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A STUDY ON WORKING CAPITAL MANAGEMENT
AT VELACHERY BRANCH,
CHENNAI.
SUMMER PROJECT REPORT
Submitted by
CHINNACHAMY.D
(Reg No: 30709631008)
Under the guidance of
Mrs.G.SRIVIDYA, B.E., M.B.A
Faculty Member, Department Of Management Studies
in partial fulfillment for the award of the degree
of
MASTER OF BUSINESS ADMINISTRATION
in
DEPARTMENT OF MANAGEMENT STUDIES
JERUSALEM COLLEGE OF ENGINEERING
NAARAYANAPURAM, PALLIKARANAI,
CHENNAI-600100
ANNA UNIVERSITY
CHENNAI-25
JULY-2010
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NE EL L NITE TION LIMITE
(A Mini Ratna Govt of India Enterprise)
P.O NEYVELI -607801, Cuddalore District, Tamil Nadu
CE TIFICATE
This is certify that the summer project report entitled A ST ON T AINING
AND DE ELOPMENT IN NE ELI LIGNITE CORPORATION , NE ELI is a
bonafide work done by A.KRISHNA KUMAR(Roll No-30709631017) in partial fulfillment
of the requirement for the award of the degree of MASTER OF BUSINESS
ADMINISTRATION through Department ofManagement Studies, Jerusalem College Of
Engineering , Narayanapuram, Pallikaranai, Chennai-600100.
The project work done under my guidance during the period between 28-06-2010 to
08-08-2010 for a period of six week.
DATE : EXTERNAL GUIDE
PLACE
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DECLARATION
I, D.CHINNACHAMY, a bonafide student of Department ofManagement studies of
JERUSALEM COLLEGE OF ENGINEERING, Chennai-100, declare that the project
titled A STUDY ON WORKING CAPITAL MANAGEMENT AT INDIAN
OVERSEAS BANK, VELACHERY BRANCH, CHENNAI submitted for the partial
fulfillment forthe award ofMBA degree from Anna university is my original work, and itis
not submitted to any other university.
Dat Si natu
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ACKNOWLEDGEMENT
I owe a great many thanks to a great many people who helped and supported me
during the project.
My deep sense of gratitude to the management of Jerusalem College of Engineering
for giving me an opportunity to undergo M.B.A degree course thereby to undertake this
project work
I express my thanks to the Principal Dr.G.SAMBANDAN, B.E., M.T ch.,
Ph.D(IIT-D), for extending his support.
I wish to express my deep sense of obligation to our most revered Head of the
department, Dr.V.DHAMODHARAN, M.B.A., Ph.D, for enlightening and helping me on
the major aspects ofthe project.
My deepest thanks to Lecturer, Mrs.G.SRIVIDYA, B.E., M.B.A., the project
coordinator of the project for guiding and adding valuable insights for the project of mine
with attention and care. I also wish to thank my project guide Mrs.G.SRIVIDYA, B.E.,
M.B.A., He has taken pain to go through the project and guide me as and when needed.
I convey my heartiest thanks to Mr.RAJARAM, INDIAN OVERSEAS BANK,
VELACHERY BRANCH, CHENNAI, who kindly granted permission to do this project
reportin his esteemed organization.
I also extend my heartfelt thanks to my family and well wishers, who helped me
directly orindirectly to successfully complete this project.
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ABSTRACT
This project entitled WORKING CAPITAL MANAGENENT at
INDIAN OVERSEAS BANK, VELACHERY BRANCH, CHENNAI is intended to
determine whetherthe business working capital.
The rapid growth of multinational corporations has hastened the need for the
development of powerful models to reflectthe new complexities imposed by the international
interface. Working capital management is complex in the uninational setting where the firm
must weigh the trade-offs between the liquidity and profitability of its current assets in the
face of uncertainty. Significant additional dimensionality is added to the problem when
foreign exchange rates, foreign tax methodologies, new sources of funds from foreign money
markets, and new multi-faceted social, economic, and political factors are superimposed on
the framework. This paper develops a simulation modelto assistthe multinational firm in the
management of working capital for all ofits subsidiaries considering their needs, world-wide
short-term opportunities, and global sources of short-term funds.
The simulation methodology is used in conjunction with a linear
programming model which determines the optimal sources and uses of short-term funds for
each subsidiary given the values that have been generated for each exogenous variable in the
system. The overall model capitalizes on the strengths of both simulation and the linear
programming optimization model and thus, yields a flexible but robust approach to this
difficult problem setting
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TABLE OF CONTENTS
CHAPTERTITLE
PAGE
NO
I
1.INTRODUCTION
1.1.INTRODUCTION TO INDUSTRY
1.2.INTRODUCTION TO
ORGANIZATION1.3.INTRODUCTION TO THE STUDY
II REVIEW OF LITERATURE
III RESEARCH METHODOLOGY
IVDATA ANALYSIS AND
INTERPRETATION
V SUGGESTIONS AND
RECOMMEDATIONS
VI CONCLUSION
ANNEXURES &BIBILOGRAPHY
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LIST OF TABLES
TABLE
NO.NAME OF THETABLES
PAGE
NO.
4.1STATEMENT OF WORKING CAPITAL
4.2CURRENT RATIO
4.3
ACID-TEST OR QUICK RATIO
4.4DEBTORS TURNOVER RATIO
4.5CREDITORS TURNOVER RATIO
4.6CREDITORS PAYMENT PERIOD
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CHSPTER-I
1.INTRODUCTION
1.1. INDUSTRY PROFILE
ABOUTBANKING INDUSTRY
In any country banks are the major contributors fortheir economic development.
They function as the chiefinstitution for granting ofloans and advances in orderto keep the
wheels ofthe progress moving, since they occupy a key role in the financial sector, they need
to be regulated and controlled by a proper authority that is why, every country will have a
Central bank of its own which act as the bankers bank. The Reserve Bank of India acts a
centralized body monitoring any discrepancies and shortcoming in the system. The word
bankis derived from a Greek word Bankus which means table, where money was placed in
ancient days.
The Indian banking can be broadly categorized into nationalized (government
owned), private banks and specialized banking institutions. Since the nationalization of banks
in 1969, the public sector banks orthe nationalized banks have acquired a place of rominence
and has since then seen tremendous progress.
The need to become highly customer focused has forced the slow-moving public
sector banks to adopt a fasttrack approach. The unleashing of products and services through
the net has galvanized players at all levels of the banking and financial institutions market
grid to look anew attheir existing portfolio offering. Conservative banking practices allowed
Indian banks to be insulated partially from the Asian currency crisis.
Indian banks are now quoting at higher valuation when compared to banks in
other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems
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linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are
nimble footed in approach and armed with efficient branch networks focus primarily on the
high revenue niche retail segments.
The Indian banking has finally worked up to the competitive dynamics of the
new Indian market and is addressing the relevant issues to take on the multifarious
challenges of globalization. Banks that employ IT solutions are perceived to be futuristic
and proactive players capable of meeting the multifarious requirements of the large
customers base. Private Banks have been fast on the uptake and are reorienting their
strategies using the internet as a medium The Internet has emerged as the new and
challenging frontier of marketing with the conventional physical world tenets being just as
applicable like in any other marketing medium.
The Indian banking has come from a long way from being a sleepy business
institution to a highly proactive and dynamic entity. This transformation has been largely
brought about by the large dose ofliberalization and economic reforms that allowed banks to
explore new business opportunities rather than generating revenues from conventional
streams (i.e. Borrowing and lending).
The banking system in India is highly fragmented with 30 banking units
contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks
(banks owned by the government) continue to be the major lenders in the economy due to
their sheer size and penetrative networks which assures them high deposit mobilization.
