Working Capital

WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd

WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems arise in attempting to

manage the current assets, the current liabilities and the inter relationship that exist

between them. The term current assets refers to those assets which in ordinary course of

business can be, or, will be, turned in to cash within one year without undergoing a

diminution in value and without disrupting the operation of the firm. The major current

assets are cash, marketable securities, account receivable and inventory. Current liabilities

are those liabilities which intended at there inception to be paid in ordinary course of

business, within a year, out of the current assets or earnings of the concern. The basic

current liabilities are account payable, bill payable, bank over-draft, and outstanding

expenses. The goal of working capital management is to manage the firm’s current assets

and current liabilities in such way that the satisfactory level of working capital is

mentioned. The current assets should be large enough to cover its current liabilities in

order to ensure a reasonable margin of the safety.

Definition:-1. According to Guttmann & Dougall -

“Excess of current assets over current liabilities.”

2. According to Park & Gladson -

“The excess of current assets of a business (i.e. cash, accounts receivables, inventories)

over current items owned to employees and others (such as salaries & wages payable,

accounts payable, taxes owned to government)”.

THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 1


Working capital is regarded as the lifeblood of a business. It’s effective provision can do

much to ensure the success of a business while it’s inefficient management can lead not

only to loss of profits but also to the ultimate downfall of what otherwise might be

considered as a promising concern.

A study of working capital is of major importance to the internal and external analysis

because of its close relationship with the day-to-day operations of a business. As pointed

out by Ralph, Kennedy and Steward Mc Muller, the inadequacy or mismanagement of

working capital is the leading cause of business failures. Working capital is that portion

of the assets of a business that are used in or related to current operations, and is

represented at any time by the operating cycle of such items as against receivables,

inventories of raw materials, stores, work-in-progress, finished goods, merchandise, notes

or bills receivables and cash.

In accounting, Working capital is the difference between the inflow and outflow of funds.

In other words, it is the net cash inflow. It is defined as the excess of current assets over

current liabilities and provisions.

Net Current Assets = Current Assets – Current Liabilities

Working capital represents the total of all current assets. In other words, it is “gross

working capital”.



It is also known as circulating capital or current capital for current assets that are rotating

in nature. The use of term “circulating capital” instead of “working capital” indicates its

flow is circular in nature.

THEORETICAL BACKGROUND OF WORKING CAPITAL

MANAGEMENT

Funds are needed for short-term purposes for the purchase of raw materials, payment of

wages and other day-to-day expenses, etc. These funds are known as working capital.

Working capital represents the total of all current assets. In other words, it is “gross

working capital”. It is also known as circulating capital or current capital for current

assets that are rotating in nature. The use of term “circulating capital” instead of “working

capital” indicates its flow is circular in nature.

SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT

The working capital is important for several reasons. Like the current assets of a typical

manufacturing firm account for half of its total assets. For a distribution company, they

account even more. Executive levels of current assets can easily result in a firm realizing

the sub-standard return on investment. Working capital management affects the

company’s risk, return, and share price.

However, firms with too few current assets may incur shortages and difficulties in

maintaining smooth operations.



CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

Gross working capital: Simply called as working capital, refers to the investment in

current assets. Current assets are the assets, which can be converted into cash within an

accounting year (or operating cycle) and include cash, short-term securities, debtors, bills

receivables and stock (inventory).

Net working capital: Refers to the difference between current assets and current

liabilities. Current liabilities are those claims from outsiders, which are expected to

mature for payment within an accounting year and include creditors, bills payable and

outsider’s expenses.

PROFITABILITY AND RISK

Under laying the sound working capital management, lays two fundamental decision

issues for the firm. They are for the determination of:

1. The optimum level of investment in current asset.

2. The appropriate mix of short-term and long-term financing used to support this

investment in current assets.



In turn, these decisions are influenced by the trade-off that must be made between

profitability and risk. Lowering the level of investment in current assets, while still being

able to support sales, would lead to an increase in the firms’ return of total assets. To the

extent that the explicit costs of short-term financing, the greater the proportion of short-

term debt to total debt, the higher is the profitability of the firm.

The working capital is essentially the circulating capital has been admirably summed up

by Brown and Howard, who compare it with a river which is always there but, whose

water level is constantly changing. However some transactions are totally independent of

the circular process, for they have no line with operational flows. Borrowing from one

such source to repay the past loans from another source is one such transactions,

redeeming capital or debentures by a fresh issue of share is another. Working capital is

one segment of the capital structure of the business but constitutes an inter-woven part of

the total integrated business system. Therefore, neither is regarded as an independent

entity nor can the working capital decisions be taken in isolation.

“Float” is the amount of money required to get into business. This is the minimum

amount necessary for maintaining a going concern, which is in a position to serve its

customers. This amount of float in the form of cash, inventory and other current assets is

the minimum cushion needed to support the business. A business needs a working capital

over and above the float. The requirements of a business moreover, are governed by the

rate of its turnover, type of credit, the seasonality of its operations, break even point and

other general considerations.



Apart from these, the management strategies planned extent of growth due to vast

unexplored market etc also largely influence the requirement of working capital.

NEED FOR WORKING CAPITAL

The need for working capital gross or current assets cannot be over emphasized. As

already observed, the objective of financial decision making is to maximize the

shareholders wealth. To achieve this, it is necessary to generate sufficient profit. Earning

a steady amount of profit requires successful sales activities. There is a need for working

capital in the form of current assets to deal with the problem arising out of lack of

immediate realization of cash against goods sold. Therefore sufficient working 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 will be required for purchasing the raw

material may be available on credit basis. Then the company has to spend some amount

for labor and factory overhead to convert the raw material in work in progress, and

ultimately finished goods. These finished goods convert in to sales on credit basis in the

form of sundry debtors. Sundry debtors are converting into cash after expiry of credit

period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and

sundry debtors and day to day cash requirements. However some part of current assets

may be financed by the current liabilities also. The amount required to be invested in this

current assets is always higher than the funds available from current liabilities.

This is the precise reason why the needs for working capital arise.



Working capital is needed for the following purposes:

For the purchase of raw material, components and spares.

To pay wages.

To incur day-to-day expenses and overhead costs such as fuel, power and office

expenses, etc.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customers.

To maintain the inventories of raw material, work-in-progress, stores and spares

and finished stock.

OPERATING CYCLE

The duration of time required to complete the following cycle of events in case of a

manufacturing firm is called a operating cycle.

1. Conversion of cash into raw materials.

2. Conversion of raw material into work in progress.

3. Conversion of work in progress into finished goods.

4. Conversion of finished goods into debtors and bills receivable through sales.

5. Conversion of debtors and bills receivable into cash.

It can be expressed in the following way by using symbols:

O=R+W+F+D-C



Where, O = Time duration for operating cycle.

R = Raw materials and storage period.

W = Work in process period.

F = Finished goods storage period.

D = Debtors collection period.

C = Creditors period.

The components of operating cycle referred to above can be calculated as follows:

R= Average stock of raw materials and stores

Average raw materials and stores consumption per day

W= Average work in progress inventory

Average cost of production per day

F= Average finished goods inventory

Average costs of goods sold per day

D= Average book debts

Average credit sales per day

C= Average trade creditors

Average credit purchases per day



Since, the cash inflows and cash outflows do not match, the firm has to necessarily keep

Cash or invest in short-term marketable (liquid) securities so that they will be in a

position to meet the obligations when they become due. Similarly, the firms must have

adequate inventory to guard against the possibility of not being able to meet the demand

for their products. Adequate inventory, therefore, provides a cushion against being out of

stock. If firms have to be competitive, they must sell goods to their customers on credit,

which necessitates the holding of account receivables.

DEBTORS (RECEIVABLES)

CASH FINISHED GOODS

RAW MATERIALS WORK-IN-PROCESS

The firm begins with the purchase of Raw materials, which are paid for after a delay,

which represents the account payable period.

The firm converts the raw materials into finished goods and then sells the same. The time

lag between the purchase of raw materials and the sale of finished goods is the inventory

period. Customers pay their bills sometime after the sales. The period that elapses

between the date of sales and the date collection of receivables is the accounts payable

period (debt period).



TYPES OF WORKING CAPITAL

The operating cycle creates the need for current assets (working capital). However the

need does not come to an end after the cycle is completed to explain this continuing need

of current assets a destination should be drawn between permanent and temporary

working capital.

1) Permanent working capital

The need for current assets arises, as already observed, because of the cash cycle. To

carry on business certain minimum level of working capital is necessary on continues and

uninterrupted basis. For all practical purpose, this requirement will have to be met

permanent as with other fixed assets. This requirement refers to as permanent or fixed

working capital.

2) Temporary working capital

Any amount over and above the permanent level of working capital is temporary,

fluctuating or variable, working capital. This portion of the required working capital is

needed to meet fluctuation in demand consequent upon changes in production and sales

as result of seasonal changes.

3) Balance sheet working capital

The balance sheet working capital is one which is calculated from the items appearing in

the balance sheet.



Gross working capital, which is represented by the excess of current

Assets, and net working capital, which is represented by the excess of current assets over

Current liabilities, are examples of the Balance sheet working capital.

4) Cash working capital

Cash working capital is one which is calculated from the items appearing in the profit and

loss account. It shows the real flow of money or value at a particular time and is

considered to be the most realistic approach in working capital management. It is the

basis of the operating cycle concept which has assumed a great important in financial

management in recent years. The reason is that the cash working capital indicates the

adequacy of the cash flow, which is an essential prerequisite of a business.

