Project Report - Working Capital Management

WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,
1)     Fixed Capital
2)     Working Capital
        Every business needs funds for two purposes for its establishment and to carry out its day-
to-day operations. Long terms funds are required to create production facilities through purchase
of fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent
that part of firm’s capital which is blocked on permanent or fixed basis and is called fixed
capital. Funds are also needed for short-term purposes for the purchase of raw material, payment
of wages and other day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that
part of the firm’s capital which is required for financing short- term or current assets such as
cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep
revolving fast and are being constantly converted in to cash and this cash flows out again in
exchange for other current assets. Hence, it is also known as revolving or circulating capital or
short term capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1.     Gross working capital
2.     Net working capital
The gross working capital is the capital invested in the total current assets of the
enterprises current assets are those
Assets which can convert in to cash within a short period normally one accounting
year.
CONSTITUENTS OF CURRENT ASSETS
1)     Cash in hand and cash at bank
2)     Bills receivables
3)     Sundry debtors
4)     Short term loans and advances.
5)     Inventories of stock as:
a.      Raw material
b.     Work in process
c.     Stores and spares
 d.     Finished goods
6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
 
In a narrow sense, the term working capital refers to the net working. Net
working capital is the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT
LIABILITIES.
Net working capital can be positive or negative. When the current assets
exceeds the current liabilities are more than the current assets. Current liabilities
are those liabilities, which are intended to be paid in the ordinary course of
business within a short period of normally one accounting year out of the
current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1.     Accrued or outstanding expenses.
2.     Short term loans, advances and deposits.
3.     Dividends payable.
4.     Bank overdraft.
5.     Provision for taxation , if it does not amt. to app. Of profit.
6.     Bills payable.
7.     Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:
1.     It enables the enterprise to provide correct amount of working
capital at correct time.
2.     Every management is more interested in total current assets with
which it has to operate then the source from where it is made
available.
3.     It take into consideration of the fact every increase in the funds of
the enterprise would increase its working capital.
 4.     This concept is also useful in determining the rate of return on
investments in working capital. The net working capital concept,
however, is also important for following reasons:
        It is qualitative concept, which indicates the firm’s ability to meet to
its operating expenses and short-term liabilities.
        IT indicates the margin of protection available to the short term
creditors.
        It is an indicator of the financial soundness of enterprises.
        It suggests the need of financing a part of working capital
requirement out of the permanent sources of funds.
 
CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in to ways:
o       On the basis of concept.
o        On the basis of time.
On the basis of concept working capital can be classified as gross working
capital and net working capital. On the basis of time, working capital may be
classified as:
     Permanent or fixed working capital.
     Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has
to maintain a minimum level of raw material, work- in-process, finished goods and cash balance.
This minimum level of current assts is called permanent or fixed working capital as this part of
working is permanently blocked in current assets. As the business grow the requirements of
working capital also increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can further be
classified as seasonal working capital and special working capital. The capital required to meet
the seasonal need of the enterprise is called seasonal working capital. Special working capital is
that part of working capital which is required to meet special exigencies such as launching of
extensive marketing for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that is required
for short periods and cannot be permanently employed gainfully in the business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
    SOLVENCY OF THE BUSINESS: Adequate working capital helps in
maintaining the solvency of the business by providing uninterrupted of
production.
     Goodwill: Sufficient amount of working capital enables a firm to make
prompt payments and makes and maintain the goodwill.
     Easy loans: Adequate working capital leads to high solvency and credit
standing can arrange loans from banks and other on easy and favorable terms.
     Cash Discounts: Adequate working capital also enables a concern to
avail cash discounts on the purchases and hence reduces cost.
     Regular Supply of Raw Material: Sufficient working capital
ensures regular supply of raw material and continuous production.
     Regular Payment Of Salaries, Wages And Other Day TO
Day Commitments: It leads to the satisfaction of the employees and raises
the morale of its employees, increases their efficiency, reduces wastage and costs
and enhances production and profits.
     Exploitation Of Favorable Market  Conditions: If a firm is
having adequate working capital then it can exploit the favorable market
conditions such as purchasing its requirements in bulk when the prices are lower
and holdings its inventories for higher prices.
     Ability To Face Crises: A concern can face the situation during the
depression.
     Quick And Regular Return On Investments:  Sufficient
working capital enables a concern to pay quick and regular of dividends to its
investors and gains confidence of the investors and can raise more funds in future.
     High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency in a
business.
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its
business operations. It should have neither redundant or excess working capital nor
inadequate nor shortages of working capital. Both excess as well as short working
capital positions are bad for any business. However, it is the inadequate working
capital which is more dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING
CAPITAL
 1.     Excessive working capital means ideal funds which earn no
profit for the firm and business cannot earn the required rate of
return on its investments.
2.     Redundant working capital leads to unnecessary purchasing
and accumulation of inventories.
3.     Excessive working capital implies excessive debtors and
defective credit policy which causes higher incidence of bad debts.
4.     It may reduce the overall efficiency of the business.
5.     If a firm is having excessive working capital then the relations
with banks and other financial institution may not be maintained.
6.     Due to lower rate of return n investments, the values of shares
may also fall.
7.     The redundant working capital gives rise to speculative
transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital arises due
to the time gap between production and realization of cash from sales. There is an operating
cycle involved in sales and realization of cash. There are time gaps in purchase of raw material
and production; production and sales; and realization of cash.
Thus working capital is needed for the following purposes:
       For the purpose of raw material, components and spares.
       To pay wages and salaries
       To incur day-to-day expenses and overload costs such as office expenses.
       To meet the selling costs as packing, advertising, etc.
       To provide credit facilities to the customer.
       To maintain the inventories of the raw material, work-in-progress, stores and
spares and finished stock.
For studying the need of working capital in a business, one has to study the business
under varying circumstances such as a new concern requires a lot of funds to meet its
initial requirements such as promotion and formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed for working capital
depends upon the size of the company and ambitions of its promoters. Greater the
size of the business unit, generally larger will be the requirements of the working
capital.
The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of working
capital required is called normal working capital.
There are others factors also influence the need of working capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL
REQUIREMENTS
1.  NATURE OF BUSINESS: The requirements of working
is very limited in public utility undertakings such as electricity, water supply
and railways because they offer cash sale only and supply services not
products, and no funds are tied up in inventories and receivables. On the other
hand the trading and financial firms requires less investment in fixed assets
but have to invest large amt. of working capital along with fixed investments.
2.  SIZE OF THE BUSINESS: Greater the size of the
business, greater is the requirement of working capital.
3.  PRODUCTION POLICY: If the policy is to keep
production steady by accumulating inventories it will require higher working
capital.
4.  LENTH OF PRDUCTION CYCLE: The longer the
manufacturing time the raw material and other supplies have to be carried for
a longer in the process with progressive increment of labor and service costs
before the final product is obtained. So working capital is directly proportional
to the length of the manufacturing process.
5.  SEASONALS VARIATIONS: Generally, during the
busy season, a firm requires larger working capital than in slack season.
6.  WORKING CAPITAL CYCLE: The speed with which
the working cycle completes one cycle determines the requirements of
working capital. Longer the cycle larger is the requirement of working capital.
 
                           DEBTORS
CASH                                 FINISHED GOODS
 
RAW MATERIAL                        WORK IN PROGRESS
  
 7.     RATE OF STOCK TURNOVER: There is an inverse co-
relationship between the question of working capital and the velocity or speed
with which the sales are affected. A firm having a high rate of stock turnover
wuill needs lower amt. of working capital as compared to a firm having a low
rate of turnover.
8.     CREDIT POLICY: A concern that purchases its requirements on
credit and sales its product / services on cash requires lesser amt. of working
capital and vice-versa.
9.     BUSINESS CYCLE: In period of boom, when the business is
prosperous, there is need for larger amt. of working capital due to rise in sales,
rise in prices, optimistic expansion of business, etc. On the contrary in time of
depression, the business contracts, sales decline, difficulties are faced in
collection from debtor and the firm may have a large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern,
we shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms
have more earning capacity than other due to quality of their products,
monopoly conditions, etc. Such firms may generate cash profits from
operations and contribute to their working capital. The dividend policy also
affects the requirement of working capital. A firm maintaining a steady high
rate of cash dividend irrespective of its profits needs working capital than the
firm that retains larger part of its profits and does not pay so high rate of cash
dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect the
working capital requirements. Generally rise in prices leads to increase in
working capital.
Others FACTORS: These are:
     Operating efficiency.
     Management ability.
     Irregularities of supply.
     Import policy.
     Asset structure.
     Importance of labor.
     Banking facilities, etc.
 
MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in
attempting to manage the current assets, current liabilities. The basic goal of
working capital management is to manage the current assets and current liabilities
of a firm in such a way that a satisfactory level of working capital is maintained,
i.e. it is neither adequate nor excessive as both the situations are bad for any firm.
There should be no shortage of funds and also no working capital should be ideal.
WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its
probability, liquidity and structural health of the organization. So working capital
management is three dimensional in nature as
1.     It concerned with the formulation of policies with regard to
profitability, liquidity and risk.
2.     It is concerned with the decision about the composition and
level of current assets.
3.     It is concerned with the decision about the composition and
level of current liabilities.
 
  WORKING CAPITAL ANALYSIS
As we know working capital is the life blood and the centre of a business.
Adequate amount of working capital is very much essential for the smooth
running of the business. And the most important part is the efficient management
of working capital in right time. The liquidity position of the firm is totally
effected by the management of working capital. So, a study of changes in the uses
and sources of working capital is necessary to evaluate the efficiency with which
the working capital is employed in a business. This involves the need of working
capital analysis.
The analysis of working capital can be conducted through a number of devices,
such as:
1.     Ratio analysis.
2.     Fund flow analysis.
3.     Budgeting.
 
1.    RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique
of ratio analysis can be employed for measuring short-term liquidity or working
capital position of a firm. The following ratios can be calculated for these
purposes:
1. Current ratio.
2. Quick ratio
3.  Absolute liquid ratio
4.  Inventory turnover.
5.  Receivables turnover.
6.  Payable turnover ratio.
7.  Working capital turnover ratio.
8.  Working capital leverage
9.  Ratio of current liabilities to tangible net worth.
 
2.    FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the source from
which additional funds were derived and the use to which these sources were put.
The fund flow analysis consists of:
 
a.      Preparing schedule of changes of working capital
b.     Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position
(working capital) business enterprise between beginning and ending of the
financial dates.
 
3.    WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of business plans and
polices to be pursued in the future period time. Working capital budget as a part
of the total budge ting process of a business is prepared estimating future long
term and short term working capital needs and sources to finance them, and then
comparing the budgeted figures with actual performance for calculating the
variances, if any, so that corrective actions may be taken in future. He objective
working capital budget is to ensure availability of funds as and needed, and to
ensure effective utilization of these resources. The successful implementation of
working capital budget involves the preparing of separate budget for each element
of working capital, such as, cash, inventories and receivables etc.  
 
 ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR
TEST OF LIQUIDITY
The short –term creditors of a company such as suppliers of goods of credit and
commercial banks short-term loans are primarily interested to know the ability
of a firm to meet its obligations in time. The short term obligations of a firm can
be met in time only when it is having sufficient liquid assets. So to with the
confidence of investors, creditors, the smooth functioning of the firm and the
efficient use of fixed assets the liquid position of the firm must be strong. But a
very high degree of liquidity of the firm being tied – up in current assets.
Therefore, it is important proper balance in regard to the liquidity of the firm.
Two types of ratios can be calculated for measuring short-term financial
position or short-term solvency position of the firm.
1.     Liquidity ratios.
2.     Current assets movements ‘ratios.
 
A)   LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and
when these become due. The short-term obligations are met by realizing
amounts from current, floating or circulating assts. The current assets should
either be liquid or near about liquidity. These should be convertible in cash for
paying obligations of short-term nature. The sufficiency or insufficiency of
current assets should be assessed by comparing them with short-term liabilities.
If current assets can pay off the current liabilities then the liquidity position is
satisfactory. On the other hand, if the current liabilities cannot be met out of the
current assets then the liquidity position is bad. To measure the liquidity of a
firm, the following ratios can be calculated:
1.     CURRENT RATIO
2.     QUICK RATIO
3.     ABSOLUTE LIQUID RATIO
 
1.   CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general
liquidity and its most widely used to make the analysis of short-term financial
position or liquidity of a firm. It is defined as the relation between current assets
and current liabilities. Thus,
 CURRENT RATIO = CURRENT ASSETS 
                                     CURRENT LIABILITES
The two components of this ratio are:
1)     CURRENT ASSETS
2)     CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry
debtors, inventories and work-in-progresses. Current liabilities include
outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time. On the hand a low current ratio
represents that the liquidity position of the firm is not good and the firm shall
not be able to pay its current liabilities in time. A ratio equal or near to the rule
of thumb of 2:1 i.e. current assets double the current liabilities is considered to
be satisfactory.
 