The Reserve Bank of India acts as a centralized body monitoring any discrepancies and
shortcoming in the system. Itis the foremost monitoring body in the Indian financial sector.
The nationalized banks (i.e. government-owned banks) continue to dominate the Indian
banking arena. Industry estimates indicate that out of 274 commercial banks operating in
India, 223 banks are in the public sector and 51 are in the private sector. The private sector
bank grid also includes 24 foreign banks that have started their operations here. Under the
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ambit of the nationalized banks come the specialized banking institutions. These co-
operatives, rural banks focus on areas of agriculture, rural development etc.,
Nature ofindustry
Banks safeguard money and valuables and provide loans, credit, and payment
services, such as checking accounts, money orders, and cashiered checks. Banks also may
offerinvestment and insurance products, which they were once prohibited from selling. As a
variety of models for cooperation and integration among finance industries have emerged,
some ofthe traditional distinctions between banks, insurance companies, and securities firms
have diminished. In spite ofthese changes, banks continue to maintain and perform their
primary roleaccepting deposits and lending funds from these deposits.
There are several types of banks, which differ in the number of services they
provide and the clientele they serve. Although some ofthe differences between these types of
banks have lessened as they begin to expand the range of products and services they offer,
there are still key distinguishing traits. Commercial bank, which dominate this industry, offer
a full range of services for individuals, businesses, and governments. These banks come in a
wide range of sizes, from large global banks to regional and community banks. Global banks
are involved in international lending and foreign currency trading, in addition to the more
typical banking services. Regional banks have numerous branches and automated teller
machine (ATM) locations throughout a multi-state area that provide banking services to
individuals. Banks have become more oriented toward marketing and sales. As a result,
employees need to know about all types of products and services offered by banks.
Community banks are based locally and offer more personal attention, which many
individuals and small businesses prefer. In recent years, online bankswhich provide all
services entirely over the Internethave entered the market, with some success. However,
many traditional banks have also expanded to offer online banking, and some formerly
Internet-only banks are opting to open branches.
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Savings banks and savings and loan associations, sometimes called thrift
institutions, are the second largest group of depository institutions. They were first
established as community-based institutions to finance mortgages for people to buy homesand still cater mostly to the savings and lending needs of individuals.Credit unions are
another kind of depository institution. Most credit unions are formed by people with a
common bond, such as those who work for the same company or belong to the same labor
union or church. Members pooltheir savings and, when they need money, they may borrow
from the credit union, often at a lower interest rate than that demanded by other financial
institutions.
Federal Reserve banks are Government agencies that perform many financial
services forthe Government. Their chief responsibilities are to regulate the banking industry
and to help implement our Nations monetary policy so our economy can run more
efficiently by controlling the Nations money supplythe total quantity of money in the
country, including cash and bank deposits. For example, during slower periods of economic
activity, the Federal Reserve may purchase government securities from commercial banks,
giving them more money to lend, thus expanding the economy. Federal Reserve banks also
perform a variety of services for other banks. For example, they may make emergency loans
to banks that are short of cash, and clear checks that are drawn and paid out by different
banks.
Interest on loans is the principal source of revenue for most banks, making their
various lending departments critical to their success. The commercial lending department
loans money to companies to start or expand a business or to purchase inventory and capital
equipment. The consumer lending department handles student loans, credit cards, and loans
for home improvements, debt consolidation, and automobile purchases. Finally, the mortgage
lending departmentloans money to individuals and businesses to purchase real estate.
The money to lend comes primarily from deposits in checking and savings
accounts, certificates of deposit, money market accounts, and other deposit accounts that
consumers and businesses set up with the bank. These deposits often earn interest for the
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owner, and accounts that offer checking provides an easy method for making payments safely
without using cash. Deposits in many banks are insured by the Federal Deposit Insurance
Corporation, which ensures that depositors will gettheir money back, up to a stated limit, if abank should fail.
Technology is having a major impact on the banking industry. For example,
many routine bank services that once required a teller, such as making a withdrawal or
deposit, are now available through atms that allow people to access their accounts 24 hours a
day. Also, direct deposit allows companies and governments to electronically transfer
payments into various accounts. Further, debit cards, which may also used as ATM cards,
instantaneously deduct money from an account when the card is swiped across a machine at a
stores cash register. Electronic banking by phone or computer allows customers to pay
bills and transfer money from one account to another. Through these channels, bank
customers can also access information such as account balances and statement history. Some
banks have begun offering online account aggregation, which makes available in one place
detailed and up-to date information on a customers accounts held atvarious institutions.
Advancements in technology have also led to improvements in the ways in
which banks process information. Use of check imaging, which allows banks to store
photographed checks on the computer, is one such example that has been implemented by
some banks. Other types of technology have greatly impacted the lending side of banking.
For example, the availability and growing use of credit scoring software allows loans to be
approved in minutes, rather than days, making lending departments more efficient.Other
fundamental changes are occurring in the industry as banks diversify their services to become
more competitive. Many banks now offer their customers financial planning and asset
management services, as well as brokerage and insurance services, often through a subsidiary
or third party. Others are beginning to provide investment banking services that help
companies and governments raise money through the issuance of stocks and bonds, also
usually through a subsidiary. As banks respond to deregulation and as competition in this
sector grows, the nature ofthe banking industry will continue to undergo significant change.
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1.2. Companyprofile
Profile of Indian Overseas Bank
Indian Overseas Bank(IOB) was founded on February 10, 1937 by Shri.M.Ct.M.
Chidambaram Chettyar. IOB had the unique distinction of commencing business on the
inaugural day itselfin three branches simultaneously - at Karaikudi and Chennaiin India and
Rangoon in Burma (presently Myanmar) followed by a branch in Penang.
Indian Overseas Bank was the first Bank to venture into consumer credit. It
introduced the popular Personal Loan scheme. In 1964, the Bank made a beginning in
computerization in the areas ofinter-branch reconciliation and provident fund accounts. IOB
was one ofthe 14 major banks that were nationalized in 1969. On the eve of Nationalization
in 1969, IOB had 195 branches in India with aggregate deposits of Rs 67.70 crores and
Advances of Rs 44.90 crores. In 1977, IOB opened its branch in Seoul and the Bank opened a
Foreign Currency Banking Unitin the free trade zone in Colombo in 1979.
As of March 2003, IOB had 1427 branches in India and 6 branches overseas.
Besides the Bank has a network of over 240 atms and 243 Extension Counters. IOB has
specialized branches to cater to the exclusive needs of Commercial & Industrial credit,
Industrial finance, Small Scale industries, hi-tech agriculture and foreign exchange.
Head office
763, anna salai,Chennai - 600002.
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Company back round
One ofthe few public sector banks that have shown remarkable turnaround in asset
quality, Indian Overseas Bank (IOB) shows very healthy growth prospects. The bank was
established in 1937 with the twin objective of specializing in foreign exchange and overseas
banking. The bank has been performing well until it was hit with the menace of NPA
problems, which have been safely negotiated. The bank operates through a network of 1,457
branches and 165 atms. The bank is not a big player in the retail market and has recently
moved into stepping up the retail lending process. The bank is authorized to collect
Government revenue, which helps it garner fee income.
Business
IOB has been showing impressive in its business (credit + deposits). The home loan
outstanding amountincreased 60% on yoy basis for 2004. The bank is one ofthe few banks
meeting the priority as well as the agriculturallending target.
History
y 1937: Shri.M.Ct.M. Chidambaram Chettyar establishes the Indian Overseas Bank(IOB) to encourage overseas banking and foreign exchange operations. IOB started up
simultaneously at three branches, one each in Karaikudi, Madras (Chennai) and
Rangoon (Yangon). It then quickly opened a branch in Penang and another in
Singapore. The bank served the Nattukottai Chettiars, who were a mercantile class
that atthe time had spread from Chettinad in Tamil Nadu state to Ceylon (Sri Lanka),Burma (Myanmar), Malaya, Singapore, Java, Sumatra, and Saigon. As a result, from
the beginning IOB specialized in foreign exchange and overseas banking (see below).
