INDEX

TOPIC
SR.NO
1.
INTRODUCTION
2.

KINDS OF WORKING CAPITAL

3.
WORKING CAPITAL BEHAVIOUR
4.

COMPONENTS OF WORKING CAPITAL

5.

OPERATING ENVIRONMENT OF WORKING CAPITAL

6.

DETERMINATION OF WORKING CAPITAL

7.

APPROACH TO FINANCING WORKING CAPITAL

8.

CONCLUSION

9.

BIBLIOGRAPHY

CHAPTER 1
INTRODUCTION

Whatever may be the organization, working capital plays an important role, as the company
needs capital for its day to day expenditure. Thousands of companies fail each year due to poor
working capital management practices. Entrepreneurs often dont account for short term
disruptions to cash flow and are forced to close their operations. In simple term, working capital
is an excess of current assets over the current liabilities. Good working capital management
reveals higher returns of current assets than the current liabilities to maintain a steady liquidity
position of a company. Otherwise, working capital is a requirement of funds to meet the day to
day working expenses. So a proper way of management of working capital is highly essential to
ensure a dynamic stability of the financial position of an organization.
Working capital management deals with maintaining the levels of working capital to optimum,
because if a concern has inadequate opportunities and if the working capital is more than
required then the concern will lose money in the form of interest on the blocked funds. Therefore
working capital management plays a very important role in the profitability of a company. And
also due to heavy competitions among different organizations it is now compulsory to look after
working capital.
Definition of Working Capital
Working capital may be defined in two ways, either as the total of current assets or as the
variation flanked by the total of current assets and total of current liabilities. Like mainly other
financial conditions the concept of working capital is used in dissimilar connotations through
dissimilar writers. Therefore, there appeared the following two concepts of working capital.
Gross concept of working capital
Net concept of working capital

Gross Concept

No special distinction is made flanked by the conditions total current assets and working capital
through authors like Mehta, Archer, Bogen, Mead, and Baker. Just as to them working capital is
nothing but the total of current assets for the following causes:
Profits are earned with the help of the assets which are partly fixed and partly current. To a sure
degree, parallel can be observed in fixed and current assets in that both are partly borrowed and
yield profit in excess of and above the interest costs. Logic then demands that current assets
should be taken to mean the working capital of the corporation.
With every augment in funds, the gross working capital will augment while just as to the net
concept of working capital there will be no transform in the funds accessible for the operating
manager. The management is more concerned with the total current assets as they constitute the
total funds accessible for operating purposes than with the sources from which the funds came,
and that The net concept of working capital had relevance when the shape of organization was
single entrepreneurship or partnership. In other languages a secure get in touch with was
involved flanked by the ownership, management and manage of the enterprise and consequently
the ownership of current and fixed assets is not given so much importance as in the past.
Net Concept
Contrary to the aforesaid point of view, writers like Smith, Guthmann, and Dongall. Howard and
Gross believe working capital as the mere variation flanked by current assets and current
liabilities. A broader view of working capital would also contain current liabilities such as
explanations payable, notes payable and other accruals. In his opinion, working capital
management involves the managing of individual current liabilities and the managing of all interrelationships that link current assets with current liabilities and other balance sheet explanations.
The net concept is advocated for the following causes:
In the extensive-run what matters is the surplus of current assets in excess of current liabilities. It
is this concept which helps creditors and investors to judge the financial soundness of the
enterprise. what can always be relied upon to meet the contingencies is the excess of current
assets in excess of current liabilities, as it is not to be returned; and This definition helps to
discover out the correct financial location of companies having the similar amount of current
assets.

In common, the gross concept is referred to as the Economics concept, as assets are employed to
derive a rate of return. What rate of return is generated through dissimilar assets is more
significant than the analyzed variation flanked by assets and liabilities. On the contrary, the net
concept is said to be the point of view of an accountant. In this sense, working capital is viewed
as a liquidation concept. So, the solvency of the firm is seen from the point of view of this
variation usually, lenders and creditors view this as the mainly pertinent approach to the problem
of working capital.
Constituents of Working Capital
No matter how, we describe working capital, we should know what constitutes current assets and
current liabilities. Let us refer to the Balance Sheet of Lupin Laboratories Ltd. for this purpose.
Current Assets
The following are listed through the Company as current assets:
Inventories:
Raw materials and packing materials
Work-in-progress
Finished/Traded goods
Stores, Spares and fuel
Sundry Debtors:
Debts outstanding for a era exceeding six months
Other debts Cash and Bank balances:
With Scheduled Banks
In Current explanations
In Deposit explanations

With others in Current explanations

Loans and advances:
Secured Advances
Unsecured (measured good)
Advances recoverable in cash or type for value to be received
Deposits
Balances with customs and excise authorities
Current Liabilities
Current Liabilities:
Sundry creditors
Unclaimed dividend warrants
Unclaimed debenture interest warrants
Short term credit:
Short term loans Cash credit from banks
Other short term payables
Provisions:
For Taxation
Proposed Dividend
On preference shares
On equity shares

Besides, things like prepaid expenses, sure advance payments are also incorporated in the list of
current assets. Likewise, bills payable, income received in advance for the services to be
rendered are treated as current liabilities. Nevertheless, there is variation of opinion as to what is
current. In the strict sense of the term, it is related to the, operating cycle, of the firm and current
assets are treated as those that can be converted into cash within the operating cycle. The era of
the operating cycle may be more or less compared to the accounting era of the firm. In case of
some firms the operating cycle era may be little and in an accounting era there can be more than
one cycle. In order to avoid this confusion, a more common treatment is given to the,
currentness, of assets and liabilities and the accounting era (usually one-year) is taken as the
foundation for distinguishing current and non-current assets.

