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1. INTRODUCTION

1.1 INTRODUCTION TO THE STUDY

Working capital management is a significant fact of financial management due to

the fact that it plays a pivotal role in keeping the wheels of a business enterprise
running. The requirement of working capital for day to day business activities
cannot be overemphasized. It cannot be defined that a firm invests a part of its
permanent capital in fixed assets and keeps a part of it for working capital i.e. for
meeting the day to day requirements. The requirement of working capital varies
from firm to firm depending upon the nature of the business, production policy,
market conditions, and condition of supply.

Working capital management is a part of the firms capital which is required for
financing current assets such as cash, marketable securities, debtors and
inventories. The basic objective of working capital is to manage the firms
currents assets and current liabilities in such a way that a satisfactory level of
working capital in maintained.

Working capital management deals with maintaining the levels of working

capital to optimum, because if a concern has inadequate opportunities and if the
working capital is more than required then the concern will lose money in the
form of interest on the blocked funds. Therefore working capital management
plays a very important role in the profitability of a company. And also due to
heavy competitions among different organizations it is now compulsory to look
after working capital.

The significance of working capital management is to ensure that the

organisation maintains a good fit with the changing environment and strives to
build the capability to cope with challenges.

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1.2 INDUSTRY PROFILE

Steel industry is one of the major industries in India. India is the fifth largest
steel producing country in the world. Indian Government plays an important role
in the development of steel. Steel has now been an important part of the industrial
economy. Steel was introduced in the late 1850s but steel has been the basic if
the worlds industrial economy. Steel industry is a business of processing iron or
into steel, which in its simplified form is an iron carbon alloy and in the same
cases turning that metal into partially finished products or recycling scrap material
into steel.

INDIAN STEEL INDUSTRY

India is the fifth largest producer of steel in the world. India steel industry has
grown by leaps and bounds, especially in recent times with Indian firms buying
steel companies overseas.
The scope for steel is huge and industry estimates indicate that the industry will
continue will to grow reasonably in the coming years with huge demands for
stainless steel in the construction of new airports and metro rail projects. The
Government is planning a massive enhancement of the steel production capacity
of India with the modernization of the existing steel plants.

INDUSTRY STATISTICS
Government targets to increase the production capacity from 56 million tonnes
annually to 124 MT in the first phase which will come to an end by 2011-12.
Currently with a production of 56 million tonnes India accounts for over 7% of
the total steel produced globally, while it accounts to about 5% of global steel
consumption. The steel sector in India grew by 5.3% in May 2009. Globally
India is the only country to post a positive overall growth in the production of
crude steel at 1.01% for the period of January-March in 2009.

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EXPORT
About 50% of the steel produced in India is exported. Indias export of steel
during April-December 2008 was 64.4 MT as against 9.7 MT in December 2007.
In February 2009, steel export increased by 17% to 12.6 MT from 10.8 MT in the
same month last year. More than 50% of steel from India is exported to China.
The Governments decision to reduce export duty on iron ore lumps from 15% to
5% has given a major boost to the export of steel.

DOMESTIC SUPPLY
The estimated demand of the re-rolled products has been estimated at about 8
millionTonnes. The share of the secondary steel producers in India out of the total
production of finished steel has been assessed at 59 per cent which itself proves
the achievement of this sector. The secondary industry has always been
recognized by the Government and the steel experts as a compliment to the main
stream of steel industry. The industry has created thousands and thousands tonnes
of its products to core projects, dams, state Electricity Broad and other
infrastructure projects in India. The steel re-rolling industry caters to the needs of
the domestic fields up to the tonnes of 68 per cent of the total exports of rounds
and bars have been recorded from the secondary steel producers.

HURDLES
Power shortage hampers the production of steel
Use of out-dated process for production
Lags behind in the production of stainless steel
Deficiency of raw materials required by the industry
Labour productivity is low. It is 144 tons per worker per year againt 600
tons in Western Europe as per estimates
Inadequate shipment capacity and transport structure

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STRENGTHS
There are many strong points of the industry that makes it one of the leading
names in the global steel industry. The rate of labour wage in India is among one
of the lowest in the world thereby making large scale production feasible. The
boom witnessed in the automobile industry has ensured that the demand for steel
is increasing gradually and will continue to do so in the near future. There is huge
manpower in India which is another reason why steel production in India is high
and the industry is is doing pretty well both nation and internationally.
INVESTMENTS
Numerous steel companies some major projects in the pipeline to invest in
India steel industry. Steel companies have earmarked more than 100 million USD
for the setting up of sponge iron units in Koppal and Bellary in Karnataka. As per
investment commission of India more than 30 billion USD are in the pipeline for
investments over the next five years.

SECTOR STRUCTURE/MARKET SIZE

The steel industry in India has been moving from strength to strength and
according to the Annual Report 2009-10 by the ministry of steel, India has
emerged as the 5th largest producer of steel in the world and is likely to become
the second largest producer of crude steel by 2015-16.
Recently, Steel Minister, Mr. Virdhadra Singh said that India will become
the worlds second-largest steel producer by 2012, more than doubling its capacity
to 124 million tons (MT) as part of the push being given to assist overall
infrastructure development.

PRODUCTION
Steel production rose 4.2 per cent to reach 60MT in 2009-2010, according
to Ministry of Steel.
The National Steel Policy 2005 had projected an annual Steel consumption
growth of 7 per cent based on GDP growth rate of 7-7.5 per-cent and production
of 110 MT of crude Steel 2019-2020. Nonetheless, with the current rate of on-

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going Greenfield and Brownfield projects, the Ministry of Steel has projected that
these growth trends are likely to be exceeded and it in envisaged that in the next 5
years demand will grow at higher annual average growth rate of over 10 per cent
as compared to around 7 per cent growth achieved between 1991-92 and 2005-06.
Moreover, according to the Ministry, the crude Steel production capacity in the
country by 2011-12 will be nearby 124MT.
According to the Ministry of Steel, 222 memorandum of understanding (MoUs)
have been signed with various states for planned capacity of around 276 MT.
Major investment plans are in Orissa, Jharkhand, Chhattisgarh, West Bengal,
Karnataka, Gujarat and Maharashtra.
According to the Annual Report 2009-10 by the Ministry of Steel, domestic
crude Steel production grew at a compounded annual growth rate of 8.6 per cent
during 2004-05 and 2008-09.

CONSUMPTION
Indias Steel consumption rose 8 per cent in the year ended March 2010,
over the same period a year above on account of improved demand from sectors
like automobile, infrastructure and housing. The countrys Steel consumption
increased to 56.3 MT in the 12 months to March 2010 from 52.3 MT in the
previous year, as per the Ministry of Steel.

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1.3 COMPANY PROFILE

Profile of the company

Name of the company : Krishna steel rolling mills

Nature of the company : MANUFACTURESSERS OF

MS.INGOTS

Managing director : Sri. R Elangovan

Annual production and

Turn over : 24 Cr

Working hours : 20 Hrs/Day

Type & name of product : M.S. INGOTS

Buyers : INSIDE KERALA

Address : 355/1, NIDA, KANJIKODE

PALAKKAD, KERALA

Phone no : 0491-2568763/ FAX NO. :

0421-2568763

Email id : krishnasteel@hotmail.com

Bankers : City Union Bank

Auditor : Shiva Chettor

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KRISHNA STEEL ROLLING MILLS is one of the steel ingot manufacturers in

India. Incepted in the year of 2008, the company has started its voyage as a
specialist manufactures of the steel ingot. The company also manufacture per
excellence alloy steel ingot. They have developed its own manufacturing
facilities, located at NIDA, Kanjikode.The company stands in the side of
technology and in quality to bring the best over years.

Krishna steel rolling mills is registered under the companys act 1956. It enjoy a
monopoly market in Kerala and tamilnadu. The company functions under the
ample leadership of Sri. R Elangovan who is the managing director of the
company. There are around 150 staff employees working in this company and
employees are appointed on contract basis in peak seasons the labourers are
mainly from Orissa and Bihar. Krishna steel rolling mills was set up on November
2008. The company achieved the certificate of ISI (Fe415) and ISO 9001-2000.
MrElangovan who is the managing director of Krishna steels has also received
the prestigious UdyogRatna Award 2009 for best employer. Krishna steel has
branches in tamilnadu and in Palakkad(two branches).
Krishna steel are situated in 16km away from Palakkad town in the industrial
development area, kanjikode.

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OBJECTIVES OF THE COMPANY

To ensure quality requirements of the products and services offered, are

maintained at all stages.

To create a culture among all employees towards quality concepts and

productivity through total involvement and commitment of all employees.

To create healthy working environment for all attainment of quality goals

with excellence and to make quality a way of life.

To detect and prevent conformance detects easily as possible and to

eliminate them through appropriate changes to the quality management system

To achieve and maintain quality leadership through continuous technology

up gradation, improvement in techniques, systems and procedures and to meet
customers changing needs.

