INTRODUCTION:

Every business needs funds for two purposes, for its establishment and to carry out its day-today operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant & machinery, land, building, furniture, etc. Investments in these assets represent that part of firms 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 firms capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital. MEANING AND CONCEPT OF WORKING CAPITAL According to Bhattacharya (2006), the concept of working capital was perhaps first Evolved by Karl Marx, though in a somewhat different form, and the term he used was Variable Capital. Guthmann and Dougall (1948) defined working capital as, current assets minus current liabilities and their view was elaborated by Park and Gladson (1963). This definition is also known as net working capital. Narrower definition for working capital is Inventory + Accounts Receivable Accounts Payable. This definition emphasizes operating efficiency of a firm. There are two concepts of working capital: 1. 2.

Gross Working Capital Net Working Capital

Gross Working Capital: - The gross working capital is the amount 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) 2) 3) 4) 5) Cash in hand and bank balances Bills Receivables Sundry Debtors (less provision for bad debts) Short-term loans and advances. 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.

Net Working Capital: - In a narrow sense, the term working capital refers to the net

working capital. 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 exceed the current liabilities net working capital is positive and when current liabilities are more than the current assets net working capital is negative. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of time normally one accounting year out of the current assts or the income of the business. Constituents of current liabilities: 1. 2. 3. 4. 5. 6. 7. Accrued or Outstanding Expenses. Short-term loans, advances and deposits. Dividends Payable. Bank Overdraft. Provision for taxation, if it does not amount to appropriation of profits. Bills Payable. Sundry Creditors or Accounts Payable.

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 NEED OF WORKING CAPITAL Every business or organization needs certain amount of working capital to run day to day business activities. Working capital should be adequate for smooth running of the operations and uninterrupted flow of production. It will maintain credit worthiness in the market and meet the entire current obligation including the payment of dividends to shareholders. Both the inadequate and excessive working capital is dangerous. It is said that inadequate working capital is disastrous, where as redundant working capital is criminal waste. Working Capital is needed for following purposes: a) b) c) d) To pay wages and salaries to workers. To incur day to day expenses and overhead costs. To provide credit facilities. To meet current obligation.

SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT

Solvency of the Business: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted flow of production. Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and hence helps in creating and maintaining goodwill. Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and others 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. OBJECTIVES OF THE STUDY The main thrust of the study is to make a statistical analysis of working capital. The present aim is to study the working capital of Bank of India by formulating a package of parameters for evaluating patterns of working capital. The study also aims at making a comprehensive analysis of working capital for past 4 years of Bank of India, as the working capital pattern might be expected to differ depending upon their financial activities, size and age. It also helps to design and achieve an optimal working capital to enjoy a competitive advantage over their peers, to estimate financing deficit/excess, to help in aligning a balance between current assets and liabilities to improve their working capital efficiency. - To analyze the effect of working capital on decision making system of Bank of India. - To assess the existing financial policy and strategies adopted by the Bank of India to support its growth. - To find out the impact of working capital analysis on Bank of India.

- To suggest and recommend favorable policies towards improvement of the working capital system in the case organization. SIGNIFICANCE OF THE STUDY Most banking organizations in order to be very affective, the management consistently make the endeavor to improve the position of working capital. These practices must be evaluated in the context of other system in operational strategies of other nationalised banks. It specifies the kind of performance and performance level of the nationalised banks needs to be demonstrate in order to be very effective. Hence it is a critical guide for the design of the financial policy of the bank and methods adopted to minimize the cost. But how does the bank address the critical system properly? Does the banking organization facilitate in proper management of working capital? Does the bank take decisions to minimize the day to day expenses? Does the bank communicate all the strategies to bring effectiveness in the working capital management? So these are kind of question that a nationalised bank has to ask its self while going for in bringing improvement in working capital management. This study is articulated in that direction. It may be noted that the literature survey reviles that any comprehensive study has not been conducted from the point of view of present prospective. LITERATURE REVIEW Some of the research studies have been analyzed for the purpose of literature review. The findings of these research studies are mentioned below. Deloof (2003) discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results he suggested that managers could create value for their shareholders by reducing the number of days accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills. Ghosh and Maji (2003) in this paper made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992 1993 to 2001 2002. For measuring the efficiency of working capital management, performance, utilization, and overall efficiency indices were calculated instead of using some common. working capital management ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also tested the speed of achieving that target level of efficiency by an individual firm during the period of study. Findings of the study indicated that the Indian Cement Industry as a whole did not perform remarkably well during this period. Shin and Soenen (1998) highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. The way working capital was managed had a significant impact on both profitability and liquidity. The relationship between the length of Net Trading Cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital

intensity. They found a strong negative relationship between lengths of the firms nettrading Cycle and its profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock returns. Rafuse (1996) Working capital starvation is generally credited as a major cause if not the major cause of small business failure in many developed and developing countries. Jarvis et al (1996) the success of a firm depends ultimately, on its ability to generate cash receipts in excess of disbursements. The cash flow problems of many small businesses are exacerbated by poor financial management and in particular the lack of planning cash requirements. Kargar and Blumenthal (1994) the Management of Working Capital While the performance levels of small businesses have traditionally been attributed to general managerial factors such as manufacturing, marketing and operations, working capital management may have a consequent impact on small business survival and growth. The study undertaken by Peel et al. (2000) revealed that small firms tend to have a relatively high proportion of current assets, less liquidity, exhibit volatile cash flows, and a high reliance on short-term debt. The recent work of Howorth and Westhead (2003), suggest that small companies tend to focus on some areas of working capital management, where they can expect to improve marginal returns. Peel and Wilson (1996) For small and growing businesses, an efficient working capital management is a vital component of success and survival; i.e both profitability and liquidity. They further assert that smaller firms should adopt formal working capital management routines in order to reduce the probability of business closure, as well as to enhance business performance. The study of Grablowsky (1976) and others have showed a significant relationship between various success measures and the employment of formal working capital policies and procedures. Walker and Petty (1978) & Deakins et al (2001) Managing cash flow and cash conversion cycle is a critical component of overall financial management for all firms, especially those who are capital constrained and more reliant on short-term sources of finance. Given these peculiarities, Peel and Wilson (1996) have stressed the efficient management of working capital, and more recently good credit management practice as being pivotal to the health and performance of the small firm sector. Along the same line, Berry et al (2002) finds that SMEs have not developed their financial management practices to any great extent and they conclude that owner-managers should be made aware of the importance and benefits that can accrue from improved financial management practices. The study conducted by De Chazal Du Mee (1998) revealed that 60% enterprises suffer from cash flow problems. Narasimhan and Murty (2001) stress on the need for many industries to improve their return on capital employed (ROCE) by focusing on some critical areas such as cost

containment, reducing investment in working capital and improving working capital efficiency. It is observed from the above literature review that Working Capital management has an important role in the organization and it decide the financial performance of the organization. Hence the performance of working capital has recently become an important topic for the research. However, very few empirical researches have been does on the above issue. In this context, the management of working capital, current position of the business, the decision making is some of the issued are to be examined. In this section a brief study of selected research studies on working capital has been presented. HYPOTHESES OF STUDY The study aims at examining the following hypothesis with available data and techniques. The hypotheses are: The nature of business, size and age of the bank has great impact on its working capital . Government policy and supply to govt. projects have substantially affected the working capital requirement.

RESEARCH METHODOLOGY SOURCES OF THE STUDY The data for the purpose will be collected mainly from the financial statements of company published in the Annual Reports of Bank of India. The additional information will also be collected from various other sources. Scope of the study has been on Indian Banking Sector with emphasis on Bank of India. PERIOD OF THE STUDY The secondary data for the study are considered for four-year period. SCOPE OF THE STUDY The basic objective of present study is to examine the trends and sources of working capital financing, shifts in pattern of working capital structure during the period of last four years. TOOLS OF THE STUDY We will use various accounting and statistical techniques such as ratios, percentages, mean, trend analysis, growth rates, etc. for the purpose of analyzing various working financing aspects. ITS LIKELY CONTRIBUTION TO KNOWLEDGE Any research study can explore only a limited field of knowledge. However it is expected that this study will contribute to knowledge by providing a finer approach for measuring, analysis and interpreting working capital structure.