CHAPTER 2
KINDS OF WORKING CAPITAL
Sometimes, working capital is divided into two diversities as:
Permanent working capital
Variable working capital
Permanent Working Capital
However working capital has a limited life and generally not exceeding a year, in actual practice
some section of the investment in that is always permanent. As firms have relatively longer life
and manufacture does not stop at the end of a scrupulous accounting era some investment is
always locked up in the shape of raw materials, work-in-progress, finished stocks, book debts
and cash. The investment in these components of working capital is basically accepted forward
to the after that year. This minimum stage of investment in current assets that is required to
continue the business without interruption is referred to as permanent working capital. While
suggesting a methodology for financing working capital necessities through commercial banks,
the Tandon committee has also recognized the require to uphold a minimum stage of investment
in current assets. It referred them as, difficult core current assets. The Committee wanted the
borrowers to meet this portion of investment out of their own sources and not to depend on
commercial banks.
Variable Working Capital
This is also recognized as the circulating or transitory working capital. This is the amount of
investment required to take care of the fluctuations in the business action. While permanent
working capital is meant to take care of the minimum investment in several current assets,
variable working capital is expected to care for the peaks in the business action. While
investment in permanent portion can be predicted with some probability, investment in variable
portion of working capital cannot be predicted easily as sudden changes in the business action
reasons variations in this portion of working capital.

CHAPTER 3
WORKING CAPITAL BEHAVIOUR
One of the implications of the division of working capital into two kinds is to understand its
behaviour in excess of an era of time. Investment in working capital is related to sales volume. A
difference in sales volume in excess of time would consequently bring in relation to the
transform in the investment of working capital. This is said to modify depending upon the kind
of working capital
Cyclical Flow and Aspects of Working Capital
For every business enterprise there will be a natural cycle of action. Due to the interaction of the
several forces affecting the working capital, it transforms and moves from one to the other. The
role of the financial manager then, is to ensure that the flow proceeds by dissimilar working
capital levels at an effective rate and at the appropriate time. Though, the successive movements
in this cycle will be dissimilar from one enterprise to another, based on the nature of the
enterprises.
But in real business situations, the cyclical flow of working capital is not easy and smooth going,
as one may be tempted to conclude from these easy flows. This cyclical procedure is repeated
again and again and so do the values stay on changing as they move by the cash to cash path. In
other languages the cash flows arising from cash sales and collections from debtors will either
exceed or be lower than cash outflows represented through the amounts spent on materials,
labour, and other expenses. An excess cash outflow in excess of cash inflow is a clear indication
of the enterprise having suffered a loss. Therefore it is evident, that the amount of working
capital required and its stage at any scrupulous time will be governed directly through the
frequency with which this cash cycle can be continued and repeated. The faster the cycle the
lesser will be the investment needed in working capital. Shape the aforesaid discussion, one can
easily identify three significant aspects of working capital, namely, short life span, swift
transformation and interrelated asset shapes and synchronization of action stages.

Short-life Span
Components of working capital are short-existed. Typically their life span does not exceed one
year. In practice, though, some assets that violate this criterion are still classified as current
assets.
Swift Transformation and Inter-related Asset Shapes
In addition to their short span of life, each component of the current assets is swiftly transformed
into the other asset. Therefore cash is utilized to replenish inventories. Inventories are diminished
when sales increase explanations receivable and collection of explanations receivable increases
cash balances. Therefore a natural corollary of this quick transformation is the frequent and
repetitive decisions that affect the stage of working capital and the secure interaction that exists
in the middle of the members of the family of working capital. The latter entails the assumption
that efficient management of one asset cannot be undertaken without simultaneous consideration
of other assets.
Assets Shapes and Synchronization of Action Stages
A third characteristic of working capital components is that their life span depends upon the
extent to which the vital behaviors like manufacture, sharing, and collection are noninstantaneous and unsynchronized. If these three behaviors are only instantaneous and
synchronized, the management of working capital would obviously be a trivial problem. If
manufacture and sales are synchronized there would be no require to have inventories. Likewise,
when all customers pay cash, management of explanations receivable would become
unnecessary.

Scheduling for Working Capital

Scheduling gives a logical starting point for several of the decisions. It is extremely much true
for working capital decision also. Unless, we plan for procurement and effective exploit as
suggested, not be in a location to get best out of working capital. In a method, effective
scheduling leads to appropriate allocation of the money in the middle of dissimilar components
of working capital. Drawing a distinction of the type of Peter F. Drucker, flanked by efficiency
(doing items right) and effectiveness (throughout right items). Scheduling clearly embraces the

latter. It is for this cause scheduling for working capital is measured highly appropriate and
inclusive of the present discussion on conceptual framework.
While scheduling should logically begin at the top of the organizational hierarchy, responsibility
for scheduling exists at all stages within the organization. While working capital scheduling is a
section of financial scheduling the responsibility permeats in the middle of dissimilar managers
within the organisation responsible for managing dissimilar components of working capital. At
the stage of scheduling for individual components of working capital persons like materials
manager, credit manager and cash manager are involved. Though, the overall responsibility for
coordinating the scheduling of working capital typically rests with the top management.
Apparatus of Scheduling for Working Capital
It should be motivating to know how to identify the relevant apparatus for completing the
scheduling exercise. We can note down the following apparatus of analysis with respect to timeframe.
Short term scheduling Cash Budgeting
Medium term scheduling Determination of appropriate stages of working capital things
Extensive term scheduling Projected pay outs and returns to shareholders in conditions of CVP
and funds flow analysis.
Cash Budget
In the short term cash budgeting is measured a handy device for scheduling working capital. The
exploit of cash budget technique as a means of determining the size of the cash flows is
measured larger to the exploit of proforma balance sheets or judging through the past experience.
A cash budget is a comparison of estimated cash inflows and outflows for a scrupulous era such
as a day, a week, a month, a quarter, or year. Typically Cash budget is intended to cover oneyear
era and the era sheltered is subdivided into intervals. It can be prepared in several ways like the
one based on cash receipts and disbursements method, or the adjusted net income method, or the
working capital differential method. The budgeting procedure begins with the beginning balance
to which are added expected receipts. This amount is reached through multiplying expected cash
receipts through the probability sharing that the management budgetary will prevail throughout

