Working Capital Management @ Maruti-Suzuki

PREFACE
I had under gone my summer training with Maruti Suzuki India Ltd. A student can
gain this practical knowledge when he comes to same environment. He/she must have
knowledge to tackle various types of problems, which arise in business. He/she can be
able to do it, when actually faces the problem.
This is only possible during training period. A student may have a sufficient attitude
for his/her future job, but systematic practical training is essential to bring in his
confidence for job performance, mental preparation, which enable him to take a future
job responsibility.
As discussed above importance and objectives of training, besides all this, such
training solves following purposes:
 Developing skills
In this ability, to perform work efficiently & effectively is being developed.
 Modifying attitude.
Developing good attitude on the part of the training in regard to actual job requirement
that is management.
 Transmitting information
Information about the company, its product, services & policies.
So, as total above, I had the privilege of receiving my practical training in Maruti
Suzuki India Ltd. The management of company offered excellent learning situation &
sufficient facilities, to fulfill the objectives of the training.
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CHAPTER I
1. Introduction
Working capital management

Working capital management is concerned with the problems 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
diminution 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 way that the satisfactory level of working capital is mentioned.
The current should be large enough to cover its current liabilities in order to ensure a
reasonable margin of the safety.
Definition:-
1. According to Guthmann & Doughal-

“Excess of current assets over current liabilities”.
2. 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)”.
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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 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 labour 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.
Gross working capital and Net working Capital’

There are two concepts of working capital management.
1. Gross working capital

Gross working capital refers to the firm’s investment. Current assets are the assets which
can be convert in to cash within year includes cash, short term securities, debtors, bills
receivable and inventory.
2. Net working capital
Net working capital refers to the difference between current assets and current liabilities.
Current liabilities are those claims of outsiders which are expected to mature for payment
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within an accounting year and include creditors, bills payable and outstanding expenses.
Net working capital can be positive or negative.
Efficient working capital management requires that firms should operate with some
amount of net working capital, the exact amount varying from firm to firm and
depending, among other things; on the nature of industries.net working capital is
necessary because the cash outflows and inflows do not coincide. The cash outflows
resulting from payment of current liabilities are relatively predictable. The cash inflow
are however difficult to predict. The more predictable the cash inflows are, the less net
working capital will be required.
The concept of working capital was, first evolved by Karl Marx. Marx used the term
‘variable capital’ means outlays for payrolls advanced to workers before the completion
of work. He compared this with ‘constant capital’ which according to him is nothing but
‘dead labour’. This ‘variable capital’ is nothing wage fund which remains blocked in
terms of financial management, in work-in- process along with other operating expenses
until it is released through sale of finished goods. Although Marx did not mentioned that
workers also gave credit to the firm by accepting periodical payment of wages which
funded a portioned of W.I.P, the concept of working capital, as we understand today was
embedded in his ‘variable capital’.
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
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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.
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.
Determinants of working capital

The amount of working capital is depends upon a following factors.
1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital
is more rather than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no founds are blocked in piling
inventories and also no funds are blocked in receivables. E.g. public utility services like
railways, infrastructure oriented project etc. there requirement of working capital is less.
On the other hand, there are some businesses like trading activity, where requirement of
fixed capital is less but more money is blocked in inventories and debtors.
2. 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
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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.
3. Size and growth of business

In very small company the working capital requirement is quit 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.
4. 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.
5. Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to extend
more and more credit to customers, as result which more and more amount is locked up
in debtors or bills receivables which increase the working capital requirement. On the
other hand, in the case of purchase, if the credit is offered by suppliers of goods and
services, a part of working capital requirement may be financed by them, but it is
necessary to purchase on cash basis, the working capital requirement will be higher.
6 Profitability
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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.
7 Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may reduce
the strain on working capital; it may ensure proper utilization of existing resources by
eliminating the waste and improved coordination etc.
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1. OBJECTIVES OF THE STUDY
Study of the working capital management is important because unless the working capital
is managed effectively, monitored efficiently planed properly and reviewed periodically
at regular intervals to remove bottlenecks if any the company cannot earn profits and
increase its turnover. With this primary objective of the study, the following further
objectives are framed for a depth analysis.
1. To study the working capital management of Maruti Suzuki India Ltd.
2. To study the optimum level of current assets and current liabilities of the company.
3. To study the liquidity position through various working capital related ratios.
4. To study the working capital components such as receivables accounts, cash
management, Inventory position.
5. To study the way and means of working capital finance of the Maruti Suzuki India
Ltd.
6. To estimate the working capital requirement of Maruti Suzuki India Ltd.
7. To study the operating and cash cycle of the company.
2. Research methodology
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 research to know not only the research method but also know
methodology. ”The procedures by which researcher go about their work of describing,
explaining and predicting phenomenon are 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.
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Data collection is important step in any project and success of any project will be largely
depend upon now 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 important step.
Data collection plays an important role in research work. Without proper data available
for analysis you cannot do the research work accurately.
Types of data collection

There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection
1) 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 collect through personal interview,
questionnaire etc. to support the secondary data.
2) Secondary data
The secondary data are those which have already collected and stored. Secondary data
easily get those secondary data from records, journals, annual reports of the company etc.
It will save the time, money and efforts to collect the data. Secondary data also made
available through trade magazines, balance sheets, books etc.
This project is based on primary data collected through personal interview of head of
account department, head of SQC department and other concerned staff member of
finance department. But primary data collection had limitations such as matter
confidential information thus project is based on secondary information collected through
five years annual report of the company, supported by various books and internet sides.
The data collection was aimed at study of working capital management of the company
Project is based on
1. Annual report of Maruti Suzuki India Ltd. 2018-19
2. Annual report of Maruti Suzuki India Ltd 2019-20
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Limitations of the study

Following limitations were encountered while preparing this project:
1) Limited data:-
This project has completed with annual reports; it just constitutes one part of data
collection i.e. secondary. There were limitations for primary data collection
because of confidentiality.
2) Limited period:-
This project is based on five year annual reports. Conclusions and recommendations are
based on such limited data. The trend of last five year may or may not reflect the real
working capital position of the company
3) Limited area:-
Also it was difficult to collect the data regarding the competitors and their financial
information. Industry figures were also difficult to get.
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CHAPTER-II
REVIEW OF LITERATURE
WORKING CAPITAL MANAGEMENT – AN OVERVIEW
INTRODUCTION:
Working Capital of a firm may be different as the amount by which its Current
Assets exceed its Current Liabilities. Working capital management is concerned with the
problems that arise in attempting to manage current assets, current liabilities and the
inter-relationships that exist between them. The current assets refers to those assets which
in the ordinary course of business can be, or will be, turned in to cash within one year
without disrupting the operations of the firm. The major current assets are cash,
marketable securities, accounts receivables and inventory. Current liabilities are those
liabilities, which are intended at their inception to be paid in the ordinary course of
business, within a year, out of current assets or earning of the concern. The basic current
liabilities are accounts payable, bills payable, bank overdraft and outstanding expenses.
Working capital management involves the relationship between a firm’s short-
term assets and its short-term liabilities. The goal of working capital management is to
ensue that a firm is able to continue its operations and that it has sufficient ability to
satisfy both maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts receivable and
payable and cash. To pay current liabilities as they fall due. This implies a clearly
designed risk policy to determine the required liquidity level.
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. This is so because if the firm fails to do so, it is likely to become insolvent
and may even be forced in to bankruptcy. The current assets should be large enough to
cover its current liabilities in order to ensure that they are obtained and used in the best
possible way. The interaction between the current assets and current liabilities is the main
theme of the theory of working capital management.
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The important elements of working capital management include inventory
management, cash management, credit and collection policy and short-term borrowings.
Where as long term financial analysis is primarily concerned with strategic planning,
working capital management is primarily concerned with day- to-day operations making
sure, production lines do not stop as firm’s run out of the raw materials and thus
preventing the slowing down of the process. Obviously, without good working capital
management, no firm can be efficient and profitable
Management of working capital
 Cash management. Identify the cash balance which allows for the business to
meet day to day expenses,but reduces cash holding costs.
 Inventory management. Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and minimizes
reordering costs - and hence increases cash flow.Besides this, the lead times in
production should be lowered to reduce Work in Progress (WIP) and similarly, the
Finished Goods should be kept on as low level as possible to avoid over production – see
Supply chain management; Just In Time (JIT); Economic order quantity (EOQ);
Economic quantity
 Debtors management. Identify the appropriate credit policy, i.e. credit terms
which will attract customers,such that any impact on cash flows and the cash conversion
cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see
Discounts and allowances.
 Short term financing. Identify the appropriate source of financing, given the
cash conversion cycle:the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors
to cash" through "factoring".
Accounts receivable
 Accounts receivable: (A/R) in American English, receivables or debtors in
British English, is money owed to a business by its clients and shown in its accounts as
an asset. It is one of a series of accounting transactions dealing with the billing of a
customer for goods and services that the customer has ordered.
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 Accounts receivable represent money owed by entities to the firm on the sale of
products on credit. In most business entities, accounts receivable is typically executed by
generating an invoice and either mailing or electronically delivering it to the customer,
who, in turn, must pay it within an established timeframe, called credit terms or payment
terms. Accounts receivable departments use the sales ledger.
Payment terms
 An example of a common payment term is Net 30, which means that payment is
due at the end of 30 days from the date of invoice. The debtor is free to pay before the
due date; most business entities offer a discount for early payment. Other common
payment terms include Net 45 and Net 60.
 Booking a receivable is accomplished by a simple accounting transaction;
however, the process of maintaining and collecting payments on the accounts receivable
subsidiary account balances can be a full-time proposition. Depending on the industry in
practice, accounts receivable payments can be received up to 10 – 15 days after the due
date has been reached. These types of payment practices are sometimes developed by
industry standards, corporate policy, or because of the financial condition of the client.
 Since not all customer debts will be collected, businesses typically estimate the
amount of and then record an allowance for doubtful accounts which appears on the
balance sheet as a contra account that offsets total accounts receivable. When accounts
receivable are not paid, some companies turn them over to third party collection agencies
or collection attorneys who will attempt to recover the debt via negotiating payment
plans, settlement offers or pursuing other legal action.
 Outstanding advances are part of accounts receivable if a company gets an order
from its customers with payment terms agreed upon in advance. Since billing is done to
claim the advances several times, this area of collectible is not reflected in accounts
receivables. Ideally, since advance payment occurs within a mutually agreed-upon term,
it is the responsibility of the accounts department to periodically take out the statement
showing advance collectible and should be provided to sales & marketing for collection
of advances. The payment of accounts receivable can be protected either by a letter of
credit or by.
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Inventory
Inventory management is primarily about specifying the size and placement of stocked
goods.
Inventory management is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods. The
scope of inventory management also concerns the fine lines between replenishment lead
time, carrying costs of inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting, physical inventory,
available physical space for inventory, quality management, replenishment, returns and
defective goods and demand forecasting. Balancing these competing requirements leads
to optimal inventory levels, which is an on-going process as the business needs shift and
react to the wider environment. Inventory management involves a retailer seeking to
acquire and maintain a proper merchandise assortment while ordering, shipping,
handling, and related costs are kept in check. Systems and processes that identify
inventory requirements, set targets, provide replenishment techniques and report actual
and projected inventory status. Handles all functions related to the tracking and
management of material. This would include the monitoring of material moved into and
out of stockroom locations and the reconciling of the inventory balances.
Also may include ABC analysis, lot tracking, cycle counting support etc. Management of
the inventories, with the primary objective of determining/controlling stock levels within
the physical distribution function to balance the need for product availability against the
need for minimizing stock holding and handling costs. See inventory proportionality.
The reasons for keeping stock
There are three basic reasons for keeping an inventory:
1. Time - The time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amounts of inventory to use in this "lead time."
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.
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3. Economies of scale - Ideal condition of "one unit at a time at a place where a user
needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So
bulk buying, movement and storing brings in economies of scale, thus inventory.
Inventory examples
While accountants often discuss inventory in terms of goods for sale, organizations –
manufacturers, service-providers and not-for-profits - also have inventories (fixtures,
furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and
wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a
warehouse or in a shop or store accessible to customers. Inventories not intended for sale
to customers or to clients may be held in any premises an organization uses. Stock ties up
cash and, if uncontrolled, it will be impossible to know the actual level of stocks and
therefore impossible to control them. While the reasons for holding stock were covered
earlier, most manufacturing organizations usually divide their "goods for sale" inventory
into:
 Raw materials - materials and components scheduled for use in making a product.
 Work in process, WIP - materials and components that have begun their transformation to
finished goods.
 Finished goods - goods ready for sale to customers.
 Goods for resale - returned goods that are salable.
The following are the objectives of the inventory management:
1. To ensure continuous supply of materials, spares and finished goods.
2. To avoid both over stocking and under stocking of inventory.
3. To maintain investment in inventories at the optimum level as required by the
operational and sales activities.
4. To keep materials cost under control.
5. To eliminate duplication in ordering and replenishing stocks.
6. To design proper organization for inventory management.
7. To minimize losses through deterioration, pilferage, wastages and damages.
8. To ensure right quality goods at reasonable prices.
9. To ensure perpetual inventory controls so that materials shown in stock ledgers
should be actually lining the stocks.
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10. To facilitate furnishing of data for short-term and long-term planning and control
of inventory.
Principle of inventory proportionality
Purpose
Inventory proportionality is the goal of demand-driven inventory management. The
primary optimal outcome is to have the same number of days' (or hours', etc.) worth of
inventory on hand across all products so that the time of run out of all products would be
simultaneous. In such a case, there is no "excess inventory," that is, inventory that would
be left over of another product when the first product runs out. Excess inventory is sub-
optimal because the money spent to obtain it could have been utilized better elsewhere,
i.e. to the product that just ran out.
The secondary goal of inventory proportionality is inventory minimization. By
integrating accurate demand forecasting with inventory management, replenishment
inventories can be scheduled to arrive just in time to replenish the product destined to run
out first, while at the same time balancing out the inventory supply of all products to
make their inventories more proportional, and thereby closer to achieving the primary
goal. Accurate demand forecasting also allows the desired inventory proportions to be
dynamic by determining expected sales out into the future; this allows for inventory to be
in proportion to expected short-term sales or consumption rather than to past averages, a
much more accurate and optimal outcome. Integrating demand forecasting into inventory
management in this way also allows for the prediction of the "can fit" point when
inventory storage is limited on a per-product basis.
High-level inventory management

