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CHAPTER1 o Introduction o Need for the study o Objectives of the study o Methodology of the study o Limitations of the study CHAPTER2 o Industry Profile CHAPTER3 o Company Profile o General Profile & Functional profile CHAPTER4 o Theoretical Management CHAPTER5 o Analysis & Interpretation of data CHAPTER6
o Findings & Suggestions






o Bibliography

Working capital may be regarded as the life blood of the business. A study of working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. As pointed out by Ralph Kennedy and Steward Mc Muller. 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 goal of working capital management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. The success of any organization is mainly depends upon the four functional areas of management namely finance, Production, Marketing, and personnel management. Finance is de4fined as a provision of money at the time it is required. Therefore, every enterprise, whether it is big, medium or small needs finance to carry on its operations and to achieve its targets. Working capital = current assets-current liabilities. Softwares is highly perishable product. Factory, Vijayawada was commissioned on 114-1969. Softwares product factory Vijayawada has the distinction of being the first product factory in South India. Apart from handling Softwares from Krishna district it also handles surplus Softwares received from districts of Vizag, East and west Godavaary, Prakasam and Nellore. The factory had peak handing during 1982-83. With a view of handling the inceased surplus Softwares from Nellore, Prakasam and Godavari districts, a second spray drying plant with a latest design to produce about 14MT of Softwares powder has been established and commissioned during December 1982.

The surplus Softwares after meeting the required Softwares requirement of public is converted into products. This Softwares products factory, Vijayawada had the distinction of being the first public sector organization in the country to produce infant Softwares food in consumer packs. In addition to above Softwares powder, skim and whole ice cream mix powder and casein are also being manufactured in this factory. We will hardly find a business firm, which does not require any amount of working capital. Indeed, firms differ in their requirements of the working capital. There is always an operating cycle involved in the conversion of sales into cash. The firm should maintain a sound working capital position. It should have adequate working capital to run its business positions are dangerous from the firms point of view. Excessive working capital means ideal funds, which earn no profits for the firm.

NEED FOR THE STUDY IBASE Solutions is big Softwares designing Company and it the Softwares based products are being produced. The requirement of capital for each department is very high in an organization like IBASE Solutions. Therefore, I have under taken my study in this organization to understand the requirement of capital and its effective allocation of resources in working capital management. Some important points are taken into consideration. To understand the requirement of working capital in this organization. The duration of the work-in-progress state depends of length of the manufacturing cycle (SDLC), consistency in capacity utilization different stages and efficient co-ordination of various inputs.

Having this detailed study on working capital management, identify the shortage of working capital and suggest improving the working capital management in the company.

OBJECTIVES OF THE STUDY The main objective of the study is to analyze and evaluate the Working Capital performance of the IBASE Solutions, and if necessary, to give suggestions for the overall improvement in the working capital management. To analyze how working capital management is carried out in the To study various components of working capital and their To ascertain various problems faced in working capital management. To measure the operational efficiency. To study the existing system of working capital. To judge the financial positions. To determine the profitable trends. To give appropriate suggestions for the better performance of the organization. management.

company if necessary. METHODOLOGY OF THE STUDY All the data required for completion of the study has been collected from both primary and secondary sources. Primary Sources of Data: The primary sources of data required for the study was collected by the personal interaction with employees of the IBASE Solutions, in the area of Finance, Production, HRD, and administration departments. The SWOT Analysis has also been done in order to identify the major strengths, weaknesses, opportunities and threats of the company and the likely strategies to be adopted in order to improve the financial performance.

Secondary Sources of Data: The secondary data was collected from the companys. Annual reports; Financial reports; Accounting reports; Departmental manuals; Journals.


Any study is having its own advantages and certain disadvantages. Among such, few of the limitations are expressed below such as; The reliability of the study depends upon the information furnished by the officials. Due to time constraints, it is difficult to go into details of the whole As working capital management means planning for day-to-day The present study is restricted to lonely for a period of 6 years from 2003organizations. operations, certain figures are estimated figures only. 2004 to 2008-2009.


In the present scenario most of the countries over the world have relied upon Indian software company and firms or Software Companies for the software development activities, as the country possesses a global competency in the IT sector. The Software development company India comprises of businesses related to the production and maintenance of computer software. The roots of the Software Industry India lies in the IT phenomenon. Services regarding software such as training, consulting and maintenance are a part of this ever-growing industry. The Software companies is witnessing a rapid growth and offers lucrative job opportunities making IT a premium career option for the youth. Infact it is one of the fastest growing sector of Indian industry. India is emerging as a Global IT superpower. The success can be attributed to factor advantage of high quality of software human resources. The Software Industry has succeeded in converting this comparative advantage to increasing exports. More and more companies are receiving the ISO 9000 certification and the day is not far when India will have the highest number of ISO 9000 companies in the world. Indian Software Industry is estimated to be worth USD 1.2 billion. Unfortunately the growth has been limited to a few cities around Bangalore, Mumbai, Delhi and Noida. One problem that software companies in India are facing is that of outflow of IT professionals. This can be looked into by ensuring the conditions for investment and growth in the industry are safeguarded by political stability Wipro, HCL, Tata Consultancy Services, Satyam computer Services, CMC, IBM etc are some of the major Software development and software consulting firms or companies in India.


iBase Solutions is a professional website design and web development company with offices in Sydney, Adelaide and Melbourne with large client base in Australia and across the Globe. We specializes in high quality Web Designing, Website Maintenance, Web Application development, Ecommerce Website, Multimedia presentation - 2D/3D animation, Web Hosting, Search Engine Optimization (SEO) or Web Promotion, Logo Designing and custom web solutions for all types of industries. We have good expertise in the areas mentioned above and focus on delivering websites in time with best quality and with minimum cost to our Clients. Backed with 5+ years of expertise as a web solutions providing company we strive to provide excellence in service, quality, and turnaround time. Progressive businesses and organizations rely on Web Site Design Company to develop and provide hi-tech, cost effective solutions to their doorsteps in the shape of competitively priced and best quality services. Whatever your requirement, be it programming-based or designing-based, or a strategic combination of both, we offer a cost-effective solution. Our world-class professional web site designers & web developers focus on ensuring your web site gives you the best possible returns. Over the years we have designed, developed and launched search engine friendly websites by providing affordable web development services to all our clients ranging from start ups Business package to customized web based application. We make sure that all our websites are Search Engine Friendly to reach the widest possible audience and meet clients business objectives.

Customer satisfaction is the motto of our business. The professional business experience of our management team also sets us apart from many other website design firms. iBase web consultants believe in detailed discussion with clients and offer various suggestions. We work closely with our clients to compose a web site that fits their requirement, taking advantage of latest technology. We provide both small, Medium and large businesses with custom web site designs that are very affordable without disturbing your budget. We have always met our commitment to deliver professional web site design and hosting solutions along with excellent customer service. Please go through our portfolio and available services and contact us for a free estimate. We look forward to provide you web solutions tailored to your requirement. Our Philosophy Provide Innovative web design and web development solutions, using latest technologies to our clients at competitive prices in a most efficient manner. Vision and Mission iBase Solutions believes in providing equal opportunity, excellent infrastructure and work atmosphere to all employees, thereby improving the work environment and efficiency levels to serve Clients better. Our mission is to provide a web solutions as per client satisfaction in a most efficient and qualitative manner. Services: Web Designing iBASE offers a variety of web designing services in Sydney, Melbourne, Adelaide ranging from basic Website Design to complete ecommerce web application development. Our team of web designers & web developers is creative & innovative with ability to turn your ideas into reality. Checkout range of iBase web design packages covering professional web design to advanced web site development solutions.


