ARSS WCM

8/13/2019 ARSS WCM

1/68

Projectsformbu.blagspot.com

CHAPTER-2

Research Methodology

1)Introduction

2)Types of research methodology

3)Objective of the study

)!cope and limitation of the study

141 Projectsformba.blogspot. COlli

8/13/2019 ARSS WCM

2/68

8/13/2019 ARSS WCM

3/68


!econdary data easily get those secondary data from records$ journals$ annual

reports of the company etc" It #ill save the time$ money and efforts to collect

the data" !econdary data also made available through trade maga,ines$ balance

sheets$ boo%s etc"

TIlls project is based on primary data collected through personal intervie# of

head of account department and other concerned staff member of finance department"

-ut primary data collection had limitations such as matter confidential information

thus project is based on secondary information collected through five years annual

report of the company$ supported by various boo%s and internet sides" The data

collection #as aimed at study of #or%ing capital management of the company"

+roject is based on

I" 'nnual report of 'R!! 2../2..0

2" 'nnual report of 'R!! 2..0/2..

3'nnual report of 'R!! 2../2..

'nnual report of 'R!! 2../2..

0'nnual report of 'R!! 2../2..4

'nnual report of 'R!! 2..4/2. lO

2"3) O-"567TI86! OFTHE !115(9

!tudy of the #or%ing capital management is important because unless the #or%ing capital is

managed effectively$ monitored efficiently planed properly and revie#ed periodically at regular

intervals to remove bottlenec%s ifany the company can not earn profits and increase its turnover"

*ith this primary objective of the study" the follo#ing further objectives are framed for a depth

analysis"

l.

To study the #or%ing capital management of 'R!! infrastructure projects private :td"2" To study the optimum level of current assets and current liabilities of the company"

3" To study the liuidity position through various #or%ing capital related ratios"

" To study the #or%ing capital components such as receivables accounts$ cash management"

Inventory position

0" To study the #ay and means of#or%ing capital finance of the 'R!! infrastructure

projects +;1" :td"

" To estimate the #or%ing capital reuirement of'R!! infrastructure projects +;1":td

" To study the operating and cash cycle of the company"

161Projectsformba.blogspot. CJ)m

8/13/2019 ARSS WCM

4/68


2") !7O+6 & :

8/13/2019 ARSS WCM

5/68


CHAPTER-IV

Working capital level and analysis

l)Working capital level

2)Working capital trend analysis

3)Current assets analysis

)Current lia!ility analysis

")C!anges o# $orking capital

%)&perating cycle

')Working capital leverage

Working capital level

The consideration of the level investment in current assets should avoid rw.,

e&cessive and inadeuate investment in current assets" Investment in current assets should be

just adeuate$ not more or less$ to the need of the business firms" 6&cessive investment incurrent assets should be avoided because it impairs the firmBs profitability$ as idle investment

lsi Projectsformba.blogspot. COlli

8/13/2019 ARSS WCM

6/68

-) 7urrent

:iabilities


earns nothing" On the other hand inadeuate amount of #or%ing capital can be threatened

solvency of the firms because of its inability to meet its current obligation" It should be

reali,ed that the #or%ing capital need of the firms may be fluctuating #ith changing business

activity" This may cause e&cess or shortage of #or%ing capital freuently" The management

should be prompt to initiate an action and correct imbalance"

+articulars

') 7urrent

2..C0 2..0/. 2../. 2../. 2../.4 2..4/1.

'ssets

Inventories 0$24$01 1."2.$330 3$24$30 22$1.3$1. 1$2$. $4. 3$.1$.$12

!undry (ebtors 1$10$3.. 141 10$13$3. 03$0$3. 2"033$0 1224. I

7ash and -an% 14$1.."11 0.""2 11$20$42 33$444"20 1$21"43 1".40$.4.03

-alances:oans'dvances

and $00$1 1$214$0 2.0$4$0. 0.$4$10 00$1.$2 1$..43

Total of ' DEross 12$2.$ 3.1 0.$0$34 2$10$3$402 3$00$3$2 $4A2$0.1

wei

7urrent liabilities 2$32$ 121$$02. 1.0$3$31 0$430$. 1$1$42$1 1$$0$102

Pro(ision $030$4 4$23$2 30$21$04 42$130$..4 12$240$0. 20$3.$.3

Totalof- 0.$1$31 131$2$3 11$.20$2 401$..$.40 1$32.$22$1 1$.0$3$14

>et *"7" D'/-) $1.1$41 13431 344$2.$. II 1$2.0$03$0 2$20$34$. 0$2$24$3.

Table !i,e of #or%ing capital

*or%ing 7apital Trend 'nalysis@

In #or%ing capital analysis the direction at changes over a period of time is of crucial

importance" *or%ing capital is one of the important fields of management" It is therefore very

essential for an analyst to ma%e a study about the trend and direction of #or%ing capital over

a period of time" !uch analysis enables as to study the up#ard and do#n#ard trend in current

assets and current liabilities and its effect on the #or%ing capital position"

F'nalysis of #or%ing capitalF trends provide as base to judge #hether the practice and

privilege policy of the management #ith regard to #or%ing capital is good enough or an

important is to be made in managing the #or%ing capital funds"

*ORGI>E 7'+IT': !IH6 O? 'R!!

8/13/2019 ARSS WCM

7/68


9eaC 2..2..0 2..02.. 2../2.. 2..2.. 2../2..4 2..42.1.

>et #"c 1.14. 13431 3442..11 12.0030 22034. 02243.

*"7 indices 1.. 22" 01"0 103"1 243"4 01"4

Table """"""""" #or%ing capital si,e

C *or%ing 7apital Indices base year 2../2..0 ta%en as 1..

...

...

...

0...

~.

@'

J"' D)..

?i3...

2...

1...

.

2-2" 2..0/2.. 2../2.. 2..2.. 2../2..4 2..4/2.1.

\\'Ofkhg cap;ta1 hdicesyea.lStpoo91ool Regressio

for Vo*&rking capital i!

dices

2. "Projectsformba.blogspot. CJ)m

8/13/2019 ARSS WCM

8/68


Observations@

The net #or%ing capital of 'R!! Infrastructure +rojects :imited is continuously increasing from

2.D)".0 as the indices sho#s in the figure" The #or%ing capital indices of 2..4/1. compared to

2../.0 is as times because the current assets are increasing continuously #here as the current

liabilities are not as increased as current assets" There is sudden increase in current assets of2../. compared to its previous year i"e" 2"4 times" In 2../. the company has ta%en four

projects in road$ five projects in rail#ay$ one project in irrigation of rupees #orth 2 lacs$ 24113

lacs$ and 3 lacs continously" *hile in 2../.4$ the company bas ta%en only three projects of

rupees #orth 1.4 lacs" The no of projects ta%en in ?9 2..4/1. are so the value of current

assets increased"

8/13/2019 ARSS WCM

9/68

"


7urrent

'ssets

8/13/2019 ARSS WCM

10/68

#ill be because cash is non earning assets"

+articulars 2../2..0 2..0/2.. 2../2.. 2../2.. 2../2..4 2..4/2.1.

in (entories 0"4.K 33"0 13"00 2"0 02"0. 02"4

!undry ."42 23"32 2"3 3."31 11"40 11"20

debtors

7ash and 10".1 1"0 21"02 1"3 2.".. 10"

ban% balance:oans and

ad(ances3"1 2"3 3".4 23"01 10"0 2."12

total 1.. 1.. 1.. 1.. 1.. 1..