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y 1960s: The banking sectorin India was consolidating by the merger of weak privatesector banks with the stronger ones; IOB absorbed five banks, including Kulitali Bank
(est. 1933).
y 1969: The Government of India nationalized IOB. At one point, probably beforenationalization, IOB had twenty of its eighty branches located overseas. After
nationalization it, like all the nationalized banks, turned inward, emphasizing the
opening of branches in rural India.
y 1988-89: IOB acquired Bank of Tamil Nadu in a rescue.
y 2000: IOB engaged in an initial public offering (IPO) that brought the government'sshare in the bank's equity down to 75%.
International expansion
y 1937-38: As mentioned above, IOB was international from its inception with branchesin Rangoon, Penang, and Singapore.
y 1941: IOB opened a branch in Malaya that presumably closed almost immediatelybecause ofthe war.
y 1946: IOB opened a branch in Ceylon.y 1947: IOB opened a branch in Bangkok and re-opened others.
y 1948: United Commercial Bank (see below) opened a branch in Malaya.y 1949: IOB opened a branch in Bangkok.
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y 1963: The Burmese government nationalized IOBs branch in Rangoon.
y 1973: IOB, Indian Bank and United Commercial Bank established United Asian Banky Berhad in Malaysia. (Indian Bank had been operating in Malaysia since 1941 and
United Commercial Bank Limited had been operating there since 1948.) The banks
set up United Asian to comply with the Banking Law in Malaysia, which prohibited
foreign government banks from operating in the country. Also, IOB and six Indian
private banks established Bharat Overseas Bank as a Chennai-based private bank to
take over IOB's Bangkok branch.
y 1977: IOB opened a branch in Seoul.y 1979: IOB opened a Foreign Currency Banking Unitin Colombo, Sri Lanka.
y 1992: Bank of Commerce (BOC), a Malaysian bank, acquired United Asian Bank(UAB).
y 1999: Bank of Commerce (BOC) merged with Bank Bumiputras Malaysia to formy Bumiputra-Commerce Bank (BCB) Berhad.
y 2005: BCB integrates with CIMB which the company is own by the Datuk Seri NazirRazak who is the youngest son of Malaysia's second (former) Prime Minister Tun
Abdul Razak from 1970 - 1976 and youngest brother oftoday's (2005) deputy prime
minister Dato Seri Najib Tun Razak.
y 2007: IOB takes over Bharat Overseas Bank.
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Objective of IOB
The Policy and Operations Evaluation Department (IOB) meets the need for
independent evaluation of policy and operations in all policy fields falling under the
Homogenous Budget for International Cooperation (HGIS). Its evaluations enable the
ministers to accountto parliament for policy and the allocation of resources. In addition, the
evaluations aim to derive lessons forthe future. Efforts are accordingly made to incorporate
the findings of evaluations into the Ministry of Foreign Affairs' knowledge cycle. Evaluation
reports are used to provide targeted feedback, with a view to improving both policy and
implementation. They enable policymakers to devise measures that are more effective and
focused. The IOB also advises on the planning and implementation of non-central evaluations
of policy departments and embassies.
Approachandmethodology
IOB has a staff of experienced evaluators and its own budget. When carrying
out evaluations, it calls on the assistance of external experts with specialized knowledge of
the topic underinvestigation. To monitorits own quality, it sets up a reference group for each
evaluation, which includes not only external experts but also interested parties from within
the Ministry.
Programme
IOB has a rolling multi-year program me which is updated every two years.
This program me is devised using an internal selection process based on an assessment ofthe
political, social, policy-related and financialimplications of all possible themes, as well as ona number of broad consultations within the various parts ofthe Ministry. Once adopted, the
program me is submitted to parliament by the Minister of Foreign Affairs and the Minister
for Development Cooperation.
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An organizationindevelopment
Since IOB's establishment in 1977, major shifts have taken place in its
approach, areas of focus and responsibilities. In its early years, its activities tookthe form of
separate project evaluations for the Minister for Development Cooperation. Around 1985,
evaluations became more comprehensive, taking in sectors, themes and countries. Moreover,
IOB's reports were submitted to parliament, thus becoming public. 1996 saw a review of
foreign policy and a reorganization of the Ministry of Foreign Affairs. As a result, IOBs
mandate was extended to the Dutch government's entire foreign policy, in which
development cooperation occupies an important place. In recent years, it has also sought to
extend its partnerships with similar departments in other countries, forinstance through joint
evaluations. Finally, IOB also aims to expand its methodological repertoire. A recent
example is the application of statistical methods ofimpact evaluation.
IOB's history shows considerable changes in the approach and methodology
of its evaluations. However, its strict independence has remained constant. This, combined
with its thorough approach and professional evaluations, ultimately forms the rationale for
IOB's existence.
IOBprofitup
Indian Overseas Bank's net profit for the third quarter ended December 31,
2002 has increased to Rs. 116.95 crores from Rs. 45.57 crores. The net profit for the nine
months ended December 31, 2002 was higher at Rs. 277.88 crores against Rs. 167.23 crores.
This profit has been arrived at after providing VRS related expenditure. The global operating
profit for the third quarter was Rs. 236.70 crores against Rs. 131.21 crores. For the ninemonths ended December 31, 2002, the operating profit was Rs. 596.47 crores against Rs.
322.70 crores. As at December 31, 2002 global deposits grew by over Rs. 12,590 crores over
the March 1999 level. Global net advances expanded from Rs. 10,117 crores in 1999 to Rs.
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16,960 crores in December 2002. The bank's total business as of December 31, 2002 was Rs.
51,463.66 crores.
1.3.Introduction ofthe study
Introduction of working capital
The net working capital of business is its current assets less its current
liabilities.
Current Assets include:
Stock of Raw Material
Workin Progress
Finished goods
Trade debtors
Prepayments
Cash balances
CurrentLiabilities include:
Trade creditors
Accruals
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Taxation payable
Dividends payable
Shortterm Loans
Every business needs adequate liquid resources in orderto maintain day to day cash flows. It
needs enough cash to by wages and salaries as they fall due and to pay creditors. If it is to
keep its workforce and ensure its supplies. Maintaining adequate working capital; is not just
importantin the shortterm.
Sufficientliquidity must be maintained in orderto ensure the survival of business
in the long term as well. Even a profitable business may failifit does not have adequate cash
flows to meet its liabilities as they fall a due. Therefore when business make investment
decisions they must not only consider the financial outlay involved with acquiring the new
machine or the new building etc, but must also take account ofthe additional current assets
that are usually involved with any expansion of activity . Increase production tends to
engender a need to hold additional stocks of raw material & workin progress. Increased sales
usually mean thatthe level of debtor willincrease. A generalincrease in the firms scales of
operation tends to imply a need for greaterlevel of cash.
Working capitalmanagement
In a perfect world, there would be no necessity for current assets and liabilities
because there would be no uncertainty, no transaction costs, information search costs,
scheduling costs, or production and technology constraints. The unit cost of production would
not vary with the quantity produced. Borrowing and lending rates shall be same. Capital,
labour, and product market shall be perfectly competitive and would reflect all available
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information, thus in such an environment, there would be no advantage forinvesting in short
term assets.
Howeverthe world we live is not perfect. It is characterized by considerable amount
of uncertainty regarding the demand, market price, quality and availability of own products
and those of suppliers. There are transaction costs for purchasing or selling goods or
securities. Information is costly to obtain and is not equally distributed. There are spreads
between the borrowings and lending rates for investments and financings of equal risks.