High-level financial inventory has these two basic formulas, which relate to the
accounting period:
1. Cost of Beginning Inventory at the start of the period + inventory purchases
within the period + cost of production within the period = cost of goods available
2. Cost of goods available − cost of ending inventory at the end of the period = cost
of goods sold
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The benefit of these formulae is that the first absorbs all overheads of production and raw
material costs into a value of inventory for reporting. The second formula then creates the
new start point for the next period and gives a figure to be subtracted from the sales price
to determine some form of sales-margin figure.
Manufacturing management is more interested in inventory turnover ratio or
average days to sell inventory since it tells them something about relative inventory
levels.
Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average
Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) and its
inverse
Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio =
365 days a year / Inventory Turnover Ratio This ratio estimates how many times the
inventory turns over a year. This number tells how much cash/goods are tied up waiting
for the process and is a critical measure of process reliability and effectiveness. So a
factory with two inventory turns has six months stock on hand, which is generally not a
good figure (depending upon the industry), whereas a factory that moves from six turns
to twelve turns has probably improved effectiveness by 100%. This improvement will
have some negative results in the financial reporting, since the 'value' now stored in the
factory as inventory is reduced.
While these accounting measures of inventory are very useful because of their simplicity,
they are also fraught with the danger of their own assumptions. There are, in fact, so
many things that can vary hidden under this appearance of simplicity that a variety of
'adjusting' assumptions may be used. These include:
 Specific Identification
 Weighted Average Cost
 Moving-Average Cost
 FIFO and LIFO.
Current Assets Definition
1. A balance sheet account that represents the value of all assets that are reasonably
expected to be converted into cash within one year in the normal course of business.
Current assets include cash, accounts receivable, inventory, marketable securities,
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prepaid expenses and other liquid assets that can be readily converted to cash.
2. In personal finance, current assets are all assets that a person can readily convert to
cash to pay outstanding debts and cover liabilities without having to sell fixed assets.
In the United Kingdom, current assets are also known as "current accounts".
What Does Current Assets Mean?
Current assets are those assets that are expected to be used (sold or consumed) within a
year, unlike fixed assets. Current assets are shown on the balance sheet, and are listed in
order of increasing liquidity (i.e. how easy they are to convert to cash). Usually stocks
will be listed first, followed by debtors, with cash last.
The current asset position of a company is important, both for assessing its financial
strength financial position (see current assets ratio) and for gauging its operational The
first major component of the balance sheet is current assets. These assets can easily be
converted to cash within one operating cycle -- the amount of time the company needs to
sell a product and collect cash from that sale, often anywhere between 60 and 180 days.
Companies need current assets to fund their day-to-day operations. If current assets fall
short, the company will have to scramble for other sources of short-term funding, either
by taking on debt (hello, interest payments) or issuing more stock (hello, shareholder
dilution).
There are five main kinds of current assets:
 Cash and equivalents
 Short- and long-term investments
 Accounts receivable
 Inventories
 Prepaid expenses
These assets are literally money in the bank: cold, hard cash or something equivalent, like
bearer bonds, money market funds, or vintage comic books. (OK, maybe not that last
one.) As completely liquid assets, cash and equivalents should get special respect from
shareholders. If a company had nothing better to do with these funds, it could mail them
straight to you as a fat dividend, or use them to buy back shares and boost the value of
your stock.
Short-term investments
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These represent the next step above cash and equivalents. They normally come into play
when a company has so much cash on hand that it can afford to tie some of it up in
bonds lasting less than one year. This money can’t immediately be liquefied without
some effort, but it does earn a higher return than plain old cash. Cash and investments
give shares immediate value, and while they're not entirely easy to liquidate, in a pinch
they can be distributed to shareholders with minimal effort.
Accounts receivable
Normally abbreviated as A/R, these are funds that customers currently owe to a company.
They've received the company's products, but haven't yet paid for those goods or services.
Companies routinely buy goods and services from other companies on credit. Although
A/R is almost always turned into cash within a short amount of time, some customers
aren't so diligent. In rare cases, companies have to write off bad accounts receivable if
they've shipped goods or provided services to a customer unwilling or unable to pay. In
that event, you'll see something called "allowance for bad debt" in parentheses beside the
accounts receivable number. The company's set this money aside to cover the potential
for bad customers, based on any such problems it may have previously endured. Even
with this allowance, companies may still be forced to finds itself in unexpected trouble.
It's important to compare how quickly accounts receivable grow compared to revenue. If
receivables are rising faster than revenue, you know that the company hasn't yet been
paid for many of the sales in that particular quarter. (Later in this series, we'll look more
closely at ways to measure accounts receivable, including A/R turnover and days sales
outstanding.)
Inventories
These are the components and finished products that a company has currently stockpiled
to sell to customers. Not all companies have inventories, particularly if they are involved
in advertising, consulting, services, or information industries. For companies that do sell
physical goods, however, inventories are extremely important.
Investors should view inventories somewhat skeptically when evaluating a company's
assets. Because of various accounting systems like FIFO (first in, first out) or LIFO (last
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in, first out), as well as real liquidation compared to accounting value, the balance sheet
often overstates inventories' value.
In addition, inventories tie up capital. Money sunk into inventory can't be used to help
sell those goods (and turn them back into cash). Companies with inventories growing
faster than revenue, or sluggish sales of backed-up inventory, can be disasters waiting to
happen. Again, we'll look more closely at inventory turnover later in this series.
Prepaid expenditures
The company has already paid these expenses to its suppliers. They can be a lump sum
paid
to an advertising agency, or a credit for some bad merchandise issued by a supplier.
Although these expenditures aren't technically liquid, since the company does not
actually
have the money in question in the bank, having bills already paid is a definite plus. It
means
that those bills won't have to be paid in the future, allowing more of the revenue for that
particular quarter to flow to the bottom line and become liquid assets.
There are two types of fixed assets:
 Tangible fixed assets
 Intangible fixed assets
Tangible fixed assets include physical assets such as land and buildings and equipment.
Long
term financial investments are also considered tangible.
The most important intangible fixed asset is goodwill. Other intangibles includes patents,
copyrights and trademarks.
In many cases it may be necessary to adjust for the value of intangibles (usually by
deducting
them from total fixed assets) in order to allow fair comparisons between companies or to
to
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make measures of financial strength more meaningful. This is because the value of
intangibles is often less certain and usually reflects the history of the company.
 Tangible Assets: Tangible assets are the assets, that have a physical or material
existence.
For example
 Intangible Assets: Intangible assets are the ones that do not have a material existence,
but
these assets are seen in the balance sheets. For example: goodwill.
Current assets:
 Cash - at hand and at bank
 Inventories
 Sundry Debtors
 Advance and Deposits
LIABILITYES
liability can mean something that is a hindrance or puts an individual or group at a
disadvantage, or something that someone is responsible for, or something that increases
the
chance of something occurring (i.e. it is a cause).
Liability may also refer in specific fields to:
 legal liability
 public liability
Finance
 liability (financial accounting), a current obligation of an entity arising from past
transactions or events
 accrued liabilities
 current liability
 long-term liabilities
CURRENT LIABILITIES:
There are five main categories of current liabilities:
 Accounts payable
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 Accrued expenses
 Income tax payable
 Short-term notes payable
 Portion of long-term debt payable
IMPORTANCE OF WORKING CAPITAL MANAGEMENT:
Working Capital management includes a number of aspects that make it
especially important for the financial health of the firm. Surveys indicate that the largest
portion of the financial manager’s time is devoted to the day-to-day operations of the
firm, which fall under the heading of working capital management.
Current assets represent the largest proportion i.e. if total assets forms 100% then
current assets are generally above 60%. Moreover current assets fluctuate with sales and
sales vary over time. Thus managing current assets is the dynamic process and it requires
the financial manager to closely monitor sales to ensure that assets in hand are at the right
level for actual sales and production levels.
Working capital management is particularly important for small firms. Although
these firms can minimize their investment in fixed assets by renting or leasing plant and
equipment, they cannot avoid investment in cash, receivables and inventories. Further,
because small firms have relatively limited access to long-term capital markets, they must
relay heavily on trade credit and short-term loans, both of which affect working capital
by increasing current liabilities.
The relationship between sales growth and the need to invest in current assets is
close and direct. As sales grow the firm will have to increase its investments in
receivables and it may need to increase its cash balances as well. Any increase in an
account on the left side of the balance sheet must be matched by an increase on the right
side.
Therefore, it is imperative that the finance manager is aware of sales trends and
their effects on the firm’s working capital need
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TYPES OF WORKING CAPITAL
TYPES OF WORKING CAPITAL
ON THE BASIS OF CONCEPT

ON THE BASIS OF TIME
GROSS WORKING NET WORKING PERMANENT OR FIXED TEMPORARY VARIABLE

CAPITAL CAPITAL CAPITAL WORKING CAPITAL
REGULAR SEASONAL
WORKING CAPITAL WORKING CAPITAL
SPECIAL
RESERVE WORKING CAPITAL
WORKING CAPITAL
Working Capital may be classified in two ways:

(a) On the basis of concept
(b) On the basis of time
On the basis of concept, working capital
1. Gross working capital
2. Net working capital
On the basis of time, working capital can be further classified into
1. Permanent or fixed working capital.
2. Temporary or variable working capital.
Permanent Working Capital:
Permanent or fixed working capital is the minimum amount, which is
required to ensure effective utilization or fixed facilities and for maintaining the
circulation of current assets. There is always a minimum.
Level of current assets, which is continuously required by the
enterprise to carry out its normal business operations. For example, every firm has to
maintain a minimum level of raw materials, work-in-process, finished goods and cash
balance. This minimum level of current assets is called fixed working capital.
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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 fluctuations in demand consequent upon changes in production and sales
as a result of seasonal changes.
CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital namely:
 Gross Working Capital
 Net Working Capital
The two concepts of working capital have equal significance from
management viewpoint the gross working capital concept focuses attention on two
aspects of current assets management.
GROSS WORKING CAPITAL:

The term working capital refers to gross working capital. It refers to the firm’s
investments in total current circulating assets. Under the gross concept, working capital is
equal to total current assets.
 Optimum investment in current assets
 Financing of current assets.
The investment in current assets should be just adequate, not more or not less, to
the needs of the business firm. Excessive investment in current assets should be avoided
because it impairs firm’s profitability, as idle investment earns nothing. On the other
hand, in adequate amount of working capital can threaten the solvency of the firm, if it
fails to meet its current obligations. Another aspect of gross working capital points to the
need of arranging funds to finance current assets. When ever a need for working capital
funds arise due to the increasing level of the business activity or for any other reason, the
arrangement should be made quickly. Similarly, if suddenly some surplus funds arise,
they should not be allowed to remain ideal, but should be invested in short term
securities.
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Thus a finance manager should have the knowledge of the sources of working
capital funds as well as the investment avenues where the idle funds may be temporarily
invested.
NET WORKING CAPITAL:
Net working capital, being the difference between current assets and current
liabilities is a qualitative concept. It includes
 The liquidity position of the firm