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ORGANIZATION CHART

MANAGING DIRECTOR

General Manager

Production Purchase Finance Sales Personnel

Department Department Department Department Department

Purchase General Sales Personnel

Finance
Manager Administrati Manager Manager
Manager
ve Officer

Supervisor Workers

Employees

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1.1 RESEARCH PROBLEM

This project deals with the study about Working Capital Management in
KRISHNA STEEL ROLLING MILLS.

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1.5OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVES

To know the effectiveness of working capital management in Krishna steel

rolling mills

SECONDARY OBJECTIVES

To identify the factors affecting working capital of the company

To analyse financial performance of the company with reference to its

working capital components

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1.6 RESEARCH METHODOLOGY

RESEARCH DESIGN

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

May be understood as a science of studying now research is done systematically.
In that various steps, those are generally adopted by a researcher in studying his
problem along with the logic behind them.

The procedures by which researchers go about their work of describing,

explaining and predicting phenomenon are called methodology.

PROBLEM STATEMENT

Working capital management or simply the management of capital invested in

current assets is the focus of study. So topic is to study working capital
management Krishna steel rolling mills Kanjikode, Working capital is the fund
invested by a firm in current assets. Now in a cut throat competitive era where
each firm competes with each other to increase their production and sales, holding
of sufficient current assets have become mandatory as current assets include
inventories and raw materials which are required for smooth production runs.
Holding of sufficient current assets will ensure smooth and un interrupted
production but at the same time, it will consume a lot of working capital. Here
creeps the importance and need of efficient working capital management.
Working capital management aims at managing capital assets at optimum level,
the level at which it will aid smooth running of production and also it will involve
investment of nominal working capital in capital assets.

The problem generally explains that, less attention has been paid to the area of
short-term finance, in particular that of working capital management. Such neglect
might be acceptable were working capital considerations of relatively little

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importance to the firm, but effective working capital management has a crucial
role to play in enhancing the profitability and growth of the firm. Indeed,
experience shows that inadequate planning and control of working capital is one
of the more common causes of business failure.

TYPE OF RESEARCH

ANALYTICAL RESEARCH

Analytical research is a specific type of research that involves critical thinking

skills and the evaluation of facts and information relative to the research being
conducted.

SOURCES OF DATA

There are mainly two through which the data required for the research is
collected.

Primary data:

The primary data is that data which is collected fresh or first hand, and for first
time which is original in nature.

In this study the Primary data has been collected from Personal Interaction with
finance manager and other staff members.

Secondary data:

The secondary data are those which have already collected and stored.
Secondary data easily get those secondary data from records, annual reports of the
company etc. It will save the time, money and efforts to collect the data.

In this stud the major source of data for this project was collected through annual
reports, profit and loss account of 5 year period from 2009-2014& some more
information collected from internet and text sources.

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TOOLS USED FOR FINANCIAL STATEMENT ANALYSIS

RATIO ANALYSIS

Ratio analysis is the powerful tool of financial statements analysis. A ratio is

define as the indicated quotient of two mathematical expressions and as the
relationship between two or more things. The absolute figures reported in the
financial statement do not provide meaningful understanding of the performance
and financial position of the firm. Ratio helps to summaries large quantities of
financial data and to make qualitative judgment of the firms financial
performance.

CLASSIFICATION OF RATIOS:

A) Liquidity Ratios

B) Activity Ratios

C) Profitability Ratios

A) Liquidity Ratios

These ratios portray the capacity of the business unit to meet its short term
obligation from its short-term resources (i.e. Current Ratio, Quick Ratio.)

Current Ratio:

Current ratio may be defined as the relationship between current assets and
current liabilities it is the most common ratio of measuring liquidity. It is
calculated by dividing current assets and current liabilities. Current assets are
those, the amount of which can be realized with in a period of one year. Current
liabilities are those amounts which are payable with in the period of the year.

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Current assets
Current ratio =
Current liabilities

Liquid Ratio:

The term liquidity refers to the ability of a firm to pay its short-term obligation
as and when they become due. The term quick assets or liquid assets refers
current assets which can be converted into cash immediately it comprises all
current assets except stock and prepaid expenses it is determined by dividing
quick assets by quick liabilities.

Liquid assets
Liquid Ratio =
Liquid liabilities
Absolute Liquid Ratio
Absolute Liquid Ratio is also called as Cash Position Ratio (or) Over Due
Liability Ratio. This ratio established the relationship between the absolute liquid
assets and current liabilities. Absolute Liquid Assets include cash in hand, cash at
bank, and marketable securities or temporary investments. The optimum value for
this ratio should be one, i.e., 1: 2. It indicates that 50% worth absolute liquid
assets are considered adequate to pay the 100% worth current liabilities in time. If
the ratio is relatively lower than one, it represents that the company's day-to-day
cash management is poor. If the ratio is considerably more than one, the absolute
liquid ratio represents enough funds in the form of cash to meet its short-term

Absolute Liquid Assets

Absolute Liquid Ratio =
Current Liabilities

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B). PROFITABILITY RATIOS

The term profitability means the profit earning capacity of any business activity.
Thus, profit earning may be judged on the volume of profit margin of any activity
and is calculated by subtracting costs from the total revenue accruing to a firm
during a particular period. Profitability Ratio is used to measure the overall
efficiency or performance of a business. Generally, a large number of ratios can
also be used for determining the profitability as the same is related to sales or
investments.

The following important profitability ratios are discussed below:

1. Gross Profit Ratio.

2. Net Profit Ratio.

1 Gross Profit Ratio

Gross Profit Ratio established the relationship between gross profit and net sales.
This ratio is calculated by dividing the Gross Profit by Sales. It is usually
indicated as percentage.

Gross profit
Gross profit ratio =
Net sales

2. Net profit ratio

Net Profit Ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio
(or) Net Profit to Sales Ratio. This ratio reveals the firm's overall efficiency in
operating the business. Net profit Ratio is used to measure the relationship

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between net profit (either before or after taxes) and sales. This ratio can be
calculated by the following formula:

Net Profit Ratio = Net Profit after Tax x 100

Net Sales

Net profit includes non-operating incomes and profits. Non-Operating Incomes

such as dividend received, interest on investment, profit on sales of fixed assets,
commission received, discount received etc. Profit or Sales Margin indicates
margin available after deduction cost of production, other operating expenses, and
income tax from the sales revenue. Higher Net Profit Ratio indicates the standard
performance of the business concern.

SCHEDULE OF CHANGES IN WORKING CAPITAL

The schedule of changes in working capital can be prepared by comparing the

current assets and current liabilities of two periods. It may be in the following
form.

A) Current assets

1) Cash balance

2) Bills receivable

3) Sundry debtors

4) Stock/inventories

5) Prepaid expenses

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B) Current liabilities

1) Sundry creditors

2) Bills payable

3) Bank overdraft

4) Outstanding expenses

5) Provision for taxation

6) Reserve for bad debt

Working capital [(A)-(b)]

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1.7SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The
main scope of the study was to put into practical the theoretical aspect of the study
into real life work experience. The study of working capital is based on tools like
Ratio Analysis, Statement of changes. Further the study is based on last 5 years
Annual Report of Krishna steel rolling mills.

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1.8 NEED FORSTUDY

The study has been conducted for gaining practical knowledge about Working
Capital Management & activities Krishna steel rolling mills
It is beneficial to management of the company by providing clear picture
regarding important aspects like liquidity, leverage, and solvency.

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1.9 LIMITATION OF THE STUDY

The analysis is limited to just 5 years of data study (from year 2011 to
2015) for financial years.
There may be some fractional differences in the calculated ratios.

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2.CHAPTER SCHEMA

A STUDY ON EFFECTIVENESS OF WORKING CAPITAL

MANAGEMENT AT KRISHNA STEEL ROLLING MILLS

CHAPTER 1 CHAPTER3

INTRODUCTI DATA
ON ANALYSIS
AND
INTERPRETA CHAPTER 4
CHAPTER 2
ION
FINDINGS
LITERATUR
E REVIEW

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CHAPTER 1 1 INTRODUCTION

INTODUCTION 1.1 INTRODUCTION TO THE STUDY

1.2 INDUSTRY PROFILE

1.3 COMPANY PROFILE

1.4 RESEARCH PROBLEM

1.5 OBJECTIVES OF THE STUDY

1.6 RESEARCH PROBLEM

1.7 SCOPE OF THE STUDY

1.8 NEED FOR THE STUDY

1.9 LIMITATIONS

1.10 CHAPTER SCHEMA

CHAPTER 2

REVIEW OF 2. REVIEW LITERATURE

LITERATURE

CHAPTER 3 3. DATA ANALYSIS AND

DATA ANALYSIS AND INTERPRETATION

INTERPRETATION

4.1 FINDINGS
CHAPTER 4
4.2 SUGGESTION
FINDINGS
4.3 CONCLUSION

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2.1REVIEW OF LITERATURE

STUDIES RELATED TO WORKING CAPITAL MANAGEMENT

According to Raheman and Nasr, (2007) Management of current assets to meet

short term obligations of the company is WCM. Objective of the Working Capital
Management is to make sure that firm meets the operating requirements and also
remain in a position to pay short term debt when they fall due (Mohamad&Noriza
2010). Mismanagement of working capital will lead a firm to liquidity crisis by
reducing its profitability and creditability, so managing working capital
effectively is necessary for going concern of the business and also for its
profitability (Siddique& Khan 2009).