Website Maintenance Web Maintenance Services by third party can surly reduce your costs by eliminating the need to hire full time website designer or web developer. Our professional Website Maintenance service deliverers just that. We will ensures that your website gets the attention to detail and accuracy that is essential for your website's success. Communications are easily handled with e-mail and telephone. We always try to accommodate any rush or emergency changes from our clients. Website Hosting The World Wide Web is a massive collection of web sites, all hosted on computers (called web servers) all over the world. The web server (computer) where your web site's html files, graphics, etc. reside is known as the web host. Web hosting clients simply upload their web sites to a shared (or dedicated) webserver, which the ISP maintains to ensure a constant, fast connection to the Internet. Domain Registration Domain name registration is the process by which a company or individual can register a website name or URL, such as Domain registration is done for a specified period like 1 to 10 years and once you have completed domain registration the domain becomes yours for the period of the contract. Now once this time period is going to be over. Website Promotion Search engine promtion or optimization is a critical component of your site's success... A company will spend long hours and valuable resources developing a website to bring in vast amounts of new business from all over the world. Once the design is done and the new website published, the expectation is that new business will come from those millions of people browsing and searching the Internet each day. Multimedia Presentation


Our Multimedia & Design Solutions offers a wide variety of professional multimedia solutions for all of your needs. We offer complete art, animation, photo manipulation, graphics, interactive presentation CDs, sound/voice/music editing and creation, audio CDs, FLASH, Director and more. We can help you design and create professional, top quality, cutting edge multimedia presentation with the latest tools.

Web Application Development As the Internet grew into a major player on the global economic front, so did the number of investors who were interested in its development. So, you may wonder, how does the Internet continue to play a major role in communications, media and news? The key words are: Web Application Projects. Web applications are business strategies and policies implemented on the Web Business. Ecommerce Solutions All company whether a small trading company or a large business house, requires to be part of the increasingly important internet market for successful business future. With internet pentration increasing to many folds in developed and developing nation, Results in the increasing number of consumers turning to the internet to locate the products and services they desire. Content Management System IBASE offers you CMS - Content managemenment system to manage your website without any knowledge or experience of web designing. Our CMS is cost-effective and user-friendly solutions in web site content management that enables you to easily update website content without any programming training. We provide you with a simple browser based method to update your content as we separate your content from the layout, which makes YOU in charge of your own dynamic content for your web site.


Contact Details: Australia Level 2, Suite 15 103 George St Parramatta, 2150, NSW P: 0413 752 018 E: India (1) 012, Sushant Tower, Sushant Lok II, Sector 56, Gurgaon 122011, Haryana, India P: 0091 - 124 - 4112136, 4113453 M: 0091 - 9958320320 E: (2) Mohammads Castle Plot #128, Behind Allahabad bank Madhuranagar, Yousufguda Main Road Hyderabad 500 038 Email:


INTRODUCTION TO FINANCE: Finance is a specialized, functional field found under the general classification of business administration. The term Finance can be defined as the management of the flows of money through as organization whether it is a corporation, bank, Govt., agency; e.t.c., Finance concerns itself with the actual flows of money, as well as any claims against money. As a business discipline, finance can be differentiated from accounting and economics. Accounting is concerned with the recording, reporting and measuring of business transaction, where as finance uses the information provided by the accounting system to make decision to help organizations to achieve their objectives. Economies are concerned with analyzing the allocation of resources in a society. It studies transactions, among people involving in a society. It studies transaction, among people involving goods and services with or without the exchanges of money. Individual businesses are face problems dealing with the acquisition of funds to carry on their activities and with the determination of optimum methods of employing funds. In competitive market place, businessman must actively manage their funds to achieve their goals. The financial tools help the manage. Determine which sources offer the lowest cost of funds and which activities will provide the greatest return on invested capital. A successful business manager for enterprise uses a goal oriented financial structure. The financial manager performs certain tasks that help to achieve its operating objective. The important goals of financial management are: Wealth maximization of share holders. Liquidity. Profitability of the firm.



Although it may be difficult to separate the finance functions from production, marketing and other functions, yet the functions themselves can be readily identified. The functions of raising funds, investing in assets and distributing returns earned from assets, shareholders respectively known as financing, investment and dividend decision. While performing these functions, a firm attempts to balance cash inflows and cash outflows. This is called liquidity decision and we add it to the list of important finance decisions or functions. a. Investment or long term asset mix decision. b. Financing or capital mix decision c. Dividend or profit allocation decision. d. Liquidity or short term asset mix decision. A firm performs finance functions simultaneously and continuously in the normal course of the business. They do not necessarily occur in a sequence. Finance function call for skillful planning, control and exception of a firms activities. Let us note that outset that share holders are made better off by a finance decision, which increase value of their shares. Thus while performing the finance functions, the financial manager should strive to maximize the market value of shares. INVESTMENT DECISION: Investment decision or capital budgeting involves the decision of allocation of capital or commitment of funds to long-term assets, which would yield, benefits in future. Its one very significant aspect is the task of measuring the prospective profitability of new investments. Future benefits are difficult future; capital budgeting decision involves risk. Investment proposals should, therefore be evaluated in terms of both expected return and risk, besides the decision to commit funds in new investment proposal; capital


budgeting also involves decision of recommitting funds when an asset becomes less productive or non profitable. FINANCING DECISION: Financing decision is the second important function to be performed by the financial manager. Broadly, he must decide when, where and how to acquire funds to meet the firms investment needs, the central issue before him is to determine the proportion of equity and debt. The mix of debt and equity is known as the firms capital structure. The financial manager must strive to obtain the best financing mix or the optimum capital structure for his firm. DIVIDEND DECISION: Dividend decision is the third major financial decision. The financial manager must decide whether the firm should distribute of all profits, or retain them, or distribute a portion and retain the balance. Like the debt policy, the dividend policy should be determined in terms of its impact on the shareholders value. The optimum dividend policy is one, which maximizes the market value of the firms shares. Thus, if shareholders are not in different to the firms dividend policy, the financial manager must determine the optimum dividend-pay out ratio. LIQUIDITY DECISION: Current assets management, which affects a firms liquidity, is yet another important finances function, in addition to the management of long-term assets. Current assets should be managed efficiently for safeguarding the firm Against the dangers of insolvency. Investment in current asset affects firms profitability, liquidity and risk. A conflict exists between profitability and liquidity while managing current assets. If the firm does not invest sufficient funds in current assets, it 16

may become illiquid. But it would lose profitability, as idle current assets would not earn anything. Thus, a proper trade-off must be achieved between profitability and liquidity. In order to ensure that neither insufficient nor unnecessary funds are invested in current assets, the financial manager should develop sound techniques of managing current assets and make sure that funds would be made available when needed. WORKING CAPITAL MANAGEMENT INTRODUCTION: Every business needs funds for two purposes for its establishment and to carry out its day-to-day operations. Working capital refers to that part of the firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Working capital is the amount of funds necessary to cover the cost of operating the enterprise. The goal of working capital management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. Working capital is the difference between the inflow and outflow of funds. Net cash inflow defines as the excess of current liabilities over current assets. Working capital is also revolving or circulating capital or short-term capital. DEFINITIONS: 1. Working capital is defined as the difference between current assets and current liabilities. -I.M.PANDEY. 2. Working capital is the amount of funds necessary to cover the cost of operating the enterprise. -SHUBIN 17

3. Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another as for example, cash to inventories, inventories to B/R, B/R to cash. Working capital is also called as revolving and short-term capital. -GENESTEN BERG OPERATING CYCLE CONCEPT: A company operating cycle typically consists of three primary activities purchasing resources, producing the product and distributing (selling) the product. These activities create funds flows that are both unsynchronized and uncertain. They are uncertain because future sales and costs, which generate the respective receipts and disbursement, cannot be forecasted with complete accuracy. If the firm is to maintain liquidity and function properly it has to invest funds in various short-term assets (working capital) during this cycle. It has to maintain a cash balance to pay the bills as they come due. In addition the company must invest in inventories to fill customer orders promptly and finally the company invests in accounts receivables to extend to its customers. The operating cycle is equal to the length of the inventory and receivables conversion periods. Operating Cycle: Inventory conversion period + receivables conversion period. The inventory conversion period is the length if time required producing and selling the products it is defined as follows. Inventory conversion period = Average inventory cost of sales / 365. The receivable conversion period or average collection period represents the length of time required to collect the sales receipts it is calculated as follows.