CALCULATION OF CURRENT RATIO
                                                                              (Rupees in crore)
e.g.

Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57
Current Liabilities 27.42 20.58 33.48
Current Ratio 2.96:1 4.03:1 4.08:1
Interpretation:-
As we know that ideal current ratio for any firm is 2:1. If we see the current
ratio of the company for last three years it has increased from 2006 to 2008. The
current ratio of company is more than the ideal ratio. This depicts that
company’s liquidity position is sound. Its current assets are more than its current
liabilities.
2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio
may be defined as the relationship between quick/liquid assets and current or
liquid liabilities. An asset is said to be liquid if it can be converted into cash
with a short period without loss of value. It measures the firms’ capacity to pay
off current obligations immediately.
QUICK RATIO = QUICK ASSETS
                                CURRENT LIABILITES
Where Quick Assets are:
1)           Marketable Securities
2)           Cash in hand and Cash at bank.
3)           Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet its
current liabilities in time and on the other hand a low quick ratio represents that
the firms’ liquidity position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought
that if quick assets are equal to the current liabilities then the concern may be
able to meet its short-term obligations. However, a firm having high quick ratio
may not have a satisfactory liquidity position if it has slow paying debtors. On
the other hand, a firm having a low liquidity position if it has fast moving
inventories.
CALCULATION OF QUICK RATIO

e.g.                                                              (Rupees in Crore)

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55
Current Liabilities 27.42 20.58 33.48
Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
Interpretation :
       A quick ratio is an indication that the firm is liquid and has the ability to
meet its current liabilities in time. The ideal quick ratio is   1:1. Company’s
quick ratio is more than ideal ratio. This shows company has no liquidity
problem.
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more liquid
than inventories, yet there may be doubts regarding their realization into cash
immediately or in time. So absolute liquid ratio should be calculated together
with current ratio and acid test ratio so as to exclude even receivables from the
current assets and find out the absolute liquid assets. Absolute Liquid Assets
includes :
ABSOLUTE LIQUID RATIO =      ABSOLUTE LIQUID ASSETS
                                                       CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.
 e.g.                                                          (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid Assets 4.69 1.79 5.06
Current Liabilities 27.42 20.58 33.48
Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1
Interpretation :
       These ratio shows that company carries a small amount of cash. But there is
nothing to be worried about the lack of cash because company has reserve,
borrowing power & long term investment. In India, firms have credit limits
sanctioned from banks and can easily draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn
profits. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, large is the amount of
sales and profits. Current assets movement ratios measure the efficiency with
which a firm manages its resources. These ratios are called turnover ratios
because they indicate the speed with which assets are converted or turned over
into sales. Depending upon the purpose, a number of turnover ratios can be
calculated. These are :
1.                 Inventory Turnover Ratio
2.                 Debtors Turnover Ratio
3.                 Creditors Turnover Ratio
4.                 Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets include
high amount of debtors due to slow credit collections and moreover if the assets
include high amount of slow moving inventories. As both the ratios ignore the
movement of current assets, it is important to calculate the turnover ratio.
1.                 INVENTORY TURNOVER OR STOCK
TURNOVER RATIO :
Every firm has to maintain a certain amount of inventory of finished goods
so as to meet the requirements of the business. But the level of inventory
should neither be too high nor too low. Because it is harmful to hold more
inventory as some amount of capital is blocked in it and some cost is
involved in it. It will therefore be advisable to dispose the inventory as
soon as possible.
 INVENTORY TURNOVER RATIO =      COST OF GOOD SOLD
                                                    AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is
converted into sales. Usually a high inventory ratio indicates an efficient
management of inventory because more frequently the stocks are sold ; the
lesser amount of money is required to finance the inventory. Where as low
inventory turnover ratio indicates the inefficient management of inventory.
A low inventory turnover implies over investment in inventories, dull
business, poor quality of goods, stock accumulations and slow moving
goods and low profits as compared to total investment.
AVERAGE STOCK  =   OPENING STOCK + CLOSING STOCK
                                                                 2

                                                      (Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times
Interpretation :
       These ratio shows how rapidly the inventory is turning into receivable
through sales. In 2007 the company has high inventory turnover ratio but in
2008 it has reduced to 1.75 times. This shows that the company’s inventory
management technique is less efficient as compare to last year.
2.                 INVENTORY CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD =   365 (net working days)
                                                INVENTORY TURNOVER RATIO
e.g.

