A

STUDY
OF
“WORKING CAPITAL MANAGEMENT”
AT
CAUVESOFT TECHNOLOGIES

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 (THEORETICAL BACKGROUND)

2.1 OVERVIEW OF FINANCIAL MANAGEMENT

2.2 WORKING CAPITAL MANAGEMENT – WHAT FOR?
2.3 WORKING CAPITAL MEANING, DEFINATION
2.4 NEED FOR WORKING CAPITAL
2.5 OPERATING CYCLE
2.6 TYPES OF WORKING CAPITAL
2.7 DETERMINANTS OF WORKING CAPITAL
2.8 WORKING CAPITAL FINANCING
2.9 EXCESSIVE OR INADEQUATE WORKING CAPITAL-THE DANGEROUS

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2.1 OVERVIEW OF FINANCIAL MANAGEMENT
Finance is regarded as the lifeblood of any business organization.
The Financial management study of about the process of procuring of
financial resources and its judicious utilization with a view to maximizing
the shareholders wealth. Efficient management of every business
enterprise is largely dependent on the efficient management of its
finance.
“Financial Management is concerned with the efficient use of an
important economic resource, namely capital funds”. From the starting and
registration to winding up of a unit, finance play dominate role in each and
every business unit.
In short financial management is managerial activity, which is
concerned with planning and controlling of the firm’s financial resources.
Modern approach of financial management requires four broad
decision areas of financial management viz.,
 Investment Decision
 Financing Decision
 The dividend policy Decision
 Working Capital Management

This report covers analysis of the last decision i.e., Working Capital
Management. It is very important for short-term survival, which is must for
long-term success. It is concerned with the management of current assets.

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2.2 WORKING CAPITAL MANAGEMENT – WHAT FOR?
Management of working capital is an extremely important area of
financial management as current assets represent more than half of the total
assets of a business. Fixed assets through essential for a business
organization, does not by itself produce revenue or income. Fixed assets act
with current assets to generate revenue or income. Therefore, working
capital is necessary for utilizing the productive capacity of fixed capital. For
shortage of working capital, the enterprise would suffer reduction in
earnings due to productive capacity remain unutilized. While, excess
working capital leads to extra cost for want of productive capacity. Thus, the
amount of working capital in every enterprise, whether manufacturing or
non-manufacturing, should be neither more or less than what is actually
required.
Working capital in business is just live blood in human body.
Optimum and appropriate movement of blood through the body is extremely
necessary to continue life. Like human blood, the proper circulation of funds
(working/circulating capital) is utmost necessary to continue business. If the
circulation of working capital becomes weak, the businesses can hardly
prosper and service. An enterprise should maintain optimum amount of
working capital so as to carry on the productive and distributive activities
smoothly. While, the determination of optimum level of working capital
involves fundamental decisions to an organization’s liquidity, which in turn
are influenced by a trade off between profitability and liquidity.
Thus, goal of working capital management is to manage the firm’s
current assets and liabilities in such a way that satisfactory level of working
capital minted.

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2.3 WORKING CAPITAL MEANING, DEFINATION
In accounting “Working capital is the difference between the inflow
and out flow of funds.” It other words it is the net cash inflow.
Working capital is defined as excess of current assets over current
liabilities and provision. In other word, it is “net current assets or net
working capital.”
Working capital can be defined broadly in two different ways i.e.
gross working capital and Net working capital.
Gross working capital refers to organizations investment in total
current assets. Current assets are the assets, which can be, convert in to cash
with in an accounting year and include cash, marketable securities, intently
etc. it is also known as circulating capital.
Net working capital refers to the different between current assets and
current liabilities are those claims of outsiders, which are accepted to mature
for payment within an accounting year and include creditors, bills payable
and outstanding expenses.

Symbolically:
NWC = CA – CL.
Where, NWC = Net working Capital
CA = Current Assets
CL = Current Liabilities
Net working capital can also be defined as that portion of firm’s
current assets, which is financed by long-term funds.

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2.4 NEED FOR WORKING CAPITAL
The need for working capital to run the day-to-day business activities
cannot over emphasized. We will hardly find a business firm, which doesn’t
require any amount of working capital. Indeed, firms differ in their
requirement of working capital.
We known that firm should aimed at maximizing the wealth of its
shareholders. In its endeavor to do so, firm should earn sufficient return
from its operation. Earning a study amount of profit require successful sales
activity. But there is always time gap between the day of sales & its
realization from debtors realization from debtors will take time but firm has
arrange money for purchase of raw material, to pay for salary, wages and
other expenses. Therefore sufficient working capital in needed. The
operating cycle can be said to be reason for the need for working capital.

2.5 OPERATING CYCLE

The operating cycle is the length of time required to complete the
following stages of the cycle.