12..."..K

..."..K

."..K

inventories

Sundry debtors

~Cas and ban! balane

C loa ns and adva nes

#total

Observation@

The current assets increases as the sales increase" The e&cess of current assets is al#ays

positive for the company but it is not al#ays good" It may adversely affect the profitability of

the firm" There are certain investments for #hich company pay interest" ?rom the table ofcomposition of current assets$ there is good amount of inventory available e&cept one year

D2../.)" 6&cess amount of inventory is good for the company because the company is


8/13/2019 ARSS WCM

11/68

diversifying its business into different sectors and there is no certainty about the projects

Dtime of the projects) in certain sectors" The loans and advances of the firm are in ,ig,ag #ay"

The loans and advances should be minimum as the high loans create a greater amount of

interest" The company #as doing #ell from 2../. to 2../.4 as the company had ta%en

four projects in road$ five in rail#ay$ and one in irrigation" -ut in 2..4/1. it has increasedbecause of the 'R!! too% good projects" The company is doing better in sundry debtors in

previous t#o years" The company had ta%en its amount from its debtors" 7ash and ban%

balances is good for all the years"

7urrent liabilities

7urrent liabilities mean the liabilities #hich the company have to pay in current financial year" It

includes sundry creditors means supplier #hose payment is due but not paid yet$ thus creditors

called as current liabilities"7urrent liabilities also include short term loan and provision as ta&

provision" 7urrent liabilities also includes ban% overdraft" ?or some current assets li%e ban%overdrafts and short term loan$ company has to pay interest thus the management of current

liabilities has importance

current lia!ility si,e

particulars 2../2..0 2..0/2.. 2../2.. 2../2.. 2../2..4 2..4/2.1.

7urrent 2$32$ 121$$02. 1.0$3"31 0$430$. 1$1"42"1 1"$0$102

liabilities

Pro(ision $030"4 4$23$2 30$21$04 42$130$..4 12"2400. 20$3.".3Totalof- 0.$1$31 131$2$3 ../2"/2, 401$..$.40 1$32.$22$1 1$.0$3$14

Indices

7":

of 1.. 22". 21"1 140" 231"0 3.."14

1Table """""""" current liability si,e and its indices

241 Projectsformba.blogspot. CJ)m

8/13/2019 ARSS WCM

12/68

...

30..

3...

Current liability indies

20..

.~ 2...~

$ C.% des

$ E%poetial Re!gressio 5or7":F

/B 10..o

1...

0..

.

2..2..0 2..0/2.. 2..2.. 2..2.. 2../2..4 2..42.1.

#ears

?igure 7urrent liability indices

Observation

In current liabilities of the company only the sundry creditors and the provision Dprovision for

ta&ation$ fringe benefit ta&$ dividend and proposed dividend) are included" 7urrent liabilities

sho# continues gro#th each year e&cept in 2../. and 2..4/1. because company creates

the credit in the mar%et by good transaction" To get ma&imum credit from supplier #hich is

profitable to the company it reduces the need of #or%ing capital of firm" 's a current liability

increased in the year 2../. by 0"34K it also increased the #or%ing capital si,e in the

same year" -ut company enjoyed over creditors #hich may include indirect cost of creditterms in future"

C()*S +( ,-/+() C0I1%

7urrent liabilities sho# continues gro#th each year because company creates the credit in the

mar%et by good transaction" To get ma&imum credit from supplier #hich is profitable to the

company it reduces the need of #or%ing capital of firm" 's a current liability increase in the year

2../. by 30K it reduce the #or%ing capital si,e in the same year" -ut company enjoyed over

creditors #hich may include indirect cost of credit terms"

"0)7hanges in #or%ing capital

There are so many reasons to changes in #or%ing capital as follo#

: 7hanges in sales and operating e&panses@/

The changes in sales and operating e&panses may be due to three reasons

: There may be long run trend of change e"g" The price of ro# material

say oil may constantly raise necessity the holding of large inventory"

2" 7yclical changes in economy dealing to ups and do#ns in business

activity #ill influence the level of #or%ing capital both permanent andtemporary"


8/13/2019 ARSS WCM

13/68

3"7hanges in seasonality in sales activities

" +olicy changes@/

The second major case of changes in the level of #or%ing capital is because of policy changesinitiated by management" The term current assets policy may be defined as the relationship

bet#een current assets and sales volume"

0" Technology changes@/

The third major point ifchanges in #or%ing capital are changes in technology because changes in

technology to install that technology in our business more #or%ing capital is reuired' change in operating e&panses rise or full #ill have similar effects on the levels of #or%ing

follo#ing #or%ing capital statement is prepared on the base of balance sheet of last t#o year"

0TATE1ET & CHA4E0 I W&R5I4 CAPITA6

chanses in #or%inC(ital

particulars

')7urrent assets

2../2..4 2..4/2.1. increase decrease

in(entories 12.4. 3.1.12 11331

!undry debtors 20330 1224. I 30043

7ash and ban% 12143 1.40.4.03 30043

balances

:oans and

ad(ances001.2 1..43 4..0

Total current 30032 420.1 3.2410

assets

-)7urrent

liabilities

7urrent liabilities 11421 10102 24402003

pro(ision 122400. 203..3 .3

Total current

liabilities

132.221 1.0314 301...

>et#or%ing 22034. 02243. 3.13.

capital


8/13/2019 ARSS WCM

14/68

&7scryat8on

There is a positive #or%ing capital #hich sho#s Lhe further gro#th as the company ise&panding irFs business into other sectors of the construction" The #or%ing capital increased

due to the follo#ing reasons@

I) There is 0.K increase in the inventories from previous year because Lhe company is ta%ing

ne# projects in ne# sectors #ith good #orth"

2) The current Iiabi lities of the firm is very less"

3) The increased total current liabilities is very less compared to the total current assets"

&perating cycle

The need of #or%ing capital arrived because of time gap bet#een production ofgoods and their actual reali,ation after sale" This time gap is called Operating

7ycle or *or%ing 7apital 7ycle" The operating cycle of a company consist of

time period bet#een procurement of inventory and he collection of cash from

receivables" The operating cycle is the length of time bet#een the companyBs

outlay on ra# materials$ #ages and other e&panses and intlo# of cash from

sales of goods" Operating cycle is an important concept in management of cash

and management of cash #or%ing capital" The operating cycle reveals the time

that elapses bet#een outlays of cash and inflo# of cash" uic%er the operating

cycle less amount of investment in #or%ing capital is needed

and it improves profitability" The duration of the operating cycle depends on

nature of industries and efficiency in #or%ing capital management"

In manufacturing concern $the #or%ing capital cycleNoperating cycle starts

#ith the purchase of ra# material and ends #ith the realisation of cash from the

sale of finished products"This cycle involves purchase of ra# material and

stores$its conversion through into stoc%s of finished goods through #or%/in/

progress #ith progressive increment of labour and service costs$conversion of

finished stoc% into sales$debtors and receivables and ultimately realisation of

cash and this cycle continues again from cash to purchase


8/13/2019 ARSS WCM

15/68


I

I I

(6-TOR!

