SINTECH PRECISION PRODUCTS LIMITED

C-189 & 190, Site No. 1, B.S. Road, Ind. Area, Ghaziabad [U.P.]
Phone No.: 0120-2866320/21,3290635/37/38 Fax No. 0120-2867715
E-mail: marketing@sintechpumps.com Web Site: www.sintechpumps.com

CERTIFICATE

This is to certify that the Summer-Training Project of FINANCE Titled WORKING

CAPITAL MANAGEMENT and ITS APPRAISAL is an original work and that this work
has not been submitted anywhere in any form. My indebtedness to other
works/publications has been duly acknowledged at the relevant places. The project work
was carried from 1st June, 2009 to 31st July 2009 in SINTECH PRECISION PRODUCT
LIMITED.

Date: 31st July 2009

Signature
(Bulbul Sharma)
PGDM ( 2009-10)

Signature
(Mr. Sanjeev Garg)
Sintech Precision Product Limited

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 ACKNOWLEDGEMENT
Words are indeed inadequate to convey my deep sense of gratitude to all those who have
helped me in completing this summer project to the best of my ability. Being a part of this
project has certainly been a unique and a very productive experience on my part.

I am really thankful to Mr. Sanjeev Garg, Finance Manager for making all kinds of
arrangements to carry the project successfully and for guiding and helping me to solve all
kinds of quarries regarding the project work. His systematic way of working and incomparable
guidance has inspired the pace of the project to a great extent.

I would also like to thank my mentor and project coordinator, Mr. Parminder Singh, Asstt.
Manager, (Finance & Accounts) for assigning me a project of such a great learning
experience and acquainting me with real life project financing and appraisal.

I am very grateful to CA Neeta Sahu (Training & Placement Officer) AJAY KUMAR GARG
INSTITUTE OF MANAGEMENT, Ghaziabad. Who has given me the opportunity to do this
project in the Sintech Precision Product Ltd. and very thankful to all lecturers of AKGIM,
Ghaziabad for their useful guidance and advise.

This project would not have been successful without the help of Mr.N.C. Dhingra (Chairman)
Mr. Sahil Dhingra (Managing Director) of Sintech.

Last but not least I would like to thank all the employees of Sintech Precision Product Ltd.
who have directly or indirectly helped me with their moral support for the completion of my
project.

(Bulbul Sharma)

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 TABLE OF CONTENTS
Acknowledgement
Abstract
1. Introduction
The problems
Purpose of study
Research methodology
Scope of the study
Data sources
Limitations

2. Industry Profile
a. Indian Economy
b. Pump industry
c. Global Pump Market Outlook

3. Sintech Precision Product Ltd. An Overview

Companys Profile
Vision, Misson & Quality
Product Range
Sectoral Overview

4. Conceptual Framework
Introduction to Working Capital Management
Significance of working capital management
Liquidity vs Profitability: Risk Return trade off
Classification of working capital
Types of working capital needs
Financing of working capital
Factors determining working capital requirements
Working capital cycle
Sources of working capital
Inventory management

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 Cash management
Receivables management
Managing payables (Creditors)

5. Working Capital Analysis and its Appraisal

6. Major Findings

7. Conclusion

8. Suggestions and Recommendations

9. Bibliography

10. Appendices

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 ABSTRACT

This project is based on the study of working capital management in Sintech Precision
Product Ltd. An insight view of the project will encompass what it is all about, what it
aims to achieve, what is its purpose and scope, the various methods used for collecting
data and their sources, including literature survey done, further specifying the limitations
of our study and in the last, drawing inferences from the learning so far.
Sintech Precision Products Ltd., founded in 1986, by an enterprising technocrat Mr.
N.C.Dhingra is recognized as one of the largest pumping solutions provider today in
India. Sintech is an advanced pumping solution provider for water intensive heavy
industries. With a very diverse product portfolio, Sintech provides solutions for
multifarious applications like clear water, process, slurry, liquid with suspended solids,
sewage, acids, alkalies, seawater and many more. Sintech has branch offices and
dealership network in throughout the nation as well as catering the international market.
The working capital management refers to the management of working capital, or
precisely to the management of current assets. A firms working capital consists of its
investments in current assets, which includes short-term assetscash and bank balance,
inventories, receivable and marketable securities.
This project tries to evaluate how the management of working capital is done in Sintech
through inventory ratios, working capital ratios, trends, computation of cash, inventory
and working capital, and short term financing.