Operating cycle consists of five Phases: -

I. Conversion of cash in to Raw materials.
II. Conversation of raw material in to work-in-process.
III. Conversion work in process in to finished goods.
IV. Conversion of finished goods in to receivables.
V. Conversion of Receivables in to cash

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 Symbolically: -
O = R + W + F + D - C.
Where, O= Length of operating cycle.
R= Raw Material storage period.
W= work in progress period.
F= Finished stock storage period.
D= Debtors collection period.
C= Creditors payment period.

Account Receivable
Phase-V Phase-IV

Cash

Phase-I Finished
Good
Raw Material

Phase-II Phase-III
Work in Progress

(Figure 1: -OPERATING CYCLE OF MANUFACTURING FIRM.)

2.6 TYPES OF WORKING CAPITAL

There are mainly two types of working capital.
a) Permanent Working Capital
b) Temporary Working Capital

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a) Permanent Working Capital: -
The need for current assets arises because of operating cycle. The
operating cycle is continuous process and therefore the need for current
assets is felt constantly. But the magnitude of current assets needed is not
always the same. It increases and decreases over time. However there is
always a minimum level of current assets, which are continuously required,
by firm to carry or its business operations is called permanent or fixed
working capital. This minimum level of working capital is necessary on the
regular basis even if the management of working capital is done efficiently
in the organization.
As this type of working capital is minimum necessary for the business
at all points of time, it is financed by the long-term sources.

b) Temporary Working Capital: -

The amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. The need for such type of
working arises because of fluctuations in production and sales. The
additional requirement may be during more active season when the volume
of production and sales more goes up necessitating extra blockage of funds
temporarily in current assets like Bank Balance, inventory, debtors, etc.
The temporary working capital is the additional funds required.
Whose volume is different at different points of time and hence it is financed
by short-term sources.

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 Both concepts are depicted in the following figure: -

A
M
O
U
N Temporary Working Capital
T
O
F
W.
C.
Permanent working Capital

Time
(Figure 2a)

However when the business is growing, the level of permanent

working capital also grows. The working capital graph will be rising one as
given in figure below:

A
M Temporary Working Capital
O
U
N
T
O
F
W.
Permanent Working Capital
C.

Time
(Figure 2b)

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2.7 DETERMINANTS OF WORKING CAPITAL
There are no set formulates to determine the working capital
requirements of firms. A large no. of factors each having a different
importance, influence working capital needs of firms. However, the factors
may vary from organization to organization. Therefore, an analysis or
relevant factors should be made inorder to determine total investment in
working capital.
The following is the description of factors, which generally influence
the working capital requirement of firms.
1. Nature of Business: -
Business firm can be dividend in to three categories given below: -
I. Service organization or public utilities
II. Trading or financial organization
III. Manufacturing organization
Service organizations don’t normally hold any inventory or the level
inventory may be very low. Again major sale of such services are on cash
basis. Hence they require very less amount of working capital.
Trading or financial organization have to maintain sufficient amount
of cash and inventory.
Hence working capital requirement of such organization are relatively
very high.
Working capital requirement of manufacturing organization normally
falls between the above two extremes.
2. Volume of sales: -
The higher the sales on credit basis, the higher is the requirement of
working capital, as more and more amount is getting blocked in debtors.

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 3. Manufacturing Cycle: -
The manufacturing cycle refers to the time spent by a product right
from the stage of purchase of its raw material to the stage of completion of
finished goods. Obviously the larger the manufacturing cycle of a company
the higher is the volume of working capital needed to finance blockage of
money in raw material, work in progress and finished good.
4. Business Cycle: -
No business can remain study for all the time. It passes through the
stages of prosperity and depression. During Prosperity, the volume of sales
increases necessitating higher level of inventories and debtors, i.e. more
Amount of working capital is required to sustain higher levels of activity
during prosperity. Depression has exactly an opposite effect on the level of
working capital requirement.
5. Credit Policy: -
If the organization is following a liberal credit p[policy for its
customers, it will result in higher debtors leading to requirement of more
working capital.
However, if the organization is availing liberal credit term from its
suppliers, the need for working capital is reduced.
6. Tax Structure: -
The entire profit generated may not be available to the organization
because of a simplest fact. The organization has to pay its taxes in time. Tax
rates vary in different forms of organization and accordingly working capital
requirement of different organization will be different.

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 7. Dividend Pay out ratio: -
If dividend payout ratio is high, the organization may have earned
profit but-the profits available only after payment of dividends is available
for financing working capital. Hence, higher working capital will be
required if Dividend payout ratio is high.
8. Availability of Funds: -
If the credit worthiness of an organization is good, it may manage the
business with less Working Capital. The reason may be that the organization
may procure the funds whenever it needs the funds.
9. Change in Technology: -
Change in technology affect the requirement for working Capital. If
the firm decides to go for automation, this would reduce the requirements of
Working Capital. If the firm adopts a labor-intensive process, the
requirement of working capital will be larger.
10.Size of the Firm: -
Bigger firms may require lesser working capital as compared to their
total sales or assets. Of course the absolute amount of working capital will
be higher in bigger firms.

