
requirement, but on the other hand it may affect the prestige of the firm so the company has to
frame creditor’s policy in such manner. The creditors’ ratio is improving as compare to the last
years. This situation enhances the credit worthiness of the company.

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3. WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio indicates the velocity of utilization of net working capital.
This ratio indicates the number of times the working capital is turned over in the course of
the year. This ratio measures the efficiency with which the working capital is used by the
firm. A higher ratio indicates efficient utilization of working capital and a low ratio
indicates otherwise. But a very high working capital turnover is not a good situation for
any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

YEAR 2009 2008 2007 2006 2005

SALES 177619.34 110304.14 57912.12 34239.91 16846.98
NET 57,668.62 45,960.06 35,312.27 21,670.83 10939.60
WORKING
CAPITAL
WORKING 3.08 2.4 1.64 1.58 1.54
CAPITAL
TURNOVER
RATIO

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Interpretation:

This ratio indicates low much net working capital requires for sales. In 2008, the reciprocal of
this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60 paisa as working
capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sales.

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 SUGGESTIONS AND FINDINGS

Hdfc bank is the fastest growing company in engineering world. I have taken a summer
internship programme for my MBA project at Hdfc bank. I have prepared a project on
Working Capital Management of Hdfc bank. Following are some suggestions and findings of
my research work:

 Company’s main strength is its employees and company is properly taking care of that by
providing safety working conditions, canteen facilities etc

 Hdfc bank is investing more and more money in subsidiary companies for its faster growth.

 Company’s working capital us enough to maintain company’s sales and other operations
easily. Due to high goodwill the company is not getting any problem in getting short term
finance.

 Company gives 75% of dividend since last two years, instead of giving 75% dividend the
company should give 60 to 65% and reinvest the balance amount in financing the working
capital.

 Company is targeting to increase foreign exchange transactions and also trying to avoid
hedging risk.

 Company should try to utilize cheap source of finance for financing working capital
requirements.

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 CONCLUSION

The mission of Hdfc bank is providing best quality to customers. It is financially very sound
organization.

The performance of the Hdfc bank has been reasonably good. Due to constant work on the
quality, better concentration on the material usage and proper prices the Hdfc bank could
improve maximum its performance. If Hdfc bank give emphasis on human, it will useful in
increasing production.

Hdfc bank is continuously trying to maximize the wealth of share holders.

As per my knowledge Hdfc bank is running successfully and in Asia it is on number one position
in Gear division.

At last I wish bright future of Hdfc bank, and may got first rank in all over world

The overall performance of Hdfc bank Engineering Company Limited is going on good track.
The turnover has been increased by 15.57% while the profit is increased by 14.19%. With the
increase in capacity on account of the expansion projects being undertaken by the company.

The recent boom in the engineering and technology sector has coupled with continuous thrust of
government on infrastructure projects is expected to sustain healthy growth of engineering
products demand. Almost all major players have announced substantial increase in capacity
which results into increase in sales of Hdfc bank.

An increase in tax rates, transportation charges, railway freight, and cost of coal can add worries
for the company.

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 BIBILOGRAPY

 www.hdfc bank.com

 www.netmba.com

 www.bizmove.com

 Financial Management – I.M.Pandey

 Financial Management – Prasanna Chandra

 Financial Statement Analysis – Dr. Anjan Bhattacharya

 Annual Reports of Hdfc bank of last 5 years

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