Aggressive Working Capital Management refers to the firms strategy of

having fewer current assets in proportion of total assets or having high proportion
of current liabilities as compared with the total liabilities of the company. It leads
a company to low liquidity or higher profitability (Van horne&Machowicz 2004).
Conservative Working Capital Management technique appears with the
philosophy of using long term source should be used for the entire investment in
the current assets and short term should be used only for urgent situations.
Distinct features of conservative Working Capital Management are increased
liquidity and less risk but more interest has to be paid on the seasonal requirement
for the entire period.

Lazaridis&Tryfonidis (2006) worked on 131 listed companies of Athens

stock exchange for four years from 2001 to 2004. Aim behind the study was to
determine statistically significant relation between CCC and profitability which is
measured by gross operating profit. Accounts receivable turnover, accounts
payable turnover and inventory management are the three components of CCC.
Pearson correlation and regression results showed that there is a negative
relationship between accounts receivable turnover, accounts payable turnover &
inventory management and profitability which is in line with the study of Deloof
(2003).

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According to Gill et al (2010) who extended Lazaridis&Tryfonidis (2006) study

on relationship between WCM and profitability, there exists a significant
relationship between CCC and profitability. They analyzed a sample of 88 firms
listed on NYSE (New York Stock Exchange) for three years from 2005 to 2007
using correlation and regression analysis to conclude that their study was in line
with the study of Lazaridis and Tryfonidis study and said that if a manager
efficiently manages accounts receivables, accounts payables and inventory he can
increase the profits of the firm.

H. Jamal Zubairi (2010) studied Pakistan automobile sector and checked the
impact of WCM and capital structure on profitability of the firm. To measure the
profitability they used earnings before interest and taxes. Panel data set was
analyzed using regression. The results showed that profitability variations due to
the above mentioned four variables give three quarters of total variation. They
also reported positive relation between profitability and size of the firm which is
in accordance with the results of Raheman& Nasr (2007) study.

Realising the dearth of pertinent literature on working capital management,

Walker in his study (1964)made a pioneering effort to develop a theory of
working capital management by empirically testing, though partially, three
propositions based on risk-return trade-off of working capital management.
Walker studied the effect of the change in the level of working capital on the rate
of return in nine industries for the year 1961 and found the relationship between
the level of working capital and the rate of return to be negative.

Abramovitz(1950)and Modigliani (1957)highlighted the impact of capacity

utilization on inventory investment. Existing stock of inventories is expected to
take account of adjustment process to the desired levels. Thus the variable,
existing stock of inventories, is postulated to be negatively related with the
desired stock. The ratio of inventory to sales may affect inventory investment
positively because a high ratio of stocks to sales in the past suggests the
maintenance of high levels of inventories in the past and thus also calling for high
investment in inventories in the current period.

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Sastrysstudy (1966)was a cross section analysis of total inventories of

companies across several heterogeneous industries for the period 1955-60 using
balance sheet data of public limited companies in the private sector. The study
brought out the importance of accelerator represented by change in sales. It also
showed negative influence of fixed inventory investment.

Realizing the dearth of pertinent literature on working capital management,

Walker in his study (1964)2 made a pioneering effort to develop a theory of
working capital management by empirically testing, though partially, three
propositions based on risk-return trade-off of working capitalmanagement. Walker
studied the effect of the change in the level of working capital on the rate of return
in nine industries for the year 1961 and found the relationship between the level of
working capital and the rate of return to be negative. On the basis of this
observation, Walker formulated three following propositions:

Proposition I: If the amount of working capital is to fixed capital, the amount of

risk the firm assumes is also varied and the opportunities for gain or loss are
increased.

Walker further stated that if a firm wished to reduce its risk to the minimum, it
should employ only equity capital for financing of working capital; however by
doing so, the firm reduced its opportunities for higher gains on equity capital as it
would not be taking advantage of leverage. In fact, the problem is not whether to
use debt capital but how much debt capital to use, which would depend on
management attitude towards risk and return. On the basis of this, he developed
his second proposition.

Proposition II: The type of capital (debt or equity) used to finance working
capital directly affects the amount of risk that a firm assumes as well as the
opportunities for gain or loss. Walker again suggested that not only the debt-
equity ratio, but also the maturity period of debt would affect the risk-return trade-
off. The longer the period of debt, the lower be the risk. For, management would
have enough opportunity to acquire funds from operations to meet the debt
obligations. But at the same time, long-term debt is costlier. On the basis of this,
he developed his third proposition:

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Proposition III: The greater the disparity between the maturities of a firm's debt
instruments and its flow of internally generated funds, the greater the risk and
vice-versa.

Thus, Walker tried to build-up a theory of working capital management by

developing three prepositions. However, Walker tested empirically the first
proposition only. Walker's Study would have been more useful had he
attempted to test all the three propositions. Weston and Brigham (1972)3 further
extended the second proposition suggested by Walker by dividing debt into long-
term debt and short-term debt. They suggested that short-term debt should be used
in place of long-term debt whenever their use would lower the average cost of
capital to the firm. They suggested that a business would hold short-term
marketable securities only if there were excess funds after meeting short-term debt
obligations. They further suggested that current assets holding should be
expanded to the point where marginal returns on increase in these assets would
just equal the cost of capital required to finance such increases.

Lambrix and Singhvi(1979) adopting the working capital cycle approach to the
working capital management, also suggested that investment in working capital
could be optimized and cash flows could be improved by reducing the time frame
of the physical flow from receipt of raw material to shipment of finished goods,
i.e. inventory management, and by improving the terms on which firm sells goods
as well as receipt of cash. However, the further suggested that working capital
investment could be optimized also (1) by improving the terms on which firms
bought goods i.e. creditors and payment of cash, and (2) by eliminating the
administrative delays i.e. the deficiencies of paper-work flow which tended to
extend the time-frame of the movement of goods and cash.

Adesh Sharma (1994)applied accelerator model with financial variables to

determine the factors influencing investment in inventories in pesticides industry
in India. Data had been taken form the Stock Exchange Official Directory,
Mumbai for the period 1978-1992 in respect of 18 firms in this industry. The
coefficients of the accelerator and financial variables were found to be significant
and positive. The coefficient of inventory of inventory stock was significant and
negative.
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Eljelly, (2004): elucidated that efficient liquidity management involves planning

and controlling current assets and current liabilities in such a manner that
eliminates the risk of inability to meet due short-term obligations and avoids
excessive investment in these assets. The relation between profitability and
liquidity was examined, as measured by current ratio and cash gap (cash
conversion cycle) on a sample of joint stock companies in Saudi Arabia using
correlation and regression analysis. The study found that the cash conversion
cycle was of more importance as a measure of liquidity than the current ratio that
affects profitability. The size variable was found to have significant effect on
profitability at the industry level. The results were stable and had important
implications for liquidity management in various Saudi companies. First, it was
clear that there was a negative relationship between profitability and liquidity
indicators such as current ratio and cash gap in the Saudi sample examined.
Second, the study also revealed that there was great variation among industries
with respect to the significant measure of liquidity.

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

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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 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 net-trading Cycle and its
profitability. In addition, shorter net trade cycles were associated with higher risk
adjusted stock returns.

Smith and Begemann (1997): emphasized that those who promoted working
capital theory shared that profitability and liquidity comprised the salient goals of
working capital management. The problem arose because the maximization of the
firm's returns could seriously threaten its liquidity, and the pursuit of liquidity had
a tendency to dilute returns.

Oladipupo and Okafor (2013) examined the implications of a firms working

capitalmanagement practice on its profitability and dividend payout ratio. The
study focused on the extent ofthe effects of working capital management on the
Profitability and Dividend Payout Ratio. Financialdata were obtained from 12
manufacturing companies quoted on the Nigeria Stock Exchange over 5years
period (2002 to 2006). Using both the Pearson product moment correlation
technique and ordinaryleast square (OLS) regression technique, they observed that
shorter net trade cycle and debt ratiopromote high corporate profitability. While
the level of leverage has negative significant impact oncorporate profitability, the
impacts of working capital management on corporate profitability appeared to be
statistically insignificant at 5% confidence level.

Almazari (2013) investigated the relationship between the working capital

management (WCM) and the firms profitability for the Saudi cement
29
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manufacturing companies. The sample included 8Saudi cement manufacturing

companies listed in the Saudi Stock Exchange for the period of 5 years from
2008-2012. Pearson Bivariate correlation and regression analysis were used. The
study results showed that Saudi cement industrys current ratio was the most
important liquidity measure which effected profitability, therefore, the cement
firms must set a trade-off between these two objectives so that, neither the
liquidity nor profitability suffers. It was also found, as the size of a firm increases,
profitability increased. Besides, when the debt financing increased, profitability
declined. Linear regression tests confirmed a high degree of association between
the working capital management and profitability.