Similarly each organization is faced with its own limits on the production capacity and
technology it can employ there are fixed as well as variable costs associated with production
goods. In other words, the markets in which real firm operated are not perfectly competitive.
These real world circumstances introduce problems which require the necessity of
maintaining working capital. For example,, an organization may be faced with an uncertainty
regarding availability of sufficient quantity of crucial imputes in future at reasonable price.
This may necessitate the holding ofinventory., current assts. Similarly an organization my be
faced with an uncertainty regarding the level ofits future cash flows and insufficient amount
of cash may incur substantial costs. This may necessitate the holding of reserve of shortterm
marketable securities, again a shortterm capital asset. In corporate financial management, the
term Working capital management (net) represents the excess of current assets over current
liabilities.
Need for working capital
The prime objective of the company is to obtain maximum profit thought the
business. The amount of profit largely depends upon the magnitude of sales. However the
sale does not convert into cash instantaneously. There is always a time gap between sale of
goods and receipt of cash. The time gap between the sales and their actual realization in cash
is technically termed as operating cycle. Additional capital required to have uninterrupted
business operations, and the amount will be locked up in the current assets. Regular
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availability of adequate working capital is inevitable for sustained biasness oprations. If the
proper fund is not provided for the purpose, the business operations will be effected. And
hence this part of finance to be managed well.
Working capitalcycle.
Each component of working capital (namely inventory, receivables and payables) has
two dimensions time and money. When the comes to managing working capital time is
money. If you can get money to move fester around the cycle ( collect monies due from
debtors more quickly) or reduce the amount of money tied up ( ie., reduce inventory level
RECEIVABLE
SALES
OVERHEADS
Etc.
PAYABLES
INVENTORY
CASH
Equity & loan
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relative to sales). The business will generate more cash or it will need to borrow less money
to fund working capital. As a consequences, you could reduce the cost of bankinterest or you
will have additional freee4 money available to support addition sales growth or investment.Similarly, if you can negotiate improved terms with suppliers e.g. Get longer credit or an
increased creditlimit, you festively create freed finance to help fund future sales.
A perusal of operational cycle reveals thatthe cash invested in operations are recycled
backin to cash. Howeverittakes time to reconvertthe cash. Cash flows in cycle into around
and out of a business it the businesss lifeblood and every managers primary task to help
keep it flowing and to use the cash flow to generate profits. The shorter the period of
operating cycle. The larger will be the turnover ofthe funds invested in various purposes.
Determinants of working capital
Working capital requirements of a concern depends on a number of factors, each of which
should be considered carefully for determining the proper amount of working capital. It may
be however be added thatthese factors affect differently to the different units and these keeps
varying from time to time. In general, the determinants of working capital which re common
to all organizations can be summarized as under:
Nature of business
Need for working capital is highly depends on what type of business, the firm in.
There are trading firms, which needs to invest a lotin stocks, ills receivables, liquid cash etc.
Public utilities like railways, electricity, ete., need much less inventories and cash.
Manufacturing concerns stands in between these two extends. Working capital requirementfor manufacturing concerns depends on various factor like the products, technologies,
marketing policies.
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Productionpolicies
Production policies of the organization effects working capital requirements very
highly. Seasonal industries, which produces only in specific season requires more working
capital . Some industries which produces round the year but sale mainly done in some special
seasons are also need to keep more working capital.
Size of business
Size of business is another factorto determines the need for working capital
Length of operating cycle.Operating cycle of the firm also influence the working capital .
Longer the orating cycle, the higher will be the working capital requirement of the
organization.
Creditpolicy
Companies; follows liberal credit policy needs to keep more working capital
with them. Efficiency of debt collecting machinery is also relevant in this matter. Credit
availability form suppliers also effects the companys working capital requirements. Acompany doesnt enjoy a liberal credit from its suppliers will have to keep more working
capital
Business fluctuation
Cyclical changes in the economy also influancthe level of working capital. During
boom period, the tendency of management is to pile up inventories of raw materials and
finished goods to availthe advantage of rising proves. This creates demand for more capital.
Similarly. During depression when the prices and demand for manufactured goods.
Constantly reduce, the industrial and trading activities show a downward termed. Hence the
demand for working capitalis low.
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Currentassetpolicies.
The quantum of working capital of a company is significantly determined by its
current assets. Policies. A company with conservative assets policy may operate with
relatively high level of working capital than its sales volume. A company pursuing an
aggressive amount assets policy operates with a relatively lowerlevel of working capital.
Fluctuations of supplyand seasonal variations
Some companies need to keep large amount of working capital due to their irregular
sales and intermittent supply. Similarly companies using bulky materials also maintain large
reserves of raw material inventories. This increase the need of working capital . Some
companies manufacture and sell goods only during certain seasons. Working capital
requirements of such industries will be higher during certain season of such industries period.
Other factors
Effective co ordination between production and distribution can reduce the need for working
capital . Transportation and communication means. If developed helps to reduce the working
capital requirement/.
working capitalconcepts
There are two thoughts that re currently accepted about working capital. They are as follows,
Gross working capital concept Net working capital concept
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Gross working capitalconcept
This thought says thattotal investmentin current assets is the working capital ofthe
company. This concepts does not consider current liabilities at all. Reasons given for the
concept. When we consider fixed capital as the amount invested in fixed assets. Then the
amount invested in current assets should be considered as working capital.Current asset
whatever my be the sources of acquisition, are used in activities related to day to day
operations and their forms keep on changing. Therefore they should be considered as working
capital.
Net working capital
It is narrow concept of working capital and according to this, current assets minus
currentliabilities forms working capital. The excess of current assets over currentliabilities is
called as working capital. This concept lays emphasis on qualitative aspect. Which indicates
the liquidity position of the concern enterprise. The reasons for the net working capital
method are:
The materialthing in the long fun is the surplus of current assets over currentliability
Financial health can easily be judged by with this concept particularly from the view point of
creditors and investors.Excess of current assets over currentliabilities represents the amount
which is notliable to be returned and which can be relied upon to meet any contingency.
Inter company comparison of financial position may be correctly done particularly when both
the companies have the same amount of current assets.If the current assets are higher than
currentliability itis considered the financial position ofthe company is sound. If both current
assets and liabilities are equal , the company has resorted to shortterm funds for financing the
working capital and long term sources of funds have been used to finance the acquisition of
fixed assets. It doesnt not indicate the financial soundness for the company. If the current
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assets are lesser than current liabilities there is negative working capital which indicates
financial crisis.
Net working capital concept is more reasonable than the gross working capital
concepts. The balance seet of the company includes group of liabilities such as bank
overdraft, creditors, bills payables, outstanding expenses etc. If it is not deduct from current
assets , the concern may consider itself quite secured: while the reality is may be that the
concern has very little working capital or has no working capital . There fore itis reasonable
to define working capital as the excess of current assets over currentliabilities.
Characteristics of Working Capital
The features of working capital distinguishing it from the fixed capital
Are as follows:
Shortterm Needs
Working capitalis used to acquire current assets which get converted Into cash in ashort period. In this respectit differs from fixed capital which represents funds locked in long
term assets. The duration ofthe working capital depends on the length of production process,
the time that elapses in the sale and the waiting period ofthe cash receipt.
Circular movement
Working capitalis constantly converted into cash which again turns
Into working capital. This process of conversion goes on continuously. The cash is used to
purchase current assets and when the goods are produced and sold out; those current assets
are transformed into cash. Thus it moves in a circular away. That is why working capital is
also described as circulating capital.
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AnElement of Permanency
Though working capital is a short term capital, it is required always and forever. As stated
before, working capital is necessary to continue the productive activity of the enterprise.
