A REPORT ON WORKING CAPITAL MANAGEMENT AND PROFITABILITY ANALYSIS OF GATES INDIA PVT.

LTD

ROLL NO 10150 VIKRAM SHAH BATCH XVIII, 2010-2012

Report submitted in partial fulfillment for the award of Post Graduate Diploma in Management.

VIGNANA JYOTHI INSTITUTE OF MANAGEMENT (APPROVED BY AICTE, MINISTRY OF HRD, GOVT OF INDIA) BACHUPALLY, HYDERABAD.

1. INTRODUCTION

Working capital in a business is considered as life blood in human body It is the capital required to manage day to day operations of a business and it varies according to the nature of the business, production, sales policies, turnover, credit period, collection period, etc. Broadly working capital management can be described as the administration of all aspect of current assets and current liabilities. Liquidity means the capacity of the firm to convert the assets into realizable value in money. It measures the ability of the firm to honor the entire maturing obligation. Profitability is the rate of return on firms investment. It implies that return made on investment of fixed and current assets. The importance of efficient working capital management is indisputable. Working capital is the difference between resources in cash or readily convertible into cash (Current assets) and organizational commitments for which cash will soon be required (Current liabilities). The objective of working capital management is to maintain the optimum balance of each of the working capital components. Business viability relies on the ability to effective managing receivables, inventory and payables. Firms are able to reduce financing costs and/ or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. Much managerial effort is extended in bringing the non-optimal levels. An optimal level would be one in which a balance is achieved between risk and efficiency.

OBJECTIVE OF THE STUDY

To study the working capital management of the concern so as to analyze and interpret the inventory position of the GATES INDIA PVT. LTD.

To make item wise analysis of the element or components of working capital and to identify the items responsible for changes in working capital.

To assess the significance of working capital by selecting few parameters such as working capital ratio, current asset to sales ratio.

SCOPE OF THE STUDY

The study deals with working capital management of GATES INDIA PVT. LTD. which reflects only the liquidity and profitability position.

The analysis part of the study includes, the changes in the working capital position and the financial statement analysis using some ratios.

RESEARCH METHODOLOGY

It is a study of the financial performance of the company in which only the data has been collected and analyzed using the different financial tools. The data of GATES INDIA PVT. LTD. for the year (2005-06 to 2009-10) used in this study has been taken from secondary sources i.e. published annual reports of the company. Editing, classification and tabulation of the financial data, which have been collected from the above mentioned sources, have been done as per the requirement of the study. For accessing the performance of the working capital position in this study, the technique of ratio analysis has been used. Finally, the concept of inventory management, VED analysis is applied to categorize the raw materials into vital, essential and desirable according to the usage.

LITERATURE REVIEW

Business face ever increasing pressure on costs and growing financing requirement as a result of intensified competition. So, many of them are therefore considering ways of making themselves more efficient. In identifying possible options it is important not to focus on income and expense items, but also to take the balance sheet into account. Improvements to the existing capital structure can free up valuable resources and bring increased efficiency. Active working capital is an extremely effective way to increase enterprise value. Optimizing working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a reduction in inventory and capital costs.

For the purpose of optimizing working capital, the important factors are current assets accounts receivables and inventories and accounts payable. Emphasizing on which one can unlock a n average of 20-30% of the funds tied up and pays back within few months. Together with cost saving programs working capital optimization should be done as a result of which it improves business profits. In this context its important to recognize which elements of working capital are significant factors, in order to optimize relevant business processes and achieve permanent reduction in working capital. -Best Practices- working capital management, Petr Smutny, Director Business Recovery Services.

Firms are able to reduce financing costs and/or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. The importance of efficient working capital management is indisputable. Working capital is the difference between resources in cash or readily convertible into cash (Current assets) and organizational commitments for which cash will soon be required (Current liabilities). The objective of working capital management is to maintain the optimum balance of each of the working capital components. Business viability relies on the ability to effective managing receivables, inventory and payables. Firms are able to reduce financing costs and/ or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. Much managerial effort is extended in bringing the non-optimal levels. An optimal level would be one in which a balance is achieved between risk and efficiency. An example of business attempting to maximize working capital management is the recurrent attention being given to the application of Six Sigma methodology. Six Sigma helps companies measure and ensure quality in all areas of the enterprise. When used to identify and rectify discrepancies, inefficiencies and erroneous transactions in the financial supply chain, Six Sigma reduces days sales outstanding accelerates the payment cycle improves customer satisfaction and reduces the necessary amount and cost of working capital needs.

An analysis of working capital management results across industries; by Greg Filbeck, Schweser study program and Thomas M. Kruger, University of Wisconsia-La Crosse.