Gill, Biger and Mathur (2010) analyzed the relationship between working
capital management and profitability of 88 American firms listed on New York
Stock Exchange for a period of 3 years from 2005 to 2007 was selected. The data
was analyzed using Pearson Bivariate Correlation Analysis and Weighted Least
Squares (WLS) Regression techniques. They found statistically significant
relationship between the cash conversion cycle and profitability, measured
through gross operating profit. It followed that managers can create profits for
their companies by handling correctly the cash conversion cycle and by keeping
accounts receivables at an optimal level.

Gul, Khan, Rehman, Khan, Khan and Khan (2013) investigated the influence
of working capital management (WCM) on performance of small medium
enterprises (SMEs) in Pakistan. The duration of the study was seven years from
2006 to 2012. The data used in this study was taken from SMEDA, Karachi Stock
Exchange, tax offices, company itself and Bloom burgee business week. The
dependent variable of the study was Return on Assets (ROA) which was used as a
proxy for profitability. Independent variables were Number of Days Account
Receivable (ACP), Number of Days Inventory (INV), Cash Conversion Cycle
(CCC) and Number of Days Account Payable (APP). In addition to these
variables some other variables were used which included Firm Size (SIZE), Debit
Ratio (DR) and Growth (GROWTH). Regression analysis was used to determine
the relationship between WCM and performance of SMEs in Pakistan. Results
suggested that APP, GROWTH and SIZE have positive association with

30
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Profitability whereas ACP, INV, CCC and DR have inverse relation with
profitability.

Raheman, Afza, Qayyum and Bodla (2010) analyzed the impact of working
capital managementon firms performance in Pakistan for the period 1998 to
2007. For this purpose, balanced panel data of204 manufacturing firms was used
which are listed on Karachi Stock Exchange. The results indicate thatthe cash
conversion cycle, net trade cycle and inventory turnover in days are significantly
affecting theperformance of the firms. They concluded that manufacturing firms
were in general facing problemswith their collection and payment policies.
Moreover, financial leverage, sales growth and firm size also
had significant effect on the firms profitability. They study recommended that
effective policies mustbe formulated for the individual components of working
capital.

Mathuva (2010) in his study on the influence of working capital

management on corporateprofitability found that there exists a highly significant
negative relationship between the time it takesfor firms to collect cash from their
customers and profitability. He explained that the more profitablefirms take the
shortest time to collect cash from the customers. The study further revealed that
thereexist a highly significant positive relationship between the inventory
conversion period and profitability.It was explained that firms, which maintain
sufficiently high inventory levels reduce costs of possibleinterruptions in the
production process and loss of business due to scarcity and products. Finally,
thestudy established that there exists a highly significant positive significant
positive relationship betweenthe average payment period and profitability. He
held that the longer a firm takes to pay its creditors, themore profitable it is. In this
study, a sample of 30 firms listed on Nairobi Stock Exchange for the periods1993
to 2008 was used. Both the ported OLS and the fixed effects regression models
were used.

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Warren and Shelton (1971)7 applied financial simulation8 to simulate future

financial statements of a firm, based on a set of simultaneous equations. Financial
simulation approach makes it possible to incorporate both the uncertainty of the
future and the many interrelationships between current assets, current liabilities
and other balance sheet accounts. The strength of simulation as a tool of analysis
is that it permits the financial manager to incorporate in his planning both the
most likely value of an activity and the margin of error associated with this
estimate. Warren and Shelton presented a model in which twenty simultaneous
equations were used to forecast future balance sheet of the firm including
forecasted current assets and forecasted current liabilities. Current assets and
current liabilities were forecasted in aggregate by directly relating to firm sales.
However, individual working capital accounts can also be forecasted in a larger
simulation system. Moreover, future financial statements can be simulated over a
range of different assumptions to portray inherent uncertainty of the future.

Cohn and Pringle in their study (1973)9 illustrated the extension of Capital Asset
Pricing Model (CAPM) 10for working capital management decisions. They tried to
interrelate long-term investment and financing decisions and working capital
management decisions through CAPM. They emphasized that an active working
capital management policy based on CAPM could be employed to keep the firm's
shares in a given risk class. By risk, he meant unsystematic risk, the only risk
deemed relevant by CAPM. Owing to the lumpy nature for long-term financial
decisions, the firm is continually subject to shifts in the risk of its equity. The
fluid nature of working capital, on the other hand, can be exploited so as to offset
or moderate such swings. For example they suggested that a policy using CAPM
could be adopted for the management of marketable securities portfolio such that
the appropriate risk level at any point in time was that which maintains the risk of
the company's common stock at a constant level. Similarly, Copeland and
Khoury(1980)11 applied CAPM to develop a theory of credit expansion. They
argued that credit should be extended only if the expected rate of return on credit
is greater than or equal to market determined required rate of return. They used
CAPM to determine the required rate of return for the firm with its new risk,

32
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arising from uncertainty regarding collection due to the extension of credit. Thus,
these studies show how CAPM can be used for decisions involved in working
capital management.

One more approach, used mainly in empirical studies, towards working capital
management has been to apply regression analysis to determine the factors
influencing investment in working capital. Different studies in the past have
considered different explanatory variables to explain the investment in inventory.
A brief review12 of these studies is important as regression equation of investment
in working capital, in the present study, would be formulated on the basis of
works on investment in inventory.

In inventory investment literature, there is basically one school of thought

according to which firms aim at an optimum or desired stock of inventories in
relation to a given level of output/sales. This is known as acceleration principle.
Pioneering work in this field has been done by Metzler (1941)13. However, his
work was mainly on simple acceleration principle which postulated that firms
liked to maintain inventories in proportions to output/sales and they succeeded in
achieving the desired level of inventories in a unit time- period. That is to say, any
discrepancy between the actual level and desired level of inventories is adjusted
within the same time-period. Needless to say, that such an instantaneous
adjustment is not a realistic assumption to make. Modifications, therefore, have
been introduced in the literature to provide for partial adjustment. Goodwin
(1948)14 assumed that firms attempted only a partial adjustment of the discrepancy
between the desired stocks as determined by the level of output and the existing
stock.

Similarly, Darling andLovell(1965)15 modified Metzler's formulation based on

simple acceleration principle and obtained, the relationship based on flexible
accelerator principle. There are several reasons physical, financial and technical
those motivate partial adjustment. Among the physical factors, mention may be
made of procurement lags between orders and deliveries. The length of such lags
is connected with the source of supply, foreign or domestic availability. Import
licensing procedures on account of foreign exchange scarcity could cause further
delays in adjustment. Among the financial factors, cost advantages associated
33
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with bulk buying and higher procurement costs for speedy delivery are also
mentioned. Uncertainties in the market for raw materials and in the demand for
final product also play a role in influencing the speed of adjustment. Technically,
firms like to make sure that changes in demand are of a permanent character
before making full adjustment. The acceleration principle has great relevance in
inventory analysis than in the analysis of fixed investment, as there are limits to
liquidate fixed capital in the face of declining demand.

Other variables influencing inventories have been introduced in the literature in

the context of accelerator model. Rate of interest is used as a proxy for the
opportunity cost of carrying stocks or as a measure of the cost of funds needed to
hold inventories. It has been found significant in the studies of Hilton (1976)16 and
Irwin (1981)17. Time-trend is expected to be important because inventories
generally accumulate with the expansion of economic activities of the company.
Anticipated price changes, measured by changes in wholesale price index of
inventories, are taken as an explanatory variable to capture speculative element in
inventory. This suggests a positive relationship between price changes and
inventory. An increase in sales is expected to increase the demand for stocks to
meet orders regularly. An increase in capacity utilization is also expected to
increase the demand for stock by increasing the demand for raw materials and
increasing the inventories of finished goods. Thus, the variable, capacity
utilization, is postulated to have a positive coefficient in the equation.

Abramovitz(1950)18 and Modigliani (1957)19 highlighted the impact of capacity

utilization on inventory investment. Existing stock of inventories is expected to
take account of adjustment process to the desired levels. Thus the variable,
existing stock of inventories, is postulated to be negatively related with the
desired stock. The ratio of inventory to sales may affect inventory investment
positively because a high ratio of stocks to sales in the past suggests the
maintenance of high levels of inventories in the past and thus also calling for high
investment in inventories in the current period. The studies of Metzler (1941)20
and Hilton (1976)21 have found this variable, inventory-sales ratio, to be
statistically significant. Fixed investment is generally expected to affect inventory
investment inversely because of competing demand for the limited funds.

34
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However, in case of an expanding firm, the two components may be

complementary. Besides, availability of funds from retained earnings and external
sources, may affect investmentdecision by providing funds for financing
inventory investment. Therefore, retained earnings and flow of debt are postulated
to have positive coefficients.