the budgetary era. If outlays exceed the beginning balance plus anticipated receipts the variation
necessity is financed from external sources. If an excess exist, management necessity create a
decision concerning its disposal either in conditions of investing in short-term securities,
repaying the existing debts, or returning the funds to the share-holders. The preparation of the
cash budget helps management in several ways. Management will be able to ward off the
disadvantages of excessive liquidity, as there will be fact on how and when such cash results in.
Likewise it will be able to get in touch with dissimilar sources of fund to tide in excess of a
situation of cash shortage and can avoid rushing to obtain fund at whatever cost. It allows the
management to relate the maturity of the loan to require and determine the best source of funds,
as the fact furnished through the budget reflects the amounts and time for which funds are
needed. Further, cash Budget establishes a sound foundation for controlling the cash location.
Of the many methods of preparing the cash budget, Receipts and Payments method is popular in
the middle of several undertakings. More so the preparation of cash budgets in the organisations
was an integral section of the budgetary procedure, as the entire of the budgetary building was
divided into revenue budgets, expenditure budgets and cash budgets. Cash budget was prepared
through the organisations through borrowing figures from several other budgets which they
prepared such as the:
Manufacture budgets.
Sales budget.
Cost of manufacture estimates with its necessary subdivisions for instance.
Materials purchase estimates:
Labour and personnel estimates:
Plant maintenance estimates: etc.
Man authority budget.
Community and welfare estimates
Profit and loss estimates.

Capital expenditure budget.

Therefore, cash budget is prepared as a means of identifying the past cash flows and determine
the future course of activity. Cash budgets, usually are prepared through all enterprises on yearly
foundation having monthly breakups.
Medium Term Scheduling
In the medium term determining appropriate stage of working capital is measured a focal point.
We have discussed in detail the following three approaches to determine optimum investment in
working capital.
Industry Norm Approach
Economic Modeling Approach
Strategic Choice Approach
Funds Flow
Funds flow is yet another tool used in the extensive run to examine the financial location of a
company. However the term funds can be understood to contain all financial possessions,
preparation of funds flow statements on working capital foundation are more general in fund.
The preparation of such flow statements provides a thought as to the movement of funds in the
organisation. The particulars relating to the funds generated from operations and changes in net
working capital location are highly relevant in this analysis. A firms capability to pay off its
current debts depends largely on its skill to close funds from operations. The prime objective of
funds flow report (prepared on the foundation of working capital movements) is to illustrate the
ebb and flow of funds by working capital and to shed light on factors contributing to the
movements. As a matter of information the internal movement of wealth (to a big extent)
generally takes lay in the middle of working capital things. An analysis of these movements so
would give an understanding of the efficiency of working capital management.
For that matter, one has to ascertain changes in current assets and current liabilities throughout
the two balance sheet dates and record variations in working capital. This would help in
identifying the net changes. i.e., increases and decreases in working capital location.

Working Capital and Inflation

Inflation, which is commonly indicated through the rise in prices of goods and services, is so
rampant in the world that no economy is distant off from its deleterious effects. Inflation has
been experienced through approximately all the countries in the world irrespective of their
political system and the level of industrialization. The information is that, in excess of the last
two decades, annual rates of inflation in excess of two to three percent have become general all
in excess of the world.
In India, the rate of inflation was more than in several other countries, and the wholesale prices
rose through approximately 32 percent throughout 1956-61, through slightly less than 30 percent
throughout 1961-66, and 25 percent throughout the Annual Plan eras (1966-69). Besides
fluctuations the annual rate of rise in the wholesale price was exceptionally high and in 1974-75,
approximately alarming. Inflation rate based on Wholesale Price Index (WPI) averaged
approximately 9 per cent throughout 1970-71 to 1990-91. Again it touched the highest stage of
the decade in 1991-92 at 16.7 percent, when the economic action was at its lowest ebb.
Consequent upon the reforms, there has been some recovery in the economy and the rate of
inflation has approach down to even 2 percent throughout 1998-99, threatening the regime of
deflation. Nevertheless, there is no consistency in the performance of the economy. Again the
rate of inflation is moving towards a standard of 4-5 percent. Alongside these indices there are
some hidden inflationary potentials which are not evident. Prominent in the middle of these are
generous subsidies, changing international prices of crude oil and petroleum products and the
administered prices for sure other products. The combined impact of these factors is definitely
seen on the inflation.
Size of Working Capital
Inflation reasons a spurt in the prices of input factories like raw materials, labour, fuel and
authority, even however there is no augment in the quantum of such input factors used. Secondly
inflationary circumstances through providing motivation for higher profits induce the
manufacturers to augment their volume of operations. High profits and high prices make further
demand therefore , leading to further investments in inventories, receivables, and cash. The
cycle, therefore continues for an extensive time, entailing on the fund manager to arrange for

superior working funds after each successive augment in the volume of operations. Thirdly,
companies also tend to accumulate inventories throughout inflation to reap the speculative
profits. This type of blocking up of funds, in turn necessitates enterprise to uphold superior
working capital funds. Finally the existing financial reporting practices of firms on the
foundation of historical costs as per the companies Act and Income Tax Act are also responsible,
for the reduction in the size of working capital fund. Throughout the era of inflation, as historical
costs set against the current prices and inventories are valued at current prices, higher profits
would be accounted. The reporting of inflated profits makes two aberrations. The company has
to pay higher taxes on the inflated profit figure however much of it is unrealized and if the
company also declares the remaining profits as dividends, it leads to sharing of dividends out of
capital and eventually reduces the funds accessible to the company for operations in inflationary
years owing to escalation in cost of inputs, augment in the volume of operations, accumulation of
speculative inventory and the adoption of historical cost accounting system.
Availability of Working Capital
Besides the problem of increased demand for funds there would be a reduction in the availability
of such funds associated with higher costs throughout inflation. There would be no problem if
the working capital funds were accessible to an unlimited extent at a reasonable cost, regardless
of the economic condition prevailing in the economy. In reality, the situation is totally the
opposite as both internal and external sources of funds for financing working capital become
scarce.
As pointed out earlier, throughout inflation the availability of internal sources gets reduced
because of the maintenance of records on historical cost foundation. On the other hand, the
location with regard to external sources of funds is equally disheartening. The rapid augment in
inflation has given rise to the formulation of tight money policy through the Reserve Bank of
India with a view to restricting the flow of credit in the economy. Consequently, the extension of
credit facilities from banks has become very limited.
Till recently, companies depended heavily on public deposits for meeting their working capital
necessities. Their availability though was reduced due to the restrictions imposed through the
RBI on the companies for the mobilization of deposits from public, particularly as 1978. Further