5) Negative working capital

Negative working capital emerges when current liabilities exceed current assets. Such a

situation is not absolutely theoretical, and occurs when a firm is nearing a crisis of some

magnitude.

SOURCES OF WORKING CAPITAL

Sources of financing of working capital differ as per the classification of working capital

into long-term financing, short-term financing and spontaneous financing.



LONG-TERM FINANCING:

Loans from financial institutions.

Floating of debentures.

Accepting public deposits.

Issue of shares.

Raising funds by internal financing.

SHORT-TERM FINANCING:

Short-term financing refers to those sources of short-term credit that the firm must

arrange in advance. A few are as follows-

Short-term loans.

Commercial papers.

WORKING CAPITAL INVESTMENT POLICIES

Matching Approach:

When the firm follows the matching approach, the firm’s fixed assets or

permanent assets are financed with long-term funds and as the level of these assets

increases.

The temporary or variable current assets are financed with short-term funds and

as their level increases. Under, matching plan no short-term financing will be used

if the firm needs only current assets.



Conservative Approach:

A firm in practice may adopt a conservative approach in financing its current and

fixed assets. The financing policy of the firm is said to be conservative when it

depends more on the long-term funds for financing needs. Under the conservation

plan, the firm finances its permanent assets and also a part of temporary current

assets, the idle long-term funds can be invested in the tradable securities to

conserve liquidity.

Aggressive Approach:

An aggressive policy is said to be followed by the firm when it uses mere short-

term financing than warranted by the matching plan. In aggressive policies, the

firm finances a part for its permanent current assets with short-term financing.

Some extremely aggressive firms may even finance a part of their fixed assets

with short-term financing. The relatively more use of short-term financing making

the firm more risky.

Short-term v/s Long-term financing; a risk return trade-off

A firm should decide whether or not it should use short-term financing. If short-term

financing has to be used, the firm must determine its position in total financing. This

decision will be guided by the risk-return trade-off.

Short-term financing may be preferred over long-term financing for two reasons; cost

advantage and flexibility. Short-term financing is more risky than long-term financing.

Thus, there is a conflict between long-term and short-term financing.



Short-term financing is less expensive than long-term financing, but at the same time

short-term financing involves greater risks than long-term financing. The choice between

long-term and short-term financing involves trade-off between risk and return.

IMPORTANCE OF WORKING CAPITAL MANAGEMENT:

Adequate working capital helps in maintaining solvency of the business by

providing uninterrupted flow of production.

Sufficient working capital enables a business concern to make prompt payments

and hence helps in creating and maintaining goodwill.

Sufficient working capital ensures regular supply of raw materials and continuous

production.

A company which has ample working capital can make regular payment of

salaries, wages and other day-to-day commitments which raises the morale of its

employees, increases their efficiency, reduces wastages and costs and enhances

production and profits.

Only concerns with adequate working capital can exploit favorable market

conditions such as purchasing its requirements in bulk when the prices are lower

and by holding its inventories for higher prices.

Adequate working capital enables a concern to face business crisis in emergencies

such as depression because during such periods, generally, there is much pressure

on working capital.



ADEQUACY OF WORKING CAPITAL

The firm should maintain a sound working capital position. It should have adequate

working capital to run its business operations. Both excessive as well as inadequate

working capital positions are dangerous from the firm’s point of view.

DANGERS OF EXCESSIVE WORKING CAPITAL

It results in unnecessary accumulation of inventories. Thus, the chances of

inventory mishandling, waste, theft and losses increase.

It is an indication of defective credit policy and slack collection period.

Consequently, higher incidence of bad debts adversely affects profits.

Excessive working capital makes management complacent, which degenerates

into managerial efficiency.

Tendencies of accumulating inventories to make speculative profits grow. This

way tends to make the dividend policy liberal and difficult to cope in future when

the firm is unable to make speculative profits.

Excessive working capital means idle funds which earn no profits for the business

and hence the business cannot earn a proper rate of return on its investments.



DANGERS OF INADEQUATE WORKING CAPITAL

A concern which has inadequate working capital cannot pay its short-term

liabilities in time. Thus, it will lose its reputation and shall not be able to get good

credit facilities.

It becomes difficult for the firm to exploit favorable market conditions and

undertake profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and it creates

inefficiencies, increases costs and reduces the profits of the business.

It becomes impossible to utilize efficiently the fixed assets due to non-availability

of liquid funds.

The rate of return on investments also falls with the shortage of working capital.

DETERMINANTS OF THE LEVEL OF WORKING CAPITAL

1. Nature of business:

The working capital requirement of the firm is closely related to the nature of its

business. The composition of current assets is a function of the size of the

business and the industry to which it belongs. Small companies have small

proportion of cash, receivables and inventory than large corporations.



For example: a service firm like an electricity undertaking or a transport corporations,

which has a short operating cycle which sells predominantly on cash basis, has a modest

working capital requirement on the other hand a manufacturing concern like a machine

tools unit, which has a long operating cycle and which fills largely on credit, has a very

subsequent working capital requirement.

2. Seasonality of the operations:

Firms, which have marked seasonality in their operations usually, have high

working capital requirements. During the periods of peak demand, increasing

production may be expensive for the firm.

Similarly, it will be more expensive during slack periods when the firm has to

sustain its working force and physical facilities without adequate production and

sales. A firm may, thus, follow a policy of steady production, irrespective of

seasonal changes, in order to utilize its resources to the fullest extent.

3. Production policy:

A firm marked by seasonal fluctuations in its sales may pursue a production

policy, which may reduce the sharp variations in working capital requirements.

For example: A manufacturer of fans may maintain a steady production

throughout the year rather than intensify the production activity in the peak

business season. Such a production policy may dampen the fluctuations in the

working capital requirements.



4. Price-level changes:

The increasing shifts in the price level make the functions of financial manager

difficult. They should anticipate the effect of price level changes on working

capital requirements of the firm. Generally, rising price levels will require a firm

to maintain a higher amount of working capital. The firms will feel the effect of

increasing the general price level differently.

5. Profit-margin:

Firms differ in their capacity to generate profit from business operations. Some

firms enjoy a dominant position due to quality product or good marketing

management or monopoly power in the market and earn a high profit margin.

Some other firms may have to operate in an environment of intense competition

and may earn low margin of profits of the high net profit margin contributes

towards the working capital pool. In fact, the net profit is a source of working

capital to the extent it has been earned in cash.

6. Credit policy:

The credit policy of the firm affects the working capital by influencing the levels

of book debts. The credit terms granted to the customers may depend upon the

norms of the industry the firm may belong. But the firm has the flexibility of

shaping its credit policy within the constraint of industry norms and practices. The

credit policy influences the requirement of the working capital in two ways.

Firstly, credit terms granted to the customers by the firm. And, secondly, credit

term available to the firm from its customers.



The firm should be discretionary in granting credit terms to its customers.

Depending upon the individual case, different terms may be given to different

customers. A liberal policy without rating the credit worthiness of customers will

be detrimental to the firm and will create problems to the firm later on. The firm

should be prompt in making collections. A high collection period will mean tie-up

of funds in the book debts.

7. Availability of credit:

The working capital requirements of the firm are also affected by credit terms

granted by its creditors. For a firm with less working capital, liberal credit terms

are available to it. Similar availability of credit from banks also influences the

working capital needs of a firm. A firm, which can get bank credit easily on

favorable conditions, will operate with less working capital than a firm without

such a facility.

CURRENT ASSETS:

1. Cash and bank balances.

2. Investment (marketable) securities, government and other trust securities (other

than long-term purpose, eg: fund, gratuity fund, etc.)

3. Fixed deposits with banks (maturing within one year).

4. Receivables arising out of sales other than deferred receivables (including bills

purchased and discounted by bankers).

5. Installments of deferred receivables due within one year.



6. Raw material and components used in the process of manufacturing including

those in transit.

7. Stock-in-progress including semi-finished goods.

8. Finished goods including those in transit.

9. Other consumable stores.

10. Advance payment for tax.

11. Prepaid expenses.

12. Advance for purchase of raw materials, components and consumable stores.

13. Deposit kept with public bodies, etc. for normal business operation.

14. Money receivable from contracted sale of fixed assets during the next twelve

months.

CURRENT LIABILITIES:

1. Short-term borrowings (including bills purchased and discounted) from banks and

others.

2. Unsecured loans maturing within one year.

3. Public deposits maturing during one year.

4. Sundry creditors (trade) for raw materials and consumable stores and spares.

5. Interest and other charges due for payment.

6. Advance payments from customers.

7. Deposits from dealers, selling agents, etc.



8. Installments on term loans, deferred payment credits, debentures, and long-term

deposits payable within a year.

9. Statutory liabilities:

Provident fund dues.

Provision for taxation.

Sales tax, excise duty, etc.

Statutory obligations towards workers.

Miscellaneous Current Liabilities:

1. Dividends.

2. Liabilities for expenses.

3. Gratuity payable within one year.

4. Any other payment due within twelve months.

WORKING CAPITAL STRATERGY

The quantum of working capital requirement is directly dependent on the policy of

the company regarding the level of current assets, as to how much stock of

inventories of raw materials and finished goods may be considered to be

sufficiently and reasonably safe, so as to fairly avoid the possible risk of stock

outs (in the case of raw materials) and losses of business (in the case of finished

goods) and the resultant losses. Based upon these criteria, the working capital

policy may broadly be divided into three categories which is,

1. Conservative or liberal or flexible policy



The company may prefer to have somewhat heavy cash balance and bank balance

in current account and investments in readily marketable securities, as also higher

stocks of raw materials and finished goods with a view to almost eliminating the

risk of stock outs and losers of sales. Such companies may also prefer to have a

rather liberal credit policy resulting in a substantial amount of funds locked up in

sundry debtors. All this investments in the various components of current assets

will naturally require correspondingly higher levels of current liabilities and the

working capital requirements.