Receivables conversion period = Account receivable Account receivable = Annual Credit sales / 365. The payables deferred period is the of time the firm is able to differ payment on its various resource purchases (for example materials, wages and taxes) equation is used to calculate the payables deferral period. Payables deferral period = A/Cs payable + salaries, benefits and payroll taxes payable. (Cost of sales + selling general and admn. expenses) / 365 Finally the cash conversion cycle represents the net time interval between the collections of cash receipts from product sales and the cash payments for the companies various receipts purchases. It is calculated as follows cash conversion cycle operating cycle-payables deferral period. Types of working capital:

There are two types of working capital. 1. Gross working capital. 2. Net working capital.
Gross working capital: It is the broad sense the term working capital refers to the gross working capital and represents the amount of funds invested in the current assets. Thus, the gross working capital is the capita; invested in total current assets of the enterprise which in the ordinary course of business can be converted into cash within a short period of time. Gross working capital = Total of current assets


Net working capital: This refers to the difference between current assets and current liabilities. Net working capital can be either positive or negative. A positive net working will arise when current assets exceed current liabilities. A negative working capital occurs when current liabilities are in excess of current assets. Net working capital = Total of current assets Total of current Liabilities. Measuring the working capital: 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. However, it must also be noted that working capital is a means to run the business smoothly and profitably, and not an end. Thus, concept of working capital has its own importance in a going concern. The analysis of working capital can be conducted through a number of devices, such as. 1. Ratio analysis. 2. Funds flow analysis. 3. Capital Budgeting. LIST OF CURRENT ASSETS AND CURRENT LIABILITIES: Current Assets: Cash in hand. Cash at bank. Bills receivables Sundry debtors Stock. Prepaid expenses. Accrued income


Short term investment.

Current Liabilities: Bills payable. Sundry creditors. Accrued expenses. Short term loans. Dividends payable. Bank overdraft. Provision taxation.

OBJECTIVES OF WORKING CAPITAL: The need for working capital cannot be over emphasized. Every business needs some amount of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. To pay wages and salaries. To incur day-to-day expenses and overheads costs such as fuel, power and office expenses, etc. To meet the selling costs as packing, advertising, etc. To provide credit facilities to the customers.

KEY AREAS OF WORKING CAPITAL: 1. Cash management. 2. Receivables management. 3. Payables management. 4. Inventory management.


SOURCE OF WORKING CAPITAL: There are two sources of working capital they are: 1. Permanent or Fixed working capital: The fixed proportion of working capital should be generally financed from the fixed capital sources like: Shares. Debentures Public deposits. Plugging back of profits. Loans from financed institutions.

2. Temporary or Variable working capital: Variable or temporary working capital requirements of a concern may be met from the short-term sources of capital like: Commercial bankers. Indigenous bankers. Trade creditors. Advances. Accrued expenses Commercial papers. Accounts receivables.

USES OF WORKING CAPITAL: Losses from business operations. Purchases on non-current assets. Redemption of debentures and / or preference shares. Dividends to shareholders.

CLASSIFICATION OF WORKING CAPITAL: Working capital may be classified in two ways: a. On the basis of concept. b. On the basis of time, 22

A. ON THE BASIS OF CONCEPT 1. 2. Gross working capital. Net working capital

B. ON THE BASIS OF TIME 1. Permanent or fixed working capital. Regular working capital. Reserve working capital.

2. Temporary or Variable working capital. Seasonal working capital. Special working capital.

DETERMINANTS OF WORKIN CAPITAL: Nature of size of business: These kinds of institutions require limited working capital to produce goods and services. (Ex: public utility organization) These are the institutions, which require of working capital turnover. (Ex : trading concerns) This kind of institutions issues shares into orders to moderate the capital 1. Firms credit policy: The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. 2. Price level changes: The increasing shifts in price level make functions of financial manager difficult. He should anticipate the effect of price level changes on working capital.


Requirements of the firm: 1. Operating efficiency: The operating efficiency of the firm relates to the optimum utilization of resources at minimum cost. The firm will be effectively contributing in keeping the working capital investment at a lower level; it is efficient in controlling operating cost and utilizing current assets. 2. The working capital needs of a firm are related to its sales. It is difficult to precisely determine the relation b/n volume of sales and working capital needs. In practice, current assets will have to be employed before growth takes place. 3. Earning capacity and dividend policy : Earning capacity more in quality and monopoly conditions operates high working capital, high profits in its require to influence dividend policy. 4. Rate of stock turnover: Stock turnover depends upon size and growth business expansion. If small size organization requires little working capital, if it is larger size requires high working capital. 5. Business Cycle: In case of boom requires low capital, in case of depression requires high capital. In 1991 Indias position in market level will face inflation. 6. Other functions: Assets structure. Maximum facilities.

Estimating working capital needs: The most appropriate method of calculating the working capital needs of a firm is the concept of operating cycle. However we shall illustrate here three approaches, which have been successfully applied in practice.


Current assets holding period: To estimate the working capital requirements on the basis of average holding period of current assets and relating them to cost based on the companies experience in the previous years. This method is essentially based on operating cycle concept. Ratio of sales: To estimate working capital requirements as a ratio of sales on the assumption that current assets change with sales. Rate of fixed investment:

To estimate working capital requirements as a percentage of fixed investments.

Financing of working capital: The current assets of the firm are supported by spontaneous current liabilities (trade creditors and provisions others etc) short-term bank financing and long-term sources of finance (mainly debentures and equity) the working capital policy of the firm has to decide between two alternatives. Current asset financing policy. Conservative Aggressive current assets financing policy. A conservative current assets financing policy relies less on short term bank financing and more on long-term sources such as debentures and internal sources like reserves and surpluses. The highly conservative policy my seek to replace even long-term debt by equity. An aggressive current asset financing policy relies on short-term bank finance and seeks to reduce dependence on long-term financing. The consequence of those policies is that the conservative current asset financing policy reduces the risk of the firm from being unable to repay or replace its short-term debt periodically. But it may result in enhanced cost of financing as the long-term sources finances debt and equity have an associated with them. An aggressive current asset financing on the other hand may have


opposite effects; it exposes the firm to higher of risk but minimizes the average cost financing. The working capital policy adopted by a firm can be broadly conservative, moderate or aggressive with conservative or aggressive current asset financing policy. The choice of overall working capital policy depends on the risk disposition of the management. ADVANTAGES OF ADEQUATE WORKING CAPITAL: a. Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. b. Good will: Sufficient working capital enables a business concern to make prompt payments and helps in creating and maintaining goodwill. c. Easy loans: A concern having adequate working capital high solvency and good credit standing can arrange loans from banks and other an easy and favorable terms. d. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs. e. Regular supply of raw materials: Sufficient working capital ensures regular supply of raw materials on continuous production. f. Regular payment of salaries, wages and other day-to-day commitments: A company which has sample working capital can make regular payment of salaries, wage and other efficiency, day-to-day commitments which raises the morale of its employees increases their efficiency, reduces wastage and cost and enhances production profits. g. Explanation of favorable market conditions: Adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices. h. 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. i. Quick and regular return on investments: Every investor wants quick and regular return on its investments sufficient working capital enables a concern to pay quick


and regular dividends to its inventories, as there may not be much pressure to plough bad profits. This gains the confidence of its concern investors and creates a favorable market to raise additional funds in the future. j. High morale: Adequacy of working capital creates an environment of security, confidence, high and morale and creates overall efficiency in business. DANGERS OF EXCESSIVE WORKING CAPITAL: If creases in working capital is due to increase in inventories it leads to Un necessary expenses like storage maintenance costs etc. Excess cash at hand and banks lead to inefficient utilizations of funds, which leads to declaiming profitability. Large amounts of funds towards working capital results in over capitalization. Excessive working capital decreases companys profitability.

DANGERS OF INADEQUATE WORKING CAPITAL: It is not possible to utilize production facilities for want of working capital It become difficult to meet day-to-day constituents and operating inefficiencies will creep in It becomes difficult to utilize fixed assets efficiencies due to lack of working capital funds, thus rate of return an investment slumps It leads to under capitalization and to greater risk of insolvency.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT: The following are the general principles of a sound working capital management policy. 1. Principle of risk variation. 2. Principle of cost of capital. 3. Principle of equity position. 4. Principle of maturity of payment.