The level of Working Capital is determined by a wide variety of

factors that are partly internal to the firm and partly external to it. Efficient
working capital management requires efficient planning and a constant
review of the needs for an appropriate working capital strategy.

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2.8 WORKING CAPITAL FINANCING
A firm must tap the right sources in financing its current assets
requirements. Figure given below shows the financing-mix or sources-mix
or working capital.

Financing Mix

Spontaneous Negotiated Sources

Sources

Short-term Long-term
Sources Sources

(1) Trade Credit (1) BOD/Cash Credit (1) Share Capital

(2) Outstanding (2) Public Deposit (2) Retained
Expenses (3) Short-loans Earnings
(3) Bills payable etc. (4) Bill Discounting (3) Debentures
(5) Commercial Paper (4) Other Long-
(6) Factory etc. term funds.

A source is said to be spontaneous when its use is automatic or arise

in the normal course of business activities.

A source is said to be negotiated when its use depends on prior

deliberations between the borrower and the lender.

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(1) Long-term Financing: -
Long-term working capital should be provided in such a manner that
the enterprise might have its uninterrupted use for a long time. It can be
conveniently financed by shares, debentures, loans from financial Institution
term loans from banks, reserve surplus etc.
(2) Short-term financing: -
The category of funds covers the need of working capital for
financing day-to-day business requirements. It includes Bank Credit,
Commercial papers, Certificate of deposit, Commercial Bills Market, and
Factoring.
(3) Spontaneous Financing: -
It refers to the automatic sources of short-term funds arising in the
normal course of business.
The major sources of such financing are trade credit (creditors and bill
payable) and outstanding expenses. Spontaneous sources of finances are cost
free. Therefore a firm would like o finance its curre3nt assets with
spontaneous sources as much as possible.

Working capital Financing of CauveSoft Technologies.

The company used both long and short-term sources for financing
working capital requirements. The proportion can be shown in following
table: (Table 1)
Proportion of W.C.
Sources
Financing (in %)
A) Equity Share 80%
B) Short-term Loan From BOB. 20%

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2.9 EXCESSIVE OR INADEQUATE WORKING CAPITAL-THE
DANGEROUS
The firm should maintain a sound working capital position. It should
have adequate working capital to run its business operations. Both excessive
as well as inadequate working capital positions are dangerous from the
firm’s point of view. Excessive Working capital means idle funds, which
earn no profit for the firm paucity of working capital not only impairs firm’s
profitability but also results in production interruptions and inefficiencies.
The dangers of excessive Working Capital are as follows:
1) A firm may be tempted to over trade and lose heavily.
2) The situation may lead to unnecessary purchases and accumulation of
inventories. This cause more chances of theft, waste, losses, etc.
3) These arise an imbalance between liquidity and profitability.
4) It means funds are idle when funds are idle, no profit is earned when it
is so, the rate of return on its investments goes down.
5) The situation leads to greater production, which may not have
matching demand.
6) The excess of working capital may lead to carelessness about cost of
production.

In adequate working capital is also bad and has the following dangers:
1) It stagnates growth. It becomes difficult for the firm to undertake
profitable projects for non-availability of working capital funds.
2) It may fail to pay its dividend because of non-availability of funds.

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 3) Operating inefficiencies creep in when it becomes difficult even to
meet day-to-day commitment.
4) Fixed assets aren’t efficiently utilized for the lack of working capital
funds thus the profitability would deteriorate.
5) It may not be able to take advantage of cash discount
6) The firm loses its reputation when it is not in position to honor its
short-term obligation. As a result, the firm faces tight credit terms.

An enlightened management should, therefore maintain a right

amount of Working Capital on continuous basis only them a proper
functioning if business operations will be ensured.

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 The problem related to whether efficient management of working
capital is necessary or not?

Working Capital is necessary for business but excessive working

capital result in block of funds on the contrary inadequate working capital
disturbed the day-to-day operation of business. So, satisfactory level of
working capital is necessary for business for this purpose management of
working capital can be necessary.

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 These studies a part of my MBA; aim at analyzing the working capital
management of CauveSoft Technologies.
The following are the main objective of study: -
 To know how to manage current assets and current liabilities so that
satisfactory level of working capital is maintained.
 To know how to manage receivable, inventory and cash.
 To study the different sources of financing working capital.
 To study the operating cycle of company.
 To study the liquidity position of company.
 To look at possible remedial measures if any on the basis of which
tied-up funds in working capital could be used effectively and
efficiently.
 To suggest, if possible on the basis of conclusion some modification
to meet the situation.