 The extent to which the working capital needs may be financed by permanent
sources of funds.
Currents assets should be sufficiently in excess of current

liabilities to constitute a margin or buffer maturing obligations with the ordinary
operating cycle of a business. A weak liquidity position poses a threat to the solvency of
the company and makes it unsafe and unsound. Excessive liquidity is also bad it may be
due to mismanagement of current assets therefore prompt and timely action should be
taken by management to improve and correct the imbalance in the liquidity position of
the firm.
The networking capital concept also covers the question of judicious mix of long
term and short-term funds for financing current assets. For every firm, there is a
minimum amount of net working capital, which is permanent therefore a portion of the
working capital should be financed with the permanent sources of funds such as owner’s
capital, debentures, long-term debt, preference capital or retained earnings. Management
must therefore, decide the extent to which current assets should be financed with equity
capital and or borrowed capital.
In summary, the gross and net concepts of working capital are two important
facets of the working capital management. There is no precise way of determining the
exact amount of networking capital of every firm since they are firm specific. There is no
specific rule in which current assets should finance thus a judicious mix of long term and
short-term finances should be used.
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ADVANTAGES OF ADEQUATE WORKING CAPITAL
Working Capital is the lifeblood and nerve center of business. Just as circulation of
blood is essential in the human body for maintaining life, working capital is very
essential to maintain the smooth running of a business. No business can run successfully
without an adequate amount of working capital. The main advantages of maintaining
adequate amount of working capital are as follows:
1. Solvency of the business: Adequate working capital helps in maintaining
solvency of the business by providing uninterrupted flow of production.
2. Goodwill: Sufficient working capital enables a business concern to make prompt
payments and hence helps in creating and maintaining goodwill.
3. Easy loans: A concern hacking adequate working capital, high solvency and
good credit standing can arrange loans from banks and others on easy and
favorable terms.
4. Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence it reduces costs.
5. Regular payment: salaries, wages and other day-to-day commitments company
which has ample working capital can make regular payment of salaries, wages
and other day-to-day commitments which raises the morale of its employees,
increases their efficiency, reduces wastage’s and costs and enhances production
and profits.
6. Regular supply of raw materials: Sufficient working capital ensures regular
supply of raw materials and continuous production.
7. Ability to face Crisis: Adequate working capital enables a concern to face
business crisis in emergencies such as depression because during such periods,
generally, there is much pressure on working capital.
8. Quick and Regular return on Investments: Every Investor wants a quick and
regular return on investments. Sufficient of working capital enables a concern to
pay quick and regular dividends to its investors, as there may not be much
pressure to plough back profits. This gains the confidence of its investors and
creates a favorable market to raise additional funds in the future.
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9. High morale: Adequacy of working capital creates an environment of security,
confidence, and high morale and creates overall efficiency in a business.
DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

Every business concern should have adequate working capital to run its business
operations. It should neither redundant or excessive working capital nor inadequate nor
inadequate nor shortage of working capital. Both excessive as well as short working
capital positions are bad for any business.
1. Excessive working capital means idle funds which earn no profits for the business
and hence the business cannot earn a proper rate of return on its investments.
2. When there is redundant working capital, it may lead to unnecessary purchasing
and accumulation of inventories causing more chances of theft, waste and losses.
3. Excessive working capital implies excessive debtors and defective credit policy
which may cause higher incidence of bad debts.
4. It may result into overall inefficiency in the organization.
5. When there is an excessive working capital relation with the banks and other
financial institutions may not be maintained.
6. Due to low rate of return on investments the value of shares may also fall.
DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1. A concern, which has inadequate working capital, cannot pay its short-term
liabilities in time. Thus it will loose its reputation and shall not be able to get good
credit facilities.
2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.
3. It becomes difficult for the firm to exploit favorable market conditions and
undertake profitable projects due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations and it creates
inefficiencies, increases costs and reduces the profits of the business.
5. It becomes impossible to utilize efficiently the fixed assets due to non-availability
of liquid funds.
6. The rate of return on investments also fall with the shortage of working capital.
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FORECASTING OF MORKING CAPITAL
OPERATING CYCLE:
The need for working capital to run the day-to-day business activities cannot be
over emphasized. The objective of financial decision making is to maximize the
shareholder's wealth. To achieve this, it is necessary to generate sufficient profits. The
extent to which profits can be earned will depend upon the magnitude of the sales among
other things. A successful sales program is necessary for earning profits for any business
enterprise. However, sales do not convert into cash instantly; there is invariably a time
lag between the sale of goods and the receipt of cash. There is, therefore, a need for
working capital in the form of current assets to deal with the problem arising out of the
lack of immediate realisation of cash against goods sold. Therefore, sufficient working
immediate realisation of cash against goods sold. Therefore, sufficient working capital is
necessary to sustain sales activity. Technically, this is referred to as operating or cash
cycle. 'The continuing flow from cash to suppliers, to inventory, to accounts receivable
and back into cash is what is called the operating cycle"
The operating cycle can be shortened by Reduction in the inventory conversion
period i.e., by processing and selling goods more quickly. Reducing the receivables
conversion period or Lengthening the payables deferral period i.e., by slowing down its
own payments. To the extent, these actions can be taken without increasing costs or
depressing sales.
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OPERATING CYCLE
 Conversion of cash into raw materials
 Conversion of raw-material into work-in-progress
 Conversion of work-in-process into finished goods.
 Conversion of finished goods into accounts receivable and
 Conversion of accounts receivable into cash.
FACTORS INFLUENCING WORKING CAPITAL MANAGEMENT

A large number of factors influence the working capital needs of firms. These
factors however affect different enterprises differently. They also vary form time to item.
In general, the following factors are involved in a proper assessment of the quantum of
working capital required.
1. Nature and size of business:
The working capital requirements of a firm are basically influenced by the nature of
its business. Trading and financial firms have a very low investment in fixed assets but
require a large sum of money to be invested in working capital. Some manufacturing
businesses, such as tobacco manufacturers and construction firms also have to invest
substantially in working capital and a nominal amount in fixed assets.
The size of a business also has an important impact on its working capital needs. Size
may be measured in terms of the scale of operation. A firm with larger scale of operation
will need more working capital than that of a smaller firm.
2. Manufacturing cycle:
The manufacturing cycle starts with the purchase and use of raw materials and
completes with the production of finished goods. Longer the manufacturing cycle, larger
will be the firm's working capital requirements. An extended manufacturing time span
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means a large tie-up of funds in inventories. Thus, if there are alternative ways of
manufacturing a product, the process with the shortest manufacturing cycle should be
chosen. In order to minimize their investment in working capital, some firms, specifically
the firms manufacturing industrial products have a policy of asking for advance payments
form their customers.
3. Business fluctuations:
Most firms experience seasonal and cyclical fluctuations in the demand for their products
and services, which cause a shift in the working capital position, particularly for
temporary working capital requirements. The variations in business conditions may be in
two directions
 Upward phase when boom conditions prevail
 Downswing phase when economic activity is marked by a decline.
During the upswing of business activity, the need for working capital is likely to grow
to cover the lag between increased sales and receipt of cash as well as to finance
purchases of additional materials to cater to the expansion of the level of activity. The
decline in the economy is associated with in turn, will lead to a fall in the inventories and
book debts. The need for working capital in recessionary conditions is bound to decline.
In brief, business fluctuations influence the size of working capital mainly through the
effect on inventories.
4. Production policy:
A steady production policy will cause inventories to accumulate during the off-
season periods and the firms will be exposed to greater inventory costs and risk. Thus, if
the costs and risks of maintaining a constant production schedule are high, the firm may
adopt the policy of varying its production schedules in accordance with the changing
demand. Those firms, whose productive capacities can be utilized for manufacturing
varied products, can have the advantage of diversified activities and solve their working
capital problems. Thus, the production policies will differ from firm to firm depending
upon the circumstances of the individual firm.
5. Firm's credit policy:
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The credit policy of the firm affects working capital by influencing the level of
book debts. The firm should be discretionary in granting credit terms to its customers. A
liberal credit policy without rating the creditworthiness of the customers will be
detrimental to the firm and will create a problem of collecting funds later on. The firm
should be prompt in making collections. A high collection period will mean tie-up of
funds in book debts. Slack collection procedures can increase the chances of book debts.
The firm should evaluate the credit standing of new customers and periodically review
the credit-worthiness of the existing customers. The cases of delayed payments should be
thoroughly investigated.
6. Availability of credit:
The working capital requirements of a firm are also affected by the credit terms
granted by its creditors. A firm will need less working capital if liberal credit terms are
available to it. Similarly, the availability of credit from banks also influences the
working capital needs of the firm. A firm, which can get bank credit easily on favorable
conditions, will operate with less working capital than a firm without such a facility.
7. Operating efficiency:
The operating efficiency of a firm relates to the optimum utilization of resources
at minimum costs. The firm will be effectively contributing to its working capital if it is
efficient in controlling the operating costs. The use of working capital is improved and
the pace of cash cycle is accelerated with operating efficiency.
WORKING CAPITAL FINANCING
ADEQUACY OF WORKING CAPITAL:
A firm must have adequate working capital i.e., as much as needed by the firm. It
should neither be excessive or inadequate. Both situations are dangerous. Excessive
working capital means the firm has idle funds. Which earn no profits for the firm.
Inadequate working capital means the firm does not have sufficient funds for running its
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operations, which ultimately results in production, interruptions and lowering down of
profitability.
In a manufacturing concern, it is generally accepted that higher levels of working
capital decrease the risk and profitability too. While lower levels of working capital
increase the risk but have the potentiality of increasing the profitability.
SOURCES OF WORKING CAPITAL
The working capital requirements should be met both in short term and as well as
long-term sources of funds. It will be appropriate to meet at least two thirds of the
permanent working capital requirements from long-term sources and only for the period
needed. The financing of working capital through short-term sources of funds has
benefits of lower cost and establishing close relationship with the financing banks.
Financing of working capital from long-term resources provides the following benefits:
1. It reduces the risk, since the need to repay loans at frequent intervals is
eliminated.
2. It increases liquidity, since the firm has not to worry about the payments of these
funds in the near future.
The finance manager has to make use of both long term and short-term sources of
funds in a way that the overall cost of working capital is the lowest and funds are
available on time and for the period they are really needed.
A firm’s working capital may be viewed as having two components:
1. Permanent working capital
2. Variable working capital
Permanent working capital represents cash, receivables and inventories required
on a continuing basis over the entire year. It may be viewed, as the minimum current
assets needed to carry on operations at any time. Variable capital reflects additional
current assets needed at peak periods during the operating year. Additional inventory may
be needed to support higher sales during the selling season. Receivables must increase
once the goods have been sold. Extra cash may be needed to pay for increased supplies
and labour activity, preceding the period of high activity.
PERMANENT SOURCES OF WORKING CAPITAL:
1. Shares
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2. Debentures
3. Public deposit
4. Ploughing back of profits
5. Loans from financial institutions
TEMPORARAY SORCES OF WORKING CAPITAL:
1. Commercial banks
2. Indigenous bankers
3. Trade credits
4. Installment credits
5. Advances
6. Accrued expenses
FINANCING OF PERMANENT WORKING CAPITAL

1. Shares: Issue of shares is the most important source for raising the permanent or
long-term capital. A company can issue various types of shares- equity shares,
preference shares and deferred shares. However, according to the companies act,
1956 a public company cannot issue deferred shares. Preference shares carry
preferential rights in respect of dividends at a fixed rate and in regard to the
repayment of capital at the time of winding up of the company. Equity shares do not
have any fixed commitment charge and the dividend on these shares is paid subject to
the availability of sufficient profits.
2. Debentures: A debenture is an instrument issued by the company acknowledging
its debt to its holder. It is also an important method of raising long-term or permanent
working capital. Debentures may be of various kinds such as simple, unsecured
debentures and secured or mortgaged debentures, redeemable, irredeemable
debentures and convertible or non-convertible debentures.
3. Public deposits: They are fixed deposits accepted by a business enterprise directly
from the public. This source of raising short-term and medium term finance was very
popular in the absence of banking facilities.
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4. Ploughing back of profits: Ploughing back of profits means the re-investment
by a concern of its surplus earning in its business. It is an internal source of finance
and is most suitable for an established firm for its expansion, modernization,
replacement etc.
5. Loans from Financial Institutions: Financial institutions such as commercial
banks, life insurance corporation, IFCI, IDBI, ICICI etc also provide short-term,
medium-term and long-term loans. This source of finance is more suitable to meet the
medium term demands of working capital.
FINANCING OF TEMPORARY WORKING CAPITAL
1. COMMERCIAL BANKS:
Commercial banks are the most important source of short-term capital. A major
portion of working capital loans is provided by commercial banks. The different forms in
which the banks normally provide loans and advances are loans, cash credits, overdrafts,
purchasing and discounting of bills.
2. INDEGENOUS BANKERS:
Private moneylenders and other country bankers are to be the only source of finance
prior to the establishment of commercial banks.
3. TRADE CREDIT:
It refers to the credit that a customer gets from suppliers of goods in the course of its
business. When purchases are made, the buying firm is allowed a deferral of payment,
which is called trade credit. Trade credit can also be called accounts payable. Trade is
stretchable only till the credit period is available. It does not involve explicit charges. The
main advantages of this source are it is a very convenient method of finance, it is flexible
and it may be possible to obtain favourable terms. However, the biggest disadvantage of
this method of finance is charging of higher prices and loss of cash discount.
4. INSTALMENT CREDIT:
This is another method by which the assets are purchased and the possession of goods
is taken immediately but the payment is made in installments over a predetermined
period of time.
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5. ADVANCES:
Some business houses get advances from their customers and agents against orders
and this source is a short-term finance for them.
6. ACCREUED EXPENSES:
They are another source of short term financing. They represent liability of the firm to
pay for services it has already received. This includes accrued salaries and accrued
interest. Employees render their services and are paid usually after a fixed interval. The
liability builds up between these intervals; being accrued salaries accrued expenses are
not stretchable or postponable for long as they are governed by legal and practical
considerations. Thus they are not much in the firm’s control.
REGULATION OF BANK FINANCE:
Bank finance being an important source of finance to companies has to be