2. Aggressive or strict or restrictive policy

The level of current asset and accordingly the working capital requirement, will,

of course, be of a much lower order in case of company adopts an aggressive or

restrictive working capital policy. But again, too much of restrictive working

capital policy may as well result in a disproportionately heavier loss by way of

stock – out risk and the consequential losses of production and lowering of the

profitability of the company.

3. Moderate or middle-of-the road policy

In the case of adoption of a moderate policy, the requirement of working capital

will be moderate, too, that is, neither too high nor too low but just right.

BANK FINANCE FOR WORKING CAPITAL



Banks are main institutional source of working capital finance in India. After trade credit,

bank credit is the most important source of financing working capital in India. A bank

considers a firm’s sales and production plane and desirable levels of current assets in

determining its working capital requirements. The amount approved by bank for the

firm’s working capital is called credit limit. Credit limit is the maximum funds which a

firm can obtain from the banking system. In practice banks do not lend 100% credit limit;

they deduct margin money.

Forms of bank finance:

1. Term Loan

2. Overdraft

3. Cash credit

4. Purchase or discounting of bills

1) Term Loan

In this case, the entire amount of assistance is disbursed at one time only, either in cash or

to the company’s account. The loan may be repaid in installments along with interest

charged on outstanding balance.

2) Overdraft

In this case, the company is allowed to withdraw in excess of the balance standing in its

Bank account. However, a fixed limit is stipulated by the Bank beyond which the

company will not able to overdraw the account. Legally, overdraft is a demand assistance

given by the bank i.e. bank can ask repayment at any point of time.

3) Cash credit



In practice, the operations in cash credit facility are similar to those of overdraft facility

except the fact that the company need not have a formal current account. Here also a fixed

limit is stipulated beyond which the company is not able to withdraw the amount.

4) Bills purchased / discounted

This form of assistance is comparatively of recent origin. This facility enables the

company to get the immediate payment against the credit bills / invoice raised by the

company. The banks hold the bills as a security till the payment is made by the customer.

The entire amount of bill is not paid to the company. The company gets only the present

worth of amount of bill form of discount charges. On maturity, bank collects the full

amount of bill from the customer.



RESEARCH DESIGN

INTRODUCTION

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

understood as a science of studying how research is done systematically. In that various

steps, those are generally adopted by a researcher in studying his problem along with the

logic behind them. It is important for researcher to know not only the research method but

also know methodology. ”The procedures by which researcher do about their work of

describing, explaining and predicting phenomenon are called methodology.” Methods

comprise the procedures used for generating, collecting and evaluating data. All this

means that it is necessary for the researcher to design his methodology for his problem as

the same may differ from problem to problem. Data collection is important step in any

project and success of any project will be largely depend upon how much accurate you

will be able to collect and how much time, money and effort will be required to collect

that necessary data, this is also important step. Data collection plays an important role in

research work. Without proper data available for analysis you cannot do the research

work accurately.



TITLE OF THE STUDY:

“Working Capital Management at PROSEAL CLOSURES LIMITED”.

STATEMENT OF THE PROBLEM:

Working Capital Management being an integral part of the overall corporate management

throws open challenges and an opportunity to study the Working Capital Management as

an individual unit. This study is an attempt in this direction.

The company is facing the following problems related to the Working Capital

Management:

The investment in Current Assets is increasing.

The receivables are not under manageable limits.

The need for external borrowings to support working capital.

This study was conducted at PROSEAL CLOSURES PVT. LTD., Bangalore. This study

will cover the financial analysis of debtors and inventories’ behavior. Other Current

Assets and Current Liabilities are also analyzed. An attempt has been made to interpret,

understand, analyze, and evaluate the requirements of working capital of PROSEAL

CLOSURES PVT LTD.



OBJECTIVES OF THE STUDY:

Study of the working capital management is important because unless the working

capital is managed effectively, monitored efficiently, planned properly and

reviewed periodically at regular intervals to remove bottlenecks if any the

company cannot earn profits and increase its turnover. With this primary objective

of the study, the following further objectives are framed for a depth analysis.

To have a brief account of operations of Proseal Closures Pvt. Ltd.

To calculate the profitability of the organization.

To interpret financial statements.

To calculate the liquidity position of the organization.

To study different components of current assets, the extents of the funds tied up

in each, the reason for high volume of debtors, inventories, etc. and suggest

possible solutions.

SCOPE OF THE STUDY

A study of Working Capital is of major importance to the internal and external analysis

because of its close relationship with the day-to-day operations of a business. The

business firms aim at maximizing the wealth of the shareholders, for this the firm should

earn sufficient returns from its operations.



Earning a steady amount of profit requires a successful sales activity. Current assets are

needed for the functioning of business operations.

COLLECTION OF DATA:

PRIMARY DATA:

The data was collected from discussions with the executives and the finance

manager. Primary data are that, which are collected freshly and for first and thus happens

to be original in character.

The methods of primary data collection are:

Observation method.

Personal interview.

SECONDARY DATA:

The data which have been collected from some one else and which have already

been passed through statistical process.

The secondary data sources are:

Record of the company.

Annual reports.

News papers and text books.

Internet.



ANALYSIS OF DATA:

The data was analyzed using the following tools and techniques of financial analysis:

Common size statement.

Trend analysis

Ratio analysis.

RESEARCH METHODOLOGY:

This being an analytical study, data for the study was collected by the concerned official

of the company books, annual reports and journal etc.

LIMITATION OF THE STUDY:

Time restriction.

The information, which was needed could not be made public by the organization.

The findings were substantially based on information given by the annual reports

of the company.

Only those concepts that have a direct bearing on working capital management of

company’s financial position were studied and covered. Those concepts that have

an indirect bearing on the company’s financial plan are not covered in the study.

Due to strict policies and guidelines of the company on certain matters like

optimum inventory, optimum investment in current assets etc cannot be disclosed

in this report.

COMPANY PROFILE:



PROSEAL CLOSURES PRIVATE LIMITED was founded by

Mr.K.Prabodhchandra Bhat in the year 1989 with a mission to provide a Quality

Closures System for the Steel Drum Industry. From a humble beginning, the Company

made a global presence by establishing customer base in U.S.A, Middle East, Far East

and African countries.

In the year 2001 the Company became a subsidiary of M/s. Greif U.S.A, which acquired

a majority stake through its joint venture M/s. Balmer Lawrie- Van Leer Ltd., India.

Located in the garden city of India, Bangalore, also recognized globally as one of the

highly industrialized cities, PROSEAL provides a conducive environment for turning out

excellence in the form of drum closures. Founded on sound objectives of customer

satisfaction, through providing quality products, at competitive prices, prompt delivery

and efficient after sales service, PROSEAL has now won the hearts of many a barrel

manufacturer.

Global acceptance of barrel closures and accessories has led to regular exports to USA,

UK, Canada, and Australia, Far-East, Middle East and a host of other countries. Growth

of PROSEAL is attributed to its ability to meet the changing and challenging needs of

barrel industry and the ever growing list of patrons.



BOARD OF DIRECTORS:

D.S.van Griethuysen (chairman)

P.C.Bhat (Managing Director)

S.K.Mukherjee

P.B.Anandrao

Suchitra Bhat

Prakash Prabhu

CUSTOMER BASE:

The Company has a substantial market share in India for its products - Drum Closures,

Flanges, Plugs and Cap seals. The Customers include Steel Drum Manufacturers, Oil

Companies and Chemical Companies. The Company also services the requirements of

Steel Drum manufacturers in U.S.A, Canada, Middle East, Africa, Australia and Far

Eastern Countries. It has a Warehousing facility in the U.S to ensure delivery at the right

time.


Board of directors

Managing director

Head of marketing

Head of planning, purchase

Head of accounts

General Manager (works)

General Manager

(operations

Assistant marketing

Officer purchaser

Assistant manager dispatch

Assistant technicians

Office assistant

Accounts manager

System analyst

Accounts assistant


ORGANISATIONAL CHART

GOAL, MISSION, VISION AND VALUES:



GOAL:

To enter new millennium and scale new heights. To get recognized as one of the best and

leading closures manufacturing company worldwide by providing high quality closures to

its customers.

MISSION:

To provide products and services of exceptional values.

To assume leadership in business through proactive customer services.

To perform behind customer exception.

To create long-term relationship.

To achieve excellence in business through continual improvement.

VISION:

We shall endeavor to understand our Customers fully to provide total customer

satisfaction.

We shall continuously add value to our customer relationship by providing

competitive products innovative solutions in closure systems.

All our commitments, actions and products must be recognized as the expression

of quality.

Creating atmosphere for employees to excel.

Superior return on assets.

Values:



Conduct business activities honestly and ethically.

Provides safe and clean environment.

Develop dedicated individuals by supporting and encouraging personal and

professional growth.

Accomplish targets through team work, training and dedication.

Recognize talents in people and utilize their idea to create solutions.

POLICIES USED:

Quality policy:

“To be a premier organization in the manufacture of drum closures, levers and

latches by incorporating contemporary technologies and is committed to meet quality

deliveries at competitive prices.”