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 Following are limitation of the study: -

 The study fully depends on financial data collected from the

published financial statement (Annual Report) of company. The data
collected from above the sources are not of detailed nature. Thus
study incorporates all the limitations that are inherent in the
considered financial statement.
 There are controversies related to correctness of current assets and
current liabilities that enters in to the domain of working capital
management.

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Introduction: -
It has already been discussed that working capital acts as lifeblood to
an organization. The Himson group of Industry mainly producing textile
machineries at lowest possible cost so that they are enable to sale it in
profitable manner. As major sale is on credit basis and not on cash mode,
working capital is of immense significance for efficiently carried out its day-
to-day operation. In the absence of proper and effective management of
working capital, it would be difficult to achieve the basic objective of its
operational efficiency.
For the efficient management of Working Capital, analyses of
working capital of company through:
 Inventory management
 Receivable management
 Cash management
 Ratio analysis

All these are analyzed subsequently in this part.

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I. WORKING CAPITAL ASSEMBLY

(Figures in thousands)
YEARS
Particulars 2000-01 2001-02 2002-03
Current Assets
1) Inventories 339,596 350,615 504,596
2) Sundry Debtors 300,586 369,429 321,324
3) Cash & Bank Balance 68,193 124,547 231,670
4) Loans & Advances 192,942 224,777 232,705
5) Other current Assets 27,872 17,358 37,502
Total Current Assets (A) 929,189 1,086,726 1,327,797
Current Liabilities
1) Current Liabilities 408,440 455,039 528,285
2) Provision 1,025 4413 28,413
Total Current Liabilities (B) 409,465 459,452 556,698

Net Working Capital (A-B) 627,274 519,724 771,099

(Table-2)

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II. GROSS WORKING CAPITAL
The amount of gross working capital during last three years is given in
following table.
(Rs. in thousands)
Year Gross W.C. (Rs.) Growth (%)
2000-01 929,189 0.11
2001-02 1,086,726 16.94
2002-03 1,327,797 22.18
(Here year 1999-00 taken as 100%)
(Table-3 Growth in Gross W.C.)

Growth in Gross W.C.

25 22.18
20 16.94
Growth (%)

15
2000-01
2001-02
10
2002-03
5
0.11
0
2000-01 2001-02 2002-03
Year

(Graph-1 Growth in Gross Working Capital)

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III. NET WORKING CAPITAL TO NET ASSETS RATIO
Net Working Capital is difference between current assets and current
liabilities. This ration measure firm’s potential reservoir funds relate to net
assets.
(Rs. in thousands)
Year Net W.C. (Rs.) Net Assets (Rs.) Ratio (in times)
2000-01 627,274 11,84,161 0.53
2001-02 519,724 11,34,542 0.46
2002-03 771,099 11,22,410 0.69

(Table-4)

0.8
0.69
0.7
0.6 0.53
0.5 0.46 2000-01
Ratio

0.4 2001-02
0.3 2002-03
0.2
0.1
0
2000-01 2001-02 2002-03
Year

(Graph 2: -Net working capital to Net asset Ratio)

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IV. CALCULATION OF OPERATING CYCLE OF COMPANY
Operating cycle of a company computed with the help of following
formula: -
O=R+W+F+D-C
R= Raw material storage period
Average Stock of Raw material
= ------------------------------------------------------
Average raw material consumption per day
Year 2000-01
124833
= ------------
1927.60
= 65 days.
Year 2001-02
120933.5
= ---------------
2349.31
= 52 days.
Year 2002-03
275028
= ------------
4044.83
= 68 days.

W= Work-in-progress period
Average Work-in-progress inventory
= -----------------------------------------------
Average cost of production per day

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 Year 2000-01
49819
= ------------
2305.96
= 22 days.
Year 2001-02
191456
= ---------------
2807.08
= 68 days.
Year 2002-03
125521
= ------------
4658.33
= 27 days.

F= Finished Stock Storage period

Average finished stock inventory
= -----------------------------------------------
Average cost of goods sold per day
Year 2000-01
17823.5
= ------------
4316.95
= 5 days.
Year 2001-02
13283
= ---------------
2294.75
= 6 days.

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 Year 2002-03
12514.5
= ------------
3350.13
= 4 days.
D= Debtors collection period
Average debtors
= ----------------------------------
Average credit sales per day
Year 2000-01
287156
= ------------
2898.23
= 99 days.
Year 2001-02
335007.5
= ---------------
3465.99
= 97 days.
Year 2002-03
345376.5
= ------------
6150.48
= 56 days.

C= Creditors payment period

Average creditors
= -------------------------------------------
Average credit purchase per day

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 Year 2000-01
327468
= ------------
1924.33
= 170 days.
Year 2001-02
301568
= ---------------
2147.15
= 140 days.
Year 2002-03
371553
= ------------
3441.96
= 108 days.

