Chapter-1: 1. Industry Scenario 1.1 Macro Prospective

A STUDY ON WORKING CAPITAL MANAGEMENT
1
INDIAN ACADAMY SCHOOL OF MANAGEMENT STUDIES

CHAPTER-1
INTRODUCTION

1. Industry Scenario
1.1 Macro Prospective

In 1867 in stansted Que, Henry seth Taylor built a carriage powered by a steam engine. His
horseless carriage was the first automobile built in Canada.
In 1908 Ford opened his first car plant in Detroit, Michigan, a number of firms these were
already making carriages, bicycles and automobile making carriages bicycles and boat engines,
Detroit became the worlds largest of automobile making centre. In 1904 a group of businessmen
started the Ford Motor Corporation of Canada Ltd. This branch plant was beginning of the
automobile Industry in Canada.
Automotive Industry in India
Although India has been much discussed in recent years, and has been the recipient of major
foreign investment in its automotive industry, it has in many ways not received the attention of
the worlds other major developing country, China but this is about to change.
With the worlds second largest and fastest-growing population, there is no denying Indias
potential in both economic and population terms and the effect it will have on the auto industry
in the years to come. The country is already off to a good start, with a well-developed
components industry and a production level of one million four-wheeled vehicles a year, plus a
further five million two- and three-wheelers. India also has substantial strength in mass
production techniques and is particularly well served in the fields of research and development
and software design. Therefore, as always, the question is when will expansion occur and to what
level?


2

Domestic Market

The Indian market for auto components can be classified into three segments as:

demand.

Export market accounting for around 15% of the demand.

Growth of the Industry
The auto component industry continued its excellent track record by registering a growth of 20%
in the year 2004-05

Production
During the year 2003-04, auto component production grew by 20% to Rs.306 billion. In 2004-
2005 the growth in production is expected to be around 13-15% led by the growth in the OEM
segment, which is likely to contribute around 45-50% of the above.
Quality
The industry has been making rapid strides towards achievements of world-class quality systems
by imbibing ISO 9000 / ISO 14001 / QS 9000 / TS 16949 quality systems.
Till now 331 companies in ACMA (Automotive Component Manufacturers Association)
membership have been certified to ISO 9000,
166 Companies have been certified to QS 9000 and
37 Companies are awarded to ISO 14001,
17 Companies have been certified with TS 16949.
2 Companies have won the Deming Prize, and
1 Company has won Japan Quality Medal.
Exports
The industry has been exporting more than 10% of its output for the last few years. The exports
during the year 2004-2005 grew by strong 32% to cross $1 billion.

3

Principal export items include replacement parts, tractor parts, motor cycle parts, piston rings,
gaskets, engine valves, fuel pump nozzles, fuel injection parts, filter and filter elements,
radiators, gears, leaf springs.
1.2 Micro prospective


4

Background
"Cash is the lifeblood of business" is an often repeated maxim amongst financial managers.
Working capital management refers to the management of current or short-term assets and short-
term liabilities. Components of short-term assets include inventories, loans and advances,
debtors, investments and cash and bank balances. Short-term liabilities include creditors, trade
advances, borrowings and provisions. The major emphasis is, however, on short-term assets,
since short-term liabilities arise in the context of short-term assets. It is important that companies
minimize risk by prudent working capital management.
What Affects Working Capital Management?
Organizations are generally focused on cash, accounts payable, and supply chain issues.
However, external issues like the legal and business environment, or internal mechanisms like
organization structure and information systems, can significantly impact working capital.
Owing to market pressures, companies are led to paying a lot of attention to producing good
quarterly results quarter after quarter. Undue focus on this may sometimes produce a flattering
but inaccurate snapshot of working capital performance. This also happens in companies that
have a marked seasonality of operations with working capital requirements varying widely from
quarter to quarter.
Working capital management is an important yardstick to measure a company's operational and
financial efficiency. This aspect must form part of the company's strategic and operational
thinking. Efforts should constantly be made to improve the working capital position. This will
yield greater efficiency and improve customer satisfaction.
In general, Working Capital refers to the firms investment in current assets. It is defined as the
excess of current assets over current liabilities and provisions. In other words, it is the net
current assets or net working capital.
Working capital represents the total of all current assets. In other words, it is the gross working
capital. It is also known as circulating capital or current capital, for current assets are rotating
in nature. Where current liabilities and provisions exceed current assets, the difference is referred

5

to as negative working capital. Working capital is often referred to as circulating capital. The
use of the term circulating capital instead of working capital indicates that its flow is circular in
nature. Working capital, as an accountant defines it is difference between current assets and
currents liabilities.
Concept of Working Capital

Gross Working Capital: Gross working capital is the amount of funds invested in various
components of current assets. This concept has the following advantages:- Concepts of working
Capital Gross working capital Net working capital Operating cycle
Financial managers are profoundly concerned with the current assets;
Gross working capital provides the correct amount of working capital at the right time;
It enables a firm to realize the greatest return on its investment;
It helps in the fixation of various areas of financial responsibility;
It enables a firm to plan and control funds and to maximize the return on investment;

For these advantages, gross working capital has become a more acceptable concept in financial
management.