Hence so long as production continues, the enterprise will constantly remain in need of
working capital. The working capital that is required permanently is called permanent or
regular working capital.
AnElement of Fluctuation
Working capital loans Though the requirement of working capital is felt
permanently, its requirement fluctuates more widely than that of fixed capital. The
requirement of working capitalvaries directly with the level of production. Itvaries with the
variation of the purchase and sale policy; price level and the level of demand also. The
portion of working capital that changes with Production, sale, price etc. Is called variable
working capital.
Liquidity
Working capital is more liquid than fixed capital. If need arises,Working capital
can be converted into cash within a short period and without much loss. A company in need
of cash can getitthrough the conversion ofits working capital by insisting on quick recovery
ofits bills receivable and by expediting sales of its product. Itis due to this trait of working
capitalthatthe companies with a larger amount of working capital feel more secure.
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Less risky
Funds invested in fixed assets get locked up for a long period of time and can not
be recovered easily. There is also a danger of fixed assets like machinery getting obsolete due
to technologicalinnovations. Hence investmentin fixed capitalis comparatively more risky.
As againstthis, Investmentin current assets is less risky as itis a shortterm investment.
Working capitalinvolves more of physical risk only, and thattoo is limited. Working capital
involves financial or economic risk to a much less extent because the variations of product
prices are less severe generally. Moreover, Working capital gets converted into cash again
and again; therefore, itis free from the risk arising out oftechnological changes.
Special Accounting Systemnotneeded
Working capitalloans Since fixed capitalis invested in long term assets, it becomes
necessary to adoptvarious systems of estimating depreciation. On the other hand working
capitalis invested in shortterm assets which last for one year only. Hence itis not necessary
to adopt special accounting system forthem.
Kinds of working capital
Working capital can be putin two categories:
Fixed or permanent working capital and
Fluctuating ortemporary working capital
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Fixed or permanent working capital
The volume of investment in current assets an change over a period of time. But
always there is minimum level of current assets that must be kept in orderto carry on the
business. This is the irreducible minimum amount needed for maintaining the operating
cycle. Itis the investmentin current assets. Which is permanently locked up in the business,
and therefore known as permanent working capital.
Variable/temporary working capital
It is the volume of working capital. Which is needed over and above the fixed
working capital in order to meet the unforced market changes and contingencies. In other
words any amount over and about the permanent level of working capital is variable or
fluctuating working capital . This type of working capitalis generally financed from shortter
souse of finance such as bank credit because this amount is not permanently required and is
usually paid back during off season or afterthe contingency.
Sources of working capital
The company can choose to finance its current assets by Long term sources,
Shortterm sources, a combination ofthem.
Long term sources of working capital
Long term sources of permanent working capitalinclude equity and preference
shares, retained earnings, debentures and other long term debts from public deposits and
financial institution. The long term working capital needs should meet through long term
means of financing. Financing through long term means provides stability, reduces risk or
payment. And increases liquidity ofthe business concern. Various types oflong term sources
of working capital are summarized as follows
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Issue of shares
It is the primary and most important sources of regular or permanent working
capital . Issuing equity shares as it does not create and burden on the income ofthe concern.
Nor the concern is obliged to refund capital should preferably raise permanent working
capital.
Retained earnings
Retain earning accumulated profits are a permanent sources of regular working
capital. Itis regular and cheapest. It creates not charge on future profits ofthe enterprises.
Issue ofdebentures
It crates a fixed charge on future earnings ofthe company. Company is obliged to
pay interest . Management should make wise choice in procuring funds by issue of
debentures.
Long termdebt
Company can raise fund from accepting public deposits, debts from financial
institution like banks, corporations etc. The costis higherthan the other financialtools.
Other sources sale ofidle fixed assets , securities received from employees and customers are
examples of other sources of finance.
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Shortterm sources oftemporary working capital
Temporary working capital is required to meet the day to day business
expenditures. The variable working capital would finance from shortterm sources of funds.
And only the period needed . It has the benefits of ,low cost and establishes closer
relationships with banker. Some sources oftemporary working capital are given below;
Commercial bank
A commercial bank constitutes a significant sources for shortterm or temporary
working capital . This will be in the form of shortterm loans, cash credit, and overdraft and
though discounting the bills of exchanges.
Publicdeposits
Most of the companies in recent years depends on this sources to meet their
shortterm working capital requirements ranging fro six month to three years.
Various credits
Trade credit, business credit papers and customer credit are other sources of
short term working capital. Credit from suppliers, advances from customers, bills of
exchanges, promissnotes, etc helps to raise temporary working capital
Reserves and other funds
Various funds of the company like depreciation fund. Provision for tax and
other provisions kept with the company can be used as temporary working capital. The
company should meetits working capital needs through both long term and shortterm funds.
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It will be appropriate to meet atleast 2/3 of the permanent working capital equipments form
long term sources, whereas the variables working capital should be financed from shortterm
sources. The working capital financing mix should be designed in such a way thatthe overallcost of working capital is the lowest, and the funds are available on time and for the period
they are really required.
Sources ofadditional working capital
Sources of additional working capitalinclude the following
Existing cash reserves Profits(when you secure it as cash) payables(credit from suppliers) new equity orloans from shareholder bank overdrafts line of credit long term loans
If you have insufficient working capital and try to increase sales, you can
easily over stretch the financial resources of the business. This is called overtrading. Early
warning signs include
pressure on existing cash exceptional cash generating activities. offering high discounts for clear cash payment bank overdraft exceeds authorized limit seeking greater overdrafts orlines of credit part paying suppliers orthere creditor. Management pre occupation with surviving ratherthan managing.
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Adequate working capital
As I stated bout keeping adequate working capital is the mantas towards the
success of financial management. The term adequate working capital refuters to the amount
of working capital to be kept with the organization to met its daily operations. Large
investment in fixed assets not sufficient to run a business successfully. Adequate working
capitalis equally important. Without working capita fixed assets are like a gun, which cannot
shoot, as there are no cartridges.
It is said that inadequate working capital is a disastrous: where as redundant
working capitalis a criminal waste. Itis clearthatthe company cantinvest allits funds in
current assets to increase working capital . At the same time it requires to keep sufficient
funds with it. So a proper leverage between both ends is needed to assure proper running of
the business . It needs to keep adequate working capital with it. Neitherless nor more than
needed.
Advantages ofadequate working capital
Adequate working capital provides certain benefits to the company they are:
Increase indebtcapacityand goodwill
Adequate working capital represents the financial soundness of the company. If
one company is financially sound it would be able to pay its creditors timely and properly. It
willincrease companies goodwill. It crests confidence among investors and creditors. Thus a
firm with adequate working capital can raise requisite funds from market , borrow shortterm
credit form banks, and purchases inventories of raw material etc., for the smooth operations
ofits busines
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Increase inproductioninefficiency
With adequate working capital the firm can smoothly carryout research and
development actives and thus adds to it production efficiency.
Exploitation of favorable opportunities
In the presence of adequate working capital , a company can availthe benefits of
favorable opportunities. Adequate working capital will help the company to have bulk
purchases, seasonal storage of raw material etc., which would reduce the cost of production,
thus adds to its profit.
Meeting contingencies adverse changes
A company can easily face certain business and economic crises a company having
adequate working capital can successfully meet contingencies such as business oscillations,
financial crisis arising from heavy losses etc.,
Available cashdiscount
Maintenance of adequate working capital enables a company to availthe advantage
of cash discount by making cash payment for to the suppliers of raw materials and
merchandise. Obviously it will reduce the cost of production and increase the profit of the
company.
Solvencyand efficiency fixedassets.