Thachappilly (2009)., Working Capital Management Manages

Flow of Funds,(2009) describes that Working capital is the cash needed to
carry on operations during the cash conversion cycle, i.e. the days from
paying for raw materials to collecting cash from customers. Raw materials
and operating supplies must be bought and stored to ensure
uninterrupted production. Wages, salaries, utility charges and other
incidentals must be paid for converting the materials into finished
products. Customers must be allowed a credit period that is standard in
the business. Only at the end of this cycle does cash flow in again

Shin, H.H and Soenen (1998)Highlighted that efficient Working

Capital Management was very important for the shareholders of
company. The manner working capital was managed had s significant
impact on both profitability & liquidity. The connection between the
length of Net

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2.2 THEORITICAL REVIEW

WORKING CAPITAL MANAGEMENT

Working capital means the funds which are required to meet the daily
transactions of the business .In otherwords it refers to that part of the firms
capital which is required for financing current assets such as cash,marketable
securities, debtors and inventories. Thus working capital is very significant facet
of financialmanagement. Every business concern should have adequate working
capital to run its operations smoothly. Itshould have neither excess working
capital nor inadequate working capital because both of these have adverseeffects
on firms profitability and liquidity positions. Therefore, business concerns should
maintain adequateworking capital. The basic objective of working capital is to
manage the firms current assets and currentliabilities in such a way that that a
satisfactory level of working capital is maintained.Working capital policies have a
great effect on a firms liquidity and profitability. Therefore, the workingcapital
should be managed in such a way which will ensure higher profitability and
proper liquidity to thebusiness concern.The significance of working capital
management is to ensure that the organization maintains a good fit withthe
changing environment and strives to build the capability to cope with challenges.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital:

Balance sheet concept or traditional concept

Operating cycle concept

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BALANCE SHEET CONCEPT OR TRADITIONAL CONCEPT

It shows the position of the firm at a certain point of time. It is calculated on the
basis of balance sheet preparedat a specific date. In this method there are two
types of working capital.

Gross working capital

Net working capital

GROSS WORKING CAPITAL

It refers to a firms investment in current assets. The sum of the current assets is
the working capital of thebusiness. The sum of the current is quantitative aspect of
working capital which emphasizes more on quantitythan on its quality, but it fails
to reveal the true picture of the financial position of the business because
everyincrease in current liabilities will decrease the gross working capital.

NET WORKING CAPITAL

It is difference between the current assets and current liabilities or the excess of
total current assets over totalcurrent liabilities. It can also be defined as that part of
a firms current asset which is financed with long termfunds. It may be either
negative or positive. When the current assets exceed the current liabilities, the
workingcapital is positive and vice-versa.

OPERATING CYCYE CONCEPT

The duration or time required to complete the sequence of events right from the
purchase of raw materials forcash to the realization of sales in cash is called
operating cycle or working capital cycle. The operating cycleconsists of three
phases:In phase 1, cash gets converted into inventory. This would include
purchase of raw materials, conversion of rawmaterials into work-in-progress,

37
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finished goods and terminate in the transfer of goods to stock at the end of
themanufacturing process. In the case of trading organization, this phase would be
shorter as there would be nomanufacturing activity and cash will be converted
into inventory directly. The phase will, of course, be totallyabsent in case of
service organizations.In phase 2 of the cycle, the inventory is converted into
receivables as credit sales are made to customers. Firmswhich do not sell on credit
will obviously not have phase 2 of the operating cycle.

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IMPORTANCE OF WORKING CAPITAL

The adequate reserve of working capital ensures a steady flow of raw

materials to the production process.
The adequate reserve of working capital indicates the good solvency
position of the concern and helps itto get loan from the market at favourable
terms.
The adequate stock of working capital makes it possible for a concern to
purchase the trading goods incash and cash purchase always carries the benefit of
getting cash discount.
A strong working capital base is probably the only remedy to overcome the
odd situations like dullmarket conditions, scarcity of raw materials and other
components in case of any emergency, suddenmarket fluctuations, etc.
A business concern can exploit the market opportunities with the help of
adequate working capital.
The regular flow of adequate working capital makes possible efficient use
of fixed assets, reduceswastage, ensures quick replying of current assets, and
establish a well- tuned working environment.

STRUCTURE OF WORKING CAPITAL

The structure of working capital includes a study of the components of current

assets and current liabilities.

CURRENT ASSETS:

The list of current assets comprises inventories (including raw materials, work-
in-progress and finished goodsand spares), sundry debtors including receivables,
readily realizable securities and tax reserve certificates, shortterminvestments,
accrued incomes, prepaid expenses (not in the nature of deferred charge), cash at
bank, andcash in hand.In Durgapur Steel Plant current assets are:

39
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Inventories (stores & spares, raw materials, semi-finished products)

Sundry debtors
Cash & bank balances
Interest receivable/accrued
Loans & advances etc.

CURRENT LIABILITIES:

The list of liabilities includes trade creditors, accounts payable, outstanding or

accrued expenses, bankoverdraft, outstanding liabilities, short-term loans and
borrowings and certain obligations including differentprovisions, i.e., provision
for taxation, proposed dividend etc.In Durgapur Steel Plant current liabilities are:

Sundry creditors
Advances from customers
Security deposit
Other liabilities etc.

FACTORS TO BE CONSIDERED WHILE ESTIMATING WORKING

CAPITAL
REQUIREMENT
Total costs incurred on materials, wages and overheads.
The length of time for which raw materials remain in stores before they are
issued to production.
The length of the production cycle or work-in-progress, i.e., the time taken
for conversion of raw materialsinto finished goods.
The length of the Sales Cycle during which finished goods are to be kept
waiting for sales.
The average period of credit allowed to customers.
The amount of cash required to pay day-to-day expenses of the business.
The amount of cash required for advance payments if any.
Time-lag in the payment of wages and other overheads.

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DETERMINANTS OF WORKING CAPITAL

The total working capital requirement is determined by a wide variety of factors.

It should be, however, notedthat these factors affect different enterprises
differently. They also vary from time to time. In general, thefollowing factors are
involved in a proper assessment of the quantum of working capital required:-

GENERAL NATURE OF BUSINESS

PRODUCTION CYCLE

BUSINESS CYCLE

CHANGES IN PRICE LEVEL

GROWTH AND EXPANTION

AVAILABILITY OF RAW MATERIALS

DIVIDEND POLICY

DEPRECIATION POLICY

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3.RESEARCH MODEL

CAUSE VARIABLE EFFECT

VARIABLE UNDER STUDY VARIABLE

ACCOUNTS INCREASE
PAYABLE REVENUE

PROFITABILITY
PAYMENT
PERIOD WORKING
CAPITAL
CREDIT POLICY MANAGEMENT LIQUIDITY

COLLECTION
POLICY SOLVANCY

INVENTORY
POLICY FINANCIAL
STABILITY

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4.DATA ANALYSIS AND INTERPRETATION

4.1RATIO ANALYSIS

4.1.1LIQUIDITY RATIOS

3.1.1( A)CURRENT RATIO

CURRENT ASSESTS
CURRENT RATIO = -----------------------------------
CURRENT LIABILITIES

TABLE NO .4.1.1(A) SHOWING CURRENT RATIO

YEAR CURRENT CURRENT RATIOS
ASSET LIABILITIES
2011-2012 431027365 231429662 1.86
2012-2013 478601780 160716794 2.97
2013-2014 284545285 123646702 2.3
2014-2015 466777395 273624627 1.70
2015-2016 373033327 362337927 1.02
Source: Secondary Data

CHART NO 4.1.1(A) SHOWING CURRENT RATIO

CURRENT RATIO

2.5

1.5

0.5

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

The standard current ratio is 2:1. The current ratio for 5 years from 2011-
2012 to 2015-2016 are calculated and presented in the above graph. The ratio
shows an fluctuating trend. But in 2012-2013 it shows a increasing trend. Some
actions should be taken to increase the ratio because the ratio has not reached up
to the standard level 2:1. Low current ratio indicates that a firm may have
difficulty to meeting current obligations. A low current ratio can often be
supported by a strong operating cash flow.

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4.1.1. B QUICK RATIO

QUICK ASSETS

QUICK RATIO = --------------------------------------------

CURRENT LIABILITIES

TABLES NO.4.1.1 (B) SHOWING QUICKS RATIO

YEAR QUICK ASSETS CURRENT RATIOS

LIABILITIES
2011-2012 196419863 231429662 0.84
2012-2013 217678453 160716794 1.30
2013-2014 214858456 123646702 1.73
2014-2015 289403424 273624627 1.06
2015-2016 194002638 362337927 0.54

CHART NO.4.1.1 (B) SHOWING QUICK RATIO

QUICK RATIO

1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

The standard quick ratio is 1:1. The quick ratio for 5 years from 2011-2012 to
2015-2016 are calculated and presented in the above graph. The ratio shows an
fluctuating trend. But in 2013-2014 it shows a increasing trend. A quick ratio is
higher it indicates that the company can meet its current financial obligations with
the available quick funds on hand. In the year the ratio is 0.54. it is lower than the
standard rate. It indicates that the company relies too much on inventory or other
assets to pay its short-term liabilities.