6

Net Working Capital: The net working capital is the difference between current assets and
current liabilities. The concept of net working capital enables a firm to determine how much
amount is left for operational requirements.
Operating Cycle: It is the time duration required to convert sales, after the conversion of
resources into inventories, into cash. The operating cycle of a manufacturing company involves
three phases:
Acquisition of resources such as raw material, labor, power and fuel etc.
Manufacture of the product which includes conversion of raw material into work-in-progress
into finished goods.
Sale of the product either for cash or on credit. Credit sales create account receivable for
collection.

Factors Determining Working Capital
Nature of Business/ Industry
Demand of Creditors
Cash Requirements
Volume of Sales
Seasonal Fluctuations
Technology and Manufacturing Policy
Credit Policy
Operating Efficiency.

In IFB AUTOMOTIVE PVT LTD the determinants of working capital are nature of business,
production policy, market conditions and price level changes.


7

Methods of Estimating Working Capital
There are two methods which are usually followed in determining working capital requirements.
These are:-
1. Conventional Method: According to the conventional method, cash inflows and
outflows are matched with each other. Greater emphasis is laid on liquidity and greater
importance is attached to current ratio, liquidity ratio, etc; which pertain to the liquidity
of a business.
2. Operating Cycle Method: In order to understand what gives rise to differences in the
amount of timing of cash flows, we should first know the length of time which is required
to convert cash into resources, resources into the final product, the final product into
receivables and receivables back into cash. We should know, in other words, the
operating cycle of an enterprise.
There are four major components of the operating cycle of a manufacturing company.
These are:
The cycle starts with free capital in the form of cash and credit, followed by investment
in materials, man power and other services
Production phase
Storage of the finished products terminating at the time-finished product is sold:
Cash or accounts receivable collection period, which results in and ends at the point of,
disinvestment of the free capital originally committed.

Adequacy of Working Capital
Working capital should be adequate so as to protect a business from the adverse effects of
shrinkage in the values of current assets. It ensures to a greater extent the maintenance of a
companys credit standing and provides for such emergencies as strikes, floods, fire etc. It
permits the carrying of inventories at a level that would enable a business to serve satisfactorily

8

the needs of its customers. It enables a company to operate its business more efficiently because
there is no delay in obtaining materials etc; because of credit difficulties.
Inadequacy of Working Capital
: When working capital is inadequate, a company faces many problems. It stagnates the growth
and it becomes difficult for the firm to undertake profitable projects for non-availability of
working capital funds. Difficulty in implementing operating plans and achieving the firms profit
targets. Operating inefficiencies creep in when it becomes difficult even to meet day-to-day
commitments. Fixed assets are not utilized efficiently thus the firms profitability would
deteriorate. Paucity of working capital funds renders the firm unable to avail attractive credit
opportunities. The firm loses its reputation when it is not in a position to honor it short-term
obligations thereby leading to tight credit terms.
Dangers of Excessive Working Capital
Too much working capital is as dangerous as too little of it. Excessive working capital raises
problems.
It results in unnecessary accumulation of inventories. Thus chances of inventory
mishandling, waste, theft and losses increase.
Indication of defective credit policy and slack collection period. Consequently, it
results in higher incidence of bad debts, adversely affecting profits,
Makes the management complacent which degenerates in to managerial inefficiency.
The tendencies of accumulating inventories to make a speculative profit, which tends
to liberalize the dividend policy, make it difficult for the concern to cope in the future
when it is not able to make speculative profits.


9

Sources of Working Capital:

In IFB AUTOMOTIVE PVT LTD the working capital source is mainly through cash credit


10

Measures To Improve Working Capital Management
1. The essence of effective working capital management is proper cash flow forecasting.
This should take into account the impact of unforeseen events, market cycles, loss of a
prime customer, and actions by competitors. The effect of unforeseen demands on
working capital should be factored in.
2. It pays to have contingency plans to tide over unexpected events. While market leaders
can manage uncertainty better, other companies must have risk management procedures.
These must be based on an objective and realistic view of the role of working capital.
3. Addressing the issue of working capital on a corporate-wide basis has certain advantages.
Cash generated at one location can well be utilized at another. For this to happen,
information access, efficient banking channels, good linkages between production and
billing, internal systems to move cash and good treasury practices should be in place.
4. An innovative approach, combining operational and financial skills and an all
encompassing view of the company's operations will help in identifying and
implementing strategies that generate short term cash. This can be achieved by having the
right set of executives who are responsible for setting targets and performance levels.
They are then held accountable for delivering. They are also encouraged to be
enterprising and to act as change agents.
5. Effective dispute management procedures in relation to customers will go along way in
freeing up cash otherwise locked in due to disputes. It will also improve customer service
and free up time for legitimate activities like sales, order entry, and cash collection.
Overall, efficiency will increase due to reduced operating costs.
6. Collaborating with your customers instead of being focused only on your own operations
will also yield good results. If feasible, helping them to plan their inventory requirements
efficiently to match your production with their consumption will help reduce inventory
levels. This can be done with suppliers also.
7.