Operating Cycle
(Figure in Days)
YEARS
Particulars 2000-01 2001-02 2002-03
Inventory Storage period
Raw material 65 52 68
Work-in-progress 22 68 27
Finished Stock 05 06 04
Debtor Collection Period 99 97 56
Total (A) 191 223 155
Creditors Payment Period (B) 170 140 108
Operating Cycle Period (A-B) 21 83 47
(Table-5a)

Operating Cycle Period

Year Operating Cycle Period
2000-01 21

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 2001-02 83
2002-03 47
(Table-5b)

90 83
80
70
60 2000-01
47
50
Days

2001-02
40
30 21 2002-03
20
10
0
2000-01 2001-02 2002-03
Year

(Graph-3 Operating Cycle of Company)

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V. MANAGEMENT OF INVENTORY
Inventory constitute major portion of current asset of public Ltd.
Companies in India .The manufacturing companies hold inventories in the
form of Raw material, work-in-process and finish good,

There are at least three motives for holding inventories.

(1) To facilitate smooth production and sales operation
(Transaction motive)
(2) To guard against the risk of unpredictable changes in usage
rate and delivery time (Precautionary Motive)
(3) To take advantage of price fluctuations. (Speculative Motive)

Inventories represent investment of a firms funds and that is why

management of inventory is necessary for the maximization of the value of
the firm. The firm should therefore consider (a) Costs (b) Return (c) Risk
Factors in establishing its inventory policy.

 EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE: -

Ratio analysis has been used for making evaluation of Inventory
management performance. As the raw material used in the company is pig
iron, proper planning and handling is required for the purpose of achieving
the right quality of output.
The ratios for last three years have been worked out and compared.
The various figures are given in the table.

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 INVENTORY MANAGEMENT IN HIMSON PVT LTD.
(Rs. in thousand)
ITEM 2000-01 2001-02 2002-03
(1) Average Inventory 329550.5 331822.5 414866
(2) Total Current Assets 929189 1086729 1327797
(3) Cost of Good Sold 760872 891349 15207147
Ratio (%)
a) Inventory to Gross
0.35 0.30 0.31
Working Capital (1/2)
b) Inventory Turnover (3/1) 2.31 2.69 3.67
c) Inventory Conversion
158 136 99
Period (365/b) days
(Table 6)

Inventory Turnover Inventory Conversion Period (days)

4 3.67 180 158

3.5 160
136
2.69 140
Inventory Turnover

Inventory Turnover

3
2.31 120 99
2.5
100
2
80
1.5
60
1 40
0.5 20
0 0
2000-01 2001-02 2002-03 2000-01 2001-02 2002-03
Year Year

2000-01 2001-02 2002-03 2000-01 2001-02 2002-03

(Graph 4) (Graph 5)

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VI. MANAGEMENT OF RECEIVABLE
When firm sell goods for cash, payments are received immediately
and therefore no receivables are created. However when a firm sells goods
or services on credit, payments are received only at a future date and
receivables are created. It is an essential marketing tool in modern
business trade. Credit creates receivables, which the firm is expected to
collect in near future. A firm grants credit to its customers so that its sales
are its customers so that its sales are not lost to competitors.
Account receivable constitutes a significant portion of the total current
assets of the business after inventories. The receivables arising out of credit
has three characteristics.
I. It involves an element of risk, which should be carefully analyzed.
II. It is based on economic value. To the buyer, the economic value
goods or services pass immediately at the time of sale, white the
seller expects an equivalent value to be received later on.
III. It implies futurity. The customers from whom receivables have to
collected in future are called debtors and represents the firm’s claim
or asset.

 DEBTORS TURN-OVER RATIO: -

This is also called “Debtors velocity” or “Receivable Turnover”. A
firm sells goods on credit and cash basis. When firm extends credit to its
customers, book debts are created in firms A/c debtors expected to converted
in to cash over short period and thus included in current assets. It is used to
measure liquidity of the receivables or to find out period over, which
receivables remain uncollected.

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 Receivable turnover Ratio
Total Sales
= -----------------------
Average Debtors
Debt collection period
365
= ------------------------------------
Receivable turnover ratio

Receivable Management in Company

Year Sales Avg. Debtors Ratio Collection Period
2000-01 1042284 287156 3.63 100
2001-02 1247759 335007.5 3.72 98
2002-03 2214174 345376.5 6.41 57
(Table 7)

Debtors Turnover Ratio Debt Collection Period

7 6.41 120
100 98
Debtors Turnover Ratio

Debtors Turnover Ratio

6 100
5
3.72 80
3.63 57
4
60
3
40
2
1 20

0 0
2000-01 2001-02 2002-03 2000-01 2001-02 2002-03
Year Year

2000-01 2001-02 2002-03 2000-01 2001-02 2002-03

(Graph 6) (Graph 7)