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 INTRODUCTION

The problems
Purpose of study
Research methodology
Scope of the study
Data sources
Limitations

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 INTRODUCTION:

The project undertaken is on WORKING CAPITAL MANAGEMENT IN SINTECH

PRECISION PROUCT LTD.
It describes about how the company manages its working capital and the various steps
that are required in the management of working capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's
ability to fund operations, reinvest and meet capital requirements and payments.
Understanding a company's cash flow health is essential to making investment
decisions. A good way to judge a company's cash flow prospects is to look at its working
capital management (WCM).

Working capital refers to the cash a business requires for day-to-day operations or, more
specifically, for financing the conversion of raw materials into finished goods, which the
company sells for payment. Among the most important items of working capital are
levels of inventory, accounts receivable, and accounts payable. Analysts look at these
items for signs of a company's efficiency and financial strength.
The working capital is an important yardstick to measure the companys operational and
financial efficiency. Any company should have a right amount of cash and lines of credit
for its business needs at all times.

This project describes how the management of working capital takes place at
SINTECH.
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 The Problems
In the management of working capital, the firm is faced with two key problems:

1. First, given the level of sales and the relevant cost considerations, what are the optimal
amounts of cash, accounts receivable and inventories that a firm should choose to
maintain?

2. Second, given these optimal amounts, what is the most economical way to finance
these working capital investments? To produce the best possible results, firms should
keep no unproductive assets and should finance with the cheapest available sources of
funds. Why? In general, it is quite advantageous for the firm to invest in short term
assets and to finance short-term liabilities.

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 PURPOSE OF STUDY

The objectives of this project were mainly to study the inventory, cash and receivable
at SINTECH PRECISION PRODUCT LTD., but there are some more and they are -

The main purpose of our study is to render a better understanding of

the concept Working Capital Management.

To understand the planning and management of working capital at SINTECH.

To measure the financial soundness of the company by analyzing various ratios.
To suggest ways for better management and control of working capital at the
concern.

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 RESEARCH METHODOLOGY

This project requires a detailed understanding of the concept Working

Capital Management. Therefore, firstly we need to have a clear idea of what
is working capital, how it is managed in SINTECH, what are the different
ways in which the financing of working capital is done in the company.

The management of working capital involves managing inventories, accounts

receivable and payable and cash. Therefore one also needs to have a sound
knowledge about cash management, inventory management and receivables
management.

Then comes the financing of working capital requirement, i.e. how the
working capital is financed, what are the various sources through which it is
done.

And, in the end, suggestions and recommendations on ways for better

management and control of working capital are provided.

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 SCOPE OF THE STUDY

This project is vital to me in a significant way. It does have some importance for
the company too. These are as follows

This project will be a learning device for the finance student.

Through this project I would study the various methods of the working capital
management.
The project will be a learning of planning and financing working capital.
The project would also be an effective tool for credit policies of the companies.
This will show different methods of holding inventory and dealing with cash and
receivables.
This will show the liquidity position of the company and also how do they
maintain a particular liquidity position.

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 DATA SOURCES:

The following sources have been sought for the preparation report:

Primary sources such as business magazines, current annual reports, book on

Financial Management by various authors and internet websites the imp
amongst them being : www.sintechpumps.com, www.indiainfoline.com,
www.studyfinance.com .
Secondary sources like previous years annual reports, CMA Data, reports on
working capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash
management, receivables management, inventory management and short term
financing was required.
This data was gathered through the companys websites, its corporate intranet,
Sintechs annual reports and CMA Data of the last three years.
A detailed study on the actual working processes of the company is also done
through direct interaction with the employees and by timely studying the
happenings at the company.
Also, various text books on financial management like Khan & Jain, Prasanna
Chandra and I.M.Pandey were consulted to equip ourselves with the topic.
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 LIMITATIONS OF THE STUDY:

We cannot do comparisons with other companies unless and until we have the
data of other companies on the same subject.
Only the printed data about the company will be