11

CHAPTER-2
PROFILE OF ORGANIZATION

2.1 History
Automobiles have always caught the fascination of man. Since the invention of wheel till to date,
automobiles have stride part significant miles stones. Automobiles industry has not only
revolutionized the modern mans life, but also has made significant advances in the technological
front.

The entry of Suzuki Motor Company (SMC), Japan a major player in the global automobile
industry, opened a new era in the Indian automobile annals. SMC with a joint venture
partnership with the government of India promoted a company called Maruti Udyog Limited
(MUL) for production of passenger cars in the early eighties. The created bright business
opportunity for industries involved in the manufacture of automobiles components.

To take advantage of this challenge and opportunity, In 1974 Mr. Bijon Nag a Technocrat
Entrepreneur promoted Indian Fine Blanking Limited at Calcutta in Technical collaboration with
Hienrich schmid AG of Switzerland. The products are Fine Blanking components and Tooling
for Fine Blanking catering mainly to Automotive Industry. Indian Fine Blanking (IFB) Industries
Limited having its registered office situated at No. 14, Taratolla Road, Calcutta. And also set up
on a manufacturing unit at Bangalore in the southern part of India in 1989.

The company is named as IFB Automotive Seating and Systems Limited (IFBASSL),
imbibing the German technology for design, development, manufacturing, testing and marketing
of auto seat mechanisms, seat recliners, seat sliders and seat height adjusters.
The company has created a niche for itself in meeting the demands for both domestic and south
East Asian Automobile market.

12

The company combined serial production of its product range conforming to International
Standards. In the last quarter of 1990 and within a short span has established itself as a market
leader for these products in this part of the world.

The companys corporate philosophy is to offer to its valuable customers safety critical products
to most stringent standards and this provide full value for their money. The company has full-
fledged design, development, manufacturing, assembly and testing facilities for these products.
IFBs guidance and strength in tool design, together with its sophisticated precision tool rooms,
combined with design, manufacturing and testing strength make the company a powerful entity.

The In-house manufacturing facility is restricted to only critical components, where all other
components are sub-contracted. The product manufactured are finished in a modern automatic
pre-treatment and powder coating plant to ensure all the treated and painted parts conform to
required standards. The products are assembled in-house, using trained personnel and are
subjected to final inspection and testing before dispatching it to customers.
The company has trained personnel involved in quality assurance and quality control activities.
Adequate facilities are provided for inspection, testing and certification of radial play, angle
check, fatigue, endurance, lever operation force, twisted hinge arm, static and salt spray tests,
besides other critical test parameters as required by the customers. The test facilities are
supported by sophisticated measuring recording instruments and gauges. The company adopts
stringent measures to adhere to desired level of quality standards in all stages.

At present the company has manufacturing facilities one at Bangalore, at Madras and the other at
Gurgaon. IFB APL, Bangalore operation consists of 3 divisions that is Seating Division, Door
Division and Motor Division producing different automotive subassemblies and motors.


13

2.2 Values &Policies

Values
The companys corporate philosophy is to offer safety, critical products to most stringent
standards.
Serve the customers with high sense of Integrity.
Quality is given a top consideration.
Cost and speed will be the drivers for competitive advantage.
Respect for Human Resource.
Rewards for Commitment to targets.

Policies
Quality Policy at Ifb
To visualize customer needs and provides satisfaction through prompt supply of value
added quality goods and services continuously.
To achieve and sustain excellence in performance through use of appropriate technology,
cost efficient operations and team work of all associates.
To have a world class Human Resource through training and motivating them for higher
aspirations and also maintain safe working environments.

Material Policy
To visualize customers needs and provide satisfaction through prompt supply of
products
To continually improve the delivery performance through use of appropriate
technology / service, cost effective operations and team work of all associates.
To maintain sage work environment


14

Environment Policy
IFB APL supply automotive systems are committed to protect the environment and present
pollution by.
Optimum utilization of Natural Resources and energy
Adhering to statutory and applicable legal and other requirements
Awareness on EMS to employees and associates
Monitoring and continual improvements of environmental aspects
Strategies of The Company
IMPLEMENTATION / Adaptation to world class quality systems
Training of Employees and Suppliers in areas of Product / Usage, quality systems
SPC & Six Sigma Strategic partnership with global automotive leaders Establishment of
state-of- the-Art Test and R&D facilities.
Close interaction with consumers
Strategic partnership with global automotive leaders
JIT suppliers

2.3 Product Profile
Major Products of the Company
Seat Sliders
Seat Recliners
Seat Latches
Window Regulators
Door Beams
Lumber Support
Break Boosters
Parking Breaks
Fine Blanking Components
Automotive Motors

15

2.4 Milestones of IFB

In 1989, IFB and RHW Germany signed a License agreement for producing Car Seat Recliners.
Today IFB is the largest supplier of Seat Recliners to all car manufactures in India. Bosch
siemens, Munich signed a license agreement for production of Front Loading Washing
Machines.

In 1991, Siemens came forward to sign an agreement with IFB for production of motors for
washing machines. Siemens is widely known as manufacture of high quality motors for domestic
appliances and motors for window regulators and seat adjusters being used in Automobiles.