regulated effectively. Over the years, various steps have been taken by the RBI to
efficiently allocate available bank funds to various industries. Before sanctioning credit to
a firm, the bank makes a post-sanctioned scrutiny under the Credit Monitoring
Arrangement (CMA).
The banker, finances only genuine working capital needs of the firm. The firm
must furnish to the bank, details like operating statement, balance sheets and funds flow
statement of the firm with both post and projected figures. Banks sanction credit on the
basis of projections of working capital requirements furnished by the firm.
NORMS FOR INVENTORY AND RECEIVABLES:
The RBI has set up certain norms for major industries for inventory and
receivables. These represent maximum levels of inventory and receivables, which can be
held by a firm. Norms have been set up to avoid excessive funding of bank finance
through bank finance. These may be deviations permitted under certain circumstances of
availability of raw material, strikes etc.
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MAXIMUM PERMISSIBLE BANK FINANCE:
Banks do not finance the entire working capital requirements of the firm. A
certain amount of current assets are set off by current liabilities. Besides this, the firm is
also required to finance part of its current assets by its won funds. Two committees
namely, THE TANDON COMMITTEE and THE CHORE COMMITTEE have
suggested methods to ascertain the level if Maximum Permissible Bank Finance.
Banks, which extended the credit facility to KAKATIYA OVERSEAS, some of
them are
 State Bank of Hyderabad.
 Syndicate Bank
 Central Bank of India.
The Banks provide credit on two basis:
1) Fund based.
2) Non-fund based.
Fund based:
I. Cash Credit: Under cash credit arrangement, credit is available to the extent of
the limits predetermined on the basis of the Credit Monitoring Authority
furnished by the company. The company provides primary security and collateral
security to the bank for obtaining cash credit.
The banks provide credit against book debts. These letters of credit are
usually Usance letters of credit. This credit facility is provided for manufacture of
goods for exports.
II. Repayable in yearly or half yearly installments. Banks provide credit on the basis
of the hypothecation of movable property, usually inventory of goods and the
personal guarantee of the Directors.
Non-Fund Based:
Letter of credit: Under this arrangement banks advance loans for a period of 3
to 7 years. A letter of credit is a very important mode of repayment used by most
purchasers internationally. It provides the supplier with an assurance the payment against
goods supplied by him will be made especially in cases where the purchaser is not known
to the supplier.
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According to IBA norms the letter of credit will permit negotiation of demand
bills and Usance bill of tenor not exceeding 90 days accompanied by the relative
documents of title to goods. The banks extend credit only for the purchase of raw
materials and not for purchase of capital goods.
MANAGEMENT OF INVENTORY:
Inventory is the third major component of current assets. Inventories are stock of
the product a company is manufacturing for sale and components that make up the
product. Every enterprise needs inventory for smooth running of its activities. It serves
as a link between production and distribution process. The various forms in which
inventories exists in a manufacturing company are raw material, work-in-progress and
finished goods.
RAW MATERIALS:
Raw materials inventories are those units, which have been purchased for
converting into finished product through the manufacturing process.
WORK-IN-PROGRESS:
They are semi-manufactured products. They represent products that need more
work before they become finished products for sale. It includes raw materials, wages,
and other manufacturing overheads.
FININSHED GOODS:
They are those inventories, which are completely manufactured products, ready
for sale. It includes total cost excluding depreciation.
OBJECTIVES:
The main objectives of inventory management are operational and financial. The
operational objectives means that materials and spares should be available insufficient
quantity so that work is not interrupted for want of inventory. The financial objectives
means that investments in inventories should not remain idle and minimum working
capital should be locked in it.
The following are the objectives of the inventory management:
11. To ensure continuous supply of materials, spares and finished goods.
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12. To avoid both over stocking and under stocking of inventory.
13. To maintain investment in inventories at the optimum level as required by the
operational and sales activities.
14. To keep materials cost under control.
15. To eliminate duplication in ordering and replenishing stocks.
16. To design proper organization for inventory management.
17. To minimize losses through deterioration, pilferage, wastages and damages.
18. To ensure right quality goods at reasonable prices.
19. To ensure perpetual inventory controls so that materials shown in stock ledgers
should be actually lining the stocks.
20. To facilitate furnishing of data for short-term and long-term planning and control
of inventory.
Why Firms Hold Cash:
The finance profession recognizes the three primary reasons offered by economist
John Maynard Keynes to explain why firms hold cash. The three reasons are for the
purpose of speculation, for the purpose of precaution, and for the purpose of making
transactions. All three of these reasons stem from the need for companies to possess
liquidity.
Speculation:
Economist Keynes described this reason for holding cash as creating the ability
for a firm to take advantage of special opportunities that if acted upon quickly will favor
the firm. An example of this would be purchasing extra inventory at a discount that is
greater than the carrying costs of holding the inventory.
Precaution:
Holding cash as a precaution serves as an emergency fund for a firm. If expected
cash inflows are not received as expected cash held on a precautionary basis could be
used to satisfy short-term obligations that the cash inflow may have been bench marked
for.
Transaction:
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Firms are in existence to create products or provide services. The providing of
services and creating of products results in the need for cash inflows and outflows. Firms
hold cash in order to satisfy the cash inflow and cash outflow needs that they have
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CHAPTER III
COMPANY PROFILE
MARUTI SUZUKI INDIA LIMITED
Company profile
MARUTI SUZUKI INDIA LIMITED

SUZUKI MOTORCYCLE INDIA PRIVATE LIMITED is a subsidiary of Suzuki Motor
Corporation, Japan where in we are having the same manufacturing philosophy of
VALUE PACKED PRODUCTS right from the inception. SMIPL will be manufacturing
two wheelers best suited for the valuable Indian customers covering all segments.
Plant area and production capacity
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We have installed our manufacturing plant in Gurgaon (Haryana) having the annual
capacity of 10,00,000 Two Wheeler P.A. Total land area of the facility at Gurgaon is 37
acres out of which the present plant is constructed in an area of 10 acres of land. The
remaining area is left for land development and future expansion.
Manufacturing
SMIPL manufacturing plant installed in Gurgaon (Haryana) having the annual plant
capacity of 10,00,000 units. We have got total land area of 37 acres and out of which
presently our plant is constructed in approx. 10 acres of land and remaining area is left
for the land development and future expansion.
Environment
At Suzuki, the philosophy of keeping "environment first" is properly percolated

downwards. To comply with all applicable legislations and setting standards thereof
remains only a beginning. We thrive to discover and invent mechanisms for better
environment management systems and it's a continuous process which is managed by a
separate wing of experts and specialist in the field.
The biggest testimony of Suzuki's commitments towards "environment first" is seen in

the new plant of Suzuki two wheelers at Gurgaon which is built to be a Zero discharge
plant.
We have embraced Natural light optimization system and water harvesting systems
besides several other measures to create better and cleaner environment around us. All
packaging material used by Suzuki is re-cyclable. A constant flow of internal
communication on environment related issues not only creates awareness amongst
employees but also helps in inculcating 'an environment friendly' value system.
One more step in making company Environmental friendly is the introduction of Natural
Gas as a Fuel for Power generation and Production processes. Natural Gas is considered
as a Cleaner Fuel and help in further improving ambient air quality levels.
Safety
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Shop Floor Safety Measures
We have safety guards/safety curtains to ensure Operator safety on machines. We have

also installed robots through out the facilities to reduce the ergonomic stress on workers.
There are gas detection systems installed to eliminate any gas related accident and fire
detection system for immediate information about any fire related incident.
We have fire fighting system (manual & automatic) for immediate handling of any fire
related accident . We have a fire tender (capacity 4500 litres water, 90Kg CO2,150Kg
DCP and 500 litres capacity foam).
We try to maintain zero accident record through regular safety audit, frequent training for
staff, line associates and contractors.
We organise different safety programs and competitions to encourage employee

awareness and involvement.
Environmental Utility
To take care of the health of all our employees, we maintain all international parameters
and standards for drinking water, treated water, ambient air shop floor, office and the
outside. We keep updating all these standards of health and welfare of employees through
a team of well qualified personnel in the laboratory.
Quality Checks
Quality Control at Suzuki Motorcycle India has four main sections:
QC has four main sections as follows:
Tested by SMC Japan with their international quality standards
Final ( Vehicle) Inspection
Market Quality
Parts Inspection
Parts Inspection
In Vehicle manufacturing, quality check consists of all body parts engine parts.
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The non conformities in the parts being procured may lead to production loss degradation
of the quality of the final output and life of the product. To ensure the product, the
dimensional, material, aesthetic performance inspection for the special processes are
carried out on the individual parts before they are declared fit for the assembly.
For carrying out the inspection activities effectively, we have the latest sophisticated
machines installed in the inspection area.
Final (Vehicle) Inspection
After the assembly is over, the vehicles are inspected for the following critical aspects:
Safety related parameters such as braking; clutch operation and other functional defects
of the vehicle.
Emission related parameters for checking the conformance of the exhaust gases with the
emission rules.
Functional & aesthetic parameters are also checked.
Market Quality
Most commonly known as "Warranty Section". The main function of this section is:
To act upon the customer's feedback received from the service department for the up
gradation of the product.
To resolve the quality issues being received from the market by visiting the suppliers &
taking the corrective & preventive measures for the same.
Monitoring for the effectiveness of the measures taken for the particular problems
through the cut off engine/ frame numbers.
Manufacturing
43
SMIPL manufacturing plant installed in Gurgaon (Haryana) having the annual plant
capacity of 10,00,000 units. We have got total land area of 37 acres and out of which
presently our plant is constructed in approx. 10 acres of land and remaining area is left
for the land development and future expansion.
Environment
At Suzuki, the philosophy of keeping "environment first" is properly percolated

downwards. To comply with all applicable legislations and setting standards thereof
remains only a beginning. We thrive to discover and invent mechanisms for better
environment management systems and it's a continuous process which is managed by a
separate wing of experts and specialist in the field.
The biggest testimony of Suzuki's commitments towards "environment first" is seen in

the new plant of Suzuki two wheelers at Gurgaon which is built to be a Zero discharge
plant.
We have embraced Natural light optimization system and water harvesting systems
besides several other measures to create better and cleaner environment around us. All
packaging material used by Suzuki is re-cyclable. A constant flow of internal
communication on environment related issues not only creates awareness amongst
employees but also helps in inculcating 'an environment friendly' value system.
One more step in making company Environmental friendly is the introduction of Natural
Gas as a Fuel for Power generation and Production processes. Natural Gas is considered
as a Cleaner Fuel and help in further improving ambient air quality levels.
Safety
Shop Floor Safety Measures
We have safety guards/safety curtains to ensure Operator safety on machines. We have

also installed robots through out the facilities to reduce the ergonomic stress on workers.
There are gas detection systems installed to eliminate any gas related accident and fire
detection system for immediate information about any fire related incident.
44
We have fire fighting system (manual & automatic) for immediate handling of any fire
related accident . We have a fire tender (capacity 4500 litres water, 90Kg CO2,150Kg
DCP and 500 litres capacity foam).
We try to maintain zero accident record through regular safety audit, frequent training for
staff, line associates and contractors.
We organise different safety programs and competitions to encourage employee

awareness and involvement.
Environmental Utility
To take care of the health of all our employees, we maintain all international parameters
and standards for drinking water, treated water, ambient air shop floor, office and the
outside. We keep updating all these standards of health and welfare of employees through
a team of well qualified personnel in the laboratory.
Quality Checks
Quality Control at Suzuki Motorcycle India has four main sections:
QC has four main sections as follows:
Tested by SMC Japan with their international quality standards
Final ( Vehicle) Inspection
Market Quality
Parts Inspection
Parts Inspection
In Vehicle manufacturing, quality check consists of all body parts engine parts.
The non conformities in the parts being procured may lead to production loss degradation
of the quality of the final output and life of the product. To ensure the product, the
dimensional, material, aesthetic performance inspection for the special processes are
carried out on the individual parts before they are declared fit for the assembly.
45
For carrying out the inspection activities effectively, we have the latest sophisticated
machines installed in the inspection area.
Final (Vehicle) Inspection
After the assembly is over, the vehicles are inspected for the following critical aspects:
Safety related parameters such as braking; clutch operation and other functional defects
of the vehicle.
Emission related parameters for checking the conformance of the exhaust gases with the
emission rules.
Functional & aesthetic parameters are also checked.
Market Quality
Most commonly known as "Warranty Section". The main function of this section is:
To act upon the customer's feedback received from the service department for the up
gradation of the product.
To resolve the quality issues being received from the market by visiting the suppliers &
taking the corrective & preventive measures for the same.
Monitoring for the effectiveness of the measures taken for the particular problems
through the cut off engine/ frame numbers.CSR Vision Statement
As a socially responsible corporate, the Company promotes inclusive and sustainable