Environmental policy:

Optimizing resource consumption.

Reducing waste generation.

Comply with environmental statutory and regulatory requirements.

Material policy:



Adhering to the quality products delivery schedules in right quantities at right

time.

Maintaining optimum inventories.

Working continually for development of new materials to add value to customer.

CERTIFICATION AND MERITS:

ISO 9002 accreditation by TUV Rhineland, Germany.

License of Bureau of Indian Standards.

Certified by various International certifying agencies.

Acclaimed as the quality products supplier among leading drum/barrel

manufacturers & oil refineries.

Export Excellency award from:



Engineering Export Promotion Council (EEPC):- Southern Region.

Federation of Karnataka Chambers Commerce – Industries (FKCCI).

Visvesvaraya Industrial Trade Center (VITC)



PRODUCT FOCUSED:

2" Zinc Plated Flange

Plating - Zinc Plated, White, Yellow & Tin coated.

Washers - Black Nitrile(Buna), EPDM, Polyethylene, Polyirridiated & Viton

2" Zinc Plated Plug





3/4” Zinc Plated Flange



3/4” Zinc Plated Plug





2” & 3/4 Metal Capseal Neutral

Plain White or Red

CLIENTS:

DOMESTIC:

1. Asian barrels P Ltd, Hyderabad

2. Baba containers Mfrs, Hyderabad

3. Balmer lawrie & co. Ltd, Mumbai

4. Beta industries Ltd, Chennai

5. Bijaya drums P Ltd, Kolkata

6. Bostik India P Ltd, Bangalore

7. Chandra containers Mfrs, Hyderabad

8. Chennai drums, Chennai

9. Dharamshi metals P Ltd, Bangalore

10. Gopal metal containers P Ltd, Chennai

11. IOC Ltd, Chennai

12. Industrial engg corp, Cochin

13. KB engg co, Hyderabad

14. Lintas packaging P Ltd. Kolkata

15. Metal Pdts & engg co, Howrah

16. Nataraj drums industries P Ltd, Rajasthan

17. Neha drums and barrels P Ltd, Bangalore

18. Pearson drums & barrels P Ltd, Kolkata

19. Radhey shyam vaish, kannauj

20. Royal Industries, Chennai



21. Santhi industries, Chennai

22. Sera containers P Ltd, Kolkata

23. Shri metal containers, New Delhi

24. Sivasakthi engg co, Bangalore

25. Standard drum & bucket factory, Mumbai

26. Tech steel Pdts Ltd, Bangalore

27. Time Mauser industries P Ltd, Raigad

28. Yashraj containers Ltd, Daman

INTERNATIONAL:

1. American flange & Mfg Co Inc, USA

2. Cosmetic pack LLC, Malaysia

3. D.C.closures Pty Ltd, Australia

4. Dur chyi industries co Ltd, Taiwan

5. Fujairah steel barrels & drums, UAE

6. SPA grief algerie, Algeria

7. Grief Saudi Arabia co Ltd, S.arabia

8. Grief south Africa Pty Ltd, S.Africa

9. Homs refinery company, Syria

10. Izvar ambalaj sanvayi ve ticaret A S, turkey

11. Metro Intl LLC, UAE

12. Rubel steel mills Ltd, Bangladesh

13. Salem Faraj S Bin Mahfooz EST, SA

14. Shekat boshke sazi foolad sakafcgegan, Iran

15. Tema lube oil co Ltd, Ghana



16. Tri sure closures Australia Pty Ltd, Australia

17. Grief Nederland B.V, Nederland

WORKING CAPITAL LEVEL:

The consideration of the level of investment in current assets should avoid two danger

points excessive and inadequate investment in current assets. Investment in current assets

should be just adequate, not more or less, to the need of the business firms. Excessive

investment in current assets should be avoided because it impairs the firm’s profitability,

as idle investment earns nothing. On the other hand inadequate amount of working capital

can be threatened solvency of the firms because of its inability to meet its current

obligation. It should be realized that the working capital need of the firms may be

fluctuating with changing business activity. This may cause excess or shortage of

working capital frequently.

WORKING CAPITAL TREND ANALYSIS:

In the words of S.P. Gupta “The term trend is very commonly used in day-today

conversion trend, also called secular or long term need is the basic tendency of

population, sales, income, current assets, and current liabilities to grow or decline over a

period of time”

According to R.C.galeziem “The trend is defined as smooth irreversible movement in

the series. It can be increasing or decreasing.”

The financial statements may be analyzed by computing trends of series of information.



This method determines the direction upwards or downwards and involves the

computation of the percentage relationship that each statement item bears to the same

item on the base year.

The information for a number of years is taken up and one year, generally the first year, is

taken as a base year. The figures of the base year are taken as 100 and trend ratios for

other years are calculated on the basis of base year. The analyst is able to see the trend of

figures, whether upward or downward.

Table 1: Table showing the trend analysis of the Working Capital of PROSEAL Ltd., for

the four years.

Trend Analysis of the Working Capital of PROSEAL ltd.

Particulars Amount Trend Percentages

2007 2008 2009 2010 2007 2008 2009 2010

Current Assets

Inventories 65669362 63846594 88310664 91042203 100 97.2 134.5 138.6

Sundry Debtors 28043822 24370416 25890546 44923035 100 86.9 92.3 160.2

Cash and Bank balances 3014705 3946627 10375816 8930476 100 130.9 344.2 296.2

Loans and Advances 21497656 21625545 26690417 38439726 100 100.6 124.1 178.8

Total Current Assets 118225545 11378918215126744

3 183335440 100 96.2 127.9 155.1

Current Liabilities and Provisions

Current Liabilities 47843821 59005489 70239991 72845717 100 123.3 146.8 152.2

Provisions 15701095 15927575 23906743 36244115 100 101.4 152.3 230.8

Total Current Liabilities 63544916 74933064 94146734 109089832 100 117.9 148.2 171.7



and Provision

Net Working Capital 54680629 38856118 57120709 74245608 100 71.1 104.5 135.8

Table 2: Table showing working capital size of PROSEAL CLOSURE Ltd over the last

four years.

Years 31/03/2007 31/03/2008 31/03/2009 31/03/2010

Net working capital 54680629 38856118 57120709 74245608

Working capital indices 100% 71.1% 104.5% 135.8%

GRAPH-1



INTERPRETATION:

Current Assets

The inventories have reduced to 97.2% in the year 2008 and has increased by

34.5% in the year 2009 and 38.6% in the year 2010, taking 2007 as the base year.

This suggests that there has been an increase in the demand for the company’s

products in the year 2009 and 2010, which has led to an increase in the production

and thus there is an increase in the inventories.

Debtors has decreased to 86.9% in the year 2008and 92.3% in the year 2009, but

since there is an increase in the demand for the products manufactured by the

company, there is an increase in the sales of the company resulting in an increase

in Sundry Debtors of 60.2% in the year 2010.

Cash and bank balances have increased by 30.9% in the year 2008 and there has

been a drastic increase by 244.2% and 196.2% in the year 2009 and 2010

respectively, taking 2007 as the base year. This is mainly due to the increase in

production on one hand and an increase in cash sales on the other.


0

20000000

40000000

60000000

80000000

100000000

Chart showing the movement of Inventories and Sundry Debtors

Inventories

Sundry Debtors

Inventories 65669362 63846594 88310664 91042203

Sundry Debtors 28043822 24370416 25890546 44923035

2007 2008 2009 2010


Loans and advances have increased by 0.6% in the year 2008. But it has

tremendously increased by 24.1% and 78.8% in the year 2009 and 2010

respectively.

As a result of an increase in most of the components of Current Assets, the total

current assets have increased by 27.9% and 55.1% in the years 2009 and 2010

respectively. But there has a decrease in the total current assets to 96.2% in the

year 2007.

GRAPH-2


0

10000000

20000000

30000000

40000000

Chart showing the movement of Cash and Bank balances & Loans and Advances

Cash and Bank balances

Loans and Advances

Cash and Bank

balances

3014705 3946627 10375816 8930476

Loans and Advances 21497656 21625545 26690417 38439726

2007 2008 2009 2010


GRAPH-3

Composition of current assets:

Analysis of current assets components enable one to examine in which components the

working capital fund has locked. A large tie up of funds in inventories affects the

profitability of the business or the major portion of current assets is made up cash alone,

the profitability will be decreased because cash is non earning assets.



Table 3- Table showing composition of current assets of proseal ltd

(No. in %)

Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010

Inventories 55.55 56.11 58.38 49.66

Sundry debtors 23.72 21.42 17.12 24.50

Cash and bank balances 2.55 3.47 6.86 4.87

Loans and Advances 18.18 19.00 17.64 20.97

Total Current Assets 100 100 100 100



Current assets components in %

GRAPH-4

INTERPRETATIONS:

The excess of current assets is showing positive liquidity position of the firm but it is not

always good because excess current assets then required, it may adversely affects on

profitability. Current assets include some funds investments for which company pay

interest. It is clearly observed that an inventory has increased gradually by the year 2009.

But it has declined in the year 2010. Though there is not much increase in % of cash and

bank balance, there is a study growth. Loans and advances have decreased by the year

2010 and forms 20.97% of the total current assets. Sundry debtors’ shows improve mental

growth in 2010 and forms 24.5 % of the total current assets. Current assets components

show sundry debtors are the major part in current assets it indicates that the inefficient



collection management. Over investment in the debtor affects liquidity of firm for that

company has raised funds from other sources like short term loan which incurred the

interest.