In 1992, Autoliv Sweden signed an agreement for design and manufacture of Safety Seat Belts
and other Retractors for the Indian Automobile Industry. Today IFB Group is the largest supplier
of safety seat belts for all varieties of Automobiles in the country with market share of 50%.
After 1992 the company gradually introduced new products into the market.
The product evolution is as follows.


16

2.5 Objectives of Ifb
To provide a global infrastructure with world class facilities for design, analysis,
development, prototyping, testing and validation at a very competitive price to the
customer
To be a total solution provider for all critical auto Sub-Assembly
Introduction of new and innovative products into the market
Promote culture for learning
Preferred supplier for automotive system in passenger car, utility vehicles and
commercial vehicles segments.
Aspire to be preferred company by all other associates


17

CHAPTER-3
RESEARCH DESIGN &METHODOLOGY

3.1 Literature Review
Research Papers Referred

a) Does Working Capital Management Affect Profitability of Belgian Firms? (by Marc
Deloof)

The relation between working capital management and corporate profitability is investigated for
a sample of 1,009 large Belgian non-financial firms for the 1992-1996 period. Trade credit
policy and inventory policy are measured by number of days accounts receivable, accounts
payable and inventories, and the cash conversion cycle is used as a comprehensive measure of
working capital management.
The results suggest that managers can increase corporate profitability by reducing the number of
days accounts receivable and inventories. Less profitable firms wait longer to pay their bills.

b) Working Capital Optimization

Sixty five percent of 400 supply chain and finance professionals surveyed for this benchmarking
study indicated that working capital optimization was a high priority for their company. This
report helps companies identify best practices in how to move from working capital optimization
theory to practical initiatives that can improve their corporate financial performance.

c) Effects of Working Capital Management on SME Profitability( by PEDRO
MARTNEZ-SOLANO , University of Murcia and PEDRO JUAN GARCA-TERUEL,
University of Murcia)


18

The objective of the research was to provide empirical evidence about the effects of working
capital management on the profitability of a sample of small and medium-sized Spanish firms. A
panel of 8,872 SMEs was covered. The results, which are robust to the presence of endogeneity,
demonstrate that managers can create value by reducing their firm's number of days accounts
receivable and inventories. Equally, shortening the cash conversion cycle also improves the
firm's profitability.
Working capital management involves the financing and management of the current assets of the
firm and they change in nature thus, possible hourly, as a result managerial decisions must be
made with respect to how much inventory is to be carried and how to get the funds to pay for it.
Unlike long-term decisions, there can be no deferral of actions. While long term decisions
involving plant and equipments or market strategy, may well determine the eventual success of
the firm, short term decisions on working capital on the other hand will determine whether the
firm gets to the long term. (Block and Hirt 2000)

Working Capital Management is the administration of the firms current asset and the financing
needed to support current asset. They further said that for a sound working capital management,
a firm needs to make two fundamental decisions. They are the determination of the optimal level
of investment in current assets and the appropriate mix of short term financing used to support
this investment in current assets. (Horne and Wachowicz, 1998)

There is plenty of literature available on the topic of working capital management.
Many textbooks and the relevant websites provide good coverage on the subject.

3.2 Statement of the Problem
Working capital is a very important resource for a manufacturing enterprise. While the fixed
assets provide infrastructure the current assets is used for the operations. The operating profits
arise out of the effective utilization of both resources but the optimization of profit largely
depends on the effective use of working capital.

19

The importance of the use of working capital is recognized throughout the world. Manager
dealing with cash, inventories, marketable securities, creditors and banks recognize the
optimization of each of these ingredients of working capital is the key to success in terms of
improved bottom line. An efficiency of organization can be measured in terms of the success of
working capital management.
3.3 Objectives of the Study
The objectives of the project is to study
The optimum level of current assets and current liabilities of the company.
The liquidity position through various working capitals related ratios.
The working capital components such as receivables accounts, cash management and inventory
positions.
The operating and cash cycle of the company.
To suggest some measures for improvement in working capital management.

A study of working capital of any enterprise would therefore be welcome both by enterprise and
analyst. Researchers have developed many tools for evaluating the efficient management of
working capital. It is therefore proposed to study this interesting area with special reference to
IFB AUTOMOTIVE PVT LTD
3.4 Scope of The Study
The scope of the study encompasses management philosophy, strategy, policy of the selected
unit towards working capital. It also includes the management of receivables, inventories and
cash with the emphasis on the stock turnover and the like. Further, the last five years working
capital performance of the selected unit is studied.
3.5 Need and Importance of The Study
The management of assets in any organization is an essential part of overall management. The
enterprise, at the time of formation attaches great importance to fixed assets management, as a
part of investment decision-making. However, in the overall day-to-day financial management,

20

after the initial investment, the management gives more importance to managing working capital.
If we look at any financial statement it will be evident that the investment in fixed assets remains
more or less static but the working capital is constantly changing. A healthy working capital
position is the sine-qua-non of a successful business. This is reflected in adequate inventories,
lowest level of debtors, minimum utilization of bank facilities for working capital, etc. thus the
study of working capital management occupies an important place in financial management.
Effective management of working capital compels finance managers to seek interdepartmental
coordination for inventories (purchase, supply planning, manufacturing, marketing, logistics),
debtors (marketing), creditors (purchase and manufacturing), and cash (finance and other
managers). The time lag between the purchase of raw materials and the realization of cash from
debtors forces the company to find money to finance its operations during that period.