the advent of Government companies into the capital market for accepting public deposits made
it harder to draw funds from the public.
Coming to the deal credit, one necessity note that it may not be accessible for extensive eras, and
the suppliers of goods tighten the credit facilities throughout inflationary era. The issue of
extensive term loans may also be slackened, as the investors would be less attracted through
investments offering a fixed return like debentures and preference shares. This is so because in
conditions of purchasing authority the principal amount of investment as well as the interest
would dwindle. Therefore , these restrictions and limitations on the availability of working
capital from internal and external sources create it hard for the fund manager to raise funds
throughout inflation.

CHAPTER 4
COMPONENTS OF WORKING CAPITAL
It may be motivating at this level of the analysis to believe the impact of inflation on the
components of working capital, namely, inventory receivables and cash.
Inventory
Not several understand fully the impact of inflation on the management of inventory. Inflation
affects the decisions in respect of inventory in several ways, namely;
It leads to in excess of-investment in inventory.
It results in shortages.
It affects valuation of inventories; and
It renders the traditional inventory manage techniques ineffective.
Throughout the eras of inflation when the prices rise rapidly, companies will have an incentive to
invest more heavily in inventory than is indicated through the minimum cost calculation. If the
management believes the price of an thing will augment through 10 per cent in the after that
month, considerably more of that thing may be ordered than normal, of course, due to augment
in inventory the company may get speculative gain, but this speculative gain may be off-set
through the augment in taxes due to higher profit figures, accounted in times of inflation and
higher carrying costs.
Another difficulty that the company is required to face is the material shortages in the eras of
inflation. It is not recognized whether inflationary escalations result in shortages or shortages
happen because of instability caused through inflation. Whatever be the real source of the
problem, companies should be conscious of the price trends and accordingly re-evaluate their
internal purchasing and organizational systems.
Extremely few firms realize the impact of inflation on the valuation of inventory and the extent
to which it contributes to unrealized profits. In other languages, inflation affects the valuation of
inventories, affecting thereby the amount of profits accounted in the financial statements.

Not only inflation affects the inventory, but inflation itself is also increased due to the inefficient
management of inventory. Delivering the keynote address at a National Convention on the
subject of, Curbing Inflation by Effective Materials Management, Shri P.J.Fernandes put
forward the following five propositions to illustrate the impact of inflation on the materials
management.
The stocks which are held through the enterprises have a direct and immediate connection to
common price stages. The price stage in any country is to a great extent determined through the
cost of manufacture. The cost of manufacture is to a great extent determined through the cost of
inputs. Hence, if the cost of inputs goes up, the cost of manufacture as well as the price stage also
goes up. An effective system of materials management necessity necessarily results in an
augment in manufacture.
The materials manager can have a total and absolute impact on manufacture outside his element,
and It is the materials management, which can reduce the crushing burden of credit expansion,
and the money supply, which again will have a direct and absolute impact on inflationary
tendency.
Receivables
The effect of inflation on the receivables is felt by the size of investment in receivables. The
amount of investment in receivables varies depending upon the credit and collection policies of
the organisation. Evidently, throughout the eras of inflation the higher the amount involved in the
receivables the greater would be the loss to the company, as the debtor would be paying cheaper
rupees. Similarly, the length of the time too creates the firm lose much in the transaction. For
example, if the firm in the beginning made a credit sale of in relation to the Rs. 1,00,000 with an
allowed credit era of three months, assuming a 20 percent inflation in the economy, the amount
the company receives in real conditions after the allowed credit era becomes only Rs. 95,000.
Here, even considering the similar time lag flanked by delivery and realization, as flanked by
debtors and creditors, sundry debtors would make better problem than the sundry creditors,
because the declining value of sundry debtors would affect adversely the anticipated profitability
of the enterprise. Therefore , the effect of inflation varies in accordance with the quantum of
receivables and the time allowed repaying them.

Cash
Management of cash takes on an added importance throughout the eras of inflation. With money
losing value in real conditions approximately daily, idle cash depreciates rapidly. A company that
holds Rs.1, 00,000 in cash throughout 20 percent annual rate of inflation discovers that the
moneys real value is only Rs. 80,000 in conditions of current purchasing authority. Even more
significant, idle cash is not earning any return. Throughout inflationary eras, it is significant that
cash is treated as an asset required to earn a reasonable return. The loss on the excess cash may
be off-set or partly mitigated, if it is invested to produce an income in the shape of interest
earned. Obviously, if the rate of interest exceeds the rise in the price stage, the firm realizes a
gain equivalent to the excess, or sustains a loss if it is vice versa. Further, the loss of the
purchasing authority of excess cash is of scrupulous concern, if the company sells debts or fixed
income securities with the intention of subsequently investing the proceeds in fixed assets.
Trends in Working Capital
In order that we gain a bigger thought of the working capital, it is also necessary to go into the
working capital in Indian companies, besides having a thought of the conceptual framework. For
the purpose of analyzing trends in working capital, data is culled from the publications of RBI on
Finances of public limited companies. The data of RBI covers roughly in relation to the onethird of the nongovernment, non-financial companies in conditions of paid-up capital. Table 1.1
depicts the era sheltered from 1992- 93 to 2001-02. The trends are analyzed for this era of nine
years with a gap of one year (98-99). In view of the variations in the example number of
companies throughout the era under consideration, trends are analyzed to a great extent in
conditions of percentages than in absolutes.