DR676I8'-:6!)

7'!< I ?I>I!6T *ORGI>E 7'+IT':

797:6

Observation@

The inventory conversion period of the company is almost same in financial

years from 2..0 to 2..4 but in the financial year 2..4/1. there is sudden

increase Ddouble times) from its previous year" Ra# Material consumption in

8/13/2019 ARSS WCM

16/68


2..4/1. decreased from previous years #hile ra# material inventory increased"

The ma&imum projects of the company D#ith joint venture7ompany) finished in

the May 2.1. as >lR'5/'R!! joint venture total value of the projects

22 lacs" The company is engaged in bidding of big projects so the company%eeps a better ra# material inventory in ?9 2..4/1." 'lso the company has a

vision of ta%ing tenders of good projects in ne&t financial year"

'R!! infrastructure +rojects :imited is a construction company and itBBs

coustomers are the Eovernment of different states$ Ministry of Rail#ay$

Ministry of Infrastructure and the Eovernment agencies li%e !'I:$ >T+7 etc"

so there is no any debtors available among itBBs coustomers because the

Eovernment or their agencies pays the money instantaneouslybeforeN during or

after the project"

The companyBs debtors are joint venture companies" !ometimes the 'R!!andifBs joint venture companies do the project but the company incurres the #hole

cost" 'nd there is delayed in payment by ifBs joint venture companies" That

comes under the debtors collection period" 7ommon sense tells that longer a

company has money out$ the more ris% it is ta%ing"-ut there is one positive

aspect that #ill boost the confidence among the companies"The company is not

purchasing on credit from ifBs supplier" !o in credit deferral period the credit

purchases ta%en as a #hole sundry creditors" These sundry creditors are for the

ban% loans$ 'dvances etc" In all the years +ro6 2..0 to 2..4 the creditors

deferral period is 3. days #hich is good for the company" The company is

enjoying the money ofitFs creditors"

*ORGI>E 7'+IT': :686R'E6

One of the important objectives of #or%ing capital management is by maintaining the

optimum level of investment in current assets and by reducing the level of

investment in current assets and by reducing the level of current liabilities the

company can minimi,e the investment in the #or%ing capital thereby improvement

inreturn on capital employed is achieved" The term #or%ing capital leverage refersto the impact of level of #or%ing capital on company s profitability" The #or%ing

capital management should improve the productivity of investment in current assets

and ultimately it #ill increase the return on capital employed"

8/13/2019 ARSS WCM

17/68

B1" 7hanges in RO76

B8or%ing capitallcverageP K 7hanges in current assets

Return on capital cmployctlP////6-IT

Total assets

The #or%ing capital leverage reflects the sensitivity of return on capital employed to

changes in level of current assets" *or%ing capital leverage #ould be less in the case

of capital intensive capital employed is same #or%ing capital leverage e&presses the

relation of efficiency of #or%ing capital management #ith the profitability of the

company"

7':7=:'TIO> O? *ORGI>E 7'+IT'::686R'E6

96'R 2../2..0 2..0/2.. 2../2.. 2../2.. 2..c2..4 2..4/2.1.

6-IT 1.13.3 20. 13442233 3.31.. .0430 121.013

Total assets 1.43 244402 2.2 143.40.1 331201 .4

RO76K 1."0 1"24 2."4 14". 1"41 10"34

K7hange in >"' 30". " /"4 /."4 /1"1

RO76

7urrent assets 122. 3.1 0.034 2103402 30032 420.1

Kchange in

current assets

>"' /0".4 0" 24"0 "2 4"4

*or%ing capital

leverage

>"' /.".0 ."2 /.".3 /.".1 /."2.

3. IProjectsformba.blogspot. CJ)m

8/13/2019 ARSS WCM

18/68


*or%ing 7apital Ratio 'nalysis

Introduction

Role of ratio analysis

:imitations of ratio analysis

7lassifications of ratio

6fficiency ratio

:iuidity ratio

71 IProjectsformba.blogspot. COlli

8/13/2019 ARSS WCM

19/68


*ORGI>E 7'+IT': R'TIO '>':9!I!

0"1) 9ntroduction

Ratio analysis is the po#erful tool of financial statements analysis" ' ratio is define as

the indicated uotient of t#o mathematical e&pressions and as the relationship

bet#een t#o or more things "The absolute figures reported in tbe financial statementdo not provide meaningful understanding of the performance and financial position

of the finn" Ratio helps to summaries large uantities of financial data and to ma%e

ualitative judgment of the firms financial performance

0"2) Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of there profitability and

efficiency of performance$ either individually or in relation to other firms in same

industry" Ratio analysis is one of the best possible techniues available tomanagement to impart the basic functions li%e planning and control" '

is closely related to the immediately past$ ratio calculated on the basis historical

financial data may be of good assistance to predict the future" 6"g" On the basis

of inventory turnover ratio or debtor s turnover ratio in the past$ the level of

inventory and debtors can be easily ascertained for any given amount of sales"

!imilarly$ the ratio analysis may be able to locate the point out the various arias

#hich need the management attention in order to improve the situation" 6"g"

7urrent ratio #hich sho#s a constant decline trend may be indicate the need for

further introduction of long term finance in order to increase the liuidityposition" 's the ratio analysis is concerned #ith all the aspect of the finnBs

financial analysis liuidity$ solvency$ activity$ profitability and overall

performance$ it enables the interested persons to %no# the financial and

operational characteristics of an organi,ation and ta%e suitable decisions"

0"3):imitations of ratio analysis

I" The basic limitation of ratio analysis is that it may be difficult to find a

basis for ma%ing the comparison


8/13/2019 ARSS WCM

20/68


2" >ormally$ the ratios are calculated on the basis of historical financial

statements" 'n organi,ation for the purpose of decision ma%ing may

need the hint regarding the future happiness rather than those in the past"

The e&ternal analyst has to depend upon the past #hich may not

necessary to reflect financial position and performance in future"

3" The techniue of ratio analysis may prove inadeuate in some situations

if there is differs in opinion regarding the interpretation of certain ratio"

" 's the ratio calculates on the basis offinancial statements$ the basic

limitation #hich is applicable to the financial statement is eually

applicable In case of techniue of ratio analysis also i"e" only facts #hichcan be e&pressed in financial terms are considered by the ratio analysis"

0" The techniue of ratio analysis has certain limitations of use in the sense

that it only highlights the strong or problem arias$ it dose not provide any

solution to rectify the problem arias"

" ?or the intra firm comparison$ the comparison may be false becausedifferent firms use different accounting policies as some finns use

:I?O D:ast in ?irst out) method #hile some use ?I?O D?irst in?irst out)"