CASH MANAGEMENT Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more not less. Cash shortage will disrupt the firms manufacturing operation while excessive cash will simple remain idle, without contributing anything towards the firms profitability. Thus, major function of the financial manager is to maintain a sound cash position. Cash is the money, which a firm can disburse immediately without any restriction. The term cash includes coins, currency and checks held by the firm, and balances in its bank accounts. Sometimes near-cash items, such as marketable securities or bank time deposits, are also included in cash. The basic characteristic of near-cash assets is that they can readily be converted into cash generally, when a firm has excess cash it invests it in marketable securities. This kind of investment contributes some profit to the firm. Cash management is concerned with the managing of: 1. Cash flows into and out of the firm 2. Cash flows within the firm, and 3. Cash balances held by the firm at a point of time by financing deficit surplus cash. MOTIVES FOR HOLDING CASH: The precautionary balance may be kept in cash and marketable securities. Marketable securities play an important role here. The amount of cash set aside for precautionary reasons is not expected to earn anything. Precautionary balance should, thus, be held more in marketable securities and relatively less in cash.


The Speculative Motive: The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. The opportunity to make profit may arise when the security process change. The firm will hold cash, when it is the firms need to hold cash may be attributed to the following three motives. The transaction motive The precautionary motive. The speculative motive.

The Transaction Motive: The transaction motive required a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends etc. the need to hold cash would not arise is there were perfect synchronization b/w cash receipts and payments, that is enough cash is received when the payment has to be made. But cash receipts and payments are not perfectly synchronized. For those periods, when cash payments exceed cash receipts, the firm should maintain some cash balance to be able to make required payments. For transaction purpose, a firm may invest its cash in marketable securities. Usually, the firm will purchase securities whose maturity corresponds with some anticipated payments, such as dividends, or meet anticipated payments whose timing is not perfectly matched with cash receipts. The Precautionary Motive: The precautionary motive is the need to hold cash to meet contingencies in future. It provides a cushion or buffer to withstand some unexpected emergency. The precautionary amount of cash depends upon the predictability of cash flows. If cash flows can be predicted with accuracy, less cash will be maintained for an emergency. The amount of precautionary cash is also influenced by the firms ability to borrow at short notice when the need arises. Stronger the ability of the stronger the ability of the firm to


borrow a short notice when the need arise stronger the ability of the firm. To borrow at short notice less the need for precautionary balance. Expected that interest rates will arise and security process will fall. Securities can be purchased when the interest rate, is expected to fall, subsequent fall in interest rates and increase in security prices will benefit the firm. The firm may also speculate on material prices. When it is expected that material prices will fall the firm can postpone materials purchasing and make purchases in future when price actually falls. The firm must decide the quantum of transactions and precautionary balance to be held. This depends upon the following factors: The expected cash inflows and outflows based on the cash budget and forecasts encompassing long and short-range cash needs of the firm. The degree of deviation between the expected and actual net cash flows. The maturity structure of the firms liabilities. The firms ability to borrow at short notice in the event of any emergency. The efficient planning and control of cash.

All the factors analyzed together will determine the appropriate level of the transactions and precautionary balances. Cash planning: Cash flows are inseparable part of the business operations of all firms. The firm needs to invest in inventories, receivables and fixed assets and to make payment for operating expenses in order to maintain growth in sales and earning. It is possible that a firm may be consuming cash very fast. The cash poor position of the firm can be corrected if its cash needs are planned in advance. At times, a firm can have excess cash with it if its cash inflows exceed cash outflows. Such excess cash inflows and outflows for a given period. The fore castes may be based on the present operations for the anticipated future operations. As a firm grows and business operations become complex, cash planning becomes inevitable for its continuing success.


RECEIVABLE MANAGEMENT INTRODUCTION: Receivables are assets which are created as a result of the sale of goods or services in the ordinary course of business. These are known as Accounts receivable, trade receivables or customer receivables. The receivables represent an important component of the current assets of a firm. Every business needs to have a proper control management of receivable. The first aspect, i.e., credit policies which have two dimensions: Credit standard defined as the criteria to determine to whom credit should be extended; and credit analysis. The second major aspect of receivables management is to credit terms comprising: a. Cash discount, b. Cash discount period, and c. Credit period. MEANING: Receivables represent amounts owed to the firm as a result of sale of goods or services in the ordinary course of business. The purpose of maintaining or investing in receivables is to meet competition, and to increase the sales and profits. CHARACTERISTICS OF MAINTAINING RECEIVABLES: 1. Expansion of sale. 2. Increased Profit. 3. Financing Receivables. 4. Administrative Expenses. 5. Cost of Collection. 6. Bad debts. MANAGEMENT OF RECEIVABLES When a firm makes an ordinary sale of goods and does not receive payment the firm grants trade credit and creates accounts receivable, which would be collected in future. Thus accounts receivable represent an extension of credit to customers allowing them a reasonable period of time in which to pay for the goods/services, which they have received.


The objective of receivables management is to have a trade-off between the benefits and costs associated with the extension of credit. The benefits are increased sales and associated increased profits/marginal contribution. The major categories of cost of account receivable are collection costs, capital costs delinquency costs and default cost. PURPOSE OF RECEIVABLES: Every commitment of financial resources in a firms expected to constitute to the goal of maximizing the present value of the firm in the market place. The result of maintaining receivables is as follows. FACTORS INFLUENCING THE RECEIVABLES: A. Size of credit sales. B. Credit policies. C. Terms of trade. D. Expansion profits. E. Relation with profits. F. Credit collection efforts. G. Habits of customers.

Forecasting age of receivables. Determining cost of goods sold. Forecasting administration costs, collection costs and bad debts. Forecasting discount. Forecasting average collection period Forecasting marginal cost of funds tied up in receivables.

DIMENSIONS OF RECEIVABLES MANAGEMENTS: Forming of credit policy. Executing the credit policy. Formulating and executing collection policy.


PAYABLES MANAGEMENT INTRODUCTION: A substantial part of purchases of goods and services in business are on credit terms rather than against cash payment. While the supplier of goods and services tend to perceive credit as a lever for enhancing sales. The suppliers credit is referred to as Account Payable, Trade credit, trade bill, trade acceptance commercial draft of bills payables depending on the nature of credit provided. The extent to which this buy-now, pay-later facility is provided will depend upon a variety of factors such as the nature, quality and volume of items to be purchased. Trade credits or payables constitute a major segment of current liabilities in may business enterprises. And they primarily finance inventories which form a major component of current assets in many cases. SIGNIFICANCE: Payables constitute a current or short-term liability representing the buyers obligation to pay a certain amount on a date in the near future for value of goods or services received. They are short-term determents of cash payments that they buyers of goods and services are allowed by the seller. Trade credits or payables serve as noninterest baring source of funds in most cases. They provide a spontaneous source of capital that flows in naturally in the course of business keeping with established commercial practices or formal understandings. TYPES OF PAYABLES: Trade credits or payables could be of three types they are as follows: Open Accounts. Promissory Notes. Bills payables.

OBJECTIVES OF PAYABLES: Explain the significance of payables as a source of finance. Identify the factors that influence the payables quantum and duration.


Highlight the advantage of payable and provide hints for effective management of payables.

INVENTORY MANAGEMENT INTRODUCTION: Every business needs inventory for smooth running of its activities. It serves as link between production and distribution processes. The unforeseen fluctuations in demand and supply of goods also necessitate the need for inventory management and also to minimize investment in inventories. Managing working capital is synonymous with controlling inventories. Good inventory management is good finance management an efficient management of inventory should ultimately result in the maximization of the owners wealth. Inventory management may be defined as the sum total of those. Activities which are necessary for the acquisition, storage, sale and disposal or use of material. MEANING AND NATURE OF INVENTORY: Inventory is one of the major current assets. The literary meaning of the word inventory is stock of goods or list of goods. The inventory is understood differently by various authors. Inventory includes the following things. Raw material. Work-in-progress. Finished Goods.

RAW MATERIAL: Inventory contains items that purchased by the firm from others and are converted into finished goods through the manufacturing (production) process. They are the important inputs for the final product. Here the Raw material is the softwares which are utilizing for the project. WORK-IN-PROGRESS:


Inventory consists of items currently being used in the production process. They are normally partially or semi-finished goods that are at various stages of production in a multi-stage production process.