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4.1.1. (C)ABSOLUTE LIQUID RATIO

CASH& BANK

ABSOLUTE LIQUID RATIO = ------------------------------------

CURRENT LIABILITIES

TABLE NO.4.1.1 (C) SHOWING ABSOLUTE LIQUID RATIO

YEAR CASH CURRENT RATIOS

LIABILITIES
2011-2012 11176997 231429662 0.048
2012-2013 13349484 160716794 0.083
2013-2014 15581216 123646702 0.126
2014-2015 10696140 273624627 0.040
2015-2016 14985345 362337927 0.041
Source: Secondary Data

CHART NO.4.1.1 (C) SHOWING ABSOLUTE LIQUID RATIO

ABSOLUTE RATIO

0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

During the year 2011-12 , the Absolute liquidity ratio was 0.048 during the year
2012-13 it was 0.083 and in the year 2013-14 it was 0.126, in the year 2014-15 it
was 0.040 in the year 2015-16 the Absolute liquidity ratio was 0.041.This shows
the company had proper cash balance in its reserve to meet its day to day
expenses.

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4.1.2 TURNOVER RATIO

4.1.2(A) CAPITAL TURN OVER RATIO

SALES

CAPITAL TURNOVER RATIO = ------------------------------------

CAPITAL EMPLOYED

CAPITAL EMPLOYED = TOTAL ASSESTS CURRENT LIABILITIES

TABLE NO.4.1.2 (A) SHOWING CAPITAL TUENOVER RATIO

YEAR SALES CAPITAL RATIOS

EMPLOYED
2011-2012 384090282 126237645 3.04
2012-2013 232381845 261968299 0.88
2013-2014 248595898 176978349 1.40
2014-2015 439080546 297451271 1.48
2015-2016 278182318 100632340 2.76
Source: Secondary Data

CHART NO.4.1.2 (A) SHOWING CAPITAL TURNOVER RATIO

RATIOS

3.5
3
2.5
2
1.5
1
0.5
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

Capital turnover ratio shows an decreasing trend from 2011-2012 to 2012-2013.

But in 2013-2014 to it shows aincreasing trend.2015-2016 it shows a better capital
turnover ratio. High capital turnover ratio indicates the capability of the company
to achieve maximum sales with minimum amount of capital employed. Higher the
capital turnover ratio better will be the situation.

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4.1.2(B)WORKING CAPITAL TURNOVER RATIO

SALES
WORKING CAPITAL TURNOVER RATIO = -------------------------------------
-
NET WORKING CAPITAL

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES

TABLE NO.4.1.2 (B) SHOWING WORKING CAPITAL TURNOVER

RATIO

YEAR SALES NET WORKING RATIOS

CAPITAL
2011-2012 384090282 199597703 1.92
2012-2013 232381845 317884986 0.73
2013-2014 248595898 160898583 1.54
2014-2015 439080546 193152768 2.27
2015-2016 278182318 10695400 26.00
Source: Secondary Data
CHART NO.4.1.2 (B) SHOWING WORKING CAPITAL TURNOVER
RATIO

WORKING CAPITAL TURNOVER RATIO

30

25

20

15

10

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

From the above table it is analyzed that the working capital turnover ratio of
the company is 26 in the year 2015-2016, and a slight decrease to 2011-2012 and
for the year 2014-2015 the company has concentrated and improved its working
capital ratio.A higher working capital ratio indicates greater efficiency. The
companys operations run more smoothly and limit the need for additional
funding.

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4.1.2(C)CASH TURNOVER RATIO

SALES
CASH TURNOVER RATIO = -------------------------------
CASH&BANK

TABLE NO.4.1.2(C) SHOWING CASH TURNOVER RATIO

YEAR SALES CASH&BANK RATIOS

2011-2012 384090282 11176997 34.36
2012-2013 232381845 13349484 17.4
2013-2014 248595898 15581216 15.95
2014-2015 439080546 10696140 41.0
2015-2016 278182318 14985345 18.5
Source: Secondary Data

CHART NO.4.1.2 (C) SHOWING CASH TURNOVER RATIO

CASH TURNOVER RATIO

45
40
35
30
25
20
15
10
5
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

From the above table it is found that the companys cash turnover ratio is
decreased in the year 2011-2012 from 34.36 to 17.4, and then in the year 2013-
2014, it is again decreased to 15.95, then in the year 2014-2015 it is increased to
41, and during 2015-2016 year cash ratio is 18.5 The Cash Turnover ratio of the
company was very low compared to 2012-2013 and 2013-2014, as there is an
increase in the amount of sales of the company and the receivables is also
increased and the net working capital is decreased due to which the cash inflow of
the company has reduced.

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4.1.2(D) DEBTORS TRUNOVER RATIO

SALES
DEBTORS TURNOVER RATIO = --------------------------
DEBTORS

TABLE NO.4.1.2 (D) SHOWING DEBTORS TURNOVER RATIO

YEAR SALES DEBTORS RATIOS

2011-2012 384090282 38135313 10.07
2012-2013 232381845 41128055 5.65
2013-2014 248595898 21691443 11.4
2014-2015 439080546 82784124 5.30
2015-2016 278182318 19248775 14.45
Source: Secondary Data

CHART NO.4.1.2 (D) SHOWING DEBTORS TURNOVER RATIO

DEBTORS TURNOVER RATIO

16
14
12
10
8
6
4
2
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
K,

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INTERPRETATION

The above table depicts the companys debt turnover ratio, it is increasing trend
from 2012-2013 to 2013-2014 and 2014-2015 to 2015-2016.but in the year 2012-
2013 and 2014-2015there is a decrease in debtors turnover ratio. The normal ratio
is 5.The company converts the debtors in to cash more than one month. It
indicates they take more time to collect the cash. A high ratio indicates that the
receivables are more liquid and are being collected promptly.

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4.1.1 (E) DEBTORS COLLECTION PERIOD

365
DEBTORS COLLECTION PERIOD = ------------------------------------------
DEBTORS TURNOVER RATIO

TABLE NO.4.1.2 (E) SHOWING DEBTORS COLLECTION PERRIOD

YEAR DAYS DEBTORS AVERAGE

TURNOVER COLLECTION
RATIO PERIOD
2011-2012 365 10.07 36
2012-2013 365 5.65 65
2013-2014 365 11.4 32
2014-2015 365 5.30 69
2015-2016 365 14.45 25
Source: Secondary Data

CHART NO.4.1.2 (E) SHOWING DEBTORS COLLECTION PERIOD

AVERAGE COLLECTION PERIOD

70
60
50
40
30
20
10
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

Debt collection period changing over the years. It was 36 days in the year 2011-
12. It increased to 29 day in the year 2012-13, in the year 2013-14 it decreased to
33 days., in the year 2014-15 it increased 37 days and 44days decreased 2015-
2016.This shows the efficient debt collection performance of the company at the
starting but it inefficient for the next year and then it again shows improve the
debt collection performance, in last year insuffientin collection of debt amount.

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4.1.2(F)CREDITORS TRUNOVER RATIO

PURCHASE
CREDITORS TURNOVER RATIO = ----------------------------
CREDITORS

TABLE NO.4.1.2 (F) SHOWING CREDITORS TURNOVER RATIO

YEAR PURCHASE CREDITORS RATIOS

2011-2012 250579288 130276050 1.92
2012-2013 164131068 153937500 1.07
2013-2014 187989744 76517249 2.46
2014-2015 471231068 179259937 2.38
2015-2016 255142202 198189478 1.29
Source: Secondary Data

CHART NO.4.1.2 (F) SHOWING CREDITORS TURNOVER RATIO

CREDITORS TURNOVER RATIO

2.5

1.5

0.5

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

It is clear that creditor turnover ratio changing over the years. It was
190times in the year 2011-12.There was a subsequent increase 151 times in the
year 2012-13. In the year 2013-14 it is decreased to 193 times. It shows that
company has taken steps toprompt payment to the creditors.in the year 2014-2015
increased 5 times and 2015-2016 average payment period is 129 times.

4.1.2 (G) CREDITORS PAYEMENT PERIOD

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365

PAYEMENT PERIOD = ------------------------------------------------

CREDITORS TURNOVER RATIO

TABLE NO.4.1.2 (G) SHOWING CREDITORS PAYEMENT PERIOD

YEAR DAYS CREDITORS AVERAGE

TURNOVER PAYEMENT
RATIOS PERIOD
2011-2012 365 1.92 190
2012-2013 365 1.07 341
2013-2014 365 2.46 148
2014-2015 365 2.38 153
2015-2016 365 1.29 282
Source: Secondary Data

CHART NO 4.1.2 (G) SHOWING CREDITORS PAYEMENT PERIOD

AVERAGE PAYEMENT PERIOD

350
300
250
200
150
100
50
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

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Average payment period changing over the years. It was 190 days in the year
2011-12. It increased to 151 days in the year 2012-2013, In the year 2013-14, it is
decreased 193 days.2014-2015 the company average payment period increased 5
days.In the last year Average payment period changed increased 129 days. It
indicates that the company has not making prompt payment to the creditors.