7lassification of ratio A/

-asically on the basis of #or%ing capital management it can be characteri,ed into

follo#ing ratios

I) 'ctivity Ratio@

'ctivity ratio is an indicator of ho# rapidly a firm converts various accounts into

cash or sales" The sooner management can convert assets into sales or cash$ the more

actively the finn run" This ratio is also called 'sset Management Ratio" 's the assets

basically categori,ed as fi&ed assets and current assets and again further the current

assets classified according to individual components of current assets vi," Inventories$

!undry (ebtor$ and receivables etc" The important 'ctivity ratios are as follo#s

8i9 *or%ing 7apital Turnover Ratio


8/13/2019 ARSS WCM

21/68

341 Projectsformba.blogspot. CJ)


8ii9 Inventory Turnover Ratio Diii)

Receivable Turnover Ratio

Div)7urrent 'sset Turnover Ratio

1) *or%ing 7apital Turnover Ratio@

' company uses #or%ing capital to fund operations and to purchase inventory" These

operation and inventory are then converted into sales revenue for the company" The

#or%ing capital turnover ratio is used to analy,e the relationship bet#een the cash

used to fund operation and sales generated from these operations" In a general sense$the higher the #or%ing capital turnover$ the better because it means that the company

is generating a lot of sales compared to the cash it uses to fund the sales"

!ales

*or%ing 7apital Turnover RatioP ////////

>et *or%ing 7apital

+articulars 2../2..0 2..0/2.. 2..2.. 2..2.. 2..2..4 2..42.1.

sales 24000 .2.01 1333211.1 313.414 2302200 1..00.23

>et*"7 1.141 13431 3442..11 12.0030 220343 02243.

*"7 TOR 3"3 3"2 3"30 2". 2" 1.:1

8/13/2019 ARSS WCM

22/68


Q


"0 $///$///F$/////$////$/////A$////$////$///$/$

w.e TOR

4 ~4_-~~-+--~-~~-4---+--+-43"01/R/

7i5;5

Bv 0wer tegresso for

."0/1/R/

./B//1//

2../2..0 2../2.. 2../2..4#ears &''(!&'') &''*!&''+ &''9,&'1'

8/13/2019 ARSS WCM

23/68


"3

,

1 , ,12

Inventory urnover =atio

1. / > '?.'"T@

"/

~

6

N ;"

.V ?~ I"#...... ...,"""SSInventory TOR

2

. .2..0/2.. 2..2.. 2..2.. 2..2..4 2..g"2.1.

#ears

?igure lnventory Turnover Ratio

&!ser(ation+

Inventory turnover ratio basically tells about the efficiency of the firm in ta%ing

the project and to accomplish that" The inventory turnover sho#s ho# rapidly

the inventory is turning into receivables through sales" ' high inventory

turnover ratio is good because the no of days convelting the inventories into the

8/13/2019 ARSS WCM

24/68


sales #i IIbecome less" 's in 2../. the inventory turnover ratio is 12"1 times

so the inventory holding days is only 24 days #hile from 2../. to 2..4/1. the

inventory turnover ratio decreasing means the no of days in inventory converting is

increasing" This can bad for the organi,ation as this creates unnecessary tie/upof funds"reduced profit$ and increasedcosts"

3) :e!tors Turno(er Ratio+

' firm sells goods andU or services for cash and credit" *hen the fum e&tends

credits to its coustomers$ debtors D'ccounts Receivables) are created in the

firmBs accounts" The liuidity position of the firm depends on the uality of

debtors to great e&tent"

Eross !ales

(ebtors Turnover Ratio 5 ###########

'verage (ebtors

?or an Infrastructure 7ompany li%e 'R!! the gross sales considers as the

contract revenue"The scrap values are not included in Eross !ales because it further comes into

sales #ith other income" 'verage (ebtors calculated by opening plus closing

balance divide by 2"lncreasing volume ofreceivables #ithout a matching

increase in sales is reflected by a lo# receivable turnover ratio" It is indication

of slo#ing do#n of the collection system or an e&tend line of credit being allo#ed by

the customer organi,ation" The latter may be due to the fact that the firm is losing out to

competition" ' credit manager engage in the tas% of grantingcredit or

monitoring receivable should ta%e the hint from a falling receivable turnover

ratio use his mar%et intelligence to find out the reason behind such failing trend"

(ebtor turnover indicates the number of times debtors turnover each year"

Eenerally the higher the value of debtorBs turnover$ the more is the management

of credit"

+articulars 2../2..0 2..0/2.. 2../2.. 2../2.. 2../2..4 2..4/2.1.

Eross sales 24000 .2.01 1333211.1 313.414 2302200 1..00.23

'verage

debtors

13214 30 214210 34430033 01.0341 .3213

("T"R 11"2 1"02 "1 "0 11"0 1"0

8/13/2019 ARSS WCM

25/68


I'."[email protected] 103

Table (ebtor turnover ratio and avarage collection period

Bebtors urnover =atio

1

1

1

12

)+; 1'

Vo

/@ 8

1

2

o2"-2% 2%-2' 2'-2, 2,-2 2))-2).)

8/13/2019 ARSS WCM

26/68

up of funds in current assets" 'n analysis of this ratio over a period of timereflects #or%ing capital management of a +ir6.

prepaid e&penses and short term loans and advances"This ratio includes the

efficiency #ith #hich current assets turn into sales" ' higher ratio implies a

more efficient use of funds thus high turnover ratio indicate to reduced the loc%

!ales

7urrent 'sset Turnover Ratio

7urrent 'ssets

+articulars 2../2..0 2..02.. 2..2.. 2..2.. 2..2..4 2..42.1.

!ales 24000 .2.10 1333211.1 313.414 2302200 1..00.23

C. 122. 3.2 0.034 2103402 30032 420.1

C.-= 2"32 1"4 2" 1"0 1" 1"

Table 7=rrent assets Turnover Ratio

Current ssets urnover =atio

2"0

2

'""""C

1"0

"7"'TOR

."0

Observation@

o2..0/2.. 2..2.. 2..4/2.1.

2..2..0 2..2.. 2../2..4

#ears

?igure 7urrent assets turnover Ratio

This ratio is very significant as it sho#s ho# fast the current assets turns into


8/13/2019 ARSS WCM

27/68

. "Projectsformba.blogspot. COlli

sales" The current asset turnover ratio is in hapha,ard #ay but comparing to

2../. the ratio is lo# in recent years" In previous years the ratio #as good"

The current asset changes in sales in 100days$ 1 days$ and 1 days

continuously in 2../.0$ 2..0/.$ and 2../." wune in 2../.$ 2../.4$2..4/1. the days are 2 days$ 2. days$ and 20. days continuously" Theincreasing no of days of current asset turnover ratio because company can maintain

high level of inventory for upcoming its projects"

Current Ratio+

The current ratio is a crude and uic% measure of the firmBs liuidity" The

current is calculated by dividing current assets by current liabilities@

7urrent 'ssets

7urrent Ratio P ////////////

7urrent :iabilities

7urrent assets include cash and those assets #hich can be converted in to cash

#ithin a year"such mar%etable securities$ debtors and inventories" 'll

obligations #ithin a year are include in current liabilities" 7urrent liabilities

include creditors$ bills payable accrued e&penses$ short term ban% loan income

ta& liabilities and long term debt maturing in the current year" 7urrent ratio

indicates the availability of current assets in rupees for every rupee of current

:iability"

This ratio is important as the value of the current assets may decrease orincrease but the value of the current liabilities is al#ays constant" That has to be

paid"

+articulars 2../2..0 2..0/2.. 2../2.. 2../2.. 2../2..4 2..4/2.1.