3.6 Methodology
This project is on descriptive research to use the available facts as information and analyze
these to make a critical evaluation of the materials with an aim to find a solution for an
immediate problem facing by the industry or business organization. The control aim of
descriptive research is to discover a solution for some pressing problem.
Type of research - descriptive research
Company Annual Reports and website at www.IFBlindia.com

3.7 Methods of data collection
The project makes use of both the primary as well as secondary data. Primary data were
collected by observation and interaction. In the course of time, the finance department provided
very appreciable co-operation during the interaction.
As for the secondary data, the various published materials were used along with the database are
the annual reports, fact-sheets, budgeted manuals, the audited balance sheet and profit and loss
account, accounting and financial database of the company.

21

Primary data
Secondary data
Primary data:
In the primary method, the collection of data was done as per the needs and requirements of the
study. It constitutes;
Discussion
Direct interview

Secondary data:
The secondary data used in this study was collected mostly from the source mentioned below:
Reference books
Annual reports
Website
Journals
The data collected has been analyzed with the help of simple mathematical and accounting
technique-(Working Capital Management).
3.8 Tool for analysis
Common size statements and Trend Analysis Statements
Statement of changes in working capital

Data analysis process and Statistical tools used for this study is as follows:
Analysis of data
Tabulation
Column and Bar Charts

22

Pie Charts and Graphs
3.9 Limitations
The study is restricted to the period of 3 years from 2010-2013.
The study taken into consideration only the quantitative aspects and not the qualitative
aspects.
The accuracy and reliability of the data could not be independently verified.
The figures and facts claimed in the annual reports and in other forms are
taken at face value
The findings of the study are based on the information retrieved by the select unit.
Time constraint factor of the official, which restricted the scope of study.

3.10 Chapter Scheme
Chapter: 1 - Introduction:
This chapter covers the introduction to financial background, Important of financial statements,
types, objectives, etc, need for study and Method, Tools of financial statements.

Chapter: 2 - Industry Profile & Company Profile:
This chapter gives details of the industry profile and industrial background in India.
Brief information about the company i.e. into what the business is, when it came into
existence, its products.

Chapter: 3 - Research Design:
This chapter deals with explaining how this entire project is dealt with towards providing
suggestions and conclusion to the title

23

Chapter: 4 - Analysis And Interpretation:
This chapter deals in application of statistical tools on the data collected for the project report
and is being represented in graphs and diagrams.
Chapter: 5 Findings, Suggestions & Conclusion:
Findings: This chapter consists of summary of findings and the major factors the company has
in its performance.
Suggestions: This chapter consists of suggestions that have been made for the improvement of
overall performance of the company based on the findings.
Conclusion: It deals with how project was dealt with and its suitability to the organization.


24

CHAPTER-4
DATA ANALYSIS & INTERPRETATION
4.1 General Indicators
Components of Current Assets
Current assets means assets that will either be used up or converted into cash within a years
time or normal operating cycle of the business whichever is longer. They include cash
and bank balances, marketable securities, inventory of raw materials, semi-finished and
finished goods, debtors, bills receivables and pre-paid expenses.

Chart 1: Composition of Current Assets


25

Analysis
The table shows the composition of current assets in five years. There has been an increase in
current assets in the financial years 2004, 2005 and 2007. This is due to increase in sundry
debtors, cash and loans and advances level in that year. The year 2006 has seen a sharp
decrease in current assets. There is a decrease in all the components of current assets except loans
and advances in 2006. This has led to overall decrease in current assets by 11.2% compared to the
previous year.
Components of Current Liabilities

Current liabilities are those liabilities or obligations, which are expected to mature in the next
twelve months. They include short-term loans and advances, accounts payable / sundry creditors,
provision for taxation, outstanding expenses and dividend payable.
Table 2: Components of Current Liabilities


26

Chart 2: Composition of Current Liabilities

Analysis:
The table shows the composition of current liabilities for five years. There is an increase in
current liabilities in all the years. This is majorly due to the contribution made by sundry
creditors and loans and advances.
6.2 Statement of Schedule of Changes in Working Capital:
The purpose of preparing this statement is for finding out the increase or
decrease in working capital and to make a comparison between two financial years.


27

Table 3: Schedule of Changes in Working Capital for the Year 2009 and 2010

Analysis: During the financial years of 2009 and 2010 there was a net decrease in working
capital of Rs 0.11 crores. It indicates an inadequate working capital in IFB
AUTOMOTIVE PVT LTD. There is an increase in Sundry Debtors, Cash, Loans and
Advances, Sundry creditors, Credit balances and Trade deposits. There is a decrease in
inventory and unclaimed dividend.


28


Analysis: During the financial years 2010 and 2011 there is decrease in sundry debtors
and other liabilities. There is an increase in Inventories, Cash, Loans and advances,
Sundry creditors, Advance from customers and trade deposits.
During the financial years of 2010 and 2011 there is a net decrease in working capital by Rs.
4.89 crores and when compared to the financial years of 2009 and 2010 there is also a decrease in
working capital. This decrease in working capital in the previous financial years is due to re-
payment of loans.