growth in the society, especially the local community it operates in, through its business
practices and social initiatives. To meet this end, the Company shall implement relevant
programmes. Stakeholder engagement and shared value creation will be the cornerstones
of the CSR programmes.
CSR Objectives
The Company will contribute towards inclusive and sustainable growth of the society
with a focus on vulnerable and marginalized population by being committed to:
46
 Improving the wellbeing of the local community by implementing projects on
education, sanitation, infrastructure development, rural and state recognized
sports in the areas around its operations.
 Environmental sustainability and ecological balance by implementing projects on
water conservation, tree plantation in the areas around its operations.
 Enhancing employability through skill development and livelihood enhancement
projects around its operations.
 Encourage and recognize its employees for volunteering in the community by
serving and sharing their expertise and skill.
 Identify needs of the intended stakeholders prior to designing and implementing
social projects.
 Measure impact of its social projects.
 Have organizational structure to ensure implementation of CSR Policy and build
capability and capacity of project implementing teams.
 Create awareness to minimize traffic violations/ public safety etc. and to be a part
of any joint promotion program in this regard.
CSR Budget
 The Board of Company shall ensure that in each financial year, the Company
spends at least 2% of the average net profit made during the immediate three
preceding financial years or such obligation as is notified under the Companies
Act, 2013 from time to time.
 The unutilized CSR budget for the financial year will be parked in a CSR Fund
(Corpus) created by the company. This Fund would also include any income
arising there from and any surplus arising out of CSR activities.
 In case of any surplus arising out of CSR projects the same shall not form part of
business profits of the Company.
 The Company may collaborate or pool resources with other companies (its
associate companies) to undertake CSR activities.
47
Validity of CSR policy
 The Board may amend the CSR policy as may be required from time to time.
Programme Areas
The Company shall undertake the CSR initiatives in the areas as are provided in Schedule
VII of the Companies Act, 2013, any other initiatives can also be taken up with the
approval of the Board.
The Company will focus primarily on the following projects:
 Community Development: The Company is committed to improving the

wellbeing of the local community by implementing social projects in the areas
around its operations.
o Education: The Company will support in upgrading infrastructure and
focus on lifting the academic performance of Government Schools. The
Company will also promote co-curricular, cultural and local and nationally
recognized sports activities amongst the school children and youth of the
local communities.
o Educate General Public on Traffic and Road Safety: In India there are
thousands of precious lives lost or make the victims disabled for life due
to road accidents and violation of traffic rules. The major cause for such
accidents is lack of awareness about traffic rules and safety measures,
Keeping in view the big impact on society the Company shall focus on
promoting awareness of general public on traffic rules and road safety and
shall contribute towards such CSR activities by donating two wheelers
manufactured by the Company to the police forces of different states
equipping them to educate general public to minimize traffic violations
and improve public safety etc. or to be a part of any joint awareness
programs in association with the police department or any other Govt. or
non Govt. Agency, as may be approved by the CSR Committee.
48
o Vocational skills for youth and women: The Company will impart
vocational skills to the youth and women in the community to enhance
their employability. .
o Sanitation: The Company will improve the overall living condition of the
communities by upgrading solid and liquid waste management practices.
The Company will also undertake mass awareness campaigns in the
community.
o Environment Sustainability: The Company will work towards
environmental sustainability through water conservation, plantation and
forestation in the local communities.
o Rural Development Projects: The Company will undertake rural
development projects based on the community needs such as development
of common community infrastructure, up gradation of health centers,
safety on roads etc.
 Skill Development:
o Up gradation of Government Vocational and Technical Training
Institutes: The Company will improve quality of training by upgrading
infrastructure, overall development of students and staff, providing
industry exposure to students and staff and offering industry oriented add-
on courses in the Government Industrial Training Institutes (ITIs) to make
students industry ready. The Company will also upgrade ITI Teacher’s
Training Institute and the Government Polytechnics.
o Skill Enhancement in Automobile Trade: The Company will enhance
skills of youth studying automobile trade at Industrial Training Institutes
and Polytechnic (government and private) to enhance their employment
opportunities in automobile sector. The project will include up gradation
of training facilities, training the trainers, providing study material and
practical training.
49
o Humanitarian Relief: The Company will support relief efforts during
natural calamities in India directly or by contributing to the Prime
Minister’s National Relief Fund.
o CSR Capability building of Personnel: The Company will build
capability of own personnel as well as of implementing agencies by way
of training, participation in conferences and through experience sharing
programmes. Expenditure on capability building will be well within the
limit prescribed in the CSR Rules.
Implementation
 Every year, the CSR Committee will place for the Board's approval, the CSR
Programmes to be carried out during the financial year and the specified budgets
thereof. The Board will consider and approve the CSR Plan with any modification
that may be deemed necessary.
 The CSR projects should be in line with applicable provisions and Company’s
CSR Policy.
 The Company will enter into partnerships with the government, business partners
and panchayats to create multiplier effect of its social projects.
 The Company will set up dedicated teams for implementation of CSR projects.
The mode of implementation will include a combination of direct implementation
and implementation through own trust/foundation/society set up by the Company
and partners such as NGOs, business partners, registered societies etc. The
Company will select its partners after adequate due diligence.
 Team responsible for implementing the various CSR projects are mentioned in the
section on the Governance Structure of the Policy.
 CSR Committee will be authorised to sign Memorandum of Understanding
(MOUs)/Agreements with the implementing partners after taking necessary action
required.
 The Company will set measurable targets for its social projects wherever possible
and will have a robust monitoring and evaluation mechanism for its CSR projects.
50
Roles and responsibilites
 The Board:
 The Board of Directors of the Company will be responsibe for:
 Approval of the CSR Policy of the Company.
 Disclosing the content of the Policy in its report and place the Policy on the
Company’s website in such a manner as prescribed under Section 135 of the
Companies Act 2013 read with the CSR Rules.
 Ensuring that the social projects included in the Policy are undertaken by the
Company.
 Ensuring that the Company spends, in every financial year, atleast 2% of the
average net profits of the Company made during the three immediately preceding
financial years in pursuance pf the Policy.
 Ensuring that the Company gives preference to the local areas around its
operations for spending the amount earmarked for CSR projects.
 Ensuring that it specifies the reasons in its report for not spending the earmarked
amount in case the Company fails to spend such amount.
 CSR Committee:
o Composition of the the CSR committee: The composition of the CSR
Committee of the Board is as under.
S. No.Name Designation/Category
1 Mr. Kenichi Umeda Managing Director
2 Mr. Masahiro Nishikawa Director
3 Mr. Saqulain Yasin Siddiqui Director

The Board shall have the power to make any change(s) in the constitution of the
Committee.
Responsibility of the CSR Committee:
51
 Formulate and recommend the CSR Policy to the Board for approval. The
Company shall indicate the projects to be undertaken by the Company as
specified in Schedule VII.
 Monitor the Policy from time to time and recommend changes to the Board.
 Recommend the amount of expenditure to be incurred on CSR projects.
 Institute a transparent monitoring mechanism for ensuring implementation of the
social projects undertaken by the Company.
 CSR Coordinating Team
 Composition of the the CSR Coordinating Team: The Company’s Legal
Department shall form team to work as CSR Coordinating Team.
Responsibility of the CSR Coordinating Team:
 Act as central coordinating point for the CSR implementing departments.

 Coordinate with the implementing departments for project designing in
compliance with the section 135 of the Companies Act and the CSR Rules.
 Plan annual budgets for CSR projects in coordination with the implementing
departments and make a proposal to the CSR Committee.
 Interface with various implementing departments within the Company to ensure
effective implementation of CSR projects.
 Report to the CSR Committee the progress on CSR projects and status of CSR
expenditure.
 Documentation and reporting of all CSR activities of the Company in pursuit of
the Companies Act and the CSR Rules.
Monitoring and Reporting Framework
 Project monitoring
 The Company will institute a well-defined monitoring and evaluation mechanism
to ensure that each social project has Clear objectives developed out of the
societal needs that are determined through baselines studies and research.
 Clear targets, time lines and measureable parameters wherever possible.
52
 A progress monitoring and reporting framework that is aligned with the
requirements of the section 135 of the Companies Act and the CSR Rules.
 Budget monitoring
 The Company will establish an accounting system to ensure project wise
accounting of CSR spend.
 Reporting framework
o The Company will monitor progress of CSR projects and the spend and
report to the top management and the CSR Committee.
o The Company will report CSR performance in its annual report as per the
structure and format prescribed in the notified CSR Rules.
53
CSR Projects approved by the Board:
 FY 2021-22
o Joy of safety: Rider safety awareness.
o Community Health Support – Medical equipment supports for setting up
of Critical Care / ICU ward for COVID patients at Government Hospital.
 FY 2020-21
o Joy of safety: Rider safety awareness.
o Community Health Support – Distribution of Ambulances to hospitals

 CAR & BIKE AWARDS 2023
 Motorcycle of the year - Suzuki V Strom SX

 TURBOCHARGED Awards 2023
 Adventure Tourer of the Year for V Strom SX

 Acko Drive Awards - 2023
 Premium Bike of the year for KATANA

54
 Premium Performance Motorcycle of the year for KATANA

 Adventure - Motorcycle of the year for V-Strom SX

 TopGear Awards 2023
 Two-Wheeler Of The Year Upto 250CC - Suzuki V-STROM SX

 Two-Wheeler Of The Year : Upto 1000CC - Suzuki KATANA

 Bike India Awards 2023
 Adventure Bike of the Year - V Strom SX

 Autocar Awards 2023
 Premium Bike of the Year - Suzuki Katana
55

 ABP Live Auto Awards-2022
 Premium Bike of the Year
 JAGRAN HITECH AWARDS 2022
 2022 Premium Bike Of The Year - Suzuki Katana

 Auto X Awards 2022
 Best of 2022 - Suzuki Katana

 Zee Auto Awards 2022
 Design of the Year - Suzuki Katana

 Faster Awards 2022
 Premium Bike of the Year 2022
56

 MOTORING WORLD AWARDS 2022
 SUPERBIKE OF THE YEAR 2022 SUZUKI HAYABUSA

 Bike India Awards 2022
 Premium Bike of the Year – Suzuki Hayabusa

 AutoX
 Best of 2021 - Suzuki Hayabusa

 Jagran hitech Awards 2021
 Performance Bike of the Year – Suzuki Hayabusa
57
 Two-Wheeler of the Year (Up to 1500cc) – Suzuki Hayabusa

 Autocar Awards 2022
 Performance Bike of the Year – Suzuki Hayabusa

 autoX Awards
 Best of the best from 2021-Suzuki Hayabusa

 MOTORING WORLD AWARDS 2020
 MOTORCYCLE OF THE YEAR 2020 SUZUKI GIXXER 250

 Bike Award
 Bike of the Year upto 250 cc- Suzuki Gixxer 250
58

 Motor Vikatan Award
 Suzuki Gixxer SF 250 won Bike of the Year 2020

 GaadiWaadi Editors Choice Awards
 Suzuki Access amongst Best scooters of the decade from 1st Jan 2019 to 31st Dec 2019.

