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Submitted To: - Submitted By:-
Mrs.Leena Dixit Anuwant Kaur
(Asst.Professor) B.B.A. VthSem.
Affiliated by Kumaun University, Nainital
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ACKNOWLEDGEMENT
Success is the outcome of diligence & perseverance, I, Anuwant kaur,
student of fifth semester BBA programmed, would, like to ascribe to my
success in completing my summer project Working Capital to Mrs.
Leena dixit & Preeti dixit (Project guide) and to my project supervisor
Mr.Neeraj joshi who have extended their sincere help in accomplishing my
project. I really want to thank the above mentioned persons for their
continuous support & guidance during the project, with out their help my
project would have been a distant dream.
Anuwant kaur
(Projectee)
BBA- Vth SEM
SIMT, Rudrapur
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DECLARATION
I am Anuwant Kaur of BBA-Vth semester of Saraswati Institute of
Mangement & Technology Rudrapur hereby declare that the project
report entitled Working Capital the outcome of my own work and the
same has not been submitted to any University / Institute for the award of
any degree or any professional diploma.
ANUWANT KAUR
BBA- Vth SEM
SIMT, RUDRAPUR
PREFACE
Theory and practice are the two aspects of management education. In order
to produce a dynamic and promising executive, the two have to be blended
together. In India, the industrial training in the domain of management
courses has received pivotal importance. It exposes the potential manager
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to the actual work environment and provides them a rich insight into what
actually goes on in the industrial climate of India. Infact it is the
implementation of theory in practice is the life force of management.
A seven week vocational training is a requirement for the award of the
Bachelor Degree in Business Administration. I had the privilege of doing
my summer training at Karam Industries (Rudrapur); I must say that the
management provided me with an excellent work atmosphere for learning.
The project I worked on during my training at Karam Industries was
Mr. Neeraj Joshi (manager Finance & Accounts) motivated me to undertaken this
topic for my project report.
CONTENTS
SECTION I
OBJECTIVE OF THE STUDY
COMPANY PROFILE
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The objectives for doing my summer training is to make myself capable
for moving forward in corporate world to gain knowledge and experience
and know how to work in the organisation environment . It will help me to
gain more and more about corporate sector which was very essential for
me to do. Therefore I joined KARAM INDUSTRIES to improve my
capabilities.
PRIMARY OBJECTIVES:-
The main purpose of my practical training at Karam Industries Ltd., was
To study the proper working system of the Accounts/Finance
Department within the organization,
To gain the practical knowledge in the Accounts/Finance field,
To manage working capital according to the priorities already setup,
To study the employee's behavior, to trained my -self properly
before working with an organization to properly deal with the
problems in the company.
SECONDARY OBJECTIVES:-
The subsidiary object of this study was to undergone with the
various activities performed within the organization,
To gain the practical knowledge about the jobs,
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Knowing the various welfare programmes & employees services
taken up by the Management of the company and the sort comings
of the programme.
To know about the Industrial environment.
How finance department link to other department.
To know the routine work in the organisation.
To know how the theoretical knowledge apply in practical approach.
COMPANY HISTORY:-
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From the year 1994, it is going stronger by the day.
The beginnings are humble and modest.
Then- A team of two like-minded individuals, backed by only five other
helping hands, besides their own self-determination, and die-hard spirit
Now - A consolidated team of more than 700 people, each marching
towards a common goal, and each backing one-another
Then- Safety Nets being the mainstay product
Now- An exhaustive range of Personal Protection Equipment, covering
Head-to-Toe
Then- A Company, only dreaming to reach out to the world.
Now- A Company that has lived up to its dreams
Then- A vision to acquire excellence in the field of Quality- in both
Product and Service
Now - A stronger vision and a greater commitment towards achieving the
same.
Manufacturing Set-Up at KARAM
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PN INTERNATIONAL
Located in the outskirts of the city of Luck now, about 500kms to the
South-East of New Delhi, the Factory is spread over a span of around
110,000 square feet, with the constructed area being just about the same.
A Unit where all the products are manufactured completely in-house, is
entirely backward-integrated, and hence is unique in its own kind. All the
components of the Fall Protection range of KARAM products are
produced within one large campus, and yarn and steel are credited as being
the only main raw materials for the same. The idea is to have a complete
control over the finest details of manufacturing in order to reach the
highest levels of quality standards.
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Strict quality parameters are laid out for Manufacturing and Systems
operations, and followed to the core. The Company has achieved the
systems certification of ISO 9001-2000 from UKAS (UK), and regular and
stringent audits keep the pace at KARAM ahead at all times.
PN SAFETECH PVT LTD
This Manufacturing set-up is located in the foot-hills of the Himalayan
range, in the small township of Rudrapur, Uttarakhand, India.
Spanning an area of more than 22,000 square feet, this Factory
works in an extremely organized manner to fulfill the demands of the
market. Also accredited with the ISO 9001:2000 Certification, the
unit is committed to provide the finest quality products to the valued
customers of KARAM INDUSTRIES.