FINISHED GOODS: It represents final or completed products, which are available for sale. The inventory of such goods consists of items that have been produced but are yet to be sold. The job of the Financial Manager is to reconcile the conflicting view points of the various functional areas regarding the appropriate inventory levels in order to fulfill the overall objective of maximizing the owners wealth. This is nothing but the completion of the project. OBJECTIVES OF INVENTORY MANAGEMENT: The objective of inventory management consists of two counter balancing parts: To minimize the firms investments in Inventory. To meet a demand for the product by efficiently organizing the firms production and sales operations. These two conflicting objectives of inventory management can also be expressed in terms of cost and benefits associated with inventory. An optimum level of inventory should be determined on the basis of the trade-off between costs and benefits associated with the levels of inventory. VALUATION OF COMPONENTS OF INVENTORY: Inventory involves certain value, which every manufacturing firm needs to account for the financial reports, so various firms follow various methods of inventory valuation methods. Few are mentioned below: FOR RAW MATERIALS: FIRST IN FIRST OUT METHOD (FIFO): In this method the raw materials are received first in the stores ledger are issued first. The name of the method itself indicates the material first received in is issued first. LAST IN FIRST OUT METHOD (LIFO): In this method is opposite to FIFO. In this method the raw materials received last by stores are issued first. The name itself indicates the materials, which are received last, are issued first.


FOR WORK-IN-PROGRESS: Work-in-progress i.e., immediate are valued at factory cost basis i.e., the value of raw materials in the process and the costs incurred to that particular point of manufacturing process. FOR FINISHED GOODS: Finished products at the factory are valued at factory cost including head office expenses and at warehouse are valued after adding freight to factory cost (Factory cost + Head office cost). COSTS INVOLVED IN INVENTORY: One operating objective of inventory management is to minimize the costs associated with the project. Excluding the cost of merchandise, the costs associated with inventory fall into two basic categories: Ordering or Acquisition or Set-up costs, and Carrying costs.

These costs are an important element of the optimum level of inventory decisions. ORDERING COSTS: Such are also known as acquisition or set-up costs. This category of costs is associated with the acquisition or ordering of project. Firms have to place orders with suppliers to replenish the project. The expenses involved are referred to as ordering costs. Apart from placing orders outside, the various departments have to acquire materials from the stores. Any expenditure involved here is a part of the ordering costs. Included in the ordering costs are costs involved in: Preparing a purchasing order or requisition from and Receiving, inspecting, and recording the Softwares received. The cost of the project consists of clerical costs and costs of stationery.


It is therefore called a set-up cost. They are generally fixed per order placed, or the more frequent the acquisition of inventory made, the higher are such costs. From a different perspective, ordering costs. The acquisition costs are inversely related to the size of inventory: they decline with the level of inventory. Thus, placing can minimize such costs fewer orders for a larger amount. But acquisition maintenance of inventory, i.e., carrying costs. CARRYING COSTS: The second board category of costs associated with inventory is the carrying costs. They are involved in maintaining or carrying inventory. The cost of holding inventory may be divided into two categories: Those that arise due to storing the inventory. The main components of this category of carrying costs are: Storage cost, i.e., tax, depreciation, insurance, and maintenance of the building, utilities and janitorial services; Insurance of inventory against fire and theft; Deterioration in inventory because of pilferage, fire technical obsolescence, style obsolescence and price decline; Serving cost, such as, labor for handling inventory, clerical and accounting costs. The opportunity cost of funds. This consists of expenses in raising funds (interest on capital) to finance the acquisition of inventory. If funds were not locked up in inventory, they would have earned a return. This is the opportunity cost of funds or the financial cost component of the cost. The carrying costs and the inventory size are positively related and move in the same direction. It the level of inventory increases, the carrying costs also increased and vices versa. The sum of the order and carrying cost represents the total cost of the inventory. This is compared with the benefits arising out of inventory to determine the optimum level of inventory.


TECHNIQUES OF INVENTORY MANAGEMENT An optimum level of inventory on the basis of the trade-off b/w cost and benefit to maximize the owners wealth should be aimed. Many sophisticated mathematical techniques are available to handle inventory management problems. The below mentioned are some of the inventory management techniques. 1. E.O.Q. 2. A.B.C analysis. 3. Stock levels. ECONOMIC ORDER QUANTITY (E.O.Q): Economic order quantity (EOQ) refers to the level of inventory at which the total cost of inventory comprising the acquisition cost, ordering cost and carrying costs are minimum. For analyzing the EOQ, as an inventory management technique, several sophisticated mathematical models are available. EOQ is the size of the order that yields the optimum total incremental inventory

cost during the given period of the time under the assumption that the demand and the rate is constant and know. The concept of EOQ applies to the items, which are replenished periodically into inventory in lots covering several periods needs. FORMULAE: Where, A = Annual demand, O = Ordering cost, C = Carrying cost. Ordering cost = No. of orders placed per year * ordering cost Per order No. of orders placed = Annual demand / No. of units per each order. Carrying cost = (Order quantity / 2) * Carrying cost per unit. EOQ = Square root of 2AO/C


ANNUAL DEMAND: The annual demand of the item depends on the number of items ordered in the year. The annual cost of carrying inventory depends on the total size of the inventory in stock. ORDERING COST: The cost is associated with the placed of an order for the acquisition of inventories. This is determined on the basis of the expenses incurred in the purchase and finance departments. CARRYING COST: Carrying cost is defined as the cost of holding the material inside and outside the stores. It is associated with the level of inventories. The greater the order the longer is the inventory carried as stock in the stores. OPPORTUNITY COST: The opportunity cost of funds, consists of the expenses in raising the funds (interest on capital) to finance the acquisition of inventory. If the funds were not locked up in the form on inventory, they would have earned a return. This is the opportunity cost of the financial cost component. The carrying cost and the inventory size are positively related and move in the same direction. If the level of the inventory increases, the carrying cost increases and if the level of the inventory decreases the carrying cost also decreases. ORDER SIZE: How much to order is one of the important questions to be deciding up on in every inventory replenishment situation? Material required must be ordered from some source. The process of ordering involves certain costs the ordering cost. The greater the order, the longer is the inventory carried in stores and greater is the annual carrying cost of the inventory. The smaller the quantity, the larger the number of orders placed per year and the larger the ordering cost ABC ANALYSIS:


ABC analysis is the selective inventory control technique and this is the first step in the inventory control process. This is the process in which 1000s of different types of inventories are classified to determine the type and degree of control required for each. This technique is based on the assumption that the firm should not exercise the same degree of control on the items of inventory. On the basis on unit price and consumption, various inventory items are categorized into 3 classes of this analysis: A B C

A group involves the largest investment and inventory control must be rigorous and intensive and the most sophisticated inventory control technique should be applied to these items. Type A is of higher cost and highly scare resource without which the production process cannot be imagined, which will be very less in quantity when compared to the investor level. A type of item-only about 10% in number, Account for 75% of the annual inventory usage value. B group stands mid-way. It deserves less attention then A and more then C. Employing less sophisticated techniques can also control it. Type B is of moderate cost and moderately important. These are freely available when compared type A. B type of item-the next 20% in number, Account for the next 15% of the annual inventory usage value. C group consists of items of inventory, which involve relatively small investments although the number of items is fairly large; these items deserve minimum attention. Type C is of lowest cost and of less importance when compared to A and B. there evince of these inventories to the main production process market and can be immediately replaced or purchased. C type of item-the next 70% in number. Account for only 10% of the annual usage value.



Category A: Tight control. Assess exact requirement. Frequent reviews. Quantity control. Regular and item wise expediting. Low safety stocks and order point control. Reduced and stabilize lea-time. Large orders with phased delivery. Tight control on scrap. Value analysis and standardization. Special care in prevention. Category B: Moderate control. Individual postings. Assess frequent reviews. Less frequent reviews. 0Lead time control Category C: Minimum control. Simple checks. Estimate appropriate requirements Group postings. In frequent reviews. Visual control.