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VII. MANAGEMENT OF CASH: -
Cash in the important current assets for the operations of the business.
Cash is the basic input needed to keep the business running on continuos
basis, it is also the ultimate output expected to be realized by selling the
service or product manufactured by the firm. The firm should keep sufficient
cash, neither more or less. Cash shortage will disrupt the firm’s
manufacturing operation while excessive cash will simply remain idle,
without contributing anything towards firm’s profitability. Thus, a major
function of the financial managers is to maintain a sound financial position.
Cash management involves following four factors: -
I. Ascertainment of the minimum cash balance and controlling the levels
of cash.
II. Controlling cash in flows
III. Controlling cash outflows
IV. Optimum utilization of surplus cash.
Cash is required to meet a firm’s transactions and precautionary
needs. A firm needs cash to make payment for acquisition of resources and
services for the normal conduct of business. It keeps additional funds to
meet any emergency situation. Some firms maintain cash for taking
advantages of speculative changes in price of input and output.

 EVALUATION OF CASH MANAGEMENT PERFORMANCE: -

The following ratios have been used to evaluate different aspects of
cash management.
(1) Cash to Current Assets Ratio.
(2) Cash turnover Ration.

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 (3) Average age of Cash.
The figures of cash and Bank Balance, total current assets and current
liabilities for the year 2000-01to 2002-03 are given in the table.
Cash Management in Himson Pvt. Ltd.
(Rs. In ‘000’s)
ITEM 2000-01 2001-02 2002-03
(1) Cash & Bank Balance 68193 124547 231670
(2) Total Current Assets 929189 1086729 1327797
(3) Total Current Liabilities 408440 455039 528285
Ratio (%)
a) Cash to Current Asset
7.34 11.46 17.45
Ratio (1/2)
b) Cash Turnover Ratio (3/1) 5.99 3.65 2.28
c) Average age of cash
61 100 160
(365/b) days
(Table 8)

Cash Turnover Ratio Avg. Age of Cash

7 180 160
5.99 160
Avg. Age of Cash (days)

6
140
Cash turnover (%)

5 120 100
3.65
4 100
3 2.28 80 61
60
2
40
1 20
0 0
2000-01 2001-02 2002-03 2000-01 2001-02 2002-03
Year Year

2000-01 2001-02 2002-03 2000-01 2001-02 2002-03

(Graph 8) (Graph 9)

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 VIII. ANALYSIS THROUGH WORKING CAPITAL RATIOS
A study of the causes of changes in uses and sources of Working
Capital is necessary to observe that whether working capital is serving the
purpose for which it has been created or not. In this technique, for each
aspect of analysis certain ratios are computed and then results are compared
with standard ratio or industry average.
The ratio analysis provides guides and clues especially in sporting
trends towards better or poorer performance and in finding out significant
deviation for any average or relatively applicable standards.

The following are the important ratios to measure the efficiency of

working capital: -
1. Ratios relating to liquidity of working capital: -
Liquidity ratios are used to measure the ability of firm to pay its
maturing obligation in time. This ratio helpful for both short-term creditors
and internal management of the firm. The following are types of ratios
relating to liquidity of working capital.

A. Current Ratio: -
It is most common measure for measuring liquidity. It is also called
“Working Capital Ratio.” It expresses relationship between current assets &
current liabilities.

Current Assets
Current Ratio = ----------------------
Current Liabilities

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 (Rs. in ‘000’s)
Year Current Assets Current Liabilities Ratio (times)
2000-01 929,189 408,440 2.27:1
2001-02 1,086,726 455,039 2.39:1
2002-03 1,327,797 528,285 2.51:1
(Table 9)
The acceptable norms for this ratio is 2:1 considering this it can be
said that company has maintained sound ratio over three year

B. Quick Ratio: -
It is also known as liquid ratio or acid test ration. It is a relation
between quick assets and quick liabilities. It is more useful in knowing the
liquidity of firm than current ratio.
Quick Assets
Quick Ratio = ----------------------
Current Liabilities

A quick asset means current assets excluding stock and prepaid

expenses.
(Rs. in ‘000’s)
Year Quick Assets Current Liabilities Ratio (times)
2000-01 589,593 408,440 1.44
2001-02 736,111 455,039 1.62
2002-03 823,201 528,285 1.56
(Table 10)
The acceptable norm for this ratio is 1:1 but the company as already
maintained it above the norms, which indicate sound financial position.

2. Composition of Gross working capital: -

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 The structure of gross working capital is evaluated by finding out the
ratio of each component of current assets with the total current assets. These
ratios indicate in which components of current assets, excess funds have
been invested to that extent.