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KARAM INDUSTRIES...expanding our vision
KARAM Industries...the new sister concern of our P. N. Safe-tech Pvt. Ltd
brings with it a new and higher level of developmental structure, with its
manufacturing base located in Sitarganj (Uttarakhand).
The company has been established with this new name, so as to highlight
the progressive changes which it has made in terms of having better
technological advances, and building its name around the already well
established brand of KARAM in the field of Safety.
The product range that KARAM Industries offers shall come with the
promise of quality defined by the high standards set by its parent company,
and reflected in the ever increasing value of the brand- KARAM.
ACHIEVEMENT OF KARAM INDUSTRIES:-
1994 The Company was founded in the year 1994, with a small scale
Safety Net Manufacturing Unit and two offices at New Delhi &
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Luck now, UP in India. Conceived as a professional organization
specializing in Design, Development, Manufacturing and
Marketing of Quality Fall Protection Devices.
1997 Set up the First Safety Belt Manufacturing Unit in Luck now, UP,
India. Bureau of Indian Standards, Govt. of India, Awarded the
quality certification for Safety Belts as per ISI: 3521: 1989.
1998 Achieved approval from the Director General of Mines and
Services, Government of India.
1999 Became the first Indian Company to achieve CE Certification on
Fall Protection Equipment. All the equipment is now
manufactured as per European Norms duly CE certified.
2003 Awarded a Trophy by the Government of India for achieving Best
Exports of Safety Equipment from the state of Uttar Pradesh,
India.
2004 Set up a Second Manufacturing Unit - a 100% Export Oriented
Unit, for Manufacturing Fall Protection Equipment in Luck now,
UP, India.
2004 Achieved the systems Certification of ISO 9001-2000 from
UKAS (UK)
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2005 Set up a Manufacturing Unit in Rudrapur, Uttarakhand, India, to
cater to the market needs of the country.
2006 Launched a new range of Personal Protective Equipment- the
Safety Eyewear, CE certified and conforming to the EN norms
2007 Doubled up the Infrastructure in both the Manufacturing as well
as the Marketing Set-ups in the country.
2007 Full Body harnesses, now complying with the American and
Australian Norms as well.
2007 Progressing steadily to cover Personal Protective Equipment
range from Head-to-Toe, KARAM launched Ear-Protection gear,
conforming to the EN norms and CE certified.
2008 Launched the Range of CE Certified Safety Shoes in the Indian
Market. Expanded our Range of CE Certified Retractable Blocks
from 5 to 15 meters both in plastic and aluminum casing.
Launched an exclusive Range of Mountaineering Equipments.
2009 Successfully achieved Malaysian Certification from Malaysias
Govt. Body (SIRIM) QAS International SDN. BHD. Malaysia.
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RESEARCH METHODOLOGY
STATEMENT OF PROJECT
Evaluation, analysis & interpretation of working capital
management of Karam Industries.
Suggesting ways to improve its working capital utilization.
OBJECTIVE OF RESEARCH
Estimation of working capital requirement
Evaluation of working capital management
Evaluation of Liquidity position & working capital utilization
Analysis of relationship between working capital and profitability
Analysis & sources of working capital
Analyzing the level of current assets with relation to current
liabilities.
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COLLECTION OF DATA:
Data has been collected from various sources like:
Annual reports of last three years
Manual of concerned departments
Consultants and personnel of Karam industries.
Internet sites like www.google.com,
Calculation of net working capital requirements.
METHODS OF QUANTATIVE ANALYSIS
Ratio analysis.
Operating cycle & cash cycle
Cash flow analysis
Determining the Financing mix
Statistical tools like graphical presentation
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ASSUMPTIONS
Year is taken of 365 days
All purchases have been taken as credit purchases and all sales have
been taken as credit sales.
In the absence of relevant data the data from internet site is taken as
the relevant information.
LIMITATIONS
The data is mostly secondary in nature
Data has been recalculated & regrouped wherever necessary
In the absence of sufficient data personnel judgment have been taken
on reasonable assumption.
In the absence of sufficient data in-depth study of cash, Receivables
and inventory management was not possible.
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INTRODUCTION OF WORKING CAPITAL
The net working capital of business is its current assets less its current
liabilities.
Current Assets include:
Stock of Raw Material
Work in Progress
Finished Goods
Trade Debtors
Prepaid Expenses
Cash Balances
Current Liabilities include:
Trade Creditors
Accruals
Taxation Payable
Dividends Payable
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Short term Loans
Every business needs adequate liquid resources in order to maintain day
to day cash flows. It needs enough cash to by wages and salaries as they
fall due and to pay creditors if it is to keep its workforce and ensure its
supplies. Maintaining adequate working capital; is not just important in
the short term.