CHAPTER 5
OPERATING ENVIRONMENT OF WORKING CAPITAL
Monetary and Credit Policies Throughout seventies after the economies have started
experiencing high inflation and low growth (a phenomenon described stagflation) economists
have turned their attention to the potentiality of the monetary policy in the economic policy
creation . The comparative importance of growth and price continuity as the objectives of
monetary policy became the focus of attention in both urbanized and developing economies. In a
method, the objectives of monetary policy can be no dissimilar from the overall objectives of
economic policy. While some central banks believe monetary targeting as operationally
meaningful, some others focus on interest rates. Whatever be the method, growth with continuity
is attempted as the objective of monetary and economic policy of India. In the conduct of
monetary policy, the following characteristics become pertinent:
Money Supply
Bank Rate
CRR & SLR
Interest Rates
Selective Credit Controls
Flow of Credit
Money Supply
As a section of the policy exercise, monetary growth is targeted every year. Policy events are
pronounced, so as to take care of this targeting exercise. This is expected to uphold real growth
and include inflation. In this context, the Central Bank identifies the order of expansion in broad
money (recognized popularly as M3 and includes of currency with the public demand and time
deposits with commercial banks, and other deposits with RBI) that would be used as an
intermediate target to realize the ultimate objective of the policy. In the case of India, both output
expansion and price continuity is significant objectives; but depending on the specific conditions

of the year, emphasis is placed on either of the two. Increasingly, it is being recognized that
central banks would have to target price continuity as real growth itself would be in jeopardy, if
inflation rates go beyond the periphery of tolerance. On a historical foundation, the standard
inflation rate in India (which had declined from 9.0 percent in 1970s to 8.0 percent in 1980s)
went up markedly to a double-digit stage of 10.7 per cent throughout the first half of 1990s. The
focus of monetary policy in recent years has, so, been to bring down the inflation rate to a
modest stage. Monetary growth is being moderated in such a method that the credit necessities
for productive behaviors are adequately met
Bank Rate
The Bank Rate has been defined in Part 49 of the Reserve Bank of India Act, 1934 as the average
rate at which the bank is prepared to buy or rediscount bills of swap or other commercial papers
eligible for purchase under the Act. The significance of bank rate is that it designates the rate at
which the public should be able to obtain accommodation on the specified kinds of paper from
the commercial banks as well as the Central Bank. This is expected to curb the tendency towards
relatively high interest rates and ensure satisfactory banking services and reasonable rates to the
people. Secondly, bank rate symbolizes the foundation of the rates at which people can obtain
credit. Thirdly, bank rate also has a significant psychological value as an instrument of credit
manages. In effect, a transform in the bank rate is to create the cost of securing funds from the
Central Bank cheaper or more expensive, bring in relation to the changes in the building of
market interest rates and serve as a signal to the money market, business society and the public
of the relaxation or restrain in credit policy. Nevertheless, the success of bank rate policy
depends on the following:
That the bank rate of the Central bank should have a prompt and decisive power on money rates
and credit circumstances within its region of operation;
That there should be a substantial measure of elasticity on the economic building, in order that
prices, wages, rents, manufacture and deal might respond to changes in money rates and credit
circumstances; and That the international flow of capital should not be hampered through any
arbitrary restrictions and artificial obstacles.

As distant as India is concerned, the exploit of bank rate as an instrument of credit manage is less
frequent. Throughout 1951- 74, Bank rate was changed only nine times; but was revised only
thrice throughout 1975-96. More so, in majority of the cases, bank rate has been used in
conjunction with other instruments of credit manage to realize the needed effectiveness in the
manage exercise. It is, of late, the RBI is taking events to reactivate the Bank Rate and link it to
the interest rates of significance, so as to facilitate its emergence as the reference rate for the
whole financial system. With effect from the secure of business on April 15, 1997, the Bank Rate
was reduced from 12 percent to 11 percent and further to 10 percent w.e.f. June 25, 1997. This
reduction in the Bank Rate signaled the beginning of a low interest rate regime, as these
downward movements resulted in same reductions in lending and deposit rates in the financial
markets. Growths in the external habitation leading to speculative action in the Swap market
resulted in a transform in the direction of interest rate policy. RBI subsequently reviewed this
policy and reduced the rate to 6 percent w.e.f. April 29, 2003.
CRR and SLR
Variations in the reserve necessities is yet another credit manage technique used through a
Central Bank. The Central Bank through this technique can transform the amount of cash
reserves of banks and affect their credit creating capability. It may be applied on the aggregate
outstanding deposits or on the increments after a base date or even on sure specific categories of
deposits. This has a certain and identifiable impact as compared to Bank Rate changes or open
market operations. The two instruments under this category are:
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Under part 42(1) of the RBI Act, scheduled commercial banks were required to uphold with the
RBI at the secure of business on any day, a minimum cash reserve on their demand and time
liabilities. Likewise, banks were required under part 24(2A) to uphold a minimum amount of
liquid assets equal to but not less than sure percentage of demand and time liabilities. However
the RBI did not exploit CRR and SLR as important instruments of credit manage throughout the
entire of the sixties, it started varying the ratios as then actively. The implication of these
variations is that when the ratio is brought down it would release the funds that would have