29


Analysis:
During the financial years 2011 and 2012 there is decrease in Inventory, sundry
debtors, Cash, Sundry Creditors, trade deposits and interest accrued. There is an
increase in Loans and advances and Advance from customers.
8.31 crores and when compared to the financial years 2009 and 2010 and financial years 2010 and
2011 there is also a decrease in working capital. This decrease in working capital in the previous
financial years is due to re-payment of loans.


30


Analysis:
During the financial years 2005 and 2006 there is decrease in Inventory, sundry
debtors, Cash, Sundry Creditors, trade deposits and interest accrued. There is an
increase in Loans and advances and Advance from customers.
8.31 crores and when compared to the financial years 2003 and 2004 and financial years 2004 and
2005 there is also a decrease in working capital. This decrease in working capital in the previous
financial years is due to re-payment of loans.


31

4.2 Calculation of Operating Cycle
Operating cycle = Inventory Period+ Average Collection
period Inventory Period = 365*Average Inventory/COGS

Chart 3: Operating Cycle Trend

Analysis: The Operating Cycle for the year 2009 is 131.502 days, for the year 2010 is
128.258 days, for the year 2011 is 112.715 days, for the year 2012 is 116.848 days and
for the year 2013 is 89.834 days. It can be observed that the operating cycle has
reduced. The lower the operating cycle the better. It indicates the efficient
management of inventory and stores in the company. The company is moving towards

32

better management and control of working capital components, which is indicated by a
lower operating cycle.

4.3 Computation of Cash Cycle:

Chart 4: Cash Cycle Trend

Analysis:
The Cash cycle for the year 2003 is -60.43764186 days, for the year 2004 is -34.6217806
days, for the year 2005 is 35.12533082 days, for the year 2006 is -106.6321898 days and for
the year 2007 is -119.2657028 days. It can be observed that the company is facing problems with

33

cash management and their payment period has increased which has led to the decrease in
the cash cycle and made it negative.
4.4 Working Capital Ratios:
A ratio can be defined as a statistical yard stick that provides a measure of
relationship between two figures. Ratio analysis is a technique of interpretation of
financial statements. The following ratios help in analyzing the working capital
position:
Current Ratio
The current ratio is an indicator of the firm's commitment to meet its short-term
liabilities. The current ratio is an index of the concern's financial stability since it shows
the extent of working capital, which is the amount by which the current assets
exceed the current liabilities. A very high current ratio would indicate inadequate
employment of funds while a poor current ratio is a danger signal to the
management. It shows that business is trading beyond its resources.
Current assets
Current ratio =
Current Liabilities


34

Analysis: It is seen from the above table that during the year 2009, the current ratio was
1.677 times, during the year 2010 it was 1.623 times, 1.345 times in the year 2011,
1.225 times in the year 2012 and 1.045 times in the year 2013.
There is a decrease in the current ratio of the firm. The current liabilities have
increased by a higher percent than current assets for the past five years. The
decrease in the ratio has contributed to the decrease in working capital. The firm is not
able to maintain the favorable ratio of 2:1.

..

Quick Ratio or Acid Test Ratio
Quick ratio is a refinement over current ratio as it shows the instant ability to meet
the current liabilities. Liquid assets means all the current assets less inventories, sticky
debts, etc., i.e. such assets as can be quickly converted into cash. The general norm for
a healthy quick ratio is 1:1. This ratio is also known as acid-test ratio.

35

Liquid Assets
QUICK RATIO =
Current Liabilities

Liquid assets=Current Assets-Inventory

Analysis: during the year 2009, the quick ratio is 1.175 times, during 2010, it is 1.182
times, during 2011, it is 0.826 times, during 2012, it is 0.779 times and during 2013, it
is 0.582.
It is seen from the above table that the firm had enough funds to cover current liabilities in
the years 2009 and 2010. But from 2011, quick ratio has reduced below the favorable ratio.
More funds are blocked in Inventory and less liquid assets are available to cover
current liabilities.


36

4.5 Activity Ratios
Working Capital Turnover Ratio:
This ratio indicates whether or not working capital has been effectively utilized in
making sales. If a firm makes higher volume of sales with relatively small amount
of working capital, it is an indicator of the operating efficiency of the company.
Net Sales
Working Capital Turnover Ratio =
Working Capital

Working Capital = Current Assets-Current Liabilities


37

Analysis: During the year 2009, Working Capital Turnover Ratio is 5.98 times. For
the year 2010, it is 6.84 times, for the year 2011, it is 11.09 times. For the year 2012, it
is 17.66 times. There has been a drastic increase in Working Capital turnover ratio in
2013. It is 82.85 times in 2013. This is due to utilization of funds for repayment of
loans. Though the sales have increased, the working capital has also reduced. The
company has not set aside more funds for working capital.
The ideal working capital turnover ratio is 8 times. But during the year 2013, the
company has a ratio of 82.85 times which is very high which indicates inadequate
working capital.