It helps to maintain the solvency ofthe company. So that payments could be made in
time as and when they fall due. Like wise, adequate working capital also increases the
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efficiency for fixed assets insofar as their proper maintenance depends upon the availability
of funds.
Attractive dividendto shareholders
It enables the company to offer attractive dividend to the shareholders so that sense
of security and confidence willincrease among them . It also increases the marketvalues of
its shares.
Dangers ofinadequate working capital
Having inadequate working capitalles to so many of dangers as it doesnt fulfillits
purpose. Some are given below:
Loss of goodwillandcreditworthiness
As the firm fails to on or its current liabilities it loses it goodwill and
creditworthiness among its creditors. Consequently, the firm finds it difficult to procure therequisite funds for its business operations on easy terms, which ultimately results in reduced
profitability as well as production interruption.
Firmcantmake use of favorable opportunities
The firm fails to undertake the profitable projects, which not only prevent the fir
from availing the benefits of favorable opportunities but also stagnate its growth.
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Adverse effects ofcredit opportunities
The firm also fails to avail the attractive credit opportunities but also stagnate its
growth
Operationalinefficiencies
In leads the company to operating inefficiencies, as day to day commitments cannot
be met.
Effects on financialcapacity
Inadequacy of working capital also weakness the shock absorbing capacity ofthe
firm because it cannot meet the contingencies arising form business oscillations, financial
losses, due to shortage of working capital.
Nonachievement ofprofittarget
The firm cannotimplement operational plans due to unavailability of fund. Which
willlead to non achievement of profit margin.
The concept ofzero working capital\
In todays world ofintense global competition , working capital management is
receiving increasing attention form managers striving for peak efficiency the goal of many
leading companies today, is zero working capital. Proponent of the zero working capital
concept claims that a movementtoward this goal not only generates cash but also speeds up
production and helps business make more timely deliveries and operate more efficiently. The
concept has its own definition of working capital : inventories+ receivables- payables. The
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rational here is (i) thatinventories and receivables are the keys to making sales , but (II) that
inventories can be financed by suppliers through account payables.
Companies use about 20% of working capital for each sales. So , on average,
working capital is turned over five times per year. Reducing working capital and thus
increasing turnover has two major financial benefits. First every money freed up by reducing
inventories or receivables, by increasing payables, results in a one time contribution to cash
flow. Second, a movement toward zero working capital permanently raises a companys
earnings.
The most important factor in moving toward zero working capital is increased
speed. If the production process is fast enough, companies can produce items as they are
ordered rather than having to forecast demand and build up large inventories that are
managed by bureaucracies. The best companies delivery requirements. This system is known
as demand flow or demand based management. And it builds on the just in time method of
inventory control.
Clearly it is not possible for most firm to achieve zero working capital and
infinitely efficient production. Still, a focus on minimizing receivables and inventories while
maximizing payables will help a firm lower its investment in working capital and achieve
financial and production economies.
Estimation of working capitalmanagement
As discussed above a number of factors are responsible for determining the amount
of working capital required by affirm . Let us know discuss the various methods/ technique
used in assessment of firms working capital requirements. These methods are.
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Estimation ofcomponents of working capitalmethod
This method is based on the basic definition of working capitalizes, excess of
current assets overthe currentliabilities . In other worked the amount of different constituent
of the working capital such as debtors, cash inventories , creditors etc are estimated
separately and the total amount of working capital requirementis worked out accordingly.
Percent sales method
This is the most simple and widely used method in combination with other scientific
methods. According to this methods a ratio is determined for estimating the future working
capital requirement . This is the generally based on the past experience of management as the
ratio varies from industry to industry. For example if the past experience shows that the
amount of working capital has been 20% of sales and projected amount of sales forthe next
yearis Rs 10 lakes, the required amount of working capital shall be Rs Two lakh.
As seen from above the above method is merely an estimation based on past
experience. Their fore a lot depends on the efficiency of decision maker, which may not becorrect in all circumstances. Moreover the basic assumptions regarding linear relationship
between sales and the working capital may not hold well in all the cases. Therefore this
method is not dependable ands not universally acceptable. At best, this method gives a rough
idea aboutthe working capital.
Operating cycle approach
The need of working capital arises mainly because of them gap between the
production of goods and their actual realization after sales. This gap is technically referred as
the operating cycle orthe cash cycle ofthe business. Ifit were possible to complete the
entire job instantaneously, there would be no need for current asset (working capital). But
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since itis not possible, every business organization is forced to have current asset and hence
operating cycle. It may be divided into four stage.
Raw materials and stores storage space. Workin process stage. Finished goods inventory stage. Debtors collection stage,
Duration of operating cycle
The duration ofthe operating cycle is equalto sum ofthe duration of these stages
less the credit period allowed by the suppliers ofthe firm. In symbol
OC=R+W+F+D-C
Where
OC= Duration ofthe Operating Cycle
R= Raw materials and storage space periods
W= workin process periods.
F= finished goods storage periods
D= debtor collection period
C= Creditors collection period.
The component of the operating cycles has already been calculated in ratio
Analysis which is as follow.
Average stock of raw material
R = --------------------------------------------------------
Average raw material consumption per day
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Average stock of storesS = -------------------------------------------------
Average stores consumption per day
Average workin process inventory
W = -----------------------------------------------
Average cost of production per day
Average book debts
D = -------------------------------------
Average credit sales per day
` Average trade credit
C = --------------------------------------------------
Average trade credit purchase per day
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1.3.1.Objectives ofthe study
Estimation of working capital requirement Study the operating and cash cycleEvaluation of Liquidity position & working capital utilizationAnalysis of relationship between working capital and profitabilityAnalysis & sources of working capital Analyzing the level of current assets with relation to currentliabilities.
1.3.2.Need ofthe study
The prime objective of the company is to obtain maximum profit thought thebusiness.
Regular availability of adequate working capital is inevitable for sustained businessoperations
To analyses organize profittransaction. To improve the organize financial activities.
1.3.3.Scope ofthe study
The scope of the study is identified after and during the study is conducted. The
study of working capital is based of tools trend analysis , ratio analysis ,working capital
leverage , operating cycle etc.
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1.3.4.Limitation ofthe study
There may be limitations to this study because the study duration is very short
and its not possible to observe every aspects of working capital management practices. the
data is mostly secondary in nature.
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CHAPTER II
2.1.Review ofliterature
The corporate finance literature has traditionally focused on the study oflong-
term financial decisions. However, short-term assets and liabilities are important components
oftotal assets and needs to be carefully analyzed. Management ofthese short-term assets and
liabilities warrants a careful investigation since the working capital management plays an
important role for the firms profitability and risk as well as its value (Smith 1980). The
optimal level of working capital is determined to a large extent by the methods adopted for
the management of current assets and liabilities.
A research study on working capital management of paper industries in India
was conducted by R. Sivarama and Prasad (2001). Their Sample consisted of 21 selected
paper mills, including 9 large, 5 medium and 7 small scales for the period from 1983-84 to
1992-93. They reported thatthe chief executives properly recognized the role of efficient use
of working capital in liquidity and profitability, but in practice they could not achieve it.
Again they reported a clear reveal of a suboptimum utilization of working capital in paperindustry.
A study on working capital management of horticulture industry in himachal
Pradesh by Joginder Singh Dulta (2001) observed the size of current assets and current
liabilities with all variations, registered a slight increase, but due to inefficient use of the
various components of working capital of Himachal Pradesh Horticulture Produce Marketing
and Processing Corporation Ltd, the current liabilities increased proportionately at a faster
rate than current assets and net working capital position was worsened continuously.
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P. Saravanan (2001) had undertaken a research on working capital
management in non-banking finance companies. Data from 1987-88 to 1996-97 for 10 non-
banking finance companies had been analyzed. He observed that, medium and large size non-banking companies have efficiently made use of bank creditto finance their working capital
requirements.