 GaadiWaadi Editors Choice Awards
 Suzuki Gixxer 250 amongst Top 3 Bikes 2020

 Exhibit Autotech Award 2020
 2wheeler of the year (Upto 500cc) to Suzuki Gixxer SF 250

 Motoroctane Award 2020
 Best Youth Bike to New Gixxer Series
59

 Motoroctane Award 2020
 Best 2 Wheeler Manufacturer Award to Suzuki Motorcycle India Pvt. Ltd

 DROOM PRE-OWNED AUTO AWARDS
 JURY’S CHOICE NEW BIKE OF THE YEAR (UNDER 300CC) – SUZUKI GIXXER
SF250

 DROOM PRE-OWNED AUTO AWARDS 2
 JURY’S CHOICE NEW BIKE OF THE YEAR (500CC – 1000CC) – SUZUKI V-STORM
650 XT ABS
MISSION AND VISION
The core philosophy of SUZUKI is to provide "VALUE-PACKED PRODUCTS". Since

the founding of SUZUKI Motor Corporation, the Organization's endeavour has always
been to provide "VALUE-PACKED PRODUCTS" as one of the manufacturing
philosophies. SUZUKI believes that "VALUE-PACKED PRODUCTS" come from the
effort to carry out Product development from customer's point of view. This policy has
been in effect since Company's inception and has helped the Organization to meet
customer's needs. As a result, SUZUKI's Products have become well received throughout
the World. SUZUKI is fully committed to create Products that meet customer's demand
60
by utilizing its dynamic, long-nurtured technological advantage coupled with its fresh and
active human resources.
 Develop products of superior value by focusing on the customers

 Establish a refreshing and innovative company through teamwork
 Strive for individual excellence through continuous improvement
61
CHAPTER IV
DATA ANALYSIS AND INTERPRETATION
Funds available for period of one year or less is called short term finance. In India short
term finance is 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.
Sources of working Capital Finance

1) Trade credit
2) Bank Finance
3) Letter of credit
1) 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 repaying the credit. Trade
credit is the spontaneous source of the financing. As the volume of the firm’s purchase
62
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.
2) Bank finance for working capital

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 bank
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:-

 Term Loan
 Overdraft
 Cash credit
 Purchase or discounting of bills
 Term Loan
In this case, the entire amount of assistance is disbursed at one time only, either in cash or
the company’s account. The loan may be paid repaid in installments will charged on
outstanding balance.
 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.
63
 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.
 Bills purchased / discounted

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.
3) 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 Tendon committee. The Chore committee made further
recommendations to strengthen the procedure and norms for working capital finance by
banks.
64
Table 5.1-Working capital loan and interest
(Rs.in millions)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Working Capital term
Loan from Bank 8152 7622 3527 2670 1967
Consortium of Bank
Working Capital
Demand Loan 5482 1919 905 359 728
Foreign Currency
Demand Loan 4965 5383 4451 5286
Cash Credit Account 6094 3848 1589 4579 5952
Export Packaging
Credit 587 1398 6736 11907 19655
Foreign Bill Discount
from bank 431 1518 494
Letter of Credit 728
Total 21474 21270 18634 23966 33588
Interest on Working
Capital 1801 2060 1947 1960 3549
65
Chart5.1-
Chart No.5.2
Observations
Maruti Suzuki India Ltd takes huge working capital loan to fulfill the requirement of
working capital, thus company had paid huge amount of interest on working capital loan.
Company raised the funds for working capital through term loan from bank, and working
capital loan from consortium of banks. Maruti Suzuki India Ltd. also used cash credit
account but cash credit is not cost free source of working capital because it involves
66
implicit cost. The supplier extending trade credit incurs cost in the form of opportunity
cost of funds invested in accounts receivable. The annual opportunity cost of forgoing
cash discount can be very high. Therefore Maruti Suzuki India Ltd. should compare the
opportunity cost of trade credit with the cost of other sources of credit while making its
financial decisions.
Estimation of working capital

After considering the various factors affecting the working capital needs, it is necessary
to forecast the working capital requirements. For this purpose, first of all estimate of all
current assets should be made, these should be followed by the estimation of all current
liabilities. Difference between the estimated current assets and estimated current
liabilities will represent the working capital requirements.
The estimation of working capital requirement of MSIL is based on few assumptions
such as follows.
1. Gross sales will increase by 40%
2. Receivables collection period will be 90 day as per standards fixed by company.
3. Unnecessary balance of Cash may reduce by finance management.
4. For working capital finance company can use maximum trade credit.
5. Inventory holding period can be 60 days instead of present 95 days.
67
Table 5.2-Estimation of the working capital
For the year 2022-23for MSIL
Particulars Estimated Amount (Rs. In Millions)
Current Assets
Inventories (Holding Period 60 Days) 40254
Sundry Debtors(Avg. Collection Period 90 Days 50921
Cash & Bank Balance 5666
Other Assets 1345
Loan & Advances 25543
Total of A 123729
B) Current Liabilities
Current Liabilities (40% Increment) 60484
Provisions(40% increment) 4632
Total of B 65116
Net Working Capital (A-B) (Estimated) 58613
Observations
Maruti Suzuki India Ltd took benefit of such position to raise the funds for working
capital finance. In the year 2018-19term loan from bank was the major source of finance,
but it reduced by 75% it indicate that company changed the finance policy to get benefit
sources like term credit (export package credit) which is not directly affect on cost of
finance. In the year 2018-19company used letter of credit but after that company not used
such facility from third person, company start own offices in foreign country to
transactions. Company used the cash credit account for working capital finance such as
cash credit facility provided by co-operative and national banks.
Company required such huge amount for working capital finance because liquidity of the
company locked in debtors. Company had around 50 % receivables account of total
current assets. Company fixed normal collection period of 90 days, but collection system
68
of the company was not able to collection from debtors within credit term. Company has
receivable but not liquidity to payment of creditors thus company took cash credit and
credit term, which increased the interest on working capital finance by around 96% from
year 2018 to year end 2023. Cash management of the company is more conservative thus
company carry huge amount in terms of liquid assets.
5. Interpretation of result
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 it’s inability to meet it’s 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.
69
Table 6.1- Size of working capital
(Rs. In Millions.)
A) Current Assets
Inventories 9180 10827 15437 18373 27430
Sundry Debtors 13346 16200 22304 28305 44051
Cash & Bank Balance 2228 1378 1127 22619 3566
Other Assets 1556 349 329 571 1010
Loan & Advances 7765 7341 7271 7577 10751
Total of A(Gross
W.C) 34075 36095 46468 77445 86808
B) Current Liabilities
Current Liabilities 14515 16572 20019 30789 43203
Provisions 138 308 369 3018 2549
Total of B 14653 16880 20388 33807 45752
Net W.C(A-B) 19422 19215 26080 43638 41056
Working capital trend analysis

In working capital analysis the direction at 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 as 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.”
Emphasizing the importance of working capital trends, Man Mohan and Goyal have
pointed out that “analysis of working capital trends provide as base to judge whether the
70
practice and privilege policy of the management with regard to working capital is good
enough or an important is to be made in managing the working capital funds.
Further, any one trend by itself is not very informative and therefore comparison with
Illustrated their ideas in these words, “An upwards trends coupled with downward trend
or sells, accompanied by marked increase in plant investment especially if the increase in
planning investment by fixed interest obligation”
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Table 6.2-Working capital size
(Rs. In Millions)
Years 2018-19 2019-20 2020-21 2021-22 2022-23
Net W.C(A-B) 19423 19217 26081 43640 41013
W.C Indices 100 98.84 134.28 224.68 211.16
Chart6.1- Working capital indices
Observations
It was observed that major source of liquidity problem is the mismatch between current
payments and current receipts from the Comparison of funds flow statements for five
years. It was observed that in the year 2018-19current assets increased by around 29%
and current liabilities increased only by 19% which affect as working capital increased by
35%. In the year 2018 to 2023 net working capital increased to Rs 4364 million from Rs.
2608 million, the increase in working capital is close to 67%. While current assets
increased by 66% and current liabilities by 65%. It shows that management is using long
term funds to short term requirements. And it has fallen to Rs.4101 million in the year
2020 because current assets gone up by only 12%, current liabilities grown by 35%. This
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two together pushed down the net working capital to the present level. The fall in
working capital is a clear indication that the company is utilizing its short term resources
with efficiency.
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.
Table 6.3-Current assets size

(Rs. In Millions)
Particulars 2018-19 2019-20 2020-21 2021-22 2022-23
Inventories 9180 10827 15437 18373 27430
Sundry Debtors 13346 16200 22304 28305 44051
Cash & Bank Balance 2228 1378 1127 22619 3566
Other assets 1556 349 329 571 1010
Loan & Advances 7765 7341 7271 7577 10751
Total of C.A 34075 36095 46468 77445 86808
C.A indices 100 105.93 136.37 227.27 254.75
Chart6.2- C.A. Indices
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Composition of current assets
Analysis of current assets components enables 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 cash alone,
the profitability will be decreased because cash is non earning assets.
Table 6.4- composition of current assets

(No. in %)
Particulars 2018-19 2019-20 2020-21 2021-22 2022-23
Inventories 26.94 29.99 33.22 23.72 31.6
Sundry Debtors 39.16 44.88 48 36.55 50.74
Cash & Bank Balance 6.54 3.82 2.42 29.21 4.11
Other assets 4.57 0.97 0.71 0.74 1.16
Loan & Advances 22.79 20.34 15.65 9.78 12.39
Total of C.A 100 100 100 100 100
Chart6.3- Current assets components
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Observations
It was observed that the size of current assets is increasing with increases in the sales.
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 include some funds investments for which company pay
interest. The balance of current assets is highly increased in year 2018-06, because of
increase in cash balance. Cash balance of the company increased in the same year
because company got some encashment of deposits in the schedule Banks as current
account Rs.439 million and fixed deposits (out of ZCCB funds) Rs.1785 million. Current
assets components show sundry debtors are the major part in current assets it indicates
that the inefficient collection management. Over investment in the debtor affects liquidity
of firm for that company has raised funds from other sources like short term loan which
incurred the interest.
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
Table 6.5-Current liabilities size

(Rs. In Crore)
Particulars 2018-19 2019-20 2020-21 2021-22 2022-23
Provisions 138 308 369 3018 2594
Total of C.L 14653 16880 20388 33807 45797
Indices of C.L 100 115.19 139.13 230.7 312.52
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Chart6.4
Observations
Current liabilities show continues growth each year because company creates the credit in
the market by good transaction. To get maximum credit from supplier which is profitable
to the company it reduces the need of working capital of firm. As a current liability
increase in the year 2018-19 by 35% it reduce the working capital size in the same year.
But company enjoyed over creditors which may include indirect cost of credit terms.
Changes in working capital

There are so many reasons to changes in working capital as follow
1. Changes in sales and operating expenses:-

The changes in sales and operating expenses may be due to three reasons
1. There may be long run trend of change e.g. The price of row 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
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4. 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.
5. 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.
Observations
Working capital decreased in the year 2009 to 2023 because:
1. Sales increased by around 35%, where cost of raw material purchased increased by
42% and manufacturing expanses increased by 51%.
2. Cost of material and manufacturing expanses increased because of inflation, which
was 6.63% in Feb. 2023 increased from 4%in 2009.
Operating Cycle
The need of working capital arrived because of time gap between production of goods
and their actual realization after sale. This time gap is called “Operating Cycle” or
“Working 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.
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Calculation of operating cycle
To calculate the operating cycle of Maruti Suzuki India Ltd used last five year data.
Operating cycle of the Maruti Suzuki India Ltd. vary year to year as changes in policy of
management about credit policy and operating control.
Table 6.7- Operating cycle

(No. of Days)
Year 2018-19 2019-20 2020-21 2021-22 2022-23
ADD
Raw Material Holding Period 70 66 58 54 58
WIP Period 2 4 3 2 1
Finished Goods Holding Period 51 58 47 39 36
Receivable Collection Period 155 133 116 107 109
Gross Operating Cycle 278 261 224 202 204
LESS
Creditors Payment Period 169 178 122 130 130
Net Operating Cycle 109 83 102 72 74
Chart6.5
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Chart6.6
Observations
Operating cycle of Maruti Suzuki India Ltd. shows the numbers of day are decreasing in
recent year it is reflect the efficiency of management. Days of operating cycle shows
period of lack of funds in current assets, if no of day are more than it increases the cost of
funds as taken from outside of the business. In 2018-19shows the high no. of days
because of reduced of creditors holding period.
Working capital leverage