Component 2000-01 2001-02 2002-03

Inventories 0.37 0.32 0.38
Sundry Debtors 0.32 0.34 0.24
Cash & Bank Balance 0.07 0.11 0.17
Loans & Advances 0.22 0.21 0.17
Other Current Assets 0.02 0.02 0.03
Total 100 100 100
(Table 11)

3. Ratios relating to Circulation or Productivity of Working

Capital: -
This ratio highlighted the efficiency with which working capital is
being utilized. It is commonly used to know turnover of working capital and
the turnover of its components to indicate the efficiency of working capital
management.
A. Circulation of Gross Working Capital: -
The method is used to examine the effectiveness of gross working
capital. It is circulated as:
Net Sales
Circulation of Gross Working Capital = ---------------------------
Total Gross W. C.

(Rs. in ‘000’s)
Year Net Sales Total Gross W.C. Ratio (times)
2000-01 1,042,284 929,189 1.12

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2001-02 1,247,759 1,086,726 1.15
2002-03 2,214,174 1,327,797 1.67
(Table 12)

This ratio tells us the relative efficiency with which the business
organization utilizes the short-term resources to generate output.
B. Circulation of Net Working Capital: -
The method used to measure the effectiveness of net working capital
is to divide net sales by net working capital. The ratio is computed as
follows: -
Net Sales
Circulation of Net Working Capital = ------------
Net W.C.

(Rs. in ‘000’s)
Year Sales Net Working Capital Ratio (times)
2000-01 1,042,284 627,274 1.66
2001-02 1,247,759 519,724 2.40
2002-03 2,214,174 771,099 2.87
(Table 13)
This ratio tells whether three is an improvement in the utilization of
net working capital or not.

4. Other Ratio: -
A. Cash Position Ratio: -
This ratio is variation of quick ratio. It measures the relationship
between cash and near cash it’s on the one had, and immediately maturing
obligations on the other. The inventory and debtors are excluded from
current assets, to calculate this ratio.

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 Cash + Marketable Securities
Cash Position Raito = -----------------------------------
Current Liabilities
(Rs. in ‘000’s)
Year Cash Current Liabilities Ratio (times)
2000-01 68,193 408,440 0.17
2001-02 124,547 455,039 0.28
2002-03 231,670 528,285 0.44
(Table 14)
Generally 0.25:1 ratio is recommended to ensure liquidity.

B. Return on Fixed Assets : -

This ratio indicates a return on fixed assets. It can be calculated as

Net profit after tax

Return on Fixed Assets = ------------------------ × 100
Net fixed assets

(Rs. in ‘000’s)
Year Net profit after Net Fixed Assets Ratio (%)
tax
2000-01 31,347 5,59,820 5.60
2001-02 59,310 4,85,507 12.22
2002-03 84,152 4,44,600 18.92
(Table 15)

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 From the above calculation it is cleared that return on fixed assets
increasing year by year, it means that company is able to earn higher return
on investment in business than the investment made in the outside deposit.

C. Current Liabilities to Total Assets Ratio: -

This ratio shows the relationship between current liability and total
assets [Net Fixed Assets + Investment + Current Assets]

Current Liabilities
Current Liabilities to Total Assets Ratio = ----------------------
Total Assets

(Rs. in ‘000’s)
Year Current Liabilities Total Assets Ratio (times)
2000-01 408,440 1,703,885 0.24
2001-02 455,039 1,761,816 0.26
2002-03 528,285 1,893,509 0.29
(Table 16)

D. Current Assets to Total Assets Ratio: -

The ratio brings out the percentage of current assets to total net assets
of the business. This ratio indicates the extent of liquidity nature of assets
required in comparison with total net assets. The formal for ratio is given
below.
Current Assets
Current Assets to Total Assets Ratio = ----------------------
Total Assets

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 (Rs. in ‘000’s)
Year Current Assets Total Assets Ratio (times)
2000-01 929,189 1,703,885 0.55
2001-02 1,086,726 1,761,816 0.62
2002-03 1,327,797 1,893,509 0.70
(Table 17)

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(A) Findings: -

Working Capital Ratios

Ratio 2000-01 2001-02 2002-03 Avg. of Ratio
1) Net W. C. to Net Assets 0.53 0.46 0.69 0.56
2) Inventory to Gross W.C. 0.35 0.30 0.31 0.32
3) Inventory Turnover 2.31 2.69 3.67 2.89
4) Inventory Conversion 158 136 99 131
period (days)
5) Debtors Turnover 3.63 3.72 6.41 4.59
6) Debt collection Period 100 98 57 85
(days)
7) Cash to Current Assets. 7.34 11.46 17.45 12.08
8) Cash Turnover Ratio 5.99 3.65 2.28 11.92
9) Avg. Age of Cash (days) 61 100 160 107
10) Current ratio 2.27 2.39 2.51 2.39
11) Quick Ratio 1.44 1.62 1.56 1.54
12) Circulation of Gross 1.12 1.15 1.67 1.31
Working Capital
13) Circulation of Net 1.66 2.40 2.87 2.31
Working Capital
14) Cash Position 0.17 0.28 0.44 0.30
15) Return on fixed Assets 5.60 12.22 18.92 12.25
16) Current liabilities to 0.24 0.26 0.29 0.26
Total Assets
17) Current Assets to Total 0.55 0.62 0.70 0.62
Assets
(Table 18)