Sufficient liquidity must be maintained in order to ensure the
survival of business in the long term as well. Even a profitable business
may fail if it does not have adequate cash flows to meet its liabilities as
they fall a due. Therefore when business make investment decisions they
must not only consider the financial outlay involved with acquiring the
new machine or the new building etc, but must also take account of the
additional current assets that are usually involved with any expansion of
activity .
Increase production tends to engender a need to hold additional stocks of
raw material & work in progress.
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Increased sales usually mean that the level of debtor will increase. A
general increase in the firms scales of operation tends to imply a need
for greater level of cash.
MEANING OF WORKING CAPITAL:
Capital required for a business can be classifies under two main categories:
Fixed Capital
Working Capital
Every business needs funds for two purposes for its establishments and to
carry out day to day operations. Long term funds are required to create
production facilities through purchase of fixed assets such as plant and
machinery, land and building, furniture etc. Investments in these assets are
representing that part of firms capital which is blocked on a permanent or
fixed basis and is called fixed capital. Funds are also needed for short term
purposes for the purchasing of raw materials, payments of wages and other
day to day expenses etc. These funds are known as working capital. In
simple words, Working capital refers to that part of the firms capital
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which is required for financing short term or current assets such as cash,
marketable securities, debtors and inventories.
CONCEPTS OF WORKING CAPITAL:
There are two concepts of working capital:
Balance Sheet concepts
Operating Cycle or circular flow concept
BALANCE SHEET CONCEPT:
There are two interpretation of working capital under the balance sheet
concept:
Gross Working Capital
Net Working Capital
The term working capital refers to the Gross working capital and
represents the amount of funds invested in current assets. Thus, the gross
working capital is the capital invested in total current assets of the
enterprises. Current assets are those assets which are converted into cash
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within short periods of normally one accounting year. Example of current
assets is:
Constituents of Current Assets:
Cash in hand and Bank balance
Bills Receivable
Sundry Debtors
Short term Loans and Advances
Inventories of Stock as:
Raw Materials
Work in Process
Stores and Spaces
Finished Goods
Temporary Investments of Surplus Funds
Prepaid Expenses
Accrued Incomes
The term working capital refers to the net working capital. Net working
capital is the excess of current assets over current liabilities or say:
Net Working Capital = Current Assets Current Liabilities.
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NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:
When the current assets exceed the current liabilities, the working capital
is positive and the negative working capital results when the current
liabilities are more than the current assets. Current liabilities are those
liabilities which are intended to be paid in the ordinary course of business
within a short period of normally one accounting year of the current assets
or the income of the business. Examples of current liabilities are:
CONSTITUENTS OF CURRENT LIBILITIES:
Bills Payable
Sundry Creditors or Account Payable
Accrued or Outstanding Expenses
Short term Loans, Advances and Deposits
Dividends Payable
Bank Overdraft
Provision for Taxation, If does not amount to appropriation of
profits
The gross working capital concept is financial or going concern concept
whereas net working capital is an accounting concept of working capital.
OPERATING CYCLE OR CIRCULATING CASH FORMAT:
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Working Capital refers to that part of firms capital which is required for
financing short term or current assets such as cash, marketable securities,
debtors and inventories. Funds thus invested in current assets keep
revolving fast and being constantly converted into cash and these cash
flows out again in exchange for other current assets. The circular flow
concept of working capital is based upon this operating or working capital
cycle of a firm. The cycle starts with the purchase of raw material and
other resources and ends with the realization of cash from the sales of
finished goods. It involves purchase of raw material and stores, its
conversion into stocks of finished goods through work in progress with
progressive increment of labor and service cost, conversion of finished
stocks into sales, debtors and receivables and ultimately realization of cash
and this cycle continuous again from cash to purchase of raw materials and
so on. The speed/ time of duration required to complete one cycle
determines the requirements of working capital longer the period of cycle,
larger is the requirement of working capital.
Receivable conversion period Raw materialstorage
(RCP) conversion period
(RMSCP)
Cash received form
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Debtors and paid to suppliers
Of raw materials
Sales of finished Raw materialsGoods introduced into process
Finished Goods
Produced
Finished goods conversion Work inprocess
Period (FGCP) Conversion
period
(WIPCP)
The gross operating cycle of a firm is equal to the length of the inventories
and receivables conversion periods. Thus,
Where,
RMCP = Raw Material Conversion Period
WIPCP = Work in- Process Conversion Period
FGCP = Finished Goods Conversion Period
RCP = Receivables Conversion Period
However, a firm may acquire some resources on credit and thus defer
payments for certain period. In that case, net operating cycle period can be
calculated as below:
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Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP
Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferral period
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Further, following formula can be used to determine the conversion
periods.
Raw Material Conversion Period = Average Stock of Raw
Material.