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4.1.2 ASSET TURNOVER RATIO

4.1.3(A) FIXED ASSET TURNOVER RATIO

SALES
FIXED ASSET TURNOVER RATIO = -------------------------
FIXED ASSETS

TABLE NO.4.1.3 (A) SHOWING FIXED ASSET TURNOVER RATIO

YEAR SALES FIXED ASSETS RATIO

2011-2012 384090282 31726147 12.10
2012-2013 232381845 63322779 3.67
2013-2014 248595898 16079763 15.46
2014-2015 439080546 104298502 4.20
2015-2016 278182318 89936936 3.09
Source: Secondary Data

CHART NO.4.1.3 (A) SHOWING FIXED ASSET TURNOVER RATIO

FIXED ASSET TURNOVER RATIO

16
14
12
10
8
6
4
2
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

There is a fluctuation in ratios during the period of study. In the year 2011-2012
the ratio is 12.10,2012-2013 A fixed asset ratio is decreasing 3.67. A low turnover
suggests that the fixed assets are being underutilized or that there are more assets
that can be effectively used.

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4.1.3 TOTAL ASSET TURNOVER RATIO

SALES
TOTAL ASSET TURNOVER RATIO = ------------------------------
TOTAL ASSETS

TABLE NO.4.1.3 (C) SHOWING TOTAL ASSET TURNOVER RATIO

YEAR SALES TOTAL ASSETS RATIOS

2011-2012 384090282 510327927 0.75

2012-2013 232381845 494350144 0.47

2013-2014 248595898 300625051 0.82

2014-2015 439080546 571075899 0.77

2015-2016 278182318 462970267 0.60

Source: Secondary Data

CHART NO.4.1.3 (C) SHOWING TOTAL ASSET TURNOVER RATIO

TOTLAL ASSET TURNOVER RATIO

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

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INTERPRETATION

The first two year the total asset turnover is decreased in 0..75 to 0.47
respectively. Then the ratios are fluctuated. The low total asset turnover ratio is
preferred as it reflects the assets utilization and also indicate production or
management problems.

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4.1.4 PROFITABILITY RATIO

4.1.4 (A) GROSS PROFIT RATIO

GROSS PROFIT
GROSS PROFIT RATIO = -----------------------------*100
SALES

TABLE NO.4.1.5 (A) SHOWING GROSS PROFIT RATIO

YEAR GROSS PROFIT SALES RATIOS

2011-2012 60084430 384090282 0.16

2012-2013 11755304 232381845 0.05

2013-2014 (8179667) 248595898 -0.03

2014-2015 (44374678) 439080546 -0.10

2015-2016 (89361460) 278182318 -0.32

Source: Secondary Data

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CHART NO.4.1.5 (A) SHOWING GROSS PROFIT RATIO

GROSS PROFIT RATIO

0.2

0.1

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
-0.1

-0.2

-0.3

-0.4

INTERPRETATION

The gross profit ratio is less in the year 2011-2012(0.16%) 2012-2013(0.05)

But the last three yearsarise gross loss. Low gross profit ratio is not sufficient to
cover all expenses. Higher ratio is better the company.

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4.1.4 (B)NET PROFIT RATIO

NET PROFIT
NET PROFIT RATIO = ---------------------------
SALES

TABLE NO.4.1.5 (B) SHOWING NET PROFIT RATIO

YEAR NET PROFIT SALES RATIOS

2011-2012 35059615 384090282 0.09

2012-2013 36432851 232381845 0.16

2013-2014 (18737169) 248595898 -0.07

2014-2015 (82051624) 439080546 -0.19

2015-2016 (130947974) 278182318 -0.47

Source: Secondary Data

CHART NO.4.1.4 (B) SHOWING NET PEOFIT RATIO

NET PROFIT RATIO

0.2

0.1

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
-0.1

-0.2

-0.3

-0.4

-0.5

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INTERPRETATION

The net profit ratio is less in the year 2011-2012(0.09%) 2012-

2013(0.16)But the last three years arise net loss. Low net profit ratio is not
sufficient to cover all expenses. Higher ratio is better the company. Then the net
profit ratio is decline that means a decline in performance and profitability levels.

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4.1.3 (C) RETURN ON ASSET

NETPROFIT

RETURN ON ASSET = ------------------------------

TOTAL ASSET

TABLE NO.4.1.4(C) SHOWING RETURN ON ASSET

YEAR NET PROFIT TOTAL ASSET RATIOS

2011-2012 35059615 510327927 0.069
2012-2013 36432851 494350144 0.074
2013-2014 (18737169) 300625051 0.062
2014-2015 (82051624) 571075899 0.039
2015-2016 (130947974) 462970267 0.038

CHART NO.4.1.4 (C) SHOWING RETURN ON ASSET

RETURN ON ASSET RATIO

0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0

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INTERPRETATION

It shows that in the year 2015, very poor management of assets the ratio as
0.033. the return on asset ratio is very low. It means the company cannot earn a
return on its investment in assets

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4.2 SCHEDULE OF CHANGES IN WORKING CAPITAL

TABLE NO.4.3.1 SHOWING SCHEDULE OF CHANGES IN WORKING

CAPITAL ON 2011-2012

PARTICULARS 2011 2012 INCREASE DECREASE

CURRENT ASSETS

CURRENT 177534932 95519101 - 82015831

INVESTMENT
234607502 260923327 26315825 -
CLOSING STOCK
38135313 41128055 2992742 -
SUNDRY DEBTORS
840133 932846 92713 -
CASH IN-HAND
DEPOSIT WITH 5928032 6550000 621968 -
GOVT.DEPARTMENT
ADVANCE TO 11219004 13557228 2338224 -
SUPPLIERS
ADVANCE TAX- - 170 170 -
SALES TAX
10336864 12416638 2079774 -
BANK
TOTAL CURRENT
ASSET 478601780 431027365

CURRENT LIABILITIES

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SALES TAX KV 1417230 1523017 - 105787

-
SUNDRY 130276050 153937500 23661450
CREDITORS
-
SALARY PAYABLE 32157 58320 26163

EBCHARGES 6338540 6992803 - 654263

PAYABLE
POSTAGE AND
TELEPHONE 150 210 - 60
EXPENSE

AUDIT FEE 138329 142330 - 4001

PAYABLE

BONUS PAYABLE 22173 29004 - 6831

TDS ON 17233 18317 - 1084

PROFESSIONAL FEE

ADVANCES FROM 22318902 68557034 - 46238132

CUSTOMERS

PF PAYABLE 99890 104093 - 4203

ESI PAYABLE 24100 29089 - 4989

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SEVICE TAX 32040 37945 - 5905

TOTAL CURRENT 160716794 231429662
LIABILITY

WORKING CAPITAL 317884986 199597703 34441416 152728699

DECREASE IN 118287283 118287283

WORKING CAPITAL
TOTAL 317884986 317884986 152728699 152728699

INTERPRETATION

In the above table, it is seen that during the year 2011 and 2012 there was a net
decrease in working capital of Rs 118287283It indicates an inadequate working
capital in Krishna steel rolling mills

This is because of

1. Increase current assets such as stock by Rs 26315825 other current assets are
increased. But the current investment is decreased Rs 82015831

2. Increase in current liabilities such as in advances from customers by Rs

46238132 and sundry creditors by 23661450.

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TABLE NO.4.3.2 SHOWING SCHEDULE OF CHANGES IN WORKING

CAPITAL ON 2012-2013

PARTICULARS 2012 2013 INCREASE DECREASE

CURRENT ASSETS

CURRENT 95519101 154061855 58542754

INVESTMENT

260923327 69686829 - 191236498

CLOSING STOCK
41128055 21691443 - 19436612
SUNDRY DEBTORS
932846 239575 693271
CASH IN-HAND
DEPOSIT WITH 6550000 7975387 1425387 -
GOVT.DEPARTMENT
ADVANCE TO 13557228 15548555 1991327 -
SUPPLIERS
ADVANCE TAX- 170 - 170
SALES TAX
12416638 15341641 2925003 -
BANK
TOTAL CURRENT 431027365 284545285
ASSET

CURRENT LIABILITIES

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SALES TAX KV 1523017 1411170 111847 -

-
SUNDRY 153937500 76517249 77420251 -
CREDITORS

SALARY PAYABLE 58320 53240 5080 -

EB CHARGES 6992803 2976830 4015973 -

PAYABLE
POSTAGE AND
TELEPHONE 210 124 86
EXPENSE

AUDIT FEE 142330 222472 - 80142

PAYABLE

BONUS PAYABLE 29004 60500 - 31496

SUBSCRIPTION - 2500 2500

PAYABLE

TDS ON 18317 18142 175 -

PROFESSIONAL FEE

ADVANCES FROM 68557034 42219357 26337677 -

CUSTOMERS

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PF PAYABLE 104093 116792 - 12699

ESI PAYABLE 29089 39194 - 10105

-
SEVICE TAX 37945 9132 28813

TOTAL CURRENT 231429662 123646702

LIABILITY

WORKING CAPITAL 199597703 160898583 172804373 210807722

DECREASE IN 38699120 38699120

WORKING CAPITAL

TOTAL 199597703 199597703 211503493 211503493

Source : Secondary Data

INTERPRETATION

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In the above table, it is seen that during the year 2012 and 2013 there was a
net decrease in working capital of Rs 14978670. It indicates an inadequate
working capital in Krishna steel rolling mills.