38

Fixed Assets Turnover Ratio:
This ratio shows how well the fixed assets are being used to generate sales in the
business. This ratio is low if the existing capacities are not fully utilized. The industry
standard is1.56 times. It is calculated as:

Fixed Assets Cost Of Sales Or Sales
Turnover Ratio =
Fixed Assets (After Depreciation)


39

Analysis: During the year 2009, the fixed assets turnover ratio is 0.794 times. In
the year 2010, it is 1.118 times, during the year 2011 it is 1.827 times. It is 2.355 times
for the year 2012 and 3.926 times for the year 2013.the ratio is less compared to the
industry during 2009 and 2010. but from 2011, the ratio for the company is above the
industry standard.
Current Assets Turnover Ratio:
The current assets turnover ratio gives the relationship between a companys sales
and current assets. It shows the ability of the company to realize the cash from debtors as
well as the less amount of money blocked in inventories.
Net Sales
Current Assets Turnover Ratio =
Current Assets


40

Analysis: There is no standard or ideal current assets turnover ratio. It indicates the
gross working capital turnover ratio.


41

For the year 2009, it is 2.413 times. For the year 2010, it is 2.552 times, for the year 2011, it
is 2.845 times. It is 3.329 times for the year 2012 and 3.626 times for the year 2013. The
Current Asset turnover ratio is improving over the years and it is not a good sign for the
company. The reason for the increase is increase of inventory and reduction of cash.
Total Assets Turnover Ratio:
This ratio indicates the efficiency or inefficiency in the use of total resources or assets
of a concern. In other words, it is a measure of the overall performance of the
business.
Net Sales
Total Assets Turnover Ratio =
Total Assets


42

Total assets (TA) include net fixed assets (NFA) and current assets (CA) (TA= NFA+CA).
Analysis: The standard or ideal total assets turnover ratio is that the sales should be at
least two times the value of the assets. During the year 2009, the Total Assets turnover
ratio is 0.944 times, for the year 2010, it is 1.006 times. For the year 2011, it is 1.11 times,
for the year 2012 it is 1.06 times and for the year 2013 it is 1.167 times. There has been
a gradual increase in the total assets turnover ratio except for the year 2012. It
indicates that the company has not utilized its assets fully.

Cash Turnover Ratio/Cash Velocity:
Cash turnover ratio is the ratio between cash and turnover or sales. This ratio
indicates the extent to which cash resources are efficiently utilized by enterprise.
It is also helpful in determining the liquidity of a concern.

This ratio is expressed as a proportion as

43

Net Annual Sales (Cash + Credit)
Cash Turnover Ratio =
Cash in hand and at bank and readily realizable
investment or securities.

Chart 11: Cash Turnover


44

Analysis: The standard or ideal cash turnover ratio is 10 times. During the year
2003, the cash turnover ratio is 8.131 times. During the year 2004, the ratio is 8.869
times. During the year 2005, the ratio is 10.85 times, during the year 2006, the ratio
is 12.003 times and during the year 2007, the ratio is 15.58 times. Year 2005
onwards the cash velocity of the company has increased above the standard ratio.
It indicates that the company is not maintaining enough cash.
Debtors Turnover Ratio: Debtors turnover ratio measures whether the amount of
funds tied up in debtors is reasonable and whether the company has been efficient in
converting debtors into cash.
Debtors turnover ratio=net credit sales/average debtors

Chart 12 Debtors Turnover ratio


45

Analysis: During the year 2003 the ratio is 4.743 times. It is 4.557 times for the
year 2004, 5.717 times for the year 2006 and 9.184 times during the year 2007. It
indicates an improvement in the debtor collection system of the company. The ratio is
above the industry standard of 5.94 times.
Average Collection period:
Debtors collection period measures the quality of debtors since it measures the rapidity or the
slowness with which money is collected from them a shorter collection period implies prompt
payment by debtors. It reduces the chances of bad debts. A longer collection period implies too
liberal and inefficient credit collection performance.
Average Collection period=365/Debtors turnover ratio
Year Debtors Turnover Ratio Average Collection Period (In Days)
2009 4.743 76.96
2010 4.557 80.845
2011 5.717 63.845
2012 6.35 57.480
2013 9.184 39.743

Chart 13: Average Collection Period


46

Analysis:
The company gives 60 days credit period for its customers. And when compared
with the average collection period, it is seen that the collection period is longer than the
credit period for the years 2003, 2004 and 2005. It indicates insufficiency in the
procedures for collecting debts.
But the collection period has reduced during the years 2006 and 2007. It indicates that
the management has taken corrective measures to collect debts.

Creditors turnover Ratio (60% credit purchases)
This ratio measures the number of times the creditors balance turned in credit
purchases. The creditors turnover ratio indicates the speed with which the
payments for credit purchases are made to the creditors. It indicates the promptness
or otherwise in making payment of credit purchases. A higher creditors turnover
ratio signifies that the creditors are being paid promptly, thus enhancing the credit
worthiness of the company. However, a very favorable ratio to this effect also shows
that the business is not taking full advantage of credit facilities, which can be allowed
by creditors.
Creditors Turnover Ratio= Credit Purchases/Creditors


47

Chart 14: Creditors Turnover Ratio

Analysis: The Creditors turnover ratio during the year 2003 is 1.141 times. It is 1.345 times
during 2004, 2.823 times during 2005, 0.979 times during 2006 and 1.047 times
during 2007. The creditors Turnover ratio is less and indicates inefficient cash management
Average age of Payables
Average age of payables = 365* Average Creditors/Purchases


48

Chart 15: Average Age of Payables

Analysis: The credit period that the suppliers have given to the company is 90 days.
When compared with the average age of payables, the company has a longer average
age of payables compared to the credit period availed by them. This indicates that they
are utilizing these funds for financing short-term requirements. The company has paid
on time only in 2005. This can affect the credit worthiness of the company.