7urrent

assets

122. 3.2 0.034 2103402 30032 420.1

7urrent 232 12102. 1.0331 0430. 11421 10102

8/13/2019 ARSS WCM

28/68

1 "Projectsformba.blogspot. COlli

liabilities

7urrent ratio 2"44 2"03 0"11 2"01 3"12 "3

Current =atio

-.rretRata

o2../2..0 2..0/2.. 2../2.. 2../2.. 2../2..4 2..4/2.1.

8/13/2019 ARSS WCM

29/68


Inventories$ loans and advances) to fulfill itBs short term liabilities Dsundry

creditors$ provision for ta&ation)" 'lso the current ratio sho#s the margin of

safety for itBs creditors"

8/13/2019 ARSS WCM

30/68


Dui! =atio

"0

3"0

.".~"3

2"0

'c"2'7.

/ick Ratio

1"0

."0

o

2..2..0 2..0/2.. 2..2.. 2..2.. 2..2..4 2..42.1.

#ears

?igure 7urrent Ratio

&!ser(ation+

The uic% ratio of 1 to 1 is considered as satisfactory financial condition" The

company has not a very high ratio throughout e&cept one year 2../." In

2../. the company had high value of cash & ban% balances$ sundry debtors

etc" #hereas the sundry creditors and provision #ere compairatively lo#"

8/13/2019 ARSS WCM

31/68


Recei(a!les Management

In(entory 1anage=ent

Cas7 Management

8/13/2019 ARSS WCM

32/68


Recei(a!le 1anage=ent+

Introduction+-

8/13/2019 ARSS WCM

33/68

Receivables or debtors are the one of the most important parts of the current assets #hich is created

if the company sells the finished goods to the customer but not receive the cash for the same

immediately" Trade credit arises #hen firm sells its products and services on credit and dose not

receive cash immediately" It is essential mar%eting tool" acting as bridge for the movement of goods

through production and distribution stages to customers" Trade credit creates receivables or boo%debts #hich the firm is e&pected to collect in the near future" The receivables include three

characteristics@

I) It involve element of ris% #hich should be analyse carefully"

2) It is based on economic value" To the buyer$ the economic value

in goods or services passes immedi ately at the time of sale$ #hile seller e&pects an euivalent value

to be received later on"

3) It implies futurity" The cash payment for goods or serves received

by the buyer #ill be made by him in a future period"

&!8ecti(e of Receivable 1anage=ent+

The sales of goods on credit basis are an essential part of the modern competitive economic system"

The credit sales are generally made up on account in the sense that there are formal

ac%no#ledgements of debt obligation through a financial instrument" 's a mar%eting tool$they are

intended to promote sales and there by profit"

8/13/2019 ARSS WCM

34/68


=eeivables Indi"es

12..

BsF@e#'"

1...

..

W ..@As

.~..

~

'" 2..

o2..0/2.. 2../2.. 2..2.. 2..2..4 2..g"2.1.

#ears

?igure Receivables Indices

$ =eelvabes "d;ces

A(erage Co>ection Period+

The average collection period measures the uality of debtors since it indicate

the speed of their collection" The shorter the average collection period$ the

better the uality of the debtors since a short collection period implies the

prompt payment by debtors" The average collection

period should be compared against the firms credit terms and policy judges its

credit and collection efficiency" The collection period ratio thus helps an analyst

in t#o resp ects@


8/13/2019 ARSS WCM

35/68


o

l. In determining the collectability of debtors and thus$ the efficiency of

collection efforts"

2" In ascertaining the firm "s comparative strength and advantages related to itscredit policy

and perform ance"

The debtorBs turnover ratio can be transformed 111 to the number of days of

hold ing of debtors@/

+articulars 2../2..0 2..02.. 2../2.. 2..2.. 2../2..4 2..42.1.

Eross sales 24000 .2.01 1333211.1 313.414 2302200 1..00.23

'vg"(ebtors 13214 30 214210 34430033 01.0341 .3213

("T"R 11"1 1"02 "1 "0 11"0 1"0

'"7"+B 2 22 0 31 22

Table 'verage collection period

veraEe olletion @eriod8ln daysF3..$///////////////////////////////$

20. /1////////////c*C &'' G#3"

"g 10. /1///////////II a0erage oollectio

C"" 1../1///////////period

~

~

./B/B/"///

2..0/2.. 2../2.. 2..4/2.1.

2../2..0 2../2.. 2../2..4

years


8/13/2019 ARSS WCM

36/68


&!ser(ationThe average collection period increased from 2../.0 to 2../. and then it

decreases from 2../. to 2..4/1." The increasing average collection period sho#s

the inefficiency of the management in collecting the debtors money #hile thedecreasing average collection period sho#s the efficient management and better

credit policy" The reason behind average collection period is high due to debtors

turnover ratio is lo#" In 2../. the company had ta%en a 11. of projects but the

company did projects alone" !o there is no chance of debting in 2../." *hile in2../. the company had ta%en 1. projects .11 the joint venture basis" 7ompanyXs

share is 1..K in those projects" In 2../.4 and 2..4/1. the company has ta%en 3

and 0 projects on the joint venture basis so there is case of debting"

In(entory 1anage=ent+

In financial vie#$ inventory defined as the sum of the value of ra# material and

supplies"including spares$ semi/processed material or #or% in progress and finished

goods" The nature of inventory is largely depending upon the type of operation

carried on" ' firm neglecting the management of inventories #ill be jeopardi,ing its

long term profitability and may fail ultimately" It is possible to reduce the inventory to

a certain level #ithout affecting production and sales$ by using simple inventory

planning and controlling techniue" The reduction in Fe&cessiveF inventories carries afavourable impact on the companyBs profitability" Maintaining inventories involves

tying up of the companyBs funds and incurrence of storage and handling cost" There

are three components@ Ra# material$ *or% in progressA and finished goods involved

in inventory management"

Objective of Inventory l8lanagement@

In the case of Inventory Management$ the finn is faced #ith the problem of meeting

t#o conflicting needs@


8/13/2019 ARSS WCM

37/68

0. IProjectsformba.blogspot. CJ)m


I) To maintain a large amount of inventory for efficient and smooth productionA

2) To maintain a minimum amount of inventory for increasing the profitabilityA

-ut the firms avoid both the cases" In the first case$ the firms avoid overinvestment

because of@/

Da) unnecessary tie/up of the firmBBs funds and loss of profits Db) e&cess carrying cost

Dc)ris% of liuidity" 'nother danger of holding e&cess inventories is deterioration of

the inventories" Maintaining a minimum level of inventories is also dangerous" The

conseuences of under/investment in inventories are@ Da) production hold/ups Db)

failure to deliver commitments" !o the aim of inventory management is@

DI)To ensure a continuous supply of ra# material to facilitate uninterrupted

productionAD2) To maintain a sufficient stoc% of the ra# material in period of short supply and

overpricesA

D3) To maintain sufficient finished goods inventory for smooth sales operation$ and

efficient customer serviceA

D) To maintain the carrying cost and timeA

D0)To control investment in inventories and %eep at optimum levelA

+articulars 2..0/2.. 2..2.. 2../2.. 2..2..4 2..4/2.1.