Current Liabilities:

The increase in the Current Liabilities of the years 2008, 2009 and 2010 can be

attributed to an increase in production by the company to meet its increasing

demand. The current liabilities have increased by 23.3%, 46.8% and 52.2% in the

years 2008, 2009 and 2010 respectively, taking the year 2007 as the base.

Provisions have witnessed a drastic rise from 101.4% in the year 2008 to 152.3%

and 230.8% in the years 2009 and 2010 respectively.

Due to the mammoth increase in the provisions over the years, the total Current

Liabilities have increased.

COMMON SIZE STATEMENTS:

The common size statements, namely balance sheets and income statement are shown in

analytical percentages. The individual figures are shown as percentages of total assets and

total liabilities for a common size balance sheet. Similarly, the individual figures from the

profit and loss account are shown as percentages of total sales, for example, the total



assets are taken as 100 and different assets are expressed as a percentage of the total.

These statements are also known as Component Percentages or 100 Percent Statements

because every individual item is stated as a percentage of the total 100.

It must be noted here that for the purpose of the project report i.e., to study the working

capital, common size statement is one of the tools used. For this sole purpose the total

current assets and current liabilities are taken as a 100, and the different components of

the current assets and current liabilities are shown as percentages of the total.

Table 4: Table showing common size statement of Current Assets and Current Liabilities

of PROSEAL Ltd. over the last four years.

Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010 Amount % Amount % Amount % Amount %Current Assets Inventories 65669362 55.55 63846594 56.11 88310664 58.38 91042203 49.66Sundry debtors 28043822 23.72 24370416 21.42 25890546 17.12 44923035 24.50Cash and bank balances 3014705 2.55 3946627 3.47 10375816 6.86 8930476 4.87

Loans and Advances 21497656 18.18 21625545 19.00 26690417 17.64 38439726 20.97 Total Current Assets 118225545 100 113789182 100 151267443 100 183335440 100.00



Current Liabilities and Provisions Current Liabilities 47843821 75.29 59005489 78.74 70239991 74.61 72845717 66.78Provisions 15701095 24.71 15927575 21.26 23906743 25.39 36244115 33.22 Total Current Liabilities 63544916 100.00 74933064 100.00 94146734 100.00 109089832 100.00

INTERPRETATION:

Table 5: Table showing the Working Capital Position of PROSEAL Ltd. over the last

four years.

Particulars 31/03/200731/03/200

8 31/03/2009 31/03/2010

Current Assets 118225545 113789182 151267443 183335440

Current Liabilities 63544916 74933064 94146734 109089832Net Working Capital 54680629 38856118 57120709 74245608


0

50000000

100000000

150000000

200000000

2007 2008 2009 2010

Chart showing the movement of Current Assets and Current Liabilities

Current Assets

Current Liabilities

Current Assets 118225545 113789182 151267443 183335440

Current Liabilities 63544916 74933064 94146734 109089832

31/03/2005 31/03/2006 31/03/2007 31/03/2008


The Working Capital has decreased in the year 2008, but increased considerably in the

other three years. Though the investment in working capital has not been adequate in the

year 2008, it has increased immensely in the following two years. Working capital must

be effectively utilized for the overall profitability of the firm. The firm should maintain a

sound working capital position. It should have adequate working capital to run its

business operations. Both excessive as well as inadequate working capital is dangerous

from the firm’s point of view.



GRAPH-5

Net Working Capital:

An increase in the Total Current Assets and a decrease in the Total Current

Liabilities have resulted in an increase in the Net Working Capital in the years

2009 and 2010.

The Net Working Capital has decreased to 71.1% in the year 2008. It has

increased by 4.5% and 35.8% in the years 2009 and 2010 respectively.


010000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

2007 2008 2009 2010

Chart showing the Net Working Capital

Net Working Capital


GRAPH-6

Liquidity Position:

A major portion of the current assets is formed by inventories and sundry debtors. Cash

and other marketable securities form a very minimal portion of the total current assets.

Thus, though the company has a lot of investment in current assets, the amount of cash

that can be realized at a moment’s notice is very less and it would serve the firm better to

improve its cash reserves so that creditors and other debts can be paid off at any time and

the dependability on debtors reduces marginally.

CHANGES IN WORKING CAPITAL



There are so many reasons to changes in working capital as follow:

1. Changes in sales and operating expenses:-

The changes in sales and operating expenses may be due to three reasons

There may be long run trend of change e.g. The price of raw materials may

constantly raise which is necessity for holding of large inventory.

Cyclical changes in economy dealing to ups and downs in business activity will

influence the level of working capital both permanent and temporary.

Changes in seasonality in sales activities

2. Policy changes:-

The second major case of changes in the level of working capital is because of policy

changes initiated by management. The term current assets policy may be defined as the

relationship between current assets and sales volume.

3. Technology changes:-

The third major point in changes in working capital is changes in technology because

changes in technology to install that technology in our business more working capital is

required. A change in operating expenses rise or full will have similar effects on the

levels of working following working capital statement is prepared on the base of balance

sheet of last two year.



Table 6: Table showing changes in working capital of PROSEAL Ltd. over the last four

years.

Particulars 31/03/2009 31/03/2010Changes in working capitalIncrease Decrease

A) Current assets

Inventories 88310664 91042203 2731539

Sundry Debtors 25890546 44923035 19032489

Cash & Bank Balance 10375816 8930476 1445340

Loan & Advances 26690417 38439726 11749309

Total of A 151267443 183335440

B) Current liabilities

Current liabilities 70239991 72845717 2605726

Provisions 23906743 36244115 12337372

Total of B 94146734 109089832

W.C.(Total A- Total B) 57120709 74245608Net Increase in WorkingCapital 17124899 17124899

Total 74245608 74245608 33513337 33513337

INTERPRETATION:

Working capital has increased in the year 2009 to 2010 because,

As a result of an increase in most of the components of Current Assets, the total

current assets have increased by 27.9% and 55.1% in the years 2009 and 2010

respectively.



An increase in the Total Current Assets and a decrease in the Total Current

Liabilities have resulted in an increase in the Net Working Capital in the years

2009 and 2010.

The Net Working Capital has decreased to 71.1% in the year 2008. But it has

increased by 4.5% and 35.8% in the years 2009 and 2010 respectively.

OPERATING CYCLE:

The need of working capital arrived because of time gap between productions of goods

and their actual realization after sale. This time gap is called “Operating Cycle” or

“Working Capital Cycle”. The operating cycle of a company consist of time period

between procurement of inventory and the collection of cash from receivables. The

operating cycle is the length of time between the company’s outlay on raw materials,

wages and other expanses and inflow of cash from sales of goods.

Calculation of operating cycle

To calculate the operating cycle of PROSEAL Ltd for the last four years data. Operating

cycle of the PROSEAL Ltd. vary year to year as changes in policy of management about

credit policy and operating control.

Table 7: Table showing operating cycle of PROSEAL Ltd. over the last four years.



(No. of Days)

Years 31/03/2007 31/03/2008 31/03/2009 31/03/2010

ADD

Raw materials holding period.

66 58 54 58

W-I-P period 4 3 2 1

Finished goods holding period

58 47 39 36

Receivable collection period

133 116 107 109

GROSS OPERATING

CYCLE

261 224 202 204

LESS

Creditors payment period

178 122 130 130

NET OPERATING CYCLE

83 102 72 74

(No. of Days)



GRAPH-7

COMPONENTS OF OPERATING CYCLE

GRAPH-8



INTERPRETATION:

Operating cycle of PROSEAL Ltd, shows the numbers of day are decreasing in recent

Years and it is reflecting the efficiency of management. Days of operating cycle shows

period of lack of funds in current assets, if number of days are more than it increases the

cost of funds as taken from outside of the business. In 2008, shows the high no. of days

because of reduced of creditors holding period.

COMPONENTS OF WORKING CAPITAL AND THEIR

MANAGEMENT

CASH MANAGEMENT

Cash is the most important current asset for the operation of a business. Cash is the basic

input needed to keep the business running on a continuous basis. It is also the ultimate

output expected to be realized by selling the service or product manufactured by a firm. A

firm should maintain an optimum level of cash, neither more nor less. Cash shortage will

disrupt any firm’s manufacturing operations, while excessive cash will remain idle,

without contributing anything towards the firm’s profitability. Cash management is

concerned with the management of:

Cash inflows and outflows.

Cash flows within the firm.



Cash forecasting and budgeting

A cash budget is the most significant tool devised for the control of cash receipts and

payments. A cash budget is a statement which summarizes the expected cash inflows and

outflows of a firm over a projected time period.

Cash forecasts are needed to prepare cash budgets. Cash forecasting may be done on a

short-term or on a long-term basis.

Options for investing surplus funds

Companies often have surplus funds for short periods of time before they are required for

capital expenditure, loan repayments or for any other purpose. These funds may be

deployed in many ways. At one end of the spectrum is the term deposit that can be made

for a minimum of 46days in a bank which is a risk-free investment that offers a relatively

modest rate of interest and at the other end of the spectrum is the investment in equity

shares which can produce highly volatile returns. In between lie several avenues like units

of a mutual fund scheme, public sector bonds, treasury bills, inter corporate deposits etc.

In order to enhance the efficiency of cash management, the following practices are

followed:

Time lag between sales and the negotiations with the banker is almost reduced to

nil.



Personal follow up is also affected to ensure that the reimbursements are realized

by the negotiation of the documents and credits.