49

4.6 Inventory Management
Inventories constitute the most significant part of the current assets of a large majority
of companies in India. On an average, inventories are approximately 40% of current
assets, 50-60% of Working capital and 20-30% of sales. Inventory management
involves a tight ropewalk between two conflicting goals - not to have too high an
inventory level, and not to have one, which is too low. An undertaking neglecting the
management of inventories will be jeopardizing its long run profitability and fail
ultimately. The reduction in excessive inventories carries a favorable impact on the
companys profitability.
The various forms of inventories existing in manufacturing companies are raw
materials; work in process and finished goods. The levels to be maintained in these
three depend on the nature of business.
The general motives for holding inventories are:
The transaction motive, which emphasizes the need to maintain inventories
to facilitate smooth production and sales operation.
The precautionary motive, which necessitates holding of inventories to guard
against
the risk of unpredictable changes in demand and supply forces and other factors.
The speculative motive, which influences the decision to increase or
reduce
inventory levels to take advantage of price fluctuations.
The objectives of inventory management can be broadly classified into
operative and financial objectives.
Operating objectives aims at avoiding production bottlenecks by providing
continuous supply of all types of materials, promotion of manufacturing
efficiency and prompt execution of their orders to ensure better services to
customers. The financial objectives of inventory management includes effecting

50

economy in purchasing through economic order quantity and taking advantage of
favorable markets, maintaining optimum level of investment in inventories etc.
The various inventory control techniques used;
Setting inventory levels
ABC analysis
Ageing schedule
Operating cycle

4.7 Accounts Receivables Management
Accounts receivables constitute a significant portion of the total current assets of
the business next after inventories. They are a direct consequence of trade credit,
which has become an essential marketing tool in modern business. While the extension
of credit is essential for sales promotion, credit sales result in accounts receivables
with all their attendant risks. When a firm sells goods for cash, payments are received
immediately and, therefore, no receivables are created. However, when a firm sells
goods or services on credit, the payments are postponed to future dates and
receivables are created. Usually, the credit sales are made on an open
account, which means that no formal acknowledgements of debt obligations are taken
from buyers. The only documents evidencing the same are a purchase order, shipping
invoice or even a billing statement. The policy of open account sales facilitates business
transactions and reduces to a great extent the paper work required in connection with
credit sales.
Receivables are asset accounts representing amounts owed to the firm as a result of sale
of goods / services in the ordinary course of business. Receivables are the result of
extension of credit facility to the customers. The objective of such a facility is to allow
the customers as reasonable period of time in which they can pay for the goods
purchased by them. Receivables are a direct result of credit sale. Credit sale is resorted
to by a firm to push up its sales, which ultimately result in pushing up the profits earned
by the firm. At the same time selling goods on credit results in blocking of funds in

51

accounts receivables. Additional funds are, therefore, required for the operation needs
of the business, which involve extra costs in terms of interest. Moreover, increase in
receivables also increases chances of bad debts. Thus creation of accounts receivables is
beneficial as well as dangerous. The finance manager has to follow a policy which
uses cash funds as economically as possible in extending receivables without
adversely affecting the chances of increasing sales and making more profits. Thus
the objective of receivables management is to promote sales and profits until that point
is reached where the return on investment in further funding of receivables is less
than the cost of funds raised to finance that additional credit (i.e. cost of capital).
There are many factors, which influence the magnitude, the accounts receivables
in a company like cyclical influences, seasonal sales, and competitive credit terms.

4.8 Trend Analysis
Trend analysis is a horizontal analysis of financial statements. The financial statements
of more than one year are analyzed and the changes are depicted and the analyst can
find out the direction of movement, i.e., whether the movement is favorable or
unfavorable. Comparison of past data over a period of time with a base year is known
as trend analysis. Trend percentage or trend ratio analysis is a useful analytical
device, since it reduces the large amounts of absolute data into simple and easily
readable percentages. Trend percentage or trend analysis ratios are immensely
helpful to the management in knowing the present position and the trend of direction
in which the enterprise is moving. Through a study of the trend percentages or ratio
over the past few years, the management can know whether the enterprise is
moving upward or going downward or remaining constant
Trend Analysis for the Companys Current Assets and Current Liabilities


52

CHAPTER-5
FINDINGS AND CONCLUSION

Chapter-1: 1. Industry Scenario 1.1 Macro Prospective

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Chapter-1: 1. Industry Scenario 1.1 Macro Prospective

Enviado por

Direitos autorais:

Formatos disponíveis

A STUDY ON WORKING CAPITAL MANAGEMENT

Você também pode gostar