Limited are periodic expediting. Minimum lead-time control. Large safety stocks. Large order size. Stocking at point of view.
STEPS FOR CONDUCTING ABC ANALYSIS ARE: Obtain unit cost of each manufactured or purchased item in inventory. Obtain the usage in units for each item or estimate the usage over a period of time. Obtain the net value of the usage by multiplying unit cost and the usage. Arrange the items in descending order of the usage value. The no. of items and their values are accumulated on a % of total basis. Roughly divide the total list into 3 groups, namely, A-items of high usage value which accounts for 70-75% of the usage value of inventories, and about 10-15% In number, B-items of medium usage value which accounts for the next 15-20% of the usage value in the inventories, C-items of low usage value, which would be the remaining group of items. WHILE APPLYING THE ABC ANALYSIS, THE FOLLOWING


Although every party of the item is important for the repair of machine, the items with Low value can be given a loose control. Tight control of the high value stock must reduce costs sufficiently to more than off set the increased costs caused by lesser controls on the low value items. When applying the ABC principle, some high value items, which will not be required due to being in excess, should actually be considered for disposal at a worthwhile price. The ABC analysis in variable involves only items moving items since the annual consumption value is based on consumption besides unit cost. The items, which arenonmoving, have also been considered separately for retention.



Re-order level:
Re-order level (ROL) Refers to the level of inventory, which gives an indication that action replenishment and proposals for purchase of a particular item are to be imitated. This level is fixed between minimum and maximum levels. ROL = Maximum consumption during the year * Maximum period required for delivery.

Minimum stock level:

Minimum stock level is also called as safety stock or buffer stock. This represents the lower limit below, which the stock of any, item should not be normally to nonavailability of raw materials. Minimum stock level = ROL-(Normal usage * average delivery period)

Maximum stock level:

Maximum stock level is the level, which should not be exceeded or maintained. Maximum stock level = ROL+ROQ-(Minimum usage * Minimum delivery period) Where, ROQ = Re-order Quantity, Average stock level lies between the min and max stock levels. Average stock levels = Minimum stock level + ROQ/2 Therefore, ABC analysis, helps in categorizing the 100s of spare parts in inventory and allots them with 3 different classes basing on their cost and consumption. EOQ technique helps in determining the ordering cost and the carrying cost of the order size, through which the right ordering quantities can be fixed and minimize the ordering and carrying costs of the inventory. A stock level helps to determine the level of stock to be maintained. It decides the reorder level and the quantity of the inventory; it forecasts the minimum and maximum levels of inventory to be maintained without any disturbance in the production process. Hence, these are the techniques of inventory management for the effective control of the inventory, which helps to provide a smooth production process without any hindrances.


PROBLEM BASED ON STOCK LEVELS: Two components, A and B are used as follows. Normal usage = 50 units each per week. Minimum usage = 25 units each per week. Maximum usage = 75 units each per week. Re-order quantity A = 300 units, B = 500 units Re-order period A = 4 to 6 weeks, B = 2 to 4 weeks

Calculate the following for each component

Re-order level Minimum level Maximum level Average stock level Solution: Re-order level = Maximum usage * Maximum delivery time. A B = 75*6 weeks = 450 units = 75*4 weeks = 300units

b. Minimum level = Re-order level - (normal usage * average delivery time) A = 450 units (50units * 5 weeks) = 450 unit - 250 units = 200 units. B = 300 units (50 units * 3 weeks) = 300 units 150 units = 150 units. c. Maximum level = Re-order level (minimum usage * minimum delivery time) + Re-order quantity A = 450 units (25*4) + 300units = 450 units 100+300 units = 450 units + 200 units = 650 units B = 300 units (25*2) + 500units = 300 units 50+500 units


= 300 units + 450 units = 750 units d. Average stock level = Minimum level + Re-order quantity /2 A = 200+300/2 = 200 + 150 = 350 units B = 150+500/2 = 150 + 250 = 400 units IMPORTANCE OF INVENTORIES IN WORKING CAPITAL MANAGEMET: Inventory plays a leading role in determining the liquidity status of the organization. From the operating cycle. We can obtain the number of items the working capital is turned as shown in the operating cycle. The endeavor of an aggressive management will be to reduce this period so that the same quantum of working capital can be turned more number of items. A case in point is of a pan shop selling chewing pans, etc. his turnover of working capital is more than 300 times as he deals with perishable leaves. There are no concepts of work-inprogress and he does not allow credit. This clearly brings out importance of inventory control and he benefits it accures to the organization from the increased profitability view and better return on investment considerations. It should be emphasized that necessary corrections should be applied for any changes in the tax structure. Consequently an efficient management of working capital has become a must for the smooth and successful operation of the business organization. Price and profits depend more on the material content and interest burden. The short-term bank borrowing is largely affected by financing and inventories. The interest for servicing the working capital, the major constituent of which is the inventory. Better inventory control is reducing the material cost and the interest burden reflecting in increased profits.


CHAPTER V CHANGES IN WORKING CAPITAL POSITION IN THE IBASE Solutions Working Capital Management Particulars A. Current Assets 1. Inventory 2. Cash & Bank balances 3. Receivables 4.subsidiry receivables Loans & Advances 1. Advances to employees 2. Advances for purchases 3. Prepaid expenses Total Current Assets B. Current Liabilities 1.for softwares purchase 2. For expenses Sundry Creditors a. Sundry Creditors b. Security Deposits Total Current Liabilities Networking CapitalIncrease / decrease working capital Year 2003-04 1,183.66 227.09 744.94 2004-05 1,136.13 78.55 773.62 WC Increase Decrease 47.53 148.54 28.68

12.82 52.72 21.9 2,243.13 299.27 478.68 436.72 109.19 1,323.86 919.27 919.27

13 46.88 19.19 2,067.37 428.6 480.04 239.44 120.25 1,268.33 799.04 120.23 919.27

0.18 5.84 2.71

129.33 1.36 197.28 22.01 120.33 554.60


INTERPRETATION During 2004-05 the net working capital of the IBASE Solutions decreased by Rs 120.33 lakhs. This is mainly due to an increase in current liabilities for softwares purchase.


CHANGES IN WORKING CAPITAL POSITION IN THE IBASE Solutions Working Capital Management Particulars A. Current Assets 1. Inventory 2. Cash & Bank balances 3. Receivables 4.subsidiry receivables Loans & Advances 1. Advances to employees 2. Advances for purchases 3. Prepaid expenses Total Current Assets B. Current Liabilities 1.for softwares purchase 2. For expenses Sundry Creditors-a. Sundry Creditors b. Security Deposits Total Current Liabilities Networking CapitalIncrease / decrease working capital Year 2004-05 1,136.13 78.55 773.62 13 46.88 19.19 2,067.37 428.6 480.04 239.44 120.25 1,268.33 799.04 351.76 1,150.80 2005-06 1,224.84 439.13 835.75 13.21 67.09 10.81 2,590.83 307.56 705.43 284.78 142.26 1,440.03 1,150.80 1,150.80 652.88 WC Increase 88.71 360.58 62.13 .21 20.21 8.38 121.04 225.39 45.34 22.01 351.76 652.88 Decrease

INTERPRETATION During 2005-06 the net working capital of the IBASE Solutions increased by Rs 351.76 lakhs. This is mainly due to an increase in current assets for inventory, cash & bank balances.