One of the important objectives of working capital management is by maintaining the
optimum level of investment in current assets and by reducing the level of investment in
current assets and by reducing the level of current liabilities the company can minimize
the investment in the working capital thereby improvement in return on capital employed
is achieved. The term working capital leverage refers to the impact of level of working
capital on company’s profitability. The working capital management should improve the
productivity of investment in current assets and ultimately it will increase the return on
capital employed. Higher level of investment in current assets than is actually required
means increase in the cost of Interest charges on short term loans and working capital
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finance raised from banks etc. and will result in lower return on capital employed and
vice versa. Working capital leverage measures the responsiveness of ROCE (Return on
Capital Employed) for changes in current assets. It is measures by applying the following
formula,
Working capital leverage= % Change in ROCE / %Change in Current Assets
Return on capital employed= EBIT/ Total Assets
The working capital leverage reflects the sensitivity of return on capital employed to
changes in level of current assets. Working capital leverage would be less in the case of
capital intensive capital employed is same working capital leverage expresses the relation
of efficiency of working capital management with the profitability of the company.
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Table 6.8-Calculation of working capital leverages.
Year 2019-20 2020-21 2021-22 2022-23
ROCE 12.32 14.89 15 18.48
% Change in ROCE 36.88 20.86 0.745 23.2
% Change in C.A 5.93 28.83 65.99 12.09
W.C Leverages 6.22 0.72 0.011 1.92
Chart6.7- W.C. Leverage
Chart6.8-
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Observations
Working capital leverage of the company has decreased in the year 2020 as compare to
the year 2018-19 reduction in working capital shows the inefficient current assets
management. In the year 2018 and 2019 the current assets has increased by high rate of
28% and 65% respectively. It adversely affects on ROCE, which increased by only rate
of 20.86% and 0.74% respectively, that resulted in push down the working capital
leverage to 0.72 and 0.011 respectively. When investment in current assets is more than
requirement that increases the cost of funds raised from short term sources may be bank
loans, which affected on profitability of the Maruti Suzuki India Ltd
Ratio analysis is the powerful tool of financial statements analysis. A ratio is defined as
“the indicated quotient of two mathematical expressions” and as “the relationship
between two or more things”. The absolute figures reported in the financial statement do
not provide meaningful understanding of the performance and financial position of the
firm. Ratio helps to summaries large quantities of financial data and to make qualitative
judgment of the firm’s financial performance.
Role of ratio analysis
Ratio analysis helps to appraise the firms in the term of their profitability and efficiency
of performance, either individually or in relation to other firms in same industry. Ratio
analysis is one of the best possible techniques available to management to impart the
basic functions like planning and control. As future is closely related to the immediately
past, ratio calculated on the basis historical financial data may be of good assistance to
predict the future. E.g. On the basis of inventory turnover ratio or debtor’s turnover ratio
in the past, the level of inventory and debtors can be easily ascertained for any given
amount of sales. Similarly, the ratio analysis may be able to locate the point out the
various arias which need the management attention in order to improve the situation. E.g.
Current ratio which shows a constant decline trend may be indicate the need for further
introduction of long term finance in order to increase the liquidity position.
Limitations of ratio analysis
1. The basic limitation of ratio analysis is that it may be difficult to find a basis for
making the comparison
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2. Normally, the ratios are calculated on the basis of historical financial statements. An
organization for the purpose of decision making may need the hint regarding the future
happiness rather than those in the past. The external analyst has to depend upon the past
which may not necessary to reflect financial position and performance in future.
3. The technique of ratio analysis may prove inadequate in some situations if there is
differs in opinion regarding the interpretation of certain ratio.
4. As the ratio calculates on the basis of financial statements, the basic limitation which
is applicable to the financial statement is equally applicable In case of technique of ratio
analysis also i.e. only facts which can be expressed in financial terms are considered by
the ratio analysis.
5. The technique of ratio analysis has certain limitations of use in the sense that it only
highlights the strong or problem areas; it does not provide any solution to rectify the
problem areas.
Classification of working capital ratio

Working capital ratio means ratios which are related with the working capital
management e.g. current assets, current liabilities, liquidity, profitability and risk turnoff
etc. these ratio are classified as follows
1. Efficiency ratio
The ratios compounded under this group indicate the efficiency of the organization to use
the various kinds of assets by converting them the form of sale. This ratio also called as
activity ratio or assets management ratio. As the assets basically categorized as fixed
assets and current assets and the current assets further classified according to individual
components of current assets viz. investment and receivables or debtors or as net current
assets, the important of efficiency ratio as follow
1. Working capital turnover ratio
2. Inventory turnover ratio
3. Receivable turnover ratio
4. Current assets turnover ratio
5. Liquidity ratio
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Liquidity ratio
The ratios compounded under this group indicate the short term position of the
organization and also indicate the efficiency with which the working capital is being
used. The most important ratio under this group is follows
1. Current ratio
2. Quick ratio
3. Absolute liquid ratio
1) Working capital turnover ratio

It signifies that for an amount of sales, a relative amount of working capital is needed. If
any increase in sales contemplated working capital should be adequate and thus this ratio
helps management to maintain the adequate level of working capital. The ratio measures
the efficiency with which the working capital is being used by a firm. It may thus
compute net working capital turnover by dividing sales by working capital.
Working capital turnover ratio= Sales/ Net working capital
Table 6.9 - W.C turnover
(
Rs. In Millions)
Particulars 2018-19 2019-20 2020-21 2021-22 2022-23
Sales 31402 39612 60481 85901 120848
Net W.C 19422 19213 26081 43646 41019
W.C.
Turnover 1.62 2.06 2.32 1.97 2.95
Chart No. 6.9
84
Observations
High working capital ratio indicates the capability of the organization to achieve
maximum sales with the minimum investment in working capital. Company’s working
capital ratio shows mostly more than two, except for the year 2018-19because of excess
of cash balance in current assets which occurred due to encashment of deposits. In the
year 2020 the ratio was around3, it indicates that the capability of the company to achieve
maximum sales with the minimum investment in working capital.
2) Inventory turnover ratio

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its
products. It is calculated by dividing the cost of goods sold by average inventory:
Table 6.10- inventory turnover
(Rs. In Crore)
Particulars 2018-19 2019-20 2020-21 2021-22 2022-23
Cost of Goods Sold 23770 30030 46490 64590 92890
Average Inventory 9180 10000 13140 16900 22900
inventory Turnover 2.59 3 3.54 3.82 4.05
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Chart no. 6.10
Observations
It was observed that Inventory turnover ratio indicates maximum sales achieved with the
minimum investment in the inventory. As such, the general rule high inventory turnover
is desirable but high inventory turnover ratio may not necessary indicates the profitable
situation. An organization, in order to achieve a large sales volume may sometime
sacrifice on profit, inventory ratio may not result into high amount of profit.
3) Receivable turnover ratio

The derivation of this ratio is made in following way
Receivable turnover ratio = Gross sales/Average account receivables

Gross sales are inclusive of excise duty and scrap sales because both may enter in two
receivables by credit sales. Average receivable calculate by opening plus closing balance
divide by 2. Increasing volume of receivables without a matching increase in sales is
reflected by a low receivable turnover ratio. It is indication of slowing down of the
collection system or an extend line of credit being allowed by the customer organization.
The latter may be due to the fact that the firm is losing out to competition. A credit
manager engage in the task of granting credit or monitoring receivable should take the
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hint from a falling receivable turnover ratio use his market intelligence to find out the
reason behind such failing trend. Debtor turnover indicates the number of times debtors
turnover each year. Generally the higher the value of debtor’s turnover, the more is the
management of credit.
Debtor’s turnover ratio =365/ Receivable turnover ratio
Table 6.11- Calculation of debtor’s turnover ratio (Rs. In Crore)

Particulars 2018-19 2019-20 2020-21 2021-22 2022-23
Gross Sale 31410 41760 63640 91020 127420
Avg. Debtors 13350 14780 19250 25370 36180
Receivable Turnover 2.35 2.83 3.31 3.59 3.52
Chart No. 6.11
Observations
It was observed from receivable turnover ratio that receivables turned around the sales
were less than 4 times. The actual collection period was more than normal collection
period allowed to customer. It concludes that over investment in the debtors which
adversely affect on requirement of the working capital finance and cost of such finance.
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4) Current assets turnover ratio
Current assets turnover ratio is calculate to know the firms efficiency of utilizing the
current assets .current assets includes the assets like inventories, sundry debtors, bills
receivable, cash in hand or bank, marketable securities, prepaid expenses and short term
loans and advances. This ratio includes the efficiency with which current assets turn into
sales. A higher ratio implies a more efficient use of funds thus high turnover ratio
indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a
period of time reflects working capital management of a firm.
Current assets Turnover ratio= Sales/ Current assets
Table 6.12-Calculation of current assets turnover ratio
(Rs.In Crore)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Gross Sales 31410 41760 63640 91020 127420
Current Assets 13350 14780 19250 25370 36180
Current Assets
Turnover 2.35 2.83 3.31 3.59 3.52
Chart No.6.12
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Observations
It was observed that current assets turnover ratio does not indicate any trend over the
period of time. Turnover ratio was 0.92 in the year 2002-03 and increase to 1.10 and 1.30
in the year 2004 and 2018 respectively, but it decreased in the year 2018-06, because of
high cash balance. Cash did not help to increase in sales volume, as cash is non earning
asset. In the year 2018-19 company increased its sales with increased investment in
current assets, thus current assets turnover ratio increased to 1.39 from 1.1 in the year
2018-06.
1) Current ratio
The current is calculated by dividing current assets by current liabilities:
Current assets
Current assets include cash and those assets which can be converted in to cash within a
year, such marketable securities, debtors and inventories. All obligations within a year
are include in current liabilities. Current liabilities include creditors, bills payable accrued
expenses, short term bank loan income tax liabilities and long term debt maturing in the
current year. Current ratio indicates the availability of current assets in rupees for every
rupee of current liability.
Table 6.13-Current ratio (Rs. In Crore)

Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Current Assets 34080 36100 46470 77450 86810
Current Ratio 2.33 2.14 2.21 2.29 2.12
Chart No.6.13
89
Observations
The current ratio indicates the availability of funds to payment of current liabilities in the
form of current assets. A higher ratio indicates that there were sufficient assets available
with the organization which can be converted in cash without any reduction in the value.
As ideal current ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates
the unnecessarily investment in the current assets in the form of debtor and cash balance.
Ratio is higher in the year 2018-19where cash balance is more than requirement which
came through encashment of deposits of ZCCB funds.
2) Quick ratio
Quick ratios establish the relationship between quick or liquid assets and liabilities. An
asset is liquid if it can be converting in to cash immediately or reasonably soon without a
loss of value. Cash is the most liquid asset .other assets which are consider to be
relatively liquid and include in quick assets are debtors and bills receivable and
marketable securities. Inventories are considered as less liquid. Inventory normally
required some time for realizing into cash. Their value also is tendency to fluctuate. The
quick ratio is found out by dividing quick assets by current liabilities.
Quick ratio = Current asset – Inventory/ Current liabilities
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Table 6.14- Quick Ratio
(Rs. In Crore)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Liquid Current Assets 24901 25273 31032 59071 5938
Quick Ratio 1.7 1.5 1.52 1.75 1.3
Chart No.6.14
Observations
Quick ratio indicates that the company has sufficient liquid balance for the payment of
current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio
is more than 1:1 over the period of time, it indicates that the firm maintains the over
liquid assets than actual requirement of such assets. In the year 2018-19 company had
Rs.1.79 cash for every 1 rupee of expenses; such a policy is called conservative policy of
finance for working capital, Rs. 0.79 is the ideal investment which affects on the cost of
the fund and returns on the funds.
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3) Absolute liquid ratio
Even though debtors and bills receivables are considered as more liquid then inventories,
it cannot be converted in to cash immediately or in time. Therefore
while calculation of absolute liquid ratio only the absolute liquid assets as like cash in
hand cash at bank, short term marketable securities are taken in to consideration to
measure the ability of the company in meeting short term financial obligation. It
calculates by absolute assets dividing by current liabilities.
Absolute liquid ratio = Absolute liquid assets/ Current liabilities
Table 6.15- Absolute liquid ratio
(Rs.In Millions)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Absolute Liquid Assets 2221 1372 1220 22611 3562
Quick Ratio 0.156 0.081 0.059 0.0688 0.077
Chart No.6.15
Observations
Absolute liquid ratio indicates the availability of cash with company is sufficient because
company also has other current assets to support current liabilities of the company. In the
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year 2018-19absolute liquid ratio increased because of company carry more cash balance,
as a cash balance is ideal assets company has to take control on such availability of funds
which is affect on cost of the funds.
Working Capital management Components

1) Receivables Management
2) Inventory Management
3) Cash Management
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
1) It involve element of risk which should be carefully analysis.
2) 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
3) It implies futurity. The cash payment for goods or serves received by the buyer will be
made by him in a future period.
Objective of receivable management

The sales of goods on credit basis are an essential part of the modern competitive
economic system. The credit sales are generally made up on account in the sense that
there are formal acknowledgements of debt obligation through a financial instrument. As
a marketing tool, they are intended to promote sales and there by profit. However
extension of credit involves risk and cost, management should weigh the benefit as well
as cost to determine the goal of receivable management. Thus the objective of receivable
management is to promote sales and profit until that point is reached where the return on
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investment in further funding of receivables is less .than the cost of funds raised to
finance that additional credit
Table 6.16-Size of receivables of AG Industries
(Rs.In Crore)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Sundry Debtors 13346 16200 22305 28305 44051
Indices 100 121.39 167.12 212.09 330.06
Chart6.17-
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.
1. In determining the collectability of debtors and thus, the efficiency of collection
efforts.
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2. 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.
Table 6.17- avg. collection period (Rs. In Crore)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Gross Sales 1410 41760 63640 91020 127420
Average Debtors 13350 14780 19250 25370 36180
Receivable Turnover 2.35 2.83 3.31 3.59 3.52
Average Collection Period (Days) 155 129 110 101 103
ChartNo.6.17
Observations
The size of receivables are staidly increasing it indicates that the company was allowing
more credit year to year, but it was not bad signal because as receivables were supporting
to the increase in the sales. Average collection period are reducing to present situation,
but as compare with the normal collection period allowed to customer by Maruti Suzuki
India Ltd. of 90 days, it was clear that the company required increasing our efficiency of
collection of receivables. All the above factors directly or indirectly affects in the debtors
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turnover ratio, current ratio and working capital ratio. For effective management of
credit, the firm should lay down clear cut guidelines and procedure for granting credit to
individual customers and collecting individual accounts should involve following steps:
(1) Credit information (2) Credit investigation (3) Credit limits (4) Collection procedure.
Inventory Management
The term ‘inventory’ is used to designate the aggregate of those items of tangible assets
which are
1. Finished goods (‘saleable’)
2. Work-in-progress (‘convertible’)
3. Material and supplies (‘consumable’)
In financial view, inventory defined as the sum of the value of raw material and supplies,
including spares, semi-processed material or work in progress and finished goods. The
nature of inventory is largely depending upon the type of operation carried on. For
instance, in the case of a manufacturing concern, the inventory will generally comprise
all three groups mentioned above while in the case of a trading concern, it will simply be
by stock- in- trade or finished goods.
Objective of inventory management