Raw Material Consumption per day
Work in process Conversion Period = Average Stock of Work-in-Progress
Total Cost of Production per day
Finished Goods Conversion Period = Average Stock of Finished Goods
Total Cost of Goods sold per day
Receivables Conversion Period = Average Accounts Receivables
Net Credit Sales per day
Payable Deferral Period = Average Payable
Net Credit Purchase per day
CLASSIFICATION OR KIND OF WORKING CAPITAL:
Working capital may be classified in two ways:
On the basis of concept
On the basis of time
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Om the basis of concept, working capital is classified as gross
working capital and net working capital. The classification is
important from the point of view of the financial manager.
On the basis of time, working capital may be classified as:
Permanent or Fixed working capital
Temporary or Variable working capital.
t
On the basis of concept On the basis of time
Net Working
Capital
Permanent or
Fixed Working
Capital
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Gross Working
Capital
Temporary or
Variable Working
Capital
Kinds of Working Capital
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1. PERMANENT OR FIXED WORKING CAPITAL:
Permanent or fixed working capital is the minimum amount which is
required to ensure effective utilization of fixed facilities and for
maintaining the circulation of current assets. There is always a minimum
level of current assets which is continuously required by the enterprises to
carry out its normal business operations.
2. TEMPRORAY OR VARIABLE WORKING CAPITAL:
Seasonal Working
Capital
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Reserve Working
Capital
Regular
Working Capital
Special Working
Capital
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Temporary or variable working capital is the amount of working capital
which is required to meet the seasonal demands and some special
exigencies.Varibles working capital can be further classified as second
working capital and special working capital. The capital required to meet
the seasonal needs of the enterprises is called the seasonal working capital.
Temporary working capital differs from permanent working capital in the
sense that is required for short periods and cannot be permanently
employed gainfully in the business.
IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL:
Working capital is the life blood and nerve centre of a business. Just a
circulation of a blood is essential in the human body for maintaining life,
working capital is very essential to maintain the smooth running of a
business. No business can run successfully without an adequate amount of
working capital. The main advantages of maintaining adequate amount of
working capital are as follows:
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Solvency of the Business
Goodwill
Easy Loans
Cash discounts
Regular supply of Raw Materials
Regular payments of salaries, wages & other day to day
commitments.
Exploitation of favorable market conditions
Ability of crisis
Quick and regular return on investments
High morals
THE NEED OR OBJECTS OF WORKING CAPITAL:
The need for working capital cannot be emphasized. Every business needs
some amount of working capital. The need of working capital arises due to
the time gap between production and realization of cash from sales. There
is an operating cycle involved in the sales and realization of cash. There
are time gaps in purchase of raw materials and production, production and
sales,
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And sales, and realization of cash, thus, working capital is needed for the
following purposes:
For the purchase of raw materials , components and spaces
To pay wages and salaries
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 materials, work in- progress,
stores and spares and finished stock.
FACTORS DETERMINING THE WORKING CAPITAL
REQUIRMENT:
The working capital requirements of a concern depend upon a large
number of factors such as nature and size of the business, the
characteristics of their operations, the length of production cycle, the rate
of stock turnover and the state of economic situation. However the
following are the important factors generally influencing the working
capital requirements.
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NATURE OR CHARACTERSTICS OF A BUSINESS: The
nature and the working capital requirement of enterprises are
interlinked. While a manufacturing industry has a long cycle of
operation of the working capital, the same would be short in an
enterprises involve in providing services. The amount required also
varies as per the nature, an enterprises involved in production would
required more working capital then a service sector enterprise.
MANAFACTURE PRODUCTION POLICY: Each enterprises in
the manufacturing sector has its own production policy, some follow
the policy of uniform production even if the demand varies from
time to time and other may follow the principles of demand based
production in which production is based on the demand during the
particular phase of time. Accordingly the working capital
requirements vary for both of them.
OPERATIONS: The requirement of working capital fluctuates for
seasonal business. The working capital needs of such business may
increase considerably during the busy season and decrease during
the off season.
MARKET CONDITION: If there is a high competition in the
chosen project category then one shall need to offer sops like credit,
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immediate delivery of goods etc for which the working capital
requirement will be high. Otherwise if there is no competition or less
competition in the market then the working capital requirements will
be low.
AVAILABILITY OF RAW MATERIAL: If raw material is
readily available then one need not maintain a large stock of the
same thereby reducing the working capital investment in the raw
material stock. On other hand if raw material is not readily available
then a large inventory stocks need to be maintained, there by calling
for substantial investment in the same.
GROWTH AND EXPANSION: Growth and Expansions in the
volume of business result in enhancement of the working capital
requirements. As business growth and expands it needs a larger
amount of the working capital. Normally the needs for increased
working capital funds processed growth in business activities.
PRICE LEVEL CHANGES: Generally raising price level requires
a higher investment in the working capital. With increasing prices,
the same levels of current assets needs enhanced investments.