Dr. D. Mukhopadhyay conducted a research study to examine working capital
management practices and the problems faced by the firms in working capital management
process particularly in heavy engineering industries. A sick engineering firm named "M/S
Heavy Engineering Company Limited had been selected and data from 1993-94 to 2002-03
had been analyzed. He reported that, the company has under its possession huge real estate
including land and the firm holds legacy of culture and heritage of more than two hundred
years of existence in industrial map of the country and as a consequence, it has built up
"Goodwill" to a remarkable extent. Thus the company may make revaluation of real estate
including land and other assets and make valuation of goodwill and disposal of idle assets
and selling off certain percentage of company goodwill can enable the company infuse fresh
blood in the form of working capitalto run the show.
Jain, Yadav, Surendra (2007), made a study on Working capital management
practices of public sector enterprises in India. The study was based on an analysis of 13 year
period data from 1991 to 2003 of 137 public sector enterprises and stated that, a business
organization has to be conscious that inadequate working capital can disrupt its operations
leading illiquidity. At the same time excessive working capital is also not desirable since it
adversely affects profitability.
Sushma Vishnani and Bhupesh Kr. Shah (2007) had taken an Empirical
Study on impact of Working Capital Management Policies on Corporate Performance by
examining coefficient of correlation and regression analysis between profitability ratios and
some key working capital policy indicator ratios of 23 Indian Consumer Electronics
companies during the period 199495 to 200405. They concluded that, no established
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relationship between liquidity and profitability exists forthe industry as a whole. The various
companies of the industry depicted different type of relationship between liquidity and
profitability, although majority of them revealed positive association between liquidity andprofitability. But working capital management policies and practices have profound impact
on a companys profit performance.
Recently (2008), a study on liquidity management of TISCO Ltd. had been taken
by Sudipta Ghosh. Data from 1996 to 2000-01 had been analyzed. He indicated that,
although the degree of association between liquidity and profitability of the company was
positive, the degree ofinfluence ofliquidity on its profitability was low and insignificant.
A research study was undertaken by Dr. Santanu Kumar Ghosh and Santi Gopal Majito
examine the efficiency of working capital management practices of 20 large cement
companies during 1992-93 to 2001-02. They had analyzed data following an alternative ratio
model developed by Prof. Hrishikesh Bhattacharya (1997). Here, I also followed same
technique to analyze and interpret data.
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CHAPTER III
3.RESEARCH METHODOLOGY
3.1.introductionabout research:
For the research to be effective and to get to derived and accurate result for the
research problem, the researcher has to list down various strategies to be followed and put
forth the research design.
The research methodology deals with various aspects of research, ittalks aboutthe
types of research to be used. The researcher plans how data can be collected either by
primary or secondary medium. He also plans for the data collection tools. The researcher
plans whattype of questionnaire to be followed and what ranking scales to be used.
The researcher decides about the sample frame (size), research boundary and the
various statisticaltools to be used in data analysis and interpretation
3.1.1. Definition of Research:
A Research, which includes findings, analysis, integration and conclusions relating
to a particular subject or matter, which will be used to take final decisions, is called as
Research.
Research is simply the process of finding solutions to a problem after thorough
study and analysis ofthe situational factors.
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3.2. Research focus:
The project study mainly focuses on the working capital requirements of Indian
Overseas Bank.
3.3. Researchdesign:
Research Design is purely and simply the framework (or) plan for a study that
guides the collection and analysis of data. The function of researcher is to ensure that the
required data is collected accurately and economically. Analytical research technique was
adopted in the project. Generally analytical studies are designed to analysis something and it
collects data for a definite purpose. In a research problem, the formidable task is that of
framing the Research Design. Research Design is defined as the arrangement of conditions
for the collection and analysis of data in a manner that aims to combine relevance to the
research purpose with economy in procedure.
To determine an appropriate method for a research problem, two points must be
taken into consideration. First the nature of the problem and second the extent or level ofexisting information.
3.3.1. A good researchdesignhas the following characteristics namely:
Problem definition Specific methods of data collections and analysis Time required for research project Estimate of expenses to be incurred.
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3.3.2. Exploratory research:
Research design followed in this study is exploratory study. Exploratory Research
is a preliminary study of an unfamiliar problem, about which the researcher has little or no
knowledge. Itis ill structured and much less focused on predetermined objectives.
3.4. Datacollectionmethod:
There are two types of collecting data (i.e.) Primary data and secondary data. This
research study includes collection of secondary data.
3.4.1. Primarydata:
As part of strengthening the study, personal contacts are made with the officials
and staff members of the finance department in the form of discussions and collection of
reports.
3.4.2. Secondarydata:
The data are collected from the annual reports, mainly balance sheet, income and
expenditure and other brochures ofthe company. The data forthe analysis are collected and
gathered from the printed reports like annual reports, official files, records and other available
related materials ofthe companies chosen forthis study
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4.5. Methods ofquantityanalysis:
Calculation of net working capital requirements. Ratio analysis Operating cycle & cash cycle Cash flow analysis Determining the Financing mix Statisticaltools like graphical presentation
4.5.1. Ratio Analysis:
Ratios are mathematical aids for appraisal and comparison of financial statements.
They are used to supplement Rupees amount inspection, to examine inter-item relationships
and to compare a specific company's performance againstits industry standard.
Ratio analysis is a process of comparison of one figure against another, which
make a ratio, and the appraisal ofthe ratios to make proper analysis aboutthe strengths and
weaknesses ofthe companys operations.
Ratio analysis is extremely helpfulin providing valuable insightinto a companys
financial picture.
4.5.1.1. Uses of Ratios:
The use of ratios reduces the influence of rupees size on analysis since these
comparisons are expressed as a percentage, fraction, decimal or rates of turnover. Only the
combinations that could be made ofthe items appearing in both schedules limitthe number of
ratios that can be developed from the balance sheet and income statement. The type of
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operation represented by the account and the nature of the risk has an important bearing on
what ratios are to be computed and studied.
Key Working Capital Ratios
The following, easily calculated, ratios are important measures of working capital
utilization.
Ratio Formulae Result Interpretation
Stock
Turnover
(in days)
Average Stock *
365/
Cost of Goods
Sold
= x days On an average, your stockturnover
Is in x days.
Obsolete stock, slow moving lines will
extend
Overall stockturnover days.
Receivables
Ratio
(in days)
Debtors * 365/
sales
= X days Ittakes your average x days to collect
receivables due to you. Effective debtor
management will minimize the days
Payables
Ratio
(in days)
Creditors * 365/
Cost of Sales (or
Purchases)
= X days On an average, you pay your suppliers
every x days. If you negotiate better credit
terms this willincrease. If you pay earlier,
say, to get a discountthis will decline.
Current ratio Total current
assets/
total current
liabilities
= X times Current Assets are assets that you can
readily turn in to cash or will do so within
12 months in the course of business.
Current Liabilities are amount you are due
to pay within the coming 12 months.
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Quick ratio (Total current
assets -
inventory)/total current
liabilities
= X times Similarto the Current Ratio buttakes
account ofthe factthatit may take time to
convertinventory into cash
Cash flow analysis
Cash flow analysis is the study of the cycle of your business' cash inflows and
outflows, with the purpose of maintaining an adequate cash flow for your business, and to
provide the basis for cash flow management. Cash flow analysis involves examining the
components of your business that affect cash flow, such as accounts receivable, inventory,
accounts payable, and credit terms. By performing a cash flow analysis on these separate
components, you'll be able to more easily identify cash flow problems and find ways to
improve your cash flow.