Ra#materials

1.3.4 10121. 1...23 20041. 040.

*"I"+ 4202. 03... 0.1220. 1012.0. 20230

?inished 3221 1.40 .023. 1100. 01023.Eoods

!tores and

spares

. . 1123 33012. 130.

Total 1.2.330 32430 221.31. 12.4. 3.1.12

Indices 1.. ."3 04". 1." 300 l.

Table" !i,e of Inventory

8/13/2019 ARSS WCM

38/68

#"

01 IProjectsformba.blogspot. CJ)m


"#oo

30..

W 3..."U"U 20..

~

Inventory indies

24# 2... "0elory idcas

~ 10..~

1...

0..

.

2..00.. 2../2.. 2..2.. 2..2..4 2..g"2.1.

#ears

?igure Inventory indices

In(entory Co=ponents+The firmFs inventory consist follo#ing components

Di) Ra# material

Dii) *or%/ in/progress

Diii) ?inished goods

To analy,e the level of ra# material inventory and #or% in progress inventory held by thefirm on an average it is necessary to e&amine the efficiency #ith #hich the firm converts ra#material inventory and #or% in progress into finished goods"

+articulars 2..0/2.. 2../2.. 2../2.. 2../2..4 2..4/2.1.

Ra# Material 1"3 2". 1" 13"0 12"00

*":+ "41 "1 4.".3 ."31 "1

8/13/2019 ARSS WCM

39/68


~.

?inished Eoods 31"3 14"0 "01 "3 1"

!toresY!pares . . 1" 1" 1"

TotalDK) 1.. 1.. 1.. 1.. 1..

Table "Inventory componentsDK)

1..

4.

.

.

.

0.

.

3.

2.

1.

.

"$C$

2..02.. 2../2.. 2..2.. 2../2..4 2..4/2.1.

?igure """"""5nventory components in ?

Ra ~1alerel

-*"I"+o @/is7ed 4oods! Stores.2Spares

1..

4.

.

."$

Hal1 > -@@@@@@@@@@@@@A

. "p"/ ! /""""""""""" ..,$. i##

0.

3.

/ 2.

,"""C$"C

- 'I

@@@@@@@@@@@@@@@

1.

l7.51

"'~#C"N2

'+ 25@ ~r

8/13/2019 ARSS WCM

40/68

Projectsformbu.blagspot.como Q ,

2..02.. &'')!3''* 2'B2, 2..2..4 2..42.1.

8/13/2019 ARSS WCM

41/68


&!ser(ation+

's the 'R!! Infrastructure +rojects :imited is a construction company" 'nd it ta%es project

of different segment in constmction sector li%e road$ rail#ay$ irrigation$ aviation$ marine$

jetty etc" The companyBs inventory #or% in progress is very high in terms of cash as #ell as

in terms ofK and it increases year by year" The company is ta%ing a no of projects #hich

completes in more than one year because of season factor"

The company did not concern about the stores and spares in the period of 2..0 and 2.." -ut

as the stores and spares plays a important role in the construction industry e&amples for

euipments" !o from 2.. on#ards the company made a certain account in the inventories" In

2../.4 the recession #as happening" The company #as unable to good projects because of

the do#nturn in the industry" 's mentioned earlier the company had ta%en only three projects

in the rail#ay segment in 2../.4" !o the ra# material remained high and the finished goods

remained lo#"

Inventory

8/13/2019 ARSS WCM

42/68


*hen the no of days in a year Dsaid as 3.) are divided by inventory turnover$ days of

inventory holding D(I

8/13/2019 ARSS WCM

43/68



8/13/2019 ARSS WCM

44/68


Cas7 1anage=ent+

7ash is common purchasing po#er or medium of e&change" 's such$ it forms the most

important component of #or%ing capital" The term cash #ith reference to cash

management

is used in t#o senses$ in narro# sense it is used broadly to cover cash and generally accepted

euivalent of cash such as cheues$ draft and demand deposits in ban%s" The broader vie# of

cash includes near cash items$ such as mar%etable securities or ban% time deposits" The basic

characteristic of near/cash assets is that they can readily be converted into cash" They also

provide short term investment outlet for e&cess and are also useful for meeting planned

outflo# of funds" Irrespective of the form in #hich it is held$ a distinguishing feature of

cash as assets is that it has no earning po#er" 7ompany have to al#ays maintain the cash

balance to fulfill the dally reuirement of e&penses" There are lour primary motives lor

maintain the cash as follo#@


8/13/2019 ARSS WCM

45/68


7ash management is concerned #ith the managing of@

Di) 7ash flo#s into and out of the

firm$ Dii) 7ash flo#s #ithin the firm"

and

Diii) 7ash balances held by the firm at a point of the time by financing deficit or investing

surplus cash"

Motives for

8/13/2019 ARSS WCM

46/68



8/13/2019 ARSS WCM

47/68


opportunities as and #hen they arise"s the firm can postpone materialsF purchasing #hen

the price of materials is high" 'nd ma%e purchase in future #hen the price of materials

falls" The primary motives to hold cash and mar%etable securities are@ the transactions and

the precautionary =oti(es@

'dvantage of 7ash Management@

7ash does not enter in to the profit and loss account of an enterprise$ hence cash is

neither profit nor lossesbut #ithout cash" profit remains meaningless for an enterprise

o#ner"

l. ' sufficient of cash can %eep an unsuccessful firm going despite lossesA

2" 'n efficient cash management through a relevant and timely cash budget may enable a

firm to obtain optimum #or%ing capital and ease the strains of cash shortage$ fascinating

temporary investment of cash and providing funds normal gro#thA

3" 7ash management involves balance sheet changes and other cash flo# that do not appear

in the profit and loss account such as capital e&penditure@

+articulars 2../2..0 2..0/2.. 2../2.. 2../2.. 2../2..4 2..4/2.1.

7ash Y-an%balance

141..11 0.2 112042 3344420 12143 1.40.4.03

Indices 1.. 20"1 .4"00 140".4 300".2 033"2

Table 7ashY-an% balance lodices


8/13/2019 ARSS WCM

48/68


..g

s

'."....

Cas&an! balane indies

c

0...~"" Zl.."m

3...

~iii 2...CB

""

"dices

~1...

D5.

2..2..0 2..02.. 2../2.. 2..2.. 2..2..4 2..4/2.1.