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MANUFACTURING CYCLE: The manufacturing cycle starts
with the purchase of raw material and is completed with the
production of finished goods. If the manufacturing cycle involves a
longer period the need for working capital would be more. At time
business needs to estimate the requirement of working capital in
advance for proper control and management. The factors discussed
above influence the quantum of working capital in the business. The
assessment of the working capital requirement is made keeping this
factor in view. Each constituents of the working capital retains it
form for a certain period and that holding period is determined by
the factors discussed above. So for correct assessment of the
working capital requirement the duration at various stages of the
working capital cycle is estimated. Thereafter proper value is
assigned to the respective current assets, depending on its level of
completion. The basis for assigning value to each component is
given below:
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The following are the general principles of a sound working capital
management policy:
1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS
POLICY):
Risk here refers to the inability of a firm to meet its obligations as and
when they become due for payment. Larger investment in current Assets
with less dependence on short term borrowings, increase liquidity, reduces
risk and thereby decreases the opportunity for gain or loss. On the other
hand less investments in current assets with greater dependence on short
term borrowings, reduces liquidity and increase profitability. In other
words there is a definite inverse relationship between the degree of risk
and profitability. In other words, there is a definite inverse relationship
between the risk and profitability. A conservative management prefers to
minimize risk by maintaining a higher level of current assets or working
capital while a liberal management assumes greater risk by reducing
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PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY
PRINCIPLES OF
RISK
VARIATIONS
PRINCIPLES OF
COST OF
CAPITAL
PRINCIPLES OF
EQUITY
PRINCIPLES
PRINCIPLES OF
MATURITY OF
PAYMENTS
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working capital. However, the goal of management should be to establish a
suitable trade off between profitability and risk.
2. PRINCIPLES OF COST OF CAPITAL: The various source of
raising working capital finance have different cost of capital and the degree
of risk involved. Generally, higher and risk however the risk lower is the
cost and lower the risk higher is the cost. A sound working capital
management should always try to achieve a proper balance between these
two.
3. PRINCIPLE OF EQUITY POSITION: The principle is concerned
with planning the total investments in current assets. According to this
principle, the amount of working capital invested in each component
should be adequately justified by a firms equity position. Every rupee
invested in current assets should contribute to the net worth of the firm.
The level of current assets may be measured with the help of two ratios:
1. Current assets as a percentage of total assets and
2. Current assets as a percentage of total sales
While deciding about the composition of current assets, the financial
manager may consider the relevant industrial averages.
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4. PRINCIPLES OF MATURITY OF PAYMENT: The principle is
concerned with planning the source of finance for working capital.
According to the principles, a firm should make every effort to relate
maturities of payment to its flow of internally generated funds. Maturity
pattern of various current obligations is an important factor in risk
assumptions and risk assessments. Generally shorter the maturity schedule
of current liabilities in relation to expected cash inflows, the greater the
inability to meet its obligations in time.
CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL:
Growth may be stunted. It may become difficult for the enterprises
to undertake profitable projects due to non availability of working
capital.
Implementations of operating plans may brome difficult and
consequently the profit goals may not be achieved.
Cash crisis may emerge due to paucity of working funds.
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Optimum capacity utilization of fixed assets may not be achieved
due to non availability of the working capital.
The business may fail to honour its commitment in time thereby adversely
affecting its creditability. This situation may lead to business closure.
The business may be compelled to by raw materials on credit and sell
finished goods on cash. In the process it may end up with increasing cost
of purchase and reducing selling price by offering discounts. Both the
situation would affect profitable adversely.
Now avaibility of stocks due to non availability of funds may result in
production stoppage. While underassessment of working capital has
disastrous implications on business overassesments of working capital also
has its own dangerous.
CONSEQUENCES OF OUR OWN ASSESSMNET OF WORKING
CAPITAL:
Excess of working capital may result in unnecessary accumulation
of inventories.
It may lead to offer too liberal credit terms to buyers and very poor
recovery system & cash management.
It may make management complacent leading to its inefficiency.
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Over investment in working capital makes capital less productive
and may reduce return on investment.
Working Capital is very essential for success of business & therefore needs
efficient management and control. Each of the components of working
capital needs proper management to optimize profit.
INVENTORY MANAGEMNT: Inventory includes all type of stocks.
For effective working capital management, inventory needs to be managed
effectively. The level of inventory should be such that the total cost of
ordering and holding inventory is the least. Simultaneously stock out costs
should be minimized. Business therefore should fix the minimum safety
stock level reorder level of ordering quantity so that the inventory costs is
reduced and outs management become efficient.
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RECEIVABLE MANAGEMENT: Given a choice, every business would
prefer selling its produce on cash basis. However, due to factors like trade
policies, prevailing market conditions etc. Business are compelled to sells
their goods on credit. In certain circumstances a business may deliberately
extend credit as a strategy of increasing sales. Extending credit means
creating current assets in the form of debtors or account receivables.