A quick and easy way to perform a cash flow analysis is to compare the total
unpaid purchases to the total sales due atthe end of each month. Ifthe total unpaid purchases
are greater than the total sales due, you'll need to spend more cash than you receive in the
next month, indicating a potential cash flow problem.
Operating cycle or Circulating cash format
Working Capital refers to that part of firms capital which is required for
financing short term or current assets such as cash, marketable securities, debtors and
inventories. Funds thus invested in current assets keep revolving fast and being constantly
converted into cash and these cash flows out again in exchange for other current assets.
Hence it is also known as revolving or circulating capital. The circular flow concept of
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working capital is based upon this operating or working capital cycle of a firm. The cycle
starts with the purchase of raw material and other resources. And ends with the realization of
cash from the sales of finished goods. It involves purchase of raw material and stores, itsconversion into stocks of finished goods through workin progress with progressive increment
oflabor and service cost, conversion of finished stocks into sales, debtors and receivables and
ultimately realization of cash and this cycle continuous again from cash to purchase of raw
materials and so on. The speed/time of duration required to complete one cycle determines
the requirements of working capital longer the period of cycle, larger is the requirement of
working capital.
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CHAPTER- IV
4. DATA ANALYSIS AND INTERPRETATION
4.1. Statement of Working capital
PARTICULARS MAR09(InCR.) MAR10(In Cr.)
A) Current Assets;
i) Inventories 3.66 5.20
ii) Sundry Debtors7.48 9.53
iii) Cash & Bank Balanc e1.88 0.86
iv) Fixed Deposit8.41 11.78
v) Loans & Advances26.69 41.95
Total Current Assets (A)49.55 69.32
B) CurrentLiabilities;
Current Liabilities (B)59.33 65.79
Working Capital (A-B)-9.78 3.53
Add: Provision 38.93 39.66
Networking Capital 29.15 43.19
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Note: - Fixed Deposit and loan and advances are assumed as short-term in nature
Interpratation
In 2009 and 2010 its working capital is positive, which intimates improvement
in operating eff
4.2.Current ratio;
The current assets of a firm ,as already stated ,representthose assets which can
be ,in the ordinary course of business, convertes into cash within a short period time oftime,
normally not exceeding one tear and include cash and bank balance marketable securities ,
inventory of raw materials, semi-finished and finished goods , debtors, net of provision for
bad and doubtful debts ,bills receivable and prepaid expanses.
The current liabilities defined as liabilities which are short-term maturity
obligations to be met , as originally contemplated with a year ,consist of trade creditors ,bills
payable ,bank credit , and provision for taxation , dividends payable and outstanding
expanses.
4.2.1.Rationale;
The current ratio of a firm measures its short-term solvency , that is , its
ability to meet short-term obligations as a measure of short-term current financial, liquidity; it
indicates the rupees of current assets (cash balance and its potential source of cash) available
for each rupee of current ratio , the larger is the amount of rupees available per rupee of
current liability, the more is the firms ability to meet current obligations and the greater is
the safety of funds of short-term creditors. Thus , current ratio ,in a way ,is a measure of
margin of safety to the creditors.
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Generally current ratio of 2:1 is considered forthe firm.
Current ratio = currentassets/currentliabilities
Particulars Mar09 Mar10
Current assets 49.55 69.32
Currentliabilities 59.33 65.79
Current ratio 0.83 1.05
Interpretation
Company has less current assets then current claims against them. In 2009-10
company current ratio is 1.05 which is not satisfactory . its short-term solvency is threatened.
4.3. Acid-test/Quickratio
The term quick assets refers to current assets which can be converted immediately
or at a short notice without diminution ofvalue. include in this category of current assets are
(1)cash and bank balance , (2)short-term marketable and (3) debtors / receivables. Thus, the
current assets which are excluded are prepaid expenses and inventory.
Liquid ratio = liquidassets / liquidliabilities
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Particulars Mar09 Mar10
Liquid assets 44.46 64.12
Liquid liabilities 59.33 65.79Liquid ratio 0.75 0.97
Interpretation
Generally quick ratio of 1:1 represents a satisfactory current financial condition.
But we have seen in table that not evens a single year it has achieves. Similarly year 2008-
2009 the company suffer from the same position. Itis increase by 0.97 in 2009-10.
Companys current financial condition is not satisfactory because liquid assets are less than
liabilities.
4.4. Debtors turnover ratio
It is determined by dividing the net credit sales by average debtors outstandingduring the year. The analysis of the debtors turnover ratio supplements the information
regarding the liquidity of one item of current assets of the firm . the ratio measures how
rapidly receivables are collected.
Debtors turnover ratio = netcredit sales / average debtors
Particulars Mar09 Mar10
Net credit sales 63.22 56.81
Average debtors 7.97 8.50
Debtors turnover ratio(times) 7.93 6.68
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Note ; its is assumed that 60% sales is on credit and 40% on cash.
Interpretation
We can say yearto yearthe shortertime between credit sells and collection
4.5. Creditors turnover ratio
Creditors turnover ratio = netcreditpurchase / average creditors
Particulars Mar09 Mar10
Net credit purchase 52.05 46.55
Average creditors 17.18 19.73
Creditors turnover
ratio(times per year)2.92 2.35
Interpretation
If creditors turnover ratio is high companys requirements of working capital will
increase and vice-a-versa.
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4.6. Creditors paymentperiod
Creditors paymentperiod = 360/creditors turnover ratio
Particulars Mar09 Mar10
Days in years 360 360
Creditors turnover ratio 2.92 2.35
Creditors payment period(in
days) 123 153
Interpretation
Company has to settle its payments within short span to time . in march 09
company makes payment after 153 days which is comparatively higherthan previous years ,it
means forthis year suppliers has given more credit period to the company. Longer payment
period shows the liberal credit terms granted by suppliers. It will reduce requirement of
current by relying on suppliers credit.
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CHAPTER-V
5.1.Finding and recommendation
Working capital financing in Indian Overseas Bankis done as perthe
recommendations proposed by different competent authorities. There is still scope for more
efficient working capital financing in the bank.
Recommendations after Scanning of working capital financing Indian
OverseaBank:
While assessing the project, the profit element should be considered with the riskelement collectively.
Financing of working capital should be avoided to a long loss making firm, eventhough regular customer.
Sometimes the clients business looks promising and realto his words then certainrelaxation should be provided as far as policies are considered.
Sectored analysis should be considered before providing the working capital financeto any firm, trends should be considered.
Statement of financialtransactions should be review at regularintervalto minimizelosses due to irregular payments and defaulters
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The recommendations were essentially based onthree principles:
A proper financial discipline has to be observed by the borrower. He should supply tothe bankerinformation regarding his operational plans wellin advance.
The main function ofthe banker as a lenderis to supplementthe borrowers resourcesto carry an acceptable level of current assets.
The bank should know the end-use of bank credit so thatitis used only forthepurposes for which itis made available.
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CHAPTER- VI
CONCLUSION
Any change in the working capital will have an effect on a business's cash
flows. A positive change in working capitalindicates thatthe business has paid out cash, for
example in purchasing or converting inventory, paying creditors etc. Hence, an increase in
working capital will have a negative effect on the business's cash holding. However, a
negative change in working capital indicates lower funds to pay off short term liabilities(currentliabilities), which may have bad repercussions to the future ofthe company
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ANNEXURES &BIBILOGRAPHY
BOOKS REFERRED
1.I. M. Pandey - Financialmanagement
vikas publishing House pvt. Ltd. - ninth edition 2006
2. M.Y. Khanand P.K. Jain, Financial management-
vikas Publishing house ltd., New Delhi.
3. K.V. Smith- Management of Working Capital-
Mc-Grow- Hill, New york
4. Satish Inamdar- Principles of Financial Management-
Everestpublishing house
Websites:
www.google.com