CHANGES IN WORKING CAPITAL POSITION IN THE IBASE SOLUTIONS Working Capital Management Particulars A. Current Assets 1. Inventory 2. Cash & Bank balances 3. Receivables 4.subsidiry receivables Loans & Advances 1. Advances to employees 2. Advances for purchases 3. Prepaid expenses Total Current Assets B. Current Liabilities 1.for Softwares purchase 2. For expenses Sundry Creditors a. Sundry Creditors b. Security Deposits Total Current Liabilities Networking CapitalIncrease / decrease working capital Year 2005-06 1,224.84 439.13 835.75 13.21 67.09 10.81 2,590.83 307.56 705.43 284.78 142.26 1,440.03 1,150.80 1,150.80 INTERPRETATION During 2006-07 the net working capital of the IBASE Solutions decreased by Rs 205.88lakhs. This is mainly due to increase in current liabilities for Softwares purchase and sundry creditor. 2006-07 1,125.61 336.75 713.75 12.06 107.85 18.13 2,314.15 374.68 555.29 272.22 167.04 1,369.23 944.92 205.88 1150.8 40.76 7.32 67.12 150.14 12.56 24.78 205.88 416.66 WC Increase Decrease 99.23 102.38 122.00 1.15



CHANGES IN WORKING CAPITAL POSITION IN THE IBASE SOLUTIONS Working Capital Management Particulars A. Current Assets 1. Inventory 2. Cash & Bank balances 3. Receivables 4.subsidiry receivables Loans & Advances 1. Advances to employees 2. Advances for purchases 3. Prepaid expenses Total Current Assets B. Current Liabilities 1.for Softwares purchase 2. For expenses Sundry Creditors a. Sundry Creditors b. Security Deposits Total Current Liabilities Networking CapitalIncrease / decrease working capital year 2006-07 1,125.61 336.75 713.75 12.06 107.85 18.13 2,314.15 374.68 555.29 272.22 167.04 1,369.23 944.92 949.92 2007-08 1,065.57 543.33 701.41 16.78 60.68 12.78 2400.55 405.93 610.46 222.02 216.59 1,455.00 945.55 4.37 949.92 50.20 49.55 4.37 265.87 WC Increase



60.04 206.58 12.34 4.72 47.17 5.35 31.25 55.17 0.00


INTERPRETATION During 2007-08 the net working capital of the IBASE Solutions decreased by Rs 4.37 lakhs. This is mainly due to increase in current libilities for Softwares purchase and sundry creditor.


CHANGES IN WORKING CAPITAL POSITION IN THE IBASE SOLUTIONS Working Capital Management Particulars A. Current Assets 1. Inventory 2. Cash & Bank balances 3. Receivables 4.subsidiry receivables Loans & Advances 1. Advances to employees 2. Advances for purchases 3. Prepaid expenses Total Current Assets B. Current Liabilities 1.for Softwares purchase 2. For expenses Sundry Creditors a. Sundry Creditors b. Security Deposits Total Current Liabilities Networking CapitalIncrease / decrease working capital INTERPRETATION During 2007-08 the net working capital of the IBASE Solutions decreased by Rs 14.82 lakhs. This is mainly due to increase in current libilities for Softwares purchase, outstanding expenses and sundry creditor. Year 2007-08 1,065.57 543.33 701.41 16.78 60.68 12.78 2400.55 405.93 610.46 222.02 216.59 1,455.00 945.55 14.82 960.37 2008-09 1,442.27 578.46 687.09 11.01 48.23 10.64 2777.70 460.62 809.65 313.57 233.49 1,817.33 960.37 960.37 411.83 WC Increase



376.7 35.13 14.34 5.77 12.45 2.14 54.69 199.19 91.55 16.95 14.82 411.83


WORKING CAPITAL TURNOVER RATIO Working capital Turnover Ratio indicates the velocity of the utilization of net working capital. Working Capital Turnover Ratio = Sales / Working Capital

Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Sales 10,297.69 11,388.74 11,782.55 11,985.11 13,204.29 14,352.23

Working Capital 919.27 799.04 1,150.80 944.92 945.55 960.33

Ratio 11.20 12.39 10.24 12.68 14.03 14.94

Working Capital Turnover Ratio

16 14 12 10 8 6 4 2 0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09


The working capital of IBASE Solutions. increased from Rs. In Lakhs 919.27 in 2003-04 to Rs. lakhs 960.33 in 2005-06. The working capital ratio has increased from 2003-04 to 2004-05 from 11.20 to 12.39 it again decreased in 2005-06 to 10.24 and increased to 2006-07 to 2008-09 from 12.68 to 14.94. The highest working capital turnover ratio was quoted in 2008-09 that is 14.94. CURRENT RATIO Current Ratio may be defined as the relationship between current assets and current liabilities. This ratio, also known as working capital ratio, is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position or liquidity of a firm. Current Ratio =Current Assets / Current Liabilities (RS. IN LAKHS) Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Current Assets 2,243.13 2,067.37 2,590.83 2,314.15 2,400.55 2,777.70 Current Liabilities 1,323.86 1,268.33 1,440.03 1,369.23 1,455.00 1,817.33 Ratio 1.69 1.63 1.83 1.69 1.64 1.53


1.85 1.8 1.75 1.7 1.65 1.6 1.55 1.5 1.45 1.4 1.35 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

The current ratio in IBASE Solutions., shown on table 1. The current assets increased year after year from Rs. lakhs 2343.13 to 2777.70 in 2006. The current ratio varied between 1.69 to 1.53 times. It increased in 2005-06 to 1.83 times. The current ratio in the year 2004-05 is 1.64 times. The current ratio was decreased in the year 2008-09 is 1.53 times. The company is not maintain is up to the a standard norm of 2:1 in all the years. CURRENT ASSETS TO TOTAL ASSETS Current Assets to total assets = Current Assets / Total Assets Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Current Assets 2,243.13 2,067.37 2,590.83 2,314.15 2,400.55 2,777.70 Total assets 3,985.93 3,810.55 4,029.23 4,369.70 4,319.66 4,718.39 (RS. IN LAKHS) Ratio 0.56 0.54 0.64 0.52 0.55 0.58


Current Assets to Total Assets

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

INTERPRETATION: The table 3 reveals about current assets as a percentage of total assets. The current assets increased year after year from Rs 2243.13 to Rs2777.70 lakhs and also total assets increased from Rs 3985.93 to Rs 4718.39 in 2005-06 The current assets formed nearly 58% of total assets in 2008-09. From all the above facts it can be considered that the current assets as a percentage of total assets are very high in IBASE Solutions. QUICK RATIO Quick ratio, also known as Acid Test or Liquid Ratio, is a more rigorous test of liquidity than the current ratio. The term liquidity refers to the ability of a firm to pay its short-term obligations as and when they become due. The two determinants of current ratio, as a measure of liquidity, are current assets and current liabilities. Current assets include inventories and prepaid expenses which are not easily convertible into cash within a short period. Quick ratio may be defined as the relationship between


quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash within a short period without loss of value. Quick Ratio= Quick Assets / Current Liabilities (RS. IN LAKHS) Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Quick Assets 1,059.47 931.24 1,365.99 1,188.54 1,334.98 1335.43 Current Liabilities 1,323.86 1,268.33 1,440.03 1,369.23 1,455.00 1,817.33 Ratio 0.80 0.73 0.95 0.86 0.91 0.73

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

The table 2 discloses the quick ratio of IBASE Solutions. The quick assets increased from Rs. lakhs 1,059.47 in 2000-01 to 1,335.43 in 2008-09. The current liabilities increased from Rs. Lakhs 1,323.86 to 1,817.33.


The quick ratio increased from 0.80 times in 2003-04 to 0.73 times in 2008-09 it is conduced that the quick ratio is not satisfactory as it is not maintaing the standard norm of 1:1. QUICK ASSETS TO TOTAL SALES Quick assets to Total Sales ratio = Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Quick assets / total sales (RS. IN LAKHS) Quick Assets 1,059.47 931.24 1,365.99 1,188.54 1,334.98 1,335.43 Total sales 1,0297.69 1,1388.74 1,1782.55 1,1985.11 1,3204.29 1,4352.23 Ratio 0.10 0.08 0.11 0.09 0.10 0.09

Quick Assets to Total Sales

0.12 0.1 0.08 0.06 0.04 0.02 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

INTERPRETATION: The table represents quick assets as a percentage of sales revenue I in IBASE Solutions.