Investment in the type of current assets needs proper and effective
management as, it gives rise to costs such as:
Cost of carrying receivables
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Cost of bad debts losses
Thus the objective of any management policy pertaining to accounts
receivables would be to ensure the benefits arising due to the
receivables are more then the costs incurred for the receivables and the
gap between benefit and costs increased resulting in increase profits.
An effective control of receivables
Help a great deal in properly managing it. Each business should therefore
try to find out coverage credit extends to its clients using the below given
formula:
Average Credit = Total amount of receivable
(Extend in days) Average credit sale per day
Each business should project expected sales and expected investments
in receivable based on various factor, which influence the working
capital requirement. From this it would be possible to find out the
average credit days using the above given formula. A business should
continuously try to monitor the credit days and see that the average.
Credit offer to clients is not crossing the budgeted period otherwise the
requirement of investment in the working capital would increase and as
a result, activities may get squeezed. This may lead to cash crisis.
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CASH BUDGET: Cash budget basically incorporates estimates of
future inflow and outflows of cash cover a projected short period of
time which may usually be a year, a half or a quarter year. Effective
cash management is facilated if the cash budget is further broken down
into months, weeks or even a daily basis.
There are two components of cash budget are:
1. Cash inflows
2. Cash outflows
The main source for thses flows are given here under:
1. Cash Sales
2. Cash received from debtors
3. Cash received from Loans, deposits etc.
4. Cash receipts other revenue income
5. Cash received from sale of investment or assets.
CASH OUTFLOWS:
1. Cash Purchase
2. Cash payments to Creditors
3. Cash payment for other revenue expenditure
4. Cash payment for assets creation
5. Cash payments for withdrawals, taxes.
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6. Repayments of Loan etc.
A suggestive for, at for cash budget is given below:
MONTHS
PARTICULARS JANUARY FERBUARY MARCH
Estimated cash inflows
.
I. Total cash inflows
Estimated cash outflows
..
.. II. Total cash outflows
III. Opening cash balances IV. Add/deduct surplus/deflictduring the month ( I-
II)
V. Closing cash balances (III -IV)
VI. Minimum level of cash balance
VII. Estimated excess or short fall of cash (V-VI)
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WORKING CAPITAL ESTIMATION
Current assets Loans & advances FY 06-07 FY 07-08 FY 08-09
Currents assets
Inventories
stock in trade 223.94 662.87 1176.85
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work in progress 2528.4 4563.76 8714.56
raw materials 7224.96 8145.37 9242.58
stores and spare parts 1131.8 1463.13 1810.73
Total Inventories 11109.1 14835.13 20944.72
Debtors 5516.14 7402.6 14211.12
Cash & Bank balances 1027.1 8042.12 5225.01
(subtracting FCCB issue unutilized -6910.46 -5272.52
money as it amounts to long term
liability)
loans and advances 3249.1 7529.5 8647.1
Net current assets 20901.44 30898.89 43755.43
Current Liabilities FY 06-07 FY07-08 FY 08-09
Sundry Creditors 1476.37 1589.57 3748.82
Creditors for capital expenditure 1456.05 365.64 258.4other liabilities 342.26 645.34 621.04
unclaimed dividend 21.33 31.66 35.29
sundry deposits 174.14 229.23 321.66
advances from customers 217.21 362.59 73.55
interest accrued but not due on loan 7.04 20.05 32.12
Net current liabilities 3694.404 3244.08 5090.88
INVENTORIES
In the context of Karam Industries the major increase in the present three
financial years has been of the inventory.
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Reasons:
The pile up of inventory that is used in trial run, before hand to be
used in the checking the machinery & the newly installed production
capacity.
The increased inventory to produce more goods so as to utilize the
new plant set up.
DEBTORS AND AVERAGE RECEIVABLES
The debtors are increasing heavily in the financial year 07-08 because of a
sales boom that has accounted for huge accounts receivables increase.
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CASH AND BANK BALANCES
Cash and bank balance as per the balance sheet it is seen to be increasing
but from the above chart it is seen to be decreasing. This discrepancy can
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be attributed to the fact that balance sheet figures carry additional cash
balance of unutilized FCCB issue proceeds which amount to long term
liability as well. Thus the actual figures are distorted because the money
from FCCB issue has to be returned and it is a kind of long term loan
which the company has sought for expansion purpose. As a result to find
the actual outlay of cash the unutilized money has been subtracted. Also
we should take note of the fact that the FCCB money can only be used for
expansion purpose and not as money for usual application of working
capital.
LOANS AND ADVANCES
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Loans & advances are increasing on the part of increased advances that are
given to pile up inventory when the company went for the expansion
mode.
CURRENT ASSETS includes cash & those assets which can be easily
converted into cash within a short period generally one year such as
marketable securities , bills receivables, sundry debtors, inventories, work
in progress, prepaid expenses etc .The total current assets are the sum of
below contingency i.e.Current Assets = Stock/ Inventory + Sundry Debtors + Advances +
Cash and bank balances + other current assets
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Conclusions: The trend of the current assets in Karam industries
throughout the period from 2006-09 are shown in the pie-chart .it is
evident from the table that the current assets in Karam industries has
increased except in year 2007-08.