Year 2006 2007 2008

Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
Interpretation :
       Inventory conversion period shows that how many days inventories takes to
convert from raw material to finished goods. In the company inventory
 conversion period is decreasing. This shows the efficiency of management to
convert the inventory into cash.
3.                 DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to increase its
sales and a liberal credit policy may result in tying up substantial funds of a firm
in the form of trade debtors. Trade debtors are expected to be converted into
cash within a short period and are included in current assets. So liquidity
position of a concern also depends upon the quality of trade debtors. Two types
of ratio can be calculated to evaluate the quality of debtors.
a)       Debtors Turnover Ratio
b)      Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)
                                                         AVERAGE DEBTORS
Debtor’s velocity indicates the number of times the debtors are turned
over during a year. Generally higher the value of debtor’s turnover ratio the
more efficient is the management of debtors/sales or more liquid are the debtors.
Whereas a low debtors turnover ratio indicates poor management of
debtors/sales and less liquid debtors. This ratio should be compared with ratios
of other firms doing the same business and a trend may be found to make a
better interpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
                                                        2
 
e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times
Interpretation :
       This ratio indicates the speed with which debtors are being converted or
turnover into sales. The higher the values or turnover into sales. The higher the
values of debtors turnover, the more efficient is the management of credit. But
in the company the debtor turnover ratio is decreasing year to year. This shows
that company is not utilizing its debtors efficiency. Now their credit policy
become liberal as compare to previous year.
 4.                 AVERAGE COLLECTION PERIOD :
Average Collection Period =    No. of Working Days
                                             Debtors Turnover Ratio
The average collection period ratio represents the average number of days
for which a firm has to wait before its receivables are converted into cash. It
measures the quality of debtors. Generally, shorter the average collection period
the better is the quality of debtors as a short collection period implies quick
payment by debtors and vice-versa.
Average Collection Period =    365 (Net Working Days) 
                                             Debtors Turnover Ratio

Year 2006 2007 2008

Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
Interpretation :
          The average collection period measures the quality of debtors and it
helps in analyzing the efficiency of collection efforts. It also helps to analysis
the credit policy adopted by company. In the firm average collection period
increasing year to year. It shows that the firm has Liberal Credit policy. These
changes in policy are due to competitor’s credit policy.
5.                 WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity of utilization of net
working capital. This ratio indicates the number of times the working
capital is turned over in the course of the year. This ratio measures the
efficiency with which the working capital is used by the firm. A higher
ratio indicates efficient utilization of working capital and a low ratio
indicates otherwise. But a very high working capital turnover is not a
good situation for any firm.
Working Capital Turnover Ratio =           Cost of Sales
                                                        Net Working Capital
 
Working Capital Turnover       =                   Sales        
                                                        Networking Capital
 
e.g.
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
Interpretation :
          This ratio indicates low much net working capital requires for sales.
In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1
the company requires 60 paisa as working capital. Thus this ratio is helpful to
forecast the working capital requirement on the basis of sale.
INVENTORIES
(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Inventories 37.15 35.69 75.01
Interpretation :
       Inventories is a major part of current assets. If any company wants to
manage its working capital efficiency, it has to manage its inventories
efficiently. The graph shows that inventory in 2005-2006 is 45%, in 2006-2007
is 43% and in 2007-2008 is 54% of their current assets. The company should try
to reduce the inventory upto 10% or 20% of current assets.
CASH BNAK BALANCE :
(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Cash Bank Balance 4.69 1.79 5.05
Interpretation :
       Cash is basic input or component of working capital. Cash is needed to
keep the business running on a continuous basis. So the organization should
have sufficient cash to meet various requirements. The above graph is indicate
that in 2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79. The
result of that it disturb the firms manufacturing operations. In 2008, it is
increased upto approx. 5.1% cash balance. So in 2008, the company has no
problem for meeting its requirement as compare to 2007.
DEBTORS :
(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

 Debtors 17.33 19.05 25.94
Interpretation :
       Debtors constitute a substantial portion of total current assets. In India it
constitute one third of current assets. The above graph is depict that there is
increase in debtors. It represents an extension of credit to customers. The reason
for increasing credit is competition and company liberal credit policy.
 