In company there should be an optimum level of investment for any asset, whether it is
plant, cash or inventories. Again inadequate disrupts production and causes losses in
sales. Efficient management of inventory should ultimately result in wealth maximization
of owner’s wealth. It implies that while the management should try to pursue financial
objective of turning inventory as quickly as possible, it should at the same time ensure
sufficient inventories to satisfy production and sales demand. The objectives of inventory
management consist of two counterbalancing parts:
1. To minimize the firm’s investment in inventory
2. To meet a demand for the product by efficiently organizing the firms production and
sales operation.
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This two conflicting objective of inventory management can also be expressed in term of
cost and benefits associated with inventory. That the firm should minimize the
investment in inventory implies that maintaining an inventory cost, such that smaller the
inventory, the better the view point .obviously, the financial manager should aim at a
level of inventory which will reconcile these conflicting elements. Some objective as
follow
1. To have stock available as and when they are required.
2. To utilize available storage space but prevents stock levels from exceeding space
available.
3. To maintain adequate accountability of inventories assets.
4. To provide, on item – by- item basis, for re-order point and order such quantity as
would ensure that the aggregate result confirm with the constraint and objective of
inventory control.
To keep low investment in inventories carrying cost an obsolesce losses to the minimum.
Table 6.18-Size of inventory
(No. Of Days)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Raw Material 3582 4182 6343 8213 14052
W.I.P 13 43 31 22 113
Finished Goods 4424 4671 6354 15013 22693
Other Inventories 1181 1932 2710 3613 9831
Total 9200 10828 15438 26861 46689
Indices 100 117.74 167.9 292.17 510.88
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Chart No.6.18-
Inventory components
The manufacturing firm’s inventory consist following components
i) Raw material
ii) Work- in-progress
iii) 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.
Chart No.6.19-
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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 (DIH).
Table 6.20- inventory holding period

Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Inventory Turnover 2.59 3 3.54 3.82 4.06
Days of Inventory Holding 141 122 103 96 90
Raw Material Turnover 5.07 5.58 6.31 6.76 5.85
Raw Material Holding Period 72 65 58 54 62
Chart No.6.20-
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Observations
Size of inventory of Maruti Suzuki India Ltd. was increasing with the increase the sales.
The inventory size was increasing because of increment in the finished goods stock; it
indicates that the company reduced the liquidity of finished goods. High inventory
turnover ratio is showing that the maximum sales turnover is achieved with the minimum
investment in the inventories. Raw material
turnover has reduced in the year 2020 it indicates that company are investing more in raw
material purchasing; thus raw material holding period has increased in the same year to
62 days from 54 days in the previous year 2018. Overall inventory holding period has
reduced because of increases in the inventory turnover and sales volume.
Management of Cash
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 dally requirement of expenses.
Motive of holding cash

There are four motives for holding cash as follow
1. Transaction motive
2. Precautionary motive
3. Speculative motive
4. Compensating motive
100
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 AG Industries 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:
1. Uncontrollable circumstances such as strike and natural calamities.
2. Unexpected delay in collection of trade dues.
3. Cancellation of some order for goods due unsatisfactory quality.
4. Increase in cost of raw material, rise in wages, etc.
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
101
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.
1. A sufficient of cash can keep an unsuccessful firm going despite losses
2. 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.
3. Cash management involves balance sheet changes and other cash flow that does not
appear in the profit and loss account such as capital expenditure.
Table 6.21-Size and indices of cash in Maruti Suzuki India Ltd.

(Rs. In Crore)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Cash And Bank Balance 2228 1378 1127 22619 3566
Indices 100 61.88 50.61 1015.6 160.08
Chart No.6.21
102
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 row material from which are
produced goods, which are then send to the customer, who later pay bills. The cash
turnover means the number of time firms cash is used during each year.
103
Table 6.22 (Days)
Particular 2018-19 2019-20 2020-21 2021-22 2022-23
Inventory Holding Period 123 128 108 95 95
(+) Account Receivable Period 155 133 116 107 109
(-) Account Payable Period 169 178 122 130 130
Cash Cycle 109 83 102 72 74
The size of the cash in the current assets of the company indicates the miss cash
management of the company. The cash balance in the year 2018-19was extremely
increased; because of encashment of deposits from schedules bank of ZCCB funs.
Company failed to proper investment of available cash. After the study of cash
management it mentioned above it can be conclude that management of cash involve
three things: a) Managing cash flow into and out of the firm. b) Managing cash inflow
within the firm, c) Financial deficit or investing surpluses cash and thus controlling cash
balance at a point of a time. The firm should hold an optimum balance of cash and invest
any temporary excess amount in short term marketable securities such as treasury bills,
commercial papers, certificates of deposit, bank deposits and inter corporate
104
CHAPTER V
FINDINGS, SUGGESTIONS AND CONCLUSION
FINDINGS
 The working capital of the company is negative in the year 2018-19. This was due
to the mismatch of funds. The current liabilities were used to invest in other than
current assets. As a result the current assets were more than the current assets.
 In the later years the working capital increased to a considerable extent.
 The company follows a standard current ratio of 1.33:1. In the year 2018-19 the
ratio was only 0.66 but later they maintained the ratio to the standard.
 The debtor’s turnover ratio was also high in all the years.
 The average debt collection period was between 30 to 40 days which shows that
the debtors are making a prompt payment to the company.
 The creditors turnover ratio increased from 1.32 to 1.40 in the years 2018-19 but
it decreased to 0.79 in the year 2022-2023
 The inventory turnover ratio increased in the 1 st two years but it decreased in the
year the ratio raised to 87.88.
 The company does not follow any inventory management technique.
105
Recommendations
Recommendation can be use by the firm for the betterment increased of the firm after
study and analysis of project report on study and analysis of working capital. I would like
to recommend.
1. Company should raise funds through short term sources for short term requirement of
funds, which comparatively economical as compare to long term funds.
2. Company should take control on debtor’s collection period which is major part of
current assets.
3. Company has to take control on cash balance because cash is non earning assets and
increasing cost of funds.
4. Company should reduce the inventory holding period with use of zero inventory
concepts.
Over all company has good liquidity position and sufficient funds to repayment of
liabilities. Company has accepted conservative financial policy and thus maintaining
more current assets balance. Company is increasing sales volume per year which
supported to company for sustain 2nd position in the world and number one position in
Asia.
106
107
Conclusion
Working capital management is important aspect of financial management. The study of
working capital management has revealed that the current ration was as per the standard
industrial practice but the liquidity position of the company showed an increasing trend.
The study has been conducted on working capital ratio analysis, working capital leverage,
working capital components which helped the company to manage its working capital
efficiency and affectively.
1. Working capital of the company was increasing and showing positive working capital
per year. It shows good liquidity position.
2. Positive working capital indicates that company has the ability of payments of short
terms liabilities.
3. Working capital increased because of increment in the current assets is more than
increase in the current liabilities.
4. Company’s current assets were always more than requirement it affect on profitability
of the company.
5. Current assets are more than current liabilities indicate that company used long term
funds for short term requirement, where long term funds are most costly then short term
funds.
6. Current assets components shows sundry debtors were the major part in current assets
it shows that the inefficient receivables collection management.
7. In the year 2018-19 working capital decreased because of increased the expenses as
manufacturing expenses and increase the price of raw material as increased in the
inflation rate.
8. Inventory was supporting to sales, thus inventory turnover ratio was increasing, but
company increased the raw material holding period.
9. Study of the cash management of the company shows that company lost control on
cash management in the year 2018-06, where cash came from fixed deposits and ZCCB
funds, company failed to make proper investment of available cash.
108
Bibliography
Books Referred
1. I. M. Pandey - Financial Management - Vikas Publishing
House Pvt. Ltd. - Ninth Edition 2018
2. M.Y. Khan and P.K. Jain, Financial management – Vikas
Publishing house ltd., New Delhi.
3. K.V. Smith- management of Working Capital- Mc-Grow-
Hill New York
4. Satish Inamdar- Principles of Financial Management-
Everest Publishing House
Websites References
1. www.jains.com
2. www.google.co.in
3. www.workingcapitalmanagement.com
109
Annexure
Balance Sheet (Rs. In Milions)
March23 March22 March 21 March 20 March 19

Sources of funds
Owner’s fund
Equity share capital 1445 1445 1445 1445 1445
Share application money 135 135 27 14.82 10
Preference share capital 145 189 189 192 194
Reserves & surplus 137230 116906 92004 82709 73654
Loan funds
Secured loans 312 265 1 1 1
Unsecured loans 2781 7949 6988 9001 1223
Total 3903 8214 6989 9002 1224
Uses of funds
Fixed assets
Gross block 1,314.87 979.00 799.12 629.30 505.16
Less: revaluation reserve - - - - -
Less: accumulated depreciation 363.75 315.70 270.33 234.82 193.42
Net block 951.12 663.29 528.79 394.48 311.74
Capital work-in-progress 99.83 84.70 64.57 41.80 10.02
Investments 390.57 315.82 177.44 82.60 8.21
Net current assets

Current assets loans & advances 1,746.96 1,456.11 978.84 915.71 603.54
Less: current liabilities & provision 849.48 647.76 523.98 406.27 268.41
110
Total net current assets 897.48 808.34 454.87 509.44 335.13
Miscellaneous expenses not written - - - - -
Total 2,339.00 1,872.16 1,225.67 1,028.32
665.1
Notes
Book value of unquoted 390.56 275.81 177.43 82.59 8.20

investments
Market value of quoted investments 0.02 0.03 0.02 0.02 -
Contingent liabilities 335.04 161.10 211.80 82.32 32.26
Number of equity 723.76 720.55 614.81 583.53 583.53

shareoutstanding(lacs)
111

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Working Capital Management @ Maruti-Suzuki

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PREFACE

In this ability, to perform work efficiently & effectively is being developed.

Information about the company, its product, services & policies.

Working capital management

1. According to Guthmann & Doughal-

Gross working capital and Net working Capital’

1. Gross working capital

Types of working capital

1) Permanent working capital

2) Temporary working capital

Determinants of working capital

2. Length of production cycle

3. Size and growth of business

4. Business/ Trade cycle

5. Terms of purchase and sales

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

Types of data collection

Limitations of the study

High-level inventory management

ON THE BASIS OF CONCEPT

GROSS WORKING NET WORKING PERMANENT OR FIXED TEMPORARY VARIABLE

Working Capital may be classified in two ways:

CONCEPTS OF WORKING CAPITAL

GROSS WORKING CAPITAL:

NET WORKING CAPITAL:

 The liquidity position of the firm

Currents assets should be sufficiently in excess of current

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

FACTORS INFLUENCING WORKING CAPITAL MANAGEMENT

FINANCING OF PERMANENT WORKING CAPITAL

REGULATION OF BANK FINANCE:

Bank finance being an important source of finance to companies has to be

NORMS FOR INVENTORY AND RECEIVABLES:

MARUTI SUZUKI INDIA LIMITED

MARUTI SUZUKI INDIA LIMITED

Plant area and production capacity

At Suzuki, the philosophy of keeping "environment first" is properly percolated

The biggest testimony of Suzuki's commitments towards "environment first" is seen in

We have safety guards/safety curtains to ensure Operator safety on machines. We have

We organise different safety programs and competitions to encourage employee

Quality Control at Suzuki Motorcycle India has four main sections:

QC has four main sections as follows:

Tested by SMC Japan with their international quality standards

Final ( Vehicle) Inspection

Final (Vehicle) Inspection

Functional & aesthetic parameters are also checked.

Plant area and production capacity

At Suzuki, the philosophy of keeping "environment first" is properly percolated

The biggest testimony of Suzuki's commitments towards "environment first" is seen in

Shop Floor Safety Measures

We have safety guards/safety curtains to ensure Operator safety on machines. We have

We organise different safety programs and competitions to encourage employee

Quality Control at Suzuki Motorcycle India has four main sections:

QC has four main sections as follows:

Tested by SMC Japan with their international quality standards

Final ( Vehicle) Inspection

Final (Vehicle) Inspection

Functional & aesthetic parameters are also checked.

As a socially responsible corporate, the Company promotes inclusive and sustainable

The Company will focus primarily on the following projects:

 Community Development: The Company is committed to improving the

1 Mr. Kenichi Umeda Managing Director

2 Mr. Masahiro Nishikawa Director