The following are the findings of the analysis: -

(a) Gross working capital: -

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 Gross working capitals of company i.e. current asset are increasing
over a period of study. It was 0.11% in 2000-01 and increased to 22.18 in
2002-03 so there is increased of 22.07%
(b) Operating cycle: -
The period for conversion of material in to finished & finished good
in to sales &sales in cash for a period of study are respectively 21.83 and 47
days on average there is 50 days required to collect money and again repeat
cycle.
(1) Net working capital to Net asset Ratio: -
The average ratio is 0.56 for period under study. It means there is a
reserve of Rs.56 on an average from net asset of Rs.100
(2) Inventory to Gross Working Capital Ratio: -
This ratio is decreasing as compared to year 2000-01 from 0.35 to
0.31 in 2002-03. It shows that firm has improved its inventory management.
(3) Inventory Turnover: -
This ratio has been increased over the three years from 2.31 in 2000-
01 to 3.67 in 2002-03. So it can be said that company has take steps to
increase the inventory-turn over ratio.
(4) Inventory Conversion Period: -
It refers to the period when manufacturing unit takes to clear a lot of
stock. There has been a continuous decreasing in conversion period. This
will help in reducing accumulation of inventories.

(5) Debtors Turnover Ratio: -

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 This ratio shows the period of which receivable remain uncollective.
The ratio is doubled in 2002-03 as compared to 2000-01. So serious steps
should be taken to reduce the collection period though sales increase.
(6) Debt Collection Period: -
It is the time period required by company to recollect its payment.
Company has made speedy collection in 2003 as compared 2000-01 by
collecting in nearly half period i.e. 57 days compared to 100 days in 2000-
01. Average collection period over 3 years is 85 days
(7) Cash to Current Asset Ratio: -
This ratio indicates the extent to which the current assets are
represented by cash&bank balance. There is an increase in the ratio over the
three years. It was increased by 10% in 2002-03 compared to 2000-01.This
increase will lower the profitability of the company.
(8)Cash Turnover: -
It indicates no. of times cash is flowed out for payment to creditors.
The ratio is continuously decreasing indicating there is ideal cash balance.
(9) Average age of cash: -
It indicates the period for which the cash remains unused. There is
continuous increased in period. It means there is lack of cash management.
(10) Current Ratio: -
It is a quick measure of the firm’s liquidity, which remained between
2.27 to 2.51 through out the period understudy. It is over the acceptable
norm i.e.2:1 so company has sufficient liquidity to meet short-term
obligation.

(11) Quick Ratio: -

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 This ratio is above the standard norm of 1:1 through out study period
so it can be said that it has satisfactory liquidity position.
(12) Circulation of Gross Working Capital: -
The ratio shows upward trend over the three-year period. It means
there is lower investment in current asset as compared to sales. Some say
that there is an improvement in working capital utilization.
(13) Circulation of Net Working Capital: -
The ratio shows an increasing trend over 3 years, which means there
is an improvement in utilization of Net Working Capital during the period.

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(B) SUGGESTIONS: -
From the analysis of working capital ratios, I have some suggestion
for company, which might help them in improving management of working
capital:
 The Gross working capital is increasing over three years but the
major proportion of current assets comprise of inventories in each
year. The company should try to reduce investment in inventory.
 The company should give more importance to inventory
management and try to reduce inventory to gross working capital
ratio. This will help in reducing inventory costs.
 There is an increase in debt collection period over three years and
at present (2002-03) it is near by two months which as per the
textile industry norm but this is possible due to increase in debtor’s
turn over ratio. So the company should try to increase this ratio as
much as possible.
 The company should additional funds in business rather than
investing in fixed deposit because company able to earn higher rate
of return on investment in fixed assets as compare to fixed deposit.

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 BIBLIOGRAPHY

Name of Book Author Publisher

 Working Capital Management P. Mohanrao Deep &

& Alok K. Pramanik Deep

 Working Capital Management Hrishikes Bhattacharya PrenticeHall

 Financial Management I. M. Pandy Vikash

Publication

 Financial Management Khan & Jain Tata

McGrawhill

 Financial Management T. J. Rana & B. S. Shah

Naresh Jain

 Management Accounting Bhagwati & Pillai Himalaya

 Annual Reports of Company

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