Follow up is also affected to ensure that reimbursements are realized by the

negotiating banker in order to avoid interest costs.

Advantages of cash management

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither

profit nor losses but without cash, profit remains meaningless for an enterprise owner.

1. A sufficient of cash can keep an unsuccessful firm going despite losses

2. An efficient cash management through a relevant and timely cash budget may

enable a firm to obtain optimum working capital and ease the strains of cash shortage,

fascinating temporary investment of cash and providing funds normal growth.

3. Cash management involves balance sheet changes and other cash flow that do

not appear in the profit and loss account such as capital expenditure.

Table 8: Table showing the Size and indices of cash in PROSEAL Ltd.,

Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010

Cash and bank balance

3014705 3946627 10375816 8930476

Indices 100 130.9 344.2 296.2



GRAPH-9

INTERPRETATION:

Cash and bank balances have increased by 30.9% in the year 2008 and there has been a

drastic increase by 244.2% and 196.2% in the year 2009 and 2010 respectively, taking

2007 as the base year. This is mainly due to the increase in production on one hand and

an increase in cash sales on the other.

CASH CYCLE:

One of the distinguishing features of the fund employed as working capital is that

constantly changes its form to drive ‘business wheel’.


CASH

FINIHED

GOODS

DEBTORS

WIP

RAW MATERIALS


It is also known as ‘circulating capital’ which means current assets of the company,

which are changed in ordinary course of business from one form to another, as for

example, from cash to inventories, inventories to receivables and receivables to cash.

Basically cash management strategies are essentially related to the cash cycle together

with the cash turnover. The cash cycle refers to the process by which cash is used to

purchase the raw material from which are produced goods, which are then send to the

customer, who later pay bills. The cash turnover means the number of time firms cash is

used during each year.



Table 9: Table showing the cash cycle of PROSEAL Ltd.,

(Days)

Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010

Inventory holding period

128 108 95 95

(+) Account receivable period

133 116 107 109

(-) Account payable period

178 122 130 130

Cash cycle 83 102 72 74

INTERPRETATION:

The size of the cash in the current assets of the company indicates the miss cash

management of the company. The cash balance in the year 2009 was extremely increased;

because of encashment of deposits from schedules bank funds. Company failed to proper

investment of available cash. After the study of cash management it mentioned above it

can be conclude that management of cash involve three things: a) Managing cash flow

into and out of the firm. b) Managing cash inflow within the firm, c) Financial deficit or

investing surpluses cash and thus controlling cash balance at a point of a time.

The firm should hold an optimum balance of cash and invest any temporary excess

amount in short term marketable securities such as treasury bills, commercial papers,

certificates of deposit, bank deposits and inter corporate deposit.

The high portion of cash balance in the current assets it adversely affected on profitability

of the company as cash is ideal asset; it reduced the working capital leverage.



INVENTORY MANAGEMENT

The term inventory refers to the stock of products a firm is offering for sale. In other

words, inventory is composed of assets that will be sold in the future in the normal course

of business operations. The inventory of a firm is the sum total of the raw materials,

work-in-progress and finished goods of a firm.

Raw materials consist of items purchased by a firm from others for conversion into

finished goods through the manufacturing process. Work-in-progress is made up of items

currently in the stage of production. These are partially finished goods that are at various

stages of production in a multi-stage production process. Finished goods represent the

final or completed products which are available for sale.

The objective of inventory management at Proseal Closures Ltd. consists of two counter-

balancing parts:

1. To minimize the investments in inventory.

2. To meet the demand for the product by efficiently organizing the firm’s

production and sales operation.



The firm has a comprehensive system for monitoring its inventory levels based on its own

experiences. The sales budget is the basis for the production and materials requirement

planning.

Inventory components

The manufacturing firm’s inventory consist following components

I) Raw material

ii) Work- in-progress

iii) Finished goods

To analyze the level of raw material inventory and work in progress inventory held by the

firm on an average it is necessary to examine the efficiency with which the firm converts

raw material inventory and work in progress into finished goods.

Table 10: Table showing size of inventory of PROSEAL Ltd.,

(No of days)

Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010

Raw materials 4182 6343 8213 14052

WIP 43 31 22 113

Finished goods 4671 6354 15013 22963

Other inventories 1932 2710 3613 9831

Total 10828 15438 26861 46959

Indices 100.00 142.57 248.07 433.68



z

GRAPH-10

INTERPRETATION:

Size of inventory of PROSEAL Ltd, was increasing with the increase in the sales. The

inventory size was increasing because of increment in the finished goods stock; it

indicates that the company reduced the liquidity of finished goods. The graph shows an

increase in inventories size. In the year 2010 the inventories indices% is 433.68.

RECEIVABLES MANAGEMENT

The term receivable is defined as “debt owed to the firm by customers arising from sale

of goods or services in the ordinary course of business”. While business firms would like

to sell goods for cash, the pressure of competition and the force of custom persuade them

to sell the same on credit. Firms grant credit to facilitate sales.



It is valuable to customers as it augments their resources. It is particularly appealing to

those customers who cannot borrow from other sources or find it very expensive to do so.

The credit period extended by business firms usually ranges from 15 days to 60 days.

When goods are sold on credit, finished goods gets converted into accounts receivables in

the books of the seller. A firm’s investment in accounts receivables depends on how

much it sells on credit and how long it takes to collect the receivables. The objectives of

the receivables management are:

To obtain maximum sales.

To minimize bad debt losses.

To minimize the cost of investment in book debts.

To minimize service and clerical costs for book debts.

Since receivables often account for a significant proportion of the total assets, it

becomes very important to manage its receivables well.

Credit policy variables

A firm’s interests in allowing credit facilities to a customer are dependent on the

following variables:

1. Credit standards :

It refers to the maximum risk that a firm is willing to take in extending credit.

Lowering the credit standard may increase credit sales. This in turn will

increase the accounts receivables which increases the collection cost and risk

of bad debts. Sound judgment must be made in developing credit standards.



2. Industrial capacity and phase of business cycle:

It is another important consideration used in granting credit. In a booming

phase of the business cycle of the firm, it has excess capacity and may use

credit standards to increase sales and plant utilization. In the phase of

recession, the firm will not allow liberal standards.

3. Credit information:

This can be collected from a variety of sources like periodic financial

statements, creditors of the company etc.

4. Bank reference :

It is another source of collecting credit information. The bank with which the

applicant has dealings can provide such information. Trade references are also

used to collect credit information. The firms who have had business dealings

with the applicant can provide useful information about the applicant.

5. Analysis of Credit Information and Deciding Credit Terms:

After credit information has been received it should be properly analyzed to

determine the credit worthiness of the applicant. The particulars should be

analyzed both quantitatively and qualitatively. Quantitative analysis will

include age wise analysis of accounts payable, profitability and liquidity ratio.



Qualitative assessment will include consideration of references from other suppliers and

bank reference. The ultimate decision is whether or not to extend credit and deciding the

terms of credit which depends on subjective interpretation of the assessment of the above

mentioned analysis.

6. Credit period:

A firm’s credit period is determined by industry customs and thus it is

different in different industries. It may be as short as seven days or as long as

six months. A major consideration for the company is to see what competitors

are doing and decide.

7. Collection effort:

Collection effort includes the methods that a firm employs in attempting to

collect dues from customers. Some commonly used terms are:

Sending notices and letters to customers informing them of the status

of past dues and requesting early payment.

Employing a collection agency.

Rejecting new orders for supply until the last dues are paid.

Taking legal action against customers.



Management of Receivables at PROSEAL LTD. :

The normal credit period allowed by the firm is 30 to 60 days. To ease the funds tied up

in the receivables, the firm has applied the following two measures:

1. Factoring

2. Securitization of Debts

Factoring:

Factoring is a method of financing where by a company sells its trade debts at a discount

to a financial institution. In other words, factoring is a continuous arrangement between a

financial institution, namely the factor, and a company which sells goods and services to

trade customers on credit. As per this arrangement, the factor purchases the client’s trade

debts including accounts receivables either with or without recourse to the client, and

thus, exercises control over the credit extended to the customers and administers the sales

ledger of his client.

Securitization of debts:

Securitization of debts means giving the bills receivables as the security for the long term

loans taken by the firm.

Tools and Techniques used for Financial Analysis of Working Capital

The following are the tools used in this report to analyze the working capital position in

PROSEAL CLOSURES Ltd. :

Trend Analysis

Common Size Statements

Ratio Analysis



Ratio Analysis:

Ratio Analysis is one of the powerful tools of the financial analysis. A ratio can be

defined as “the indicated quotient of two mathematical expressions”, and as “the

relationship between two or more things”. Ratio analysis is a technique of analysis and

interpretation of financial statements. It is the process of establishing and interpreting

various ratios for helping in making certain decisions. They serve as indicators of

financial strength, soundness, weakness and position of a concern.

Importance of Ratio Analysis

To indicate the liquidity position of the firm.

To know about the Long Term Solvency of the firm.

It allows inter firm comparisons of financial statements.

Advantages of Ratio Analysis

It helps in judging the financial health of the firm.

It helps in decision making.

It is useful in judging the operating efficiency.

It is useful in forecasting and planning.

It can be used as an instrument of management control.

It is useful in comparison of performance.



Disadvantages of Ratio Analysis

Lack of adequate standards.

The accuracy and correctness of ratios are totally dependent on the reliability of

the data contained in financial statements.

Problems of price level changes.

Ratios devoid of absolute figures may distort facts.

Personal bias.