The quick assets are increased from 1059.47 to 1335.43 with certain fluctuations the sales revenue has also increased from 10297.69 to 14352.23 in 2005-06. The percentage has varied between 0.08 to 0.11and in 2008-09 It has increased to 0.09 in 2008-09. By this we can conclude that quick assets as a percentage of sales revenue is low in IBASE Solutions. QUICK ASSETS TO TOTAL ASSETS Quick assets to Total Assets Ratio Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 = Quick assets / Total Assets Total Assets 3,985.93 3,810.55 4,029.23 4,369.70 4,319.66 4,718.39 (RS. IN LAKHS) Ratio 0.26 0.24 0.33 0.27 0.31 0.28

Quick Assets 1,059.47 931.24 1,365.99 1,188.54 1,334.98 1,335.43


Quick Assets to Total Assets

0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

INTERPRETATIONS: The table reveals about quick assets as percentage of total assets in IBASE Solutions. The quick assets have increased from Rs. Lakhs1059.47 in 2000-01 to lakhs 1335.43 in 2005-06. But the total assets have decreased and increased year after year there has been fluctuation in the total assets. The quick assets percentage of total assets has increased from 0.28 in 2008-09. Hence it can be concluded that quick assets as a percentage of total assets is low in this organization. INVENTORY TURN OVER RATIO Inventory turnover ratio also known as stock velocity is normally calculated as sales/average inventory or cost of goods sold/ average inventory. It would indicate whether inventory has been efficiently used or not. The purpose is to see whether only the required minimum funds have been locked up in inventory. Inventory turnover Ratio indicates the number of times the stock has been turned over during the period and evaluated the efficiency with which a firm is able to manage its inventory. Rs.


Inventory turnover ratio = Sales / Inventory (RS. IN LAKHS) Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Sales 10,297.69 11,388.74 11,782.55 11,985.11 13,204.29 14,352.23 Inventory 1,183.66 1,136.13 1,224.84 1,125.61 1,060.57 1,442.27 Ratio 8.70 10.02 9.46 10.64 12.45 9.95

Inventory Turnover Ratio

14 12 10 8 6 4 2 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

INTERPRETATION: The relationship between inventory and sales revenue is presented in the table. The inventory turnover increased from 8.70 times to 9.95 times and it recorded highest in 2007-08 at 12.45 times. Hence it can be conclude that inventory turnover ratio is near to the satisfactory level in IBASE Solutions.



Receivables turn over ratio = Sales / Receivables (RS. IN LAKHS) Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Total sales 1,0297.69 1,1388.74 1,1782.55 1,1985.11 1,3204.29 1,4352.23 Receivables 844.38 773.62 835.75 713.75 701.41 687.09 Ratio 12.19 14.72 14.09 16.79 18.82 20.88

Receivable Turn Over

25 20 15 10 5 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

INTERPRETATION: The receivable turn over ratio has been gradually increase in change from year on year. Their might be a slight fluctuation for the first three years and later it may continuously in positive side from 12.19 to 20.88. It is indicating that the company sales are improved much better and it is good for the company and it should continue the same in future also.


CASH TO CURRENT ASSETS Cash to Current assets ratio = Cash / Current assets Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Cash 227.09 78.55 439.13 336.75 543.33 578.46 Current Assets 2243.13 2067.37 2590.83 2314.15 2400.55 2777.70 (RS. IN LAKHS) Ratio 0.10 0.04 0.17 0.14 0.22 0.21

Cash to Current Assets Ratio

0.25 0.2 0.15 0.1 0.05 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

INTERPRETATION: The cash balance has continuous decrease from 2003-04 i.e. Rs. lakhs 227.09 to Rs. lakhs 78.55 in 2001-02 and it recorded highest in 2008-09 at Rs. lakhs 578.46, and it decrease from Rs. lakhs 439.13 in 2005-06 to Rs. lakhs 336.75 in 2003-04 and increase to Rs. lakhs 578.46 in 2008-09.


The current assets has from 2243.13 in 2003-04 to Rs. lakhs 2,067.37 and there has been decrease from 2004-05 i.e. 2,590.83 to 2003-04 to 2,314.15 increase to 2,400.55 in 2007-08 to and increase to2777.70 in 2008-09. The ratio varied between 0.04 to 0.21. CASH TO TOTAL ASSETS Cash to Total assets ratio = Cash / Total Assets Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Cash 227.09 78.55 439.13 336.75 543.33 578.46 Total Assets 3,985.93 3,810.55 4,029.23 4,369.70 4,319.66 4,718.39 (RS. IN LAKHS) Ratio 0.06 0.02 0.11 0.07 0.12 0.12

Cash To Total Assets

0.12 0.1 0.08 0.06 0.04 0.02 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09



Cash balances has decreased from Rs. lakhs 227.09 in 2003-04 to Rs. lakhs 78.55 in 2004-05 and it again increased to Rs. lakhs 336.75 in 2006-07 and it is increased to Rs. lakhs 578.46 in 2008-09 where the total assets has experienced an alternate decrease and increase. Cash as a percentage of total assets has decreased from 6% in 2003-04 to 2% in 2004-05 and increased to 11% in 2005-06. And decreased from 7% in 2005-06 to 12% in 2008-09 as whole cash in reduction to total assets is satisfactory in IBASE Solutions. Hence it is advised to the company to improve the cash and bank balances significantly. STATEMENT OF CHANGES IN WORKING CAPITAL (RS. Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Current Assets 2,243.13 2,067.37 2,590.83 2,314.15 2,400.55 2,777.70 Current Liabilities 1,323.86 1,268.33 1,440.03 1,369.23 1,455.00 1,817.33 Networking Capital 919.27 799.04 1,150.80 944.92 945.55 960.37 Increase 420.85 351.76 14.82 IN LAKHS)

Decrease 120.23 205.88 4.37 -


Fluctuations in Working Capital

450 400 350 300 250 200 150 100 50 0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09


Net working capital in 2003-04 was 919.27 and it decreased to 799.9 in 2004-05. In 2005-2006 net working capital is Rs. lakhs 1,150.80 and it decreased to 944.92 in 2006-07. In 2007-08 net working capitals is Rs. Lakhs 945.55 and it increasing to 960.37 in 2008-09. The change in networking capital is alternative increase and decrease.


It is observed that, the Net working capital of the organization is positive through out the study period. Though the net working capital is positive, it should be maintained at satisfactory level for all the years. But, in the final year it is negative. It found that, the quick ratio of this company varied between 0.80 times to 0.86 times during the period between 2003-04 to 2006-07 and 0.91 times in 2007-08; in 2008-09 it is 0.73 times. Therefore, the quick ratio is very low at the beginning of the years but later it is registered at higher rate in this organization. It is recognized that, the inventory ratio varied between 8.70 times in 2003-04 and 9.95 times in 2008-09. As a whole the inventory turnover ratio is maintained satisfactorily. It is observed that, the receivables turnover is abnormally low in 2003-04 i.e., 12.19% but in next five years the ratio is decreased and increased to 20.88% in 2008-09. In other words the company is collecting the receivables efficiently and effectively in 2008-09 than compared to other years. Cash to Total Assets has been gradually fluctuating from increase and decrease from year on year. It is too good for the change of the company. Hence we suggest that the company has to improve the cash and bank balance for the easy liquidity.


Net working capital position is too falling down from year on year due to over withdrawal of the personnel expenditure by the company. Hence we suggest that the company has to decrease their personnel expenditure and it reflects on the company dissolution.

The Cash to Current Assets Ratio it is conclude that the cash balance has been gradually increasing from year on year. The increase in cash block may clearly indicate that the company has not utilizing their funds properly. Hence we suggest that the company has to use of their funds in a proper way. So, that it could be safe from the closers.


1. It is suggested that, the fluctuations existed in the Net working capital must be controlled by properly maintaining the ratio of current assets and current liabilities. Then automatically changes identified during the period would have been be minimized. Even in future also if it is maintained the proper ratio, the company can effectively run without such deficiencies. 2. It is advised that, the yardstick for the Quick ratio is 1:1 where as it is very low in the organization. Therefore, the company should need to raise its quick assets first to over come the existing problem in order to meet the requirements. Fortunately, it reached to the good stage but, if they fail to maintain good cushion of the quick assets at any movement of time it may face the same problem. So, the quick ratio should be maintaining as per the requirement to shows the sound position of the company. 3. It is suggested that, properly maintaining the inventory turn over ratio is also very good symbol for the organization. Therefore, it is advised to maintain the same and it should try to increasing the same year by year. This ratio shows the inner strength & capability of the company. 4. It is observed that, fluctuations taken place in receivables turn over ratio up to the year 2004-2005. Afterwards for the rest of the years it is registered as increase. Hence, the receivable turn over ratio is high in the company. Therefore, it shows the good turn for the sales position of the company.



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