otherwise been locked up for investment through the commercial banks. Of late, the RBI has
removed the reserve necessities on interbank liabilities w.e.f. April 26, 1997. This single measure
released Rs.950 crore for investment in deal and industry. Likewise, as a section of monetary and
credit policy for the second half of 1997-98, RBI reduced CRR through two percentage points
from 10.0 percent in eight stages of 0.25 each. The total addition to liquidity from this was
estimated at in relation to the Rs. 9,600 crore. Even however the obligation of banks is to uphold
their liquid assets at a minimum of 25 percent, in the light of the require to restrain the pace of
expansion of bank credit, the RBI has imposed a much higher percentage of minimum liquid
assets and in some cases to the extent of even 35 percent. These events have started impounding
huge amount of possessions of the banks and encouraging governments [Central and State] to
have a simple access to bank credit. It also led to the shrinkage of possessions accessible for
genuine credit purposes. In view of the strong opposition from the banks and basing on the
recommendations of the committee on Financial Sector Reforms, RBI reduced the ceiling to
its original stage of 25 percent of the net demand and time liabilities (NDTL). The banking
system already holds government securities of in relation to the39 percent of its net demand and
time liabilities (NDTL) as against the statutory minimum requirement of 25 percent. The cash
reserve ratio (CRR) leftovers a significant instrument for modulating liquidity circumstances.
The medium-term objective is, though, to reduce CRR to the statutory minimum stage of 3.0
percent. On a review of growths in the international and domestic financial markets, a 75
foundation point reduction in the CRR throughout June to November, 2002 was followed
through a further 25 foundation points cut from June 14, 2003 taking the stage of the CRR down
to 4.5 percent. The minimum daily maintenance of CRR was raised to 80 percent of the standard
daily requirement for all the days of the reporting for night with effect from the fortnight
beginning November 16, 2002. This was subsequently lowered to 70 percent with effect from the
fortnight beginning December 28, 2002. The payment of interest on eligible CRR balances
maintained through banks was changed from quarterly foundation to monthly foundation from
April 2003. The CRR has been approximately halved as April 2000 resulting in cumulative
release of first round possessions of in excess of Rs.33,500 crore

Interest Rates
Realizing the information that Bank Rate is not functioning as an effective tool of credit manage,
RBI started influencing the cost of credit, by the changes in interest rates. The RBI derived the
power to regulate the interest rates of banks under parts 21 and 35a of the Banking Regulation
Act, 1949. This authority covers both the advances and deposit rates. The rates on loans and
advances are controlled largely in order to power the demand for credit and to introduce a unit of
discipline in the exploit of credit. This is usually done through stipulating minimum rates of
interest for extending credit against commodities sheltered under selective credit manage. Also,
concessive or ceiling rates of interest are made applicable to advances for sure purposes or to
sure sectors to reduce the interest burden and therefore facilitate their development. Further, the
objectives behind fixing the rates on deposits are to avoid unhealthy competition amongst the
banks for deposits, stay the stage of deposit rates in alignment with the lending rates of banks,
and aid in deposit mobilization.
In recent years, there has been a persistent downward trend in the interest rate structure reflecting
moderation of inflationary expectations and comfortable liquidity situation. Changes in policy
rates reflected the overall softening of interest rates as the Bank Rate has been reduced in levels
from 8.0 percent in July 2000 to 6.25 percent through October 2002, which is the lowest rate as
May 1973.
Selective Credit Controls
Central banks, usually, have a policy to exploit qualitative techniques in addition to quantitative
techniques of credit manage. The mainly widely used of the qualitative techniques are selective
credit manage and moral suasion. While the common credit controls operate on the cost and total
volume of credit, selective credit controls relate to apparatus accessible with the monetary power
for regulating the sharing or direction of bank possessions to scrupulous sectors of the economy
in accordance with the broad national priorities measured necessary for achieving the set,
developmental goals. These manage techniques have special relevance to developing countries
owing to the meager supply of credit and the chance of credit being mis-utilised for unproductive
and speculative purposes. In exercise of the authority conferred on to it, the RBI may provide
directions of the following type to the banks usually or to any bank or a cluster of banks in

scrupulous. The purposes for which advances may or may not be made; The margins to be
maintained in respect of secured advances; The maximum amount of advances; and The rate of
interest and other conditions and circumstances subject to which advances may be granted or
guarantees may be given.
Financial Markets
The role of financial markets is paramount, in the mobilization and allocation of savings in the
economy. They are the agencies that give necessary funds for all productive purposes. In
addition, the role of financial markets is increasingly becoming critical in transmitting signals for
policy and in facilitating liquidity management. They are regarded as an essential adjunct to
economic growth. The real economy can be sound and productive only when financial markets
operate on prudent rows. The largest organized financial markets in India are: The credit market,
which is dominated through commercial banks; The money market with call money segment
forming a sizeable proportion; Equity and term lending market consisting of primary, secondary
and term lending segments; Corporate debt market comprising PSU bonds and corporate
debentures; Gilt-edged market for Government securities; Housing fund market; Hire purchase
and leasing fund market, wherein the non-bank financial companies (NBFCs) predominate;
Insurance market; and Foreign swap market.
In addition, there is an unorganized and informal fund market comprising of money lenders in
villages and indigenous bankers in towns/municipalities. All the agencies constitute the financial
sector of India. In the recent past (as 1991) government has embarked upon effecting biggest
changes in the regions of industrial deal and swap rate policies. These changes are intended to
correct the macro-economic imbalances and effect structural adjustments with the objective of
bringing in relation to the more competitive system and promoting efficiency in the real sectors
of the economy. Economic reforms in the real sectors of the economy will not produce desired
results, unless the former are supplemented through appropriate and effective financial sector
reforms. With this end in view, the Government of India has appointed a committee on the
working of financial system of the country in August 1991 under the chairmanship of M.
Narasimham. The committee was asked, inter alia, to look at the existing building of the
financial system and its several components and to create recommendations for improving the
efficiency and effectiveness of the system with scrupulous reference to the economy of

operations, accountability, and profitability of the commercial banks and financial organizations.
The committee has submitted its statement in November 1991. As the submission of the
statement, the Government has taken many steps on dissimilar characteristics of the
recommendations. The important steps that were taken are: A strict criterion was evolved for
companies that access securities markets. The issuers of securities are required to meet sure
standards like the payment of dividend, minimum share-holding requirement, etc. The Securities
and Swap Board of India (SEBI) took many steps for widening and deepening dissimilar
segments of the market for promoting investor defense and market development; The safety and
integrity of the securities market were strengthened by the organization of risk management
events, which incorporated a comprehensive system of margins, intra-day trading and exposure
limits, capital adequacy norms for brokers and setting up of deal/resolution guarantee funds.
Reforms in the secondary market focused on improving market transparency, integrity, and
infrastructure. FIIs were permitted to invest up to 10 per cent in equity of any company, to invest
in unlisted companies and to invest in debt securities without any requirement for investment in
equity. They were also permitted to invest in dated government securities within the framework
of guidelines on FII investment in debt instruments. Government has also initiated events to
deepen and broaden the government securities market and augment its liquidity. The earlier
restriction that debt instruments of a corporate could be listed only after its equity had been listed
on any swap was removed. Investment guidelines concerning the utilization of funds of LIC
were revised. The Mutual Finance Regulations issued through SEBI in 1993 were further revised
on the foundation of a special revise commissioned through it.