This is because of

1. Increase current assets by current investment, cash and bank account.

2. Increase in current liabilities such as in ESI payable by Rs. 10105 bonus

payable by Rs 31496 and audit fee payable 80142

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TABLE NO.4.3.3 SHOWING SCHEDULE OF CAHNGES IN WORKING

CAPITAL 2013-2014

PARTICULARS 2013 2014 INCREASE DECREASE

CURRENT ASSETS

CURRENT 154061855 160641530 6579675 -

INVESTMENT
69686829 177373971 107687142
CLOSING STOCK -
21691443 82784124 61092681
SUNDRY DEBTORS
239575 1156242 916667
CASH IN-HAND
DEPOSIT WITH 7975387 8229099 253712
GOVT.DEPARTMENT
ADVANCE TO 15548555 27052362 11503807
SUPPLIERS
ADVANCE TAX- - 169 169
SALES TAX
15341641 9539898 - 5801743
BANK
TOTAL CURRENT 284545285 466777395
ASSET

CURRENT LIABILITIES

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SALES TAX KV 1411170 1322910 88260 -

-
SUNDRY 76517249 179259937 102742688
CREDITORS
-
SALARY PAYABLE 53240 304391 251151

EB CHARGES 2976830 11267356 - 8290526

PAYABLE
POSTAGE AND
TELEPHONE 124 1140 - 1016
EXPENSE

AUDIT FEE 222472 111236 111236 -

PAYABLE

BONUS PAYABLE 60500 349150 - 288650

SUBSCRIPTION
PAYABLE 2500 - 2500

TDS ON 18142 19743 - 1601

PROFESSIONAL FEE

ADVANCES FROM 42219357 74839309 - 32619952

CUSTOMERS

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PF PAYABLE 116792 574234 - 457442

ESI PAYABLE 39194 172502 - 133308

SEVICE TAX 9132 82719 - 73587

EXICE DUTY
PAYABLE - 5320000 5320000

TOTAL CURRENT 123646702 273624627

LIABILITY

WORKING CAPITAL 160898583 193152768 188235849 155981664

INCREASE IN 32254185 32254185

WORKING CAPITAL

TOTAL 193152768 193152768 188235849 188235849

Source : Secondary Data

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INTERPRETATION

In the above table, it is seen that during the year 2013and 2014it is net increase in
working capital by Rs32254185.

This is because

1. There is decrease the bank account 5801743

2. The amount of sales tax kv and audit fee is reduced. And all other current
liabilities increased

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TABLE NO.4.3.4 SHOWING SCHEDULE OF CHANEGES IN WORKING

CAPITAL 2014-2015

PARTICULARS 2014 2015 INCREASE DECREASE

CURRENT ASSETS

CURRENT 160641530 - - 160641530

INVESTMENT

CLOSING STOCK 177373971 179030689 1656718

SUNDRY DEBTORS 82784124 69464881 13319243

CASH IN-HAND 1156242 273733 882509

DEPOSIT WITH
GOVT.DEPARTMENT 8229099 8971734
ADVANCE TO
SUPPLIERS 27052362 28823715 742635
ADVANCE TAX-
SALES TAX 169 169 - -

ADVANCE TO SMM - 74220395 74220395

BANK 9539898 12248011 2708113 -

TOTAL CURRENT 466777395 373033327
ASSET

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CURRENT LIABILITIES

SALES TAX KV 1322910 572939 749971 -

SUNDRY 179259937 198189478 - 18929541

CREDITORS

SALARY PAYABLE 304391 430295 - 125904

EB CHARGES 11267356 10347150 920206 -

PAYABLE
POSTAGE AND
TELEPHONE 1140 7793 - 6653
EXPENSE

AUDIT FEE 111236 297472 - 186236

PAYABLE

BONUS PAYABLE 349150 493287 - 144137

TDS ON 19743 19068 675 -

PROFESSIONAL FEE

ADVANCES FROM 74839309 144337532 - 69498223

CUSTOMERS

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PF PAYABLE 574234 1484260 - 910026

ESI PAYABLE 172502 79894 89783 -

SEVICE TAX 82719 438759 - 356040

EXICE DUTY
PAYABLE 5320000 5640000 - 320000

TOTAL CURRENT 273624627 362337927

LIABILITY

WORKING CAPITAL 193152768 10695400 81088496 263545864

DECREASE IN 182457368 182457368

WORKING CAPITAL

TOTAL 193152768 193152768 263545864 2263545864

Source : Secondary Data

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INTERPRETATION

In the above table, it is seen that during the year 2014and 2015 there was also net
decrease in working capital by Rs 265320042

This is because

1. There is decrease in current investment Rs 177373971 andagain decrease in

sundry debtors 13319243 ,cash in hand Rs 882509

2. There is decrease in current liabilities such as sales tax kv749971,EB charges

payable 920206 and decrease Esi payable 89783

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5.1 FINDINGS

There are many factors that affecting working capital of the company. They
are
Accounts payable
Payment period
Credit policy
Inventory policy

An ideal current ratio is 2:1. Here Current ratio shows an increasing trend
from 2011-2012(1.86) to 2012-2013(2.97). But in 2013-2014(2.3), 2014-
2015(1.7) and 2015-2016(1.02) it shows a decline trend some action could be
taken to increase the ratio because this decrease due to high increase in current
liability over the years.

The standard quick ratio is 1:1the quick ratio of the company 2015-
2016(0.54:1) is not in a satisfactory level. As it does not reach to the standard
level

The standard Absolute quick ratio is 0.75:1As Krishna steel rolling mills
absolute quick ratio is 2015-2016(0.041), it does not meet the standard Level.

Debtors collection period is 25 days which shows the debts are collected
in a fast manner.

148 days is needed to pay the creditors,company make slow payments to its
creditors

The asset turnover ratio shows a decreasing trend from 2011-2012(12.10) to

2012-2013 (3.67). but in 2013-2014 It reflects the assets utilization and also
indicates production or management problems.

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Working capital turnover ratio is 26 in 2015-2016. So , the company can

pay all of its current liabilities

The gross profit ratio is less in the year 2011-2012(0.16%) 2012-2013(0.05)

but the last three years the company has loss because of companys sale is
decreases and the liabilities also increases

The net profit ratio is less in the year 2011-2012(0.09%) 2012-

2013(0.16)But the last three years arise net loss. Low net profit ratio is not
sufficient to cover all expenses

The increasing trend in working capital turnover ratio indicates that low
investment in working capital relation to sales is required for the company.

-Schedule of changes in working capital statements from the year 2013-

2014 working capital increased because of increment in the current assets

According to the schedule of changes in working capital shows that

decreasing trend in the 2011-2012,2012-2013,2014-2015 and 2015-2016. So it
indicates current liabilities over current assets.

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5.2 SUGGESTION

The factors affecting working capital of the company can be considered

while taking the working capital decision by the management.

The company takes necessary steps to maintain the current ratio to 2:1. That
means the current assets more than the current liabilities. This could be done by
proper management of current liability and current assets.

.
148 days is needed to pay the creditors, company can maintain its prompt
payment of its creditors, So that good relations could be achieved from its
creditors

The net profit of the firm is below performance. All the effort for increasing
profit may be taken which will further straight the working capital policies of the
company

Good gross profit ratio is helpful to meet the all expenses

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5.3 CONCLUSION

The study helps to understand the importance of working capital in the day to day
operations of the company. There are many inevitable factors that affect the
working capital decisions of the company. This study was helpful in
understanding the need for the company to improve their capacity to fully utilize
working capital of the company. The analysis reveals that the firm had a good
management system. By analysing the profitability ratios we can conclude that the
company is trying to manage, to keep the position favourable.
The top management is very aware about the good working capital analysis. They
know that can make their working environment and implementation of various
policies better with the good working capital analysis. They all are also known
that the good working capital analysis makes their environment healthy, through
which they makes their relationship is more & more better with the other parties.
The top management has a great role the progress of better working capital
analysis, through its various activities are the administrative increased in the
managerial personal. The working capital analysis is the base of company success.

91