#ears

?igure 7ash & -an% balance indices

Observation@

The cash and ban% balances of 'R!! #as continuously increasing from 2..0/. to 2..4/

1." The reason of increasing cash and ban% balances #as the increasing no of projects #ith

their value" The company entered into ne# areas and earned increasing profits" There #as a

sharp increase in cash and ban% balances in 2../.Y from ifBs previous year Di"e" 212"23K

increase)" There #as increase due to 1. projects of rail#ay$ road$ irrigation

ta%en" 7ash7ydc@

One of the distinguishing features of the fund employed as #or%ing capital is thatconstantly


8/13/2019 ARSS WCM

49/68


changes its form to drive Fbusiness #heelF" It is also %no#n as Fcirculating capitalF #hich

means current assets of the company$ #hich are changed in ordinary course of business

from one form to another$ as for e&ample$ from cash to inventories$ inventories to

receivables and receivables to cash"

. "Projectsformba.blogspot. CJ)m

8/13/2019 ARSS WCM

50/68


1 "Projectsformba.blogspot. COlli

8/13/2019 ARSS WCM

51/68


*or%ing capital finance and estimation

Introduction

!ources of capital finance

*or%ing capital loan and interest

6s timatio n of #or%ing cap ital


8/13/2019 ARSS WCM

52/68


Introd uction+

?unds available for period of one year or less is called short term finance" In India short term

finance are used as #or%ing capital finance" T#o most significant short term sources of

finance for #or%ing capital are trade credit and ban% borro#ing" Trade credit ratio of current

assets is about 40"10, it is indicated by Reserve -an% of India data that trade credit has gro#n

faster than the gro#th in sales" -an% borro#ing is the ne&t source of #or%ing capital finance"

The relative importance of this varies from time to time depending on the prevailing

environment" In india the primary source of #or%ing capital financing are trade credit and

short term ban% credit" 'fter determine the level of #or%ing capital$ a firm has to consider

ho# it #ill finance" ?ollo#ing are sources of #or%ing capital finance"

!ources of *or%ing 7apital ?inance@

I) Trade credit

2) -an% ?inance

14 Trade credit@

Trade credit refers to the credit that a customer gets from suppliers of goods in the normal

course of business" The deferral of payment in short term financing is called trade credit" It is

major source of financing for firm" +articularly small firms are heavily depend on trade credit

as a source offinance since they find it difficult to raised funds from ban%s or other sources

in the capital mar%et" Trade credit is mostly an informal arrangement$ and it granted on an

open account basis"


8/13/2019 ARSS WCM

53/68



?or 'R!! infrastructure +rojects :imited the sundry creditors are the trade credit finance

#hich is sho#n in the balance sheet of the finn"

2) -an% finance@

-an%s are main institutional source of #or%ing capital finance in India" 'fter trade credit$

ban% credit is the most important source of financing #or%ing capital in India" ' ban%s

considers firmBs contract revenue and services and desirable levels of current assets in

determining its #or%ing capital reuirements" The amount approved by ban% for the firmBs

#or%ing capital is called credit limit" 7redit limit is the ma&imum funds #hich a firm can

obtain from the ban%ing system" In pmctice ban%s do not lend 1..K credit limitA they deduct

margin money"

There are t#o types of loans involved as ban% finance in 'R!! Infrastructure +rojects

:imited"

I) !ecured loans in #hich the term loan$ #or%ing capital loanA and loan from >-?7s" The

#or%ing capital loan is secured by #ay of mortgages of land and building and hypothecation

of plant and machinery$ stoc% and boo% debts"

2) =nsecured loans in #hich the loans from ban%s and from others are included"

D'mount in crores)

+articulars 2..0/2.. 2../2.. 2..F2.. 2../2..4 2..4/2.1.

*"7 loan 12"3 23". "33 134". 2"0

Interest 1" 2"4 "3 23"44 "33

Tabl e *or%ing capital loan si,e

8/13/2019 ARSS WCM

54/68



@W@C!an

$ E%poetial Re!gressio for *"7

ban

2..0/2.. 2..2.. 2..2..2../2..42..42.1.

?ugure *or%ing 7apital si,e

8/13/2019 ARSS WCM

55/68

P rojec tsform ba. blog"Pl)t. C#)###

'S

' +roject report

on

*or%ing capital management of 'R!! infrastructure ltd

' project report submitted for the partial fullfillmeru of

+O!T ER'(='T6 (I+:OM' I> M'>'E6M6>T

!ubmitted by

QQQ

8/13/2019 ARSS WCM

56/68


CERllRC9>E

This is to satisfy that the summer project #or% of "

Titled *or%ing capit"al management is an original #or% and this #or% has not been

submitted else#here in any form" The indebtness to other #or%sNpublications has

been duly ac%no#ledged at the relevant places" The project #or% #as carried out

during in 5RSS ilfrast67ctre pro8ects pri0ate linlted

9ate:

8/13/2019 ARSS WCM

57/68


'7G>O*:6(E6M6>T

It gives me immense pleasure to present this project report on *or%ing 7apital

Management carried out at 'R!! infrastructure projects :td" In partial

fulfillment of post/graduate course of +E(M"

>o #or% can be carried out #ithout the help and guidance of various persons" I

am happy to ta%e this opportunity to e&press my gratitude to those #ho have

been helpful to me in completing this project report"

't the outset I #ould li%e to than% for their valuableadvice and guidance during my project

for timely help concerning various aspects of project" I also than%s to all staff

members of account department for help me to complete the summer internship

program"

I #ould be fail ing in my duty if I do not e&press my deep sense of gratitude to

"""""""""""""" sir #ithout his guidance it #ouldnBt have been possible for me to

complete this project #or%"

:astly I #ould li%e to than% my parents$ friends and #ell #ishers #ho

encouraged me to do this research #or% and all those #ho contributed directly

or indirectly in completing this project to #hom I am obligated to"

8/13/2019 ARSS WCM

58/68


:EC6AIRATI&

""""""""""""""""""""""""""""""" !tudent of +E(M 2..4/2. 11studying at

8/13/2019 ARSS WCM

59/68


7ertificate

'c%no#ledgement

I

II

(eclairation 11l

7ontents IJ

:ist of tables

:ist of 7harts

J

8I

*ORGI>E 7'+IT': U;Bl'>'E6U;BI6>T

1"1 Introduction12 >eed of #or%ing capital

1.7 Eross *"7 and >et *"7

1" Types of #or%ing capital

1"0 (eterminants of*"7

R6!6'R7< M6To"

!

1

2"2 Types of Reserch methodology

2"3 Objective of he study

2" !cope and limitation of the study

1/ 3"1

*ORGI>E 7'+IT': !IH6 '>( '>':9!I!

l9or%ing capital level

3"2 *or%ing capital trend analysis

3"3 7urrent assets analysis

3" 7urrent liability analysis

3"0 7hanges of #or%ing capital3" Operating cycle

3" *or%ing capital leverage

/ *or%ing 7apital Ratio analysis

0" I Introduction

0"2 Role of ratio analysis

0"3 :imitations of ratio analysis

0" 7lassifications of ratios

0"0 6fficiency ratio

0" :iuidity ratio

8/13/2019 ARSS WCM

60/68


2 *or%ing 7anital comnonents0"1 Receivables management

02 Inventory management

0"3 7ash management

"1 #orking Cauital inance and Est8ulat8on

"1 Introduction"

2 !ources of #or%ing capital finance"

"3 *or%ing capital loan and interest"

" 6stimation of #or%ing capital"

1 7onclusions and rccomandations"1 7onclusion

2 Reconunendations

K!