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CURRENT LAIBILITIES
These are those obligations which are payable within a short period of
generally one year and includes outstanding expenses, bills payable,
sundry creditors, accrued expenses, bank overdraft, short term advances,
income tax payable.
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Conclusion: The trend of Current Liabilities of Karam industries
throughout the period from 2006-2009 are shown in the table. It is evident
from the table that it shows increasing trends in the year 2006 to 2009. It
shows that the Karam industry has stability in trends of Current Liabilities.
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CREDITORS AND CREDITORS OF CAPITAL EXPENDITURE
Creditors of Karam industry limited are increasing from 70 Cr (FY 06-07)
to 18 Cr (FY 07-08) to 12 Cr (FY 08-09). The main reason for the
increase in can be attributed to the heavy purchase of the inventory for
stocking it up for trial run & use before the expansion mode.
Creditors for capital expenditure seem to be decreasing over the three years
i.e. from 18Cr (FY 06-07) to 12 Cr (FY 07-08) which is in sync with the
fact that the expansion work that has been in process and all preparations
for that are coming to an end.
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RATIO ANALYSIS
CURRENT RATIO
Current ratio is defined as the relationship between current assets and
current liabilities. It is a measure of general liquidity & is most widely
used to make the analysis of short term financial position of a firm. Current
FY 06-07
FY 07-
08 FY 08-09
Current assets 29843.52
47163.7
2 61410.49
current liabilities 7611.44 6597.95 7459.4
quick assets 12759.32
14530.4
6 20880.64
quick liabilities 7611.44 6597.95 7459.4
Net turnover (sales) 45503 52527.1 81786.93
working capital 22232.08
40565.7
7 53951.09
average inventory (average of opening & closing stock
of year) 8594.615
14476.4
65 22666.83
cost of goods sold = cost of sales 37398
47018.3
1 67855.4
total assets 87666
124436.
12 138465.6
total annual expenses -(depreciation +debt expenses) 37313.16
27364.0
6 23898.65
average gross income 97754.89
63633.3
7 51858
PROFIT before interest and taxes 5998 8120.16 14612.92
Total interest 747.8 2653.75 5214.77
Net Profit after tax (NPAT) 4115 3893.37 7383.56
capital employed (FA+CA-CL ) 89529.68
106917.
71 111772.7
investment (FA+CA) 97141.12
113515.
66 119232.1
Fixed assets 67297.6
66351.9
4 57821.59
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ratio is the ratio of current assets to current liabilities. A relatively higher
ratio is an indication that the firm is liquid and has the ability to pay its
current obligations on time. On the other hand a low current ratio indicates
that the Liquidity position of the firm is not good and shall not be able to
pay its current liabilities in time. Current Ratio:
The Current ratio is calculated by dividing current assets by current
liabilities:
Current ratio = current assets
Current ratio
QUICK RATIO: Quick ratio or liquid ratio is a more rigorous test of
liquidity than the current ratio. The term liquidity refers to the ability of the
firm to pay short term obligations as and when they become due. Quick
ratio may be defined as ratio of quick assets to quick liabilities. Liquid
assets include all the current assets excluding inventories & prepaid
FIANANCIAL
YEAR
CURRENT
ASSETS
CURRENT
LAIBILITIES CURRENT RATIO
FY 2006-2007 29843.52 7611.44 3.92
FY 2007-2008 47163.72 6597.95 7.14
FY2008-2009 61410.49 7459.4 8.23
FIANANCIAL YEAR
QUICK ASSETS
QUICKLIABILITITES CURRENT LAIBILITIES QUICK RATIO
FY 2006-2007 12759.32 7611.44 1.67
FY 2007-2008 14530.46 6597.95 2.2
FY2008-2009 20880.64 7459.4 2.78
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expenses. Liquid liabilities mean all liabilities excluding bank overdraft.
Inventories & prepaid expenses are not termed as liquid assets because
they cannot be converted into cash immediately without a loss of value.
CURRENT SCENERIO INTERPRETATION
While interpreting the figures of both the above ratios we should keep in
mind the following one point
Karam industries is a manufacturing concern
Since it is manufacturing concern the an excess of inventory as compared
to other industry models such as the services sector is an integral fact. As a
result it is bound to have higher current ratio and quick ratio as compared
to other industries.
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The sharp rise of current ratio from 20% (FY 06-07) to 37% (FY 07-08)
to 43 %( FY 08-09) Can be attributed to-
a. Higher pile up of inventory which was to be used up for trial run in
producing new products from the new plant set up.
b. Higher prepaid expenses related to advances given so as to pile up
the inventory so that when the inventory is needed for trial run, its
available.
c. An increase in average receivables which was in sync with increased
capacity of production and also increased sales.