CHAPTER 6
DETERMINATION OF WORKING CAPITAL
Determination of Working Capital Requires:
Dissimilar Approaches
The question that what is the adequate amount of working capital required to run a business, is
attempted to be answered in many ways. Theoreticians, through their natural inclination to
construct models, have based their analogy on sure foundations and constructed models to
estimate the optimum investment in working capital. Whereas, lenders such as banks, financial
organizations have based their decisions on manufacture schedules and industry practices. In
flanked by, a new point of view was urbanized calling for the adoption of a strategic approach to
the decision-creation . Let us now talk about these theoretical issues to further our understanding
of the subject matter.
Industry Norm Approach
This approach is based on the premise that every company is guided through the industry
practice. If a majority of the elements constituting a scrupulous industry adopt a kind of practice,
other elements may also follow suit. This may finally, turn out to be an industry practice. This
practice decides the normal stage of investment in dissimilar current asset things. As a matter of
information, optimum stage of investment in receivables is to a great extent convinced through
the industry practices. If majority of the firms of a scrupulous industry have been granting say
three months credit to a customer, others will have no other method except for to follow the
majority; due to the fear of losing customers. However there is no foundation for such a kind of
fear in fixing norms for other things of current assets, elements usually prefers to follow
majority. Though, the troubles in following this kind of an approach are obvious: The
classification of elements into a scrupulous industry is not that simple. Firms may not be
susceptible for such a neat classification; when the elements are multi-product firms. Deciding a
standard to symbolize a scrupulous industry is highly hard. The norms, therefore , urbanized can
be less of a reality and more of a myth. Averages have no meaning to several firms, as the nature
of firms differs. Industry norm approach may result in imitative behaviour resulting in damage to

innovation. This approach may also promote difficult mentality, therefore limiting the scope
for quality. For instance, if X element is able to uphold its manufacture schedule with only one
month requirement of raw material, while the industry norm being 2 months, there is no wisdom
as to why X should also stay 2 months. Industry norm approach is not suggested through several
as a benchmark for creation investment in current assets. Nevertheless, this has been a practice
followed through several as a custom, even the Tandon Committee has urbanized norms for
maintenance of current assets on industry foundation.
Economic Modeling Approach
Model structure, of late, has become a crucial exercise in several disciplines. Theoreticians are
creation efforts to be as much precise as possible. Widespread exploit of quantitative techniques
has helped theoreticians to develop a framework to test their hypotheses. Models effort to
suggest an optimum solution to a given problem. As in the case of several disciplines, in the
region of fund also model structure has been attempted. As distant as working capital is
concerned, optimum investment in inventory is sought to be decided with the help of EOQ
model.
Strategic Choice Approach
Unlike industry norm approach and economic modeling approach, this is not an average method
which suggests sure benchmarks to work with. The earlier methods suggest the exploit of sure
yardsticks or guidelines, irrespective of the differences in size of the business elements, nature of
industry, business building, or competition. For instance, optimum investment in inventory can
be had through applying the equation and it is approximately universal for every business
element. Likewise, industry norm approach suggests the similar yardstick for every element
constituting that industry, in spite of variations in the size, nature of business, conditions of sale
and purchase, and competition. In contrast, the strategic choice approach recognizes the
variations in business practice and advocates the exploit of strategy in taking working capital
decisions. The spirit behind this approach is to prepare the element to face challenges of
competition and take a strategic location in the market lay. The emphasis is on the strategic
behaviour of the business element. The firm is self-governing in choosing its own course of
activity; not necessarily guided through the rules of the industry. This creates it obligatory on the

section of the firm to set its own targets for attainment in the region of working capital. For
example, if the firm has set an objective like rising market share from the present stage of 20
percent to 40 percent, it can think of devising an appropriate credit policy. Such a policy may
involve variations in the conditions followed at present such as extending the credit era,
enhancing the credit limit or rising the percentage of cash discount, etc.
Therefore, the strategic choice approach presupposes a highly competitive habitation and the
willingness of the management to take risks. The success of the approach also depends on the
skill of the management to set realistic goals and prepare appropriate strategy to achieve them.
Any wrong scheduling will lead the firm into trouble; much worse than what it was when either
of the earlier methods were being followed.

Factors Influencing Determination

The working capital necessities of a firm depend on a number of factors. It is a general
proposition that the size of working capital is a function of sales. Sales alone will not determine
the size of the working capital, but instead it is constantly affected through the criss-crossing
economic currents flowing in a business. The nature of the firms behaviors, the industrial health
of the country, the availability of materials, the ease or tightness of the money market, are all
sections of these shifting forces. Of them, the power of operating cycle is measured paramount.
Operating Cycle
As working capital is represented through the sum of current assets, the investment in the similar
is determined through the stage of each current asset thing. To a big extent, the investment in
current asset things is decided through the Operating Cycle (OC) of the enterprise. The concept
of operating cycle is extremely important for computation of working capital necessities. The
size of investment in each component of working capital is decided through the length of O.C.
The term operating cycle can be understood to symbolize the length of time required for the
completion of each of the levels of operation involved in respect of working capital things. This
helps portray dissimilar levels of manufacturing action in its several manifestations, such as
peaks and troughs, beside with the required supporting stage of investment at each level in
working capital. The sum of these level-wise investments is the total amount of working capital
required to support the manufacturing action at dissimilar levels of the cycle.