CURRENT ASSETS :
(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Current Assets 81.29 83.15 136.57
Interpretation :
       This graph shows that there is 64% increase in current assets in 2008. This
increase is arise because there is approx. 50% increase in inventories. Increase
in current assets shows the liquidity soundness of company.
 
CURRENT LIABILITY :
(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Current Liability 27.42 20.58 33.48
Interpretation :
       Current liabilities shows company short term debts pay to outsiders. In
2008 the current liabilities of the company increased. But still increase in
current assets are more than its current liabilities.
 
NET WOKRING CAPITAL :
(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Net Working Capital 53.87 62.53 103.09
Interpretation :
       Working capital is required to finance day to day operations of a firm.
There should be an optimum level of working capital. It should not be too less
or not too excess. In the company there is increase in working capital. The
 increase in working capital arises because the company has expanded its
business.
 
RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically analyze
critically financial position of to the organization:
 
             I.               COMMON-SIZE P/L A/C
          II.               COMMON-SIZE BALANCE SHEET
      III.               COMPARTIVE P/L A/C
       IV.               COMPARTIVE BALANCE SHEET
          V.               TREND ANALYSIS
       VI.               RATIO ANALYSIS
 
The above parameters are used for critical analysis of financial position.  With the
evaluation of each component, the financial position from different angles is tried to
be presented in well and systematic manner. By critical analysis with the help of
different tools, it becomes clear how the financial manager handles the finance
matters in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in formulation of a
healthy and strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in efficiencies
and makes the desired changes.
 
ANALYSIS OF FINANCIAL STATEMENTS
 
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and
consistent accounting procedure to convey an under-standing of some financial
aspects of a business firm. It may show position at a moment in time, as in the case of
balance sheet or may reveal a series of activities over a given period of time, as in the
case of an income statement. Thus, the term ‘financial statements’ generally refers to
the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and obligation
of a business firm.
2. To provide other needed information about charges in such economic resources and
obligation.
3. To provide reliable information about change in net resources (recourses less
obligations) missing out of business activities.
4. To provide financial information that assets in estimating the learning potential of
the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not
present a final picture a final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation of these
statements must be done carefully otherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The data given in
these statements is only approximate. The actual value can only be determined when
the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally
one year, during the life of a concern. The costs and incomes are apportioned to
different periods with a view to determine profits etc. The allocation of expenses and
income depends upon the personal judgment of the accountant. The existence of
contingent assets and liabilities also make the statements imprecise. So financial
statement are at the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give
final and accurate position. The value of fixed assets in the balance sheet neither
represent the value for which fixed assets can be sold nor the amount which will be
required to replace these assets. The balance sheet is prepared on the presumption of a
going concern. The concern is expected to continue in future. So fixed assets are
shown at cost less accumulated deprecation. Moreover, there are certain assets in the
balance sheet which will realize nothing at the time of liquidation but they are shown
in the balance sheets.
4. The financial statements are prepared on the basis of historical costs Or original
costs. The value of assets decreases with the passage of time current price changes are
not taken into account. The statement are not prepared with the keeping in view the
economic conditions. the balance sheet loses the significance of being an index of
current economics realities. Similarly, the profitability shown by the income
statements may be represent the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and
operating result of the business but they do not become a part of these statements
because they cannot be measured in monetary terms. The basic limitation of the
traditional financial statements comprising the balance sheet, profit & loss A/c is that
they do not give all the information regarding the financial operation of the firm.
Nevertheless, they provide some extremely useful information to the extent the
balance sheet mirrors the financial position on a particular data in lines of the structure
of assets, liabilities etc. and the profit & loss A/c shows the result of operation during
a certain period in terms revenue obtained and cost incurred during the year. Thus, the
financial position and operation of the firm.
 
FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the available
accounting data and financial statements. The analysis is done

CALCULATIONS OF RATIOS

Ratios are relationship expressed in mathematical terms between figures, which are
connected with each other in some manner.
 

CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon the basis of

classification
The traditional classification has been on the basis of the financial statement to which the
determination of ratios belongs.
 
 These are:-
        Profit & Loss account ratios
        Balance Sheet ratios
        Composite ratios

Project Description :
Title : Working Capital Management of ____________
Pages : 73
Category : Project Report for MBA