An important point to note here is that an excess of cash balance arising
out of idle money coming out of FCCB issue expense has been deducted as
correspondingly it accounts for long term liability (debentures) which have
no effect on working capital management.
The quick ratio is a more important indicator of liquid position of Karam
industries as it hardly varies from 25% (FY 07-08) to 33% (FY 08-09).
Obviously the effect of inventories has been negated.
EFFICIENCY RATIO
From the perspective of working capital management we would be
discussing three important ratios they are.
Sales to working capital ratio
Inventory turnover ratio.
Current assets turnover ratio.
SALES TO WORKING CAPITAL RATIO
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This ratio is computed by dividing working capital by sales. This ratio
helps to measure efficiency of the utilization of net working capital. It
signifies that for an amount of sales. A relative amount of working capital
is needed. If any increase in sales in contemplated, working capital should
be adequate & thus this ratio helps management to maintain the adequate
level of working capital
Financial Year FY 06-07 FY 07-08 FY 08-09
Sales to working capital
ratio 2.046727 1.294863 1.51595
CURRENT SCENERIO INTERPRETATION
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As seen from the above table the ratio has decreased from 2 (FY 06-07)
to 1.29 in (FY 07-08) and then increased to 1.5 (FY 08-09). This ratio is
again indicative of the fact that the year in which the expansion took
place the sales did not match up with the scale of expansion. Otherwise
it would have remained intact and not decreased. The slight increase
from 1.29 to 1.51 is indicative of the fact that the full impact of
expansion is being slowly realized & sales are slowly increasing.
INVENTORY TURNOVER RATIO
This ration indicates the effectiveness and efficiency of inventory
management. This ratio is calculated as cost of goods sold: average
inventory shows how speedily the inventory is turned into accounts
receivables through sales. The higher the inventory turnover ratio (also
called stock velocity) the more the efficient inventory management.
Financial Year FY 06-07 FY 07-08 FY08-09inventory turnover ratio/ stock
velocity
4.3513
29
3.24791
38 2.9936
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CURRENT SCENERIO INTERPRETATION
The stock velocity is decreasing subsequently from 4.35 (FY 07-08) to
2.99 (FY 08-09) which shows inefficiency on the part of inventory
management.
Partly the reason for the fall can be attributed to stocking up of inventory
for the trail run & using them in testing the expansion mode machinery.
CURRENT ASSETS TURNOVER RATIO
This ratio is indicated by sales upon current assets. This ratio indicates the
efficiency with which the current assets turn into sales & higher currentassets turnover ratio implies by & large a more efficient use of funds in
current assets. Thus, a high turnover rate indicates reduced lock up of
funds in current assets. An analysis of this ratio over a period reflects
working capital management of the firm
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Financial Year FY 06-07 FY 07-08 FY08-09current assets turnover
ratio 1.52472 1.11371834 1.331807
CURRENT SCENERIO INTERPRETATION
The ratio is slightly decreasing from 1.52 (FY 06-07) to 1.11 (FY 07-08)
& then increasing to 1.33 (FY 08-09) which shows that sales increase is
not matched by the increase in current assets in the expansion phase of
Karam industries . The reason can be well attributed to the piling up of trial
stock and not full use of the expanded production capacity.
OPERATING RATIOS
Working ratio
Interest coverage ratios
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WORKING RATIO
A ratio used to measure a company's ability to recover operating costs
from annual revenue. This ratio is calculated by taking the company's
total annual expenses (excluding depreciation and debt-related
expenses) anddividing itby the annual gross income. A working ratio
below 1 implies that the company is able to recover operating costs,
whereas a ratio above 1 reflects the company's inability to do so.
Financial Year FY 06-07 FY 07-08 FY08-09
working ratio 0.381701 0.43002689 0.460848
CURRENT SCENERIO INTERPRETATION
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efficiency of a department; optimum use will help to generate maximum
return.
Karam industries is also using SAP 6.0 versions which is very advanced
to do every transaction of any organization. SAP 6.0 also applicable for
e-transaction.
FINDINGS
The sharp rise of current ratio finding 20% (FY 06-07) to 37% (FY
07-08) to 43% (FY 08-09).
The debtors are increasing heavily in the financial year 07-
08because of a sales boom that has accounted for huge accounts
receivables increase.
The current asset in Karam industries has increased except in year
2007-2008.
The current liabilities of Karam industries in the year 2006-2009. It
shows stability in trends of current liabilities.
The stock velocity is decreasing subsequently from 4.35(FY 07-08)to 2.99(FY 08-09).
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BIBLOGRAPHY
BOOKS:-
Financial Management theory and practice by Rosanna Chandra
Financial Management theory and practice by Shashi .K. Gupta &
R.K. Sharma.
NEWS PAPERS:-
Times of India
Economic times
MAGAZINES:-
Business Today
Money Menter
WEB SITES:-
Www. Google.com,
Www. Wikepidia.com