Instead they used the term natural business year within which an action cycle is completed.
Later, the accounting principles board of the American Institute of the Certified Public
Accountants while defining working capital used this concept. In addition to the power of
operating cycle, there is a diversity of factors that power the determination of working capital. A
brief account of the similar is provided hereunder.
Nature of Business
A companys working capital necessities are directly related to the kind of business operations.
In some industries like public utility services the consumers are usually asked to create payments
in advance and the money therefore received is used for meeting the necessities of current assets.
Such industries can carry on their business with comparatively less working capital. On the
contrary, industries like cotton, jute etc. may have to purchase raw materials for the entire of the
year only throughout the harvesting season, which obviously increases the working capital
requires in that era.
Growth and Expansion of Business
It is logical to anticipate that superior amounts of working capital are needed to support the rising
operations of a business concern. But, there is no easy formula to set up the link flanked by
growth in the companys volume of business and the growth of working capital. The critical
information is that require for increased working capital funds does not follow the growth in
business action but precedes it. Citerus paribus, growth industries need more working capital
than those that are static.
Product Policies Depending upon the type of things manufactured through adjusting its
manufacture schedules a company may be able to off-set the effects of seasonal fluctuations
upon working capital. The choice rests flanked by varying output in order to adjust inventories to
seasonal necessities and maintaining a steady rate of manufacture and permitting stocks of
inventories to build up throughout off-season era. In the first example, inventories are kept to
minimum stages; in the second, the uniform manufacturing rate avoids high fluctuations of
manufacture schedules but enlarged inventory stocks make special risks and costs.

Location of the Business Cycle

Besides the nature of business, manufacturing procedure and manufacture policies, cyclical and
seasonal changes also power the size and behaviour of working capital. Throughout the upswing
of the cycle and the busy season of the enterprise, there will be require for a superior amount of
working capital to cover the lag flanked by increased require and the receipts. The cyclical and
seasonal changes largely power the size of the working capital by the inventory stock. As regards
the behaviour of inventory throughout the business cycles, there is no unanimity of opinion in the
middle of economists. A few say that inventory moves in conventionality with business action.
While others hold the view that business action depends upon the behaviour of the inventory of
finished goods which is determined through the credit mechanism and short-term rate of interest.
Whatever are the view points, the information leftovers that the cyclical changes do power the
size of the working capital.
Conditions of Purchase and Sale
The magnitude of the working capital of a business is also affected through the conditions of
purchase and sale. If, for example, an undertaking purchases its materials on credit foundation
and sells its finished goods on cash foundation, it needs less working capital in excess of an
undertaking which is following the other method of purchasing on cash foundation, and selling
on credit foundation. It all depends on the managements discretion to set credit conditions in
consideration with the prevailing market circumstances and industry practices.
Miscellaneous
Separately from the factors some others like the operating efficiency, profit stages,
managements policies towards dividends, depreciation and other reserves, price stage changes,
shifts in demand for products competitive circumstances, vagaries in supply of raw materials,
import policy of the government, hazards and contingencies in the nature of business, etc., also
determine the amount of working capital required through an undertaking.

CHAPTER 7
APPROACH TO FINANCING WORKING CAPITAL
Financing the firms working capital necessities has been shown to involve simultaneous and
interrelated decisions concerning the firms investment in current assets. Fortunately, there exists
a principle, which can be used as a guide to firms working capital financing decisions. This is
the hedging principle or matching principle. Basically speaking, the hedging principle involves
matching the cash flow generating aspects of an asset with the maturity of the source of
financing used to fund its acquisition. For instance, a seasonal expansion in inventories, just as to
the hedging principle, should be financed with a short-term loan or current liability. The rationale
underlying the rule is straightforward. Funds are needed for a limited era of time, and when that
time has passed, the cash needed to repay the loan will be generated through the sale of the extra
inventory things. Obtaining the needed funds from an extensive-term source (longer than one
year) would mean that the firm would still have the funds after the inventories (they helped fund)
have been sold. In this case the firm would have excess liquidity, which they either hold in
cash or invest in low yielding marketable securities until the seasonal augment in inventories
occurs again and the funds are needed. This would result in an in excess of-all lowering of firm
profits.
Let us take another instance in which a firm purchases a new packing machine, which is
expected to produce cash saving to the firm through eliminating require for two laborers and,
consequently their salaries. This amounts to an annual savings of Rs.20,000. while the new
machine costs Rs. 1,00,000 to install and will last 10 years. If the firm chooses to fund this asset
with a one-year loan, then it will not be able to repay the loan from the cash flow generated
through the asset. Hence, in accordance with the hedging principle, the firm should fund the asset
with a source of financing that more almost matches the expected life and cash flow generating
aspects of the asset. In this case a 7 to 10-year loan would be more appropriate than a one-year
loan. To put it extremely succinctly the hedging principle states that the firms assets not
financed through spontaneous sources should be financed in accordance with the rule: permanent
assets (including permanent working capital requires) financed with long-term sources and
temporary assets (viz. fluctuating working capital require) with short-term sources of
fundtowards the liquidity risk.

CHAPTER 8
CONCLUSION
As the Working capital analysis study completed with a feeling of satisfaction leaving behind.
The company can achieve great or success in terms of increase in sales and profitability and
continuity of growth and build stronger equity than ever.
The company should utilize the operating activities, investing activities and financial activities in
pharmacy industry properly to get benefit from the customers and government satisfaction. So
that they can discharge current some of its creditors are current liabilities and avoid payment of
interest. The company should use the full benefits available for pharmacy industry and should
increase its efficiency.

CHAPTER 9
BIBLIOGRAPHY
M. Y. Khan & P K Jain, Financial Management Text and Problems, Tata McGraw
Hill Publishing Company Limited

Working_Capital_Management
www.workingcapital.com