FINANCIAL RATIOS

LIQUIDITY RATIOS:

Liquidity ratios measure the ability of the firm to meet its current obligations. These

are ratios which measure the finance position of a firm. It helps to assess the

sufficiency of its current assets to meet its current liability. The liquidity position is

satisfactory if current liabilities are easily met out of current assets. The liquidity

ratios used are:

(a)Current ratio:

The current ratio shows the amount of short-term resources available to service

every rupee of current debt. It measures the general liquidity position of the firm

and also represents the margin of safety.



A high ratio reveals ability to pay current debts on time. The standard current ratio

is considered to be 2:1 . Current ratio can be calculated by using the following

formula:

CURRENT RATIO= CURRENT ASSETS

CURRENT LIABILITIES

Table 11: Table showing the current ratio of PROSEAL over the last 4 years


Year Current AssetsCurrent Liability

Current Ratio

2007 118225545 63544916 1.86

2008 113789182 74933064 1.52

2009 151267443 94146734 1.61

2010 183335440 109089832 1.68

00.20.40.60.8

11.21.41.61.8

2

CR

2007 2008 2009 2010

Year

Chart Showing the Current Ratios

CR


GRAPH -11

INTERPRETATION:

As can be seen from the chart, the current ratio has been on a decreasing trend

as compared to the year 2007.

Current ratio’s of all the four years have not been up to the standard of 2:1,

indicating the firm is in danger, in terms of liquidity.

This means that the company is not having sufficient funds to meet its current

liabilities. The current assets are increasing but the current liabilities are also

increasing rapidly. Therefore, the company does not have sufficient funds to

meet its current liabilities.



In the year 2008, the current ratio has been the least of 1.52, which is

extremely low and shows the unsatisfactory liquidity position of the firm.

This has in a way hampered the profitability of the company.

(b)Quick/Acid Test Ratio

This ratio establishes a relationship between the liquid assets and current

liabilities. It measures the ability of the firm to meet its current liabilities by using

only its liquid assets. A high ratio indicates good liquidity. The standard acid test

ratio is considered to be 1:1 . Acid test ratio is be calculated using the following

formula :

ACID TEST RATIO= LIQUID ASSETS

CURRENT LIABILITIES

Liquid Assets= Current Assets- Inventory


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

LR

2007 2008 2009 2010

Year

Chart showing the Liquid Ratios

Liquid Ratio


Table 12: Table showing the Acid Test Ratio of PROSEAL Ltd. over the last four years.

Year Liquid AssetsCurrent Liability

Liquid Ratio

2007 52556183 63544916 0.83

2008 49942588 74933064 0.67

2009 62956779 94146734 0.67

2010 92293237 109089832 0.85

GRAPH-12



INTERPRETATION:

All the four years have witnessed a highly unsatisfactory Quick Ratio.

The years 2008 and 2009 show the least with a quick ratio of 0.67. The year 2007

has shown a quick ratio of 0.83 whereas the year 2010 has the highest ratio of

0.85. But none of the years did the firm reach the ideal ratio of 1:1 .

This can be attributed to the considerable increase in the current liabilities over the

last four years.

The firm in future has to design a policy to increase the liquid assets so as to meet

the current liabilities.

(c) Cash Ratio

This ratio is the most vigorous measure of the firm’s liquidity position. The accepted

standard ratio is 0.5:1 . This means that rupee one worth of absolute liquid assets are

considered adequate to pay off rupees two worth current liabilities because all the

creditors are not expected to demand at the same time and cash can be realized from

debtors and inventory. Cash ratio can be computed by using the following formula:

CASH RATIO= ABSOLUTE LIQUID ASSETS

CURRENT LIABILITIES

Absolute Liquid Assets= Cash + Marketable Securities


0.00

0.02

0.04

0.06

0.08

0.10

0.12

Ratio

2007 2008 2009 2010

Year

Chart showing the Cash Ratio

Ratio


Table13: Table showing the Cash Ratio of PROSEAL Ltd. over the last four years.

YearAbsolute liquid

assetsCurrent

LiabilitiesRatio

2007 3014705 63544916 0.047

2008 3946627 74933064 0.052

2009 10375816 94146734 0.110

2010 8930476 109089832 0.081

GRAPH-13



INTERPRETATION:

The Cash Ratio of PROSEAL Ltd., in all the four years is less than the accepted

standard ratio of 0.5:1 .

Although these are not alarming signs for the company, the company has to be

careful that such a low ratio doesn’t prove to be detrimental to the firm’s

revenues.

This ratio also throws light on the fact that the proportion of cash in the liquid

assets is very low.

The company needs to improve on this and maintain a better cash ratio.



ACTIVITY RATIOS/ TURNOVER RATIOS

Activity ratios indicate the efficiency with which the capital employed is rotated in the

business. The overall profitability of the business depends on two factors:

1. The rate of return on capital employed

2. The turnover.

In order to find out which part of the capital is efficiently employed and which part is not,

different turnover ratios are calculated. These ratios are as follows:

(a) Inventory Turnover Ratio

This ratio indicates whether investment in inventory is efficiently used or not. It therefore

explains whether investments in inventories are within proper limits or not. The ratio is

calculated as follows:

Inventory Turnover Ratio= Cost of Goods Sold/ Sales

Average Inventory



SIGNIFICANCE:

The inventory turnover ratio signifies the liquidity of the inventory.

A high inventory turnover ratio indicates brisk sales.

The ratio is a measure to discover the possible trouble in the form of over-stocking

and over-valuation.

A low inventory turnover ratio results in the blocking of funds in inventory which

may ultimately result in heavy losses due to inventory becoming obsolete or

deteriorate in quality.

Table1 4: Table showing the inventory turnover ratio of PROSEAL Ltd. over the last

four years.

Year Sales Average Stock Ratio

2007 164949145 49766966 3.31

2008 197693165 64757978 3.05

2009 290418830 76078629 3.82

2010 335620082 89676433.5 3.74


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Ratio

2007 2008 2009 2010

Years

Chart showing Inventory Turnover Ratio

Ratio


GRAPH-14

INTERPRETATION:

The firm has witnessed a highly constant Inventory Turnover Ratio over the past

four years.

The year 2009 can be considered as the year in which the inventory movement

was at its best with a ratio of 3.82 times and the year 2007 faced the least with

3.05 times.

A low inventory turnover ratio results in the blockage of funds in inventory which

may ultimately result in heavy losses due to inventory becoming obsolete or

deteriorate in quality. This in a way hampers the profitability of the company.



Measures should be implemented to increase the Inventory Turnover Ratio so that

the firm faces no possible trouble in the form of over-stocking and over-valuation.

(b) Working Capital Turnover Ratio

This is also known as Working Capital Leverage Ratio. This ratio indicates whether or

not the working capital has been effectively utilized in making sales. It is calculated as

follows:

Working Capital Turnover Ratio= Cost of Goods Sold/Sales

Working Capital

SIGNIFICANCE:

In case a firm can achieve higher volume of sales with relatively small amount of

working capital, it is an indication of the operating efficiency of the company

A low ratio indicates excess net working capital.


0.00

1.00

2.00

3.00

4.00

5.00

6.00

Ratio

2007 2008 2009 2010

Year

Chart showing Working Capital Turnover Ratio

Ratio


Table15: Table showing the working capital turnover ratio of PROSEAL Ltd., over the

last four years.

Year SalesWorking Capital

Ratio

2007 164949145 54680629 3.02

2008 197693165 38856118 5.09

2009 290418830 57120709 5.08

2010 335620082 74245608 4.52

GRAPH-15



INTERPRETATIONS:

There has been a constant fluctuation in the Working Capital Turnover Ratio of

the company over the past four years.

The ratio over the past four years has remained above 3 indicating the working

capital has proved quite profitable.

The year 2008 saw the highest working capital turnover ratio indicating that

working capital was best utilized in this year.

(c) Current Assets Turnover Ratio

The relationship between sales and current assets is called Current Assets Turnover Ratio.

It can be computed using the following formula:

Current Assets Turnover Ratio = Net Sales

Current Assets



SIGNIFICANCE:

This ratio indicates how much net sales are made for every rupee of investment in

current assets.

A low ratio may signify that the firm has an excessive investment in current

assets.

Table1 6: Table showing the Current Assets Turnover Ratio of PROSEAL Ltd., over the

last four years.

Year Sales Current Asset Ratio

2007 164949145 118225545 1.40

2008 197693165 113789183 1.74

2009 290418830 151267443 1.92

2010 335620082 183335440 1.83


0.00

0.50

1.00

1.50

2.00

Ratio

2007 2008 2009 2010

Year

Chart showing Current Assets Turnover Ratio

Ratio


GRAPH-16

INTERPRETATION:

This ratio is very similar to Working Capital Turnover Ratio.

All four years witnessed a reasonably good Current Assets Turnover Ratio,

suggesting that Current Assets were very profitably used in these years.

The year 2009 saw the sales amounting to twice the amount invested in Current

Assets suggesting that Current Assets proved to be extremely high income

generating.



The year 2009 also threw light on the point that a little increase in the investments

in current assets lead to higher increase in sales.

(d) Creditors Turnover Ratio

It is called as Creditors Velocity. It is very similar to Debtors Turnover Ratio. It indicates

the speed with which the payments for credit purchases are made to the creditors. This

ratio can be computed as follows:

Creditors Turnover Ratio:

= Credit Purchases

Average Accounts Payables

Or

= Total Purchases

Closing Accounts Payables



Significance:

It indicates the speed with which payment is made to creditors.