'nnendices

"1 -ibliography

2 -alance sheets

8/13/2019 ARSS WCM

61/68


7

8/13/2019 ARSS WCM

62/68


*ORGI>E 7'+IT': M'>'E6M6>T

.@.)Introduction

FMore business fails for lac% of cash than for #ant of profitF" 6fficient management

of #or%ing capital is one of the pre/conditions for the success of an enterprise"

6fficient management of #or%ing capital means management of various components

of #or%ing capital in such a #ay that an adeuate amount of #or%ing capital is

maintained for smooth running of a firm and for fulfilment of t#in objectives of

liuidity and profitability" *hile inadeuate amount of #or%ing capital impairs the

firmBs liuidity"

8/13/2019 ARSS WCM

63/68


is mentioned" The current assets should be large enough to cover its current liabilities

in order to ensure a reasonable margin of the safety"

(efinition@/

I" 'ccording to Euttmann & (ougall/

6&cess of current assets over current liabilities"

I. 'ccording to +ar% & E ladson/

The e&cess of current assets of a business Di"e" cash$ accounts receivables$

inventories) over current items o#ned to employees and others Dsuch as salaries &

*ages payable$ accounts payable$ ta&es o#ned to government) "

1"2)>eed of #or%ing capital management

The need for #or%ing capital gross or current assets cannot be over emphasi,ed" 's

already observed$ the objective of financial decision ma%ing is to ma&imi,e the

shareholders #ealth" To achieve this$ it is necessary to generate sufficient profits can

be earned #ill naturally depend upon the magnitude of the sales among other things

but sales can not convert into cash" There is a need for #or%ing capital in the form of

current assets to deal #ith the problem arising out of lac% of immediate reali,ation of

cash against goods sold" Therefore sufficient #or%ing capital is necessary to sustain

sales activity" Technically this is refers to operating or cash cycle" If the company

has certain amount of cash" it #ill be reuired for purchasing the ra# material may

be available on credit basis" Then the company has to spend some amount for labour

and factory overhead to convert the ra# material in #or% ill progress$ and ultimately

finished goods" These finished goods convert in to sales on credit basis in the form

of sundry debtors" !undry debtors are converting into cash after e&piry of creditperiod" Thus some amount of cash is bloc%ed in ra# materials$ *I+$ finished goods$

and sundry debtors and day to day cash reuirements"

8/13/2019 ARSS WCM

64/68


.@3) 4ross $orking capital and et $orking capital

There are 1\'10 concepts of #or%ing capital management

1" Eross #or%ing capitalEross #or%ing capital refers to the firmBs investment In current assets" 7urrent

assets are the assets #hich can be convert in to cash #ithin one financial year

includes cash$ short term securities$ debtors$ bills receivable and inventory"

2. >et #or%ing capital>et #or%ing capital refers to the difference bet#een current assets and current

liabilities" 7urrent liabilities are those claims of outsiders #hich are e&pected to

mature for payment #ithin an accounting year and include creditors$ bills payable and

outstanding e&penses" >et #or%ing capital can be positive or negative 6fficient

#or%ing capital management reuires that firms should operate #ith some amount

of net #or%ing capital$ the e&act amount varying from finn to firm and depending$

among other thingsA on the nature of industries"net #or%ing capital is necessary

because the cash outflo#s and inflo#s do not coincide" The cash outflo#s resulting

from payment of current liabilities are relatively predictable" The cash inflo# areho#ever difficult to predict" The more predictable the cash inflo#s are$ the less net

#or%ing capital #ill be reuired"

The concept of #or%ing capital #as$ first evolved by Garl Mar&" Mar& used

the term variable capital means outlays for payrolls advanced to #or%ers

before the completion of #or%"

8/13/2019 ARSS WCM

65/68


$

n

.@) Type of #or%ing capital

The operating cycle creates the need for current assets D#or%ing capital)"

8/13/2019 ARSS WCM

66/68

Projectsformbu.blagspot.com#or%ing capital line may not be hori,ontal" This may be because of changes in

II " Projectsformba.blogspot. CJ)m

8/13/2019 ARSS WCM

67/68


demand for permanent current assets might be increasing to support a rising level ofactivity"

.@") :eter=inants of $$Bor%ing capital

The amount of #or%ing capital is depends upon a follo#ing factors

I" >ature of business

!ome businesses are such$ due to their very nature$ that their reuirement of

fi&ed capital is more rather than #or%ing capital" These businesses sell services

and not the commodities and that too on cash basis" 's such$ no founds are

bloc%ed in piling inventories and also no funds are bloc%ed in receivables" 6"g"

public utility services li%e rail#ays$ infrastructure oriented project etc" there

reuirement of #or%ing capital is less" On the other hand$ there are some

businesses li%e trading activity$ #here reuirement offi&ed capital is less but

more money is bloc%ed in inventories and debtors"

2" :ength of production cycle

In some business li%e machine tools industry$ the time gap bet#een the

acuisition of ra# material till the end of final production offinished products

itself is uit high" 's such amount may be bloc%ed either in ra# material or

#or% in progress or finished goods or even in debtors" >aturally there need of

#or%ing capital is high"

3" !i,e and gro#th of business

In very small company the #or%ing capital reuirement is uit high due to high

overhead$ higher buying and selling cost etc" as such medium si,e business

positively has edge over the small companies" -ut if the business start gro#ing

after certain limit$ the #or%ing capital reuirements may adversely affect by the

increasing si,e"

" -usinessU Trade cycle

If the company is the operating in the time of boom$ the #or%ing capitalreuirement may be more as the company may li%e to buy more ra# material$


8/13/2019 ARSS WCM

68/68


may increase the production and sales to ta%e the benefit of favorable mar%et$

due to increase in the sales$ there may more and more amount of funds bloc%ed

in stoc% and debtors etc" similarly ill the case of depressions also$ #or%ing

capital may be high as the sales terms of value and uantity may be reducing$

there may be unnecessary piling up of stac% #ithout getting sold$ the receivable

may not be recovered in time etc"

0" Terms of purchase and sales

!ome time due to competition or custom$ it may be necessary for the company

to e&tend more and more credit to customers$ as result #hich more and moreamount is loc%ed up in debtors or bills receivables #hich increase tbe #or%ing

capital reuirement" On the other hand$ in the case of purchase$ if the credit is

offered by suppliers of goods and services$ a part of #or%ing capital

reuirement may be financed by them$ but it is necessary to purchase on cash

basis$ the #or%ing capital reuirement #ill be higher"

" +ro fita bility

The profitability of the business may be vary in each and every individual case$

#hich is in turn its depend on numerous factors$ but high profitability #ill

positively reduce the strain on #or%ing capital reuirement of the company$

because the profits to the e&tend that they earned in cash may be used to meet

the #or%ing capital reuirement of the company"

) Operating efficiency

If the business is carried on more efficiently$ it can operate in profits #hich

may reduce the strain on #or%ing capitalA it may ensure proper utili,ation of

e&isting resources by eliminating the #aste and improved coordination etc"

Date post:	04-Jun-2018
Category:	Documents
Upload:	higuyschilled
View:	222 times
Download:	0 times

ARSS WCM

Documents