It enhances the credit worthiness of the firm.

A high ratio indicates prompt payment made to creditors.

A high ratio may also indicate the company is not utilizing the credit period to the

full extent.


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Ratio

2007 2008 2009 2010

Year

Chart showing Creditor's Turnover Ratio

Ratio


Table1 7: Table showing the Creditors Turnover Ratio of PROSEAL Ltd., over the last

four years.

YearCredit

PurchasesAverage

CreditorsRatio

2007 101158713 33523917.5 3.02

2008 104387394 53424652.5 1.95

2009 181134402 64622737.5 2.80

2010 201094385 71542854 2.81

GRAPH-17



(e) Debt Payment Period:

It is also called as Average Payment Period. The ratio gives the average credit period

enjoyed from the creditors. It can be computed as follows:

Debt Payment Period:

= Months/ Days in a year

Creditors Turnover Ratio

Or

= Average Accounts Payable

Average Monthly/Daily Credit Purchases

SIGNIFICANCE:

A short payment period indicates prompt payment made to creditors.

A low credit period may also mean that the firm is not taking full advantage of

credit facilities offered.


0.00

1.00

2.003.00

4.005.00

6.00

7.00

No. of Months

2007 2008 2009 2010

Year

Chart showing the Debt Payment Period

Debt Payment Period


Table 18: Table showing the Debt Payment Period of PROSEAL Ltd., over the last four

years.

YearMonths in a

year

Creditors Turnover

Ratio

Debt Payment Period

2007 12 3.02 3.97

2008 12 1.95 6.15

2009 12 2.8 4.29

2010 12 2.81 4.27

GRAPH-18



INTERPRETATION:

The firm has been maintaining quite low Creditor’s Turnover Ratio over the past

four years indicating that the firm is taking full advantage of the credit facilities

offered.

As a result, the debt payment period has been on a higher side over the years with

2008 being the highest with 6.15 months.

On one hand it may be improving its profitability by utilizing the credit period to

the fullest. On the other hand this says that the firm is not quite concerned about

its credit worthiness and image in the market by delaying the payment to creditors.

If the firm is able to strike the right balance between maintaining its image and

using the credit period given judiciously, it will be the icing on the cake of an

already flourished business.



(f) Debtor’s Turnover Ratio:

It is also called as Debtors Velocity. Debtors constitute an important constituent of

current assets and therefore the quality of debtors to a great extent determines a firm’s

liquidity. Debtor’s Turnover Ratio can be calculated as follows:

Debtor’s Turnover Ratio = Credit Sales

Average Accounts Receivable

SIGNIFICANCE:

Sales to Accounts Receivables indicate the efficiency of the staff entrusted with

collection of book debts.

The higher the ratio the better it is, since it would indicate debts are being

collected more promptly.

For measuring the efficiency, it is necessary to set up a standard figure; a ratio

lower than the standard will indicate inefficiency.

The ratio helps in cash budgeting since the flow of cash from customers can be

worked out on the basis of sales.


0.00

2.00

4.00

6.00

8.00

10.00

12.00

Ratio

2007 2008 2009 2010

Year

Chart showing the Debtors Turnover Ratio

Debtors Turnover Ratio


Table 19: Table showing the Debtors’ Turnover Ratio of PROSEAL Ltd., over the last

four years.

Year Credit SalesAverage Accounts

Receivables

Debtors Turnover

Ratio

2007 164949145 20782416.5 7.94

2008 197693165 26207119 7.54

2009 290418830 25130481 11.56

2010 335620082 35406790.5 9.48

GRAPH-19



(g) Debtors Collection Period:

This ratio indicates the extent to which the debts have been collected in time. It gives the

average debt collection period. The ratio is very helpful to the lenders because it explains

to them whether their borrowers are collecting money within a reasonable time. An

increase in the period will result in greater blockage of the funds in debtors. The ratio

may be calculated in any of the following methods:

Debtors Collection Period:

= Months/ Days in a year

Debtors Turnover Ratio

Or

= Accounts Receivables

Average Monthly/ Daily Credit Sales



SIGNIFICANCE:

It measures the quality of debtors since it measures the rapidity or slowness with

which money is collected from them.

A shorter collection period implies prompt payments by the debtors; it reduces the

chances of bad debt.

A longer collection period implies too liberal and inefficient credit and collection

inefficiency.

Its average collection should be compared with that of the industry; it should

neither be too liberal nor restrictive.


0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

No. of months

2007 2008 2009 2010

Year

Chart showing the Debt Collection Period

Debt Collection Period


Table 20: Table showing the Debt Collection Period of PROSEAL Ltd., over the last four

years.

YearMonths in a

year

Debtors Turnover

Ratio

Debt Collection

Period

2007 12 7.94 1.51

2008 12 7.54 1.59

2009 12 11.56 1.04

2010 12 9.48 1.27

GRAPH-20



INTERPRETATIONS:

The firm’s collection policy has been considered reasonably good as its Debt

Collection Period over the four years has been hovering around 1.35 months (on

an average).

The year 2009 was the year in which the firm made best use of its debtors by

converting them into cash in 1.04 months with a Debtors Turnover Ratio of 11.56

times.

The other three years have also been good with a debtor’s turnover ratio of 7.93,

7.54 and 9.47 for the years 2007, 2008 and 2010 respectively.

The firm should take measures to maintain such collection policies which

ultimately enhance the profitability of the firm.

The firm may also consider analyzing the credit worthiness of its customers as an

option before extending credit to them.



FINDINGS

An analysis of the trend of the Working capital of PROSEAL CLOSURES [P]

LTD., along with the analysis of a few ratios shows that the working capital

position of the company has been really strong over the years.

There has been an increase in the demand for the products manufactured by the

company. This has lead to an increase in the production activities of the company

and thus inventories of the company have increased.

The high demand for the products has led to an increase in the sales of the

company which in turn has led to an increase in the debtors to the company. But

the period for collection of debts from the trade customers has been 1.35 months

(on an average) which is reasonably good.

The most worrying aspect in the company is that the current ratio, liquid ratio and

cash ratio has been way below the required standard. The cash ratio of the

company has been below the required standard of 0.5:1 in all four years. This

shows that the proportion of cash and marketable securities in the liquid assets is

very low and the company needs to improve on it and maintain a better cash ratio.



On the other hand, the company has had a very low inventory turnover ratio in all

the four years with the lowest being 3.05 times in the year ending 31/03/08. A low

inventory turnover ratio results in the blocking of funds in inventory which may

ultimately result in heavy losses due to inventory becoming obsolete.

The creditors have shown an increase in the year ending 31/03/07 and then a

decrease in the year ending 31/03/08. The increase in the year ending 31/03/07 is

due to an increase in the production activities of the company due to which the

company has had to purchase a greater quantity of raw materials on credit. In the

year ending 31/03/08 the amount of creditors has come down as the company has

been paying off its creditors.

The company has maintained a low creditors’ turnover ratio over the past four

years and so is fully utilizing the credit facilities offered to them. Though the

company is taking advantage of the credit facilities, it is neglecting the aspect of

developing credit worthiness.

The analysis of working capital turnover ratio shows that the relationship between

working capital and sales is quite volatile. In spite of such volatility, the

investment in working capital has resulted in sales shooting up to nearly 3 to 5

times the investment made in working capital.



The year 2007 saw a dip in the working capital turnover ratio which may be an

indicator of a high level of dead working capital in this year. However, in the

following 2 years, the company has maintained a steady ratio which suggests that

the working capital was used quite efficiently during those years.

The current assets turnover ratio gives us a clear picture of the elasticity between

the investments in current assets and the sales of the company. The year 2008-09

was the year in which the investment in current assets proved to be the most

profitable with a current assets turnover ratio of 1.92. The current assets turnover

ratio has been quite profitable even in the other 3 years. This shows the firm’s

ability to use its working capital effectively in order to generate high sales and

thus increase the overall profitability of the company.



CONCLUSION

Working capital is that portion of the assets of a business which are used in current

operations, and is represented at any time by the operating cycle of such items, as against

receivables, inventories of raw materials stores, work in progress, finished goods,

merchandise, notes, or bills receivables and cash. The study on working capital is of

major importance due to its close relation with the day to day operations of a business.

A study on working capital management at PROSEAL CLOSURES Pvt. Ltd. was

conducted in order to find out their actual working capital requirements and know how

efficiently it is being utilized in the day to day operations by the methods of ratio

analysis, trend analysis and common size income statements which helps us to compare

their financial position across 4 years.

From the study it was identified that the working capital position of the company has

been really strong over the past 4 years and has also been increasing. There is an increase

in production activities due to an increase in demand for their products, due to this factor

debtor of the company has also increased.



SUGGESTIONS

The firm’s absolute liquidity position is a major concern as the investment in cash

and marketable securities is extremely low. The firm should either improve its

absolute liquidity position or make sure that in future, such a low ratio doesn’t

hamper its profitability.

The company’s debt collection and payment policies are pretty good. However,

the company should give importance to its credit worthiness and also that its

payment period is a little higher than its collection period. If this is used

effectively, this will allow the company to enhance its profits.

The company should assess its customers before extending credit to them. This

reduces the bad debts on one hand and if done properly, the company will no

longer require the services of a factor to collect its book debt and so the company

will cut down on its collection costs.

The dead working capital in the company has been increasing over the past three

years. The company should find alternative avenues for investing these funds so to

obtain a steady return. This will also help the company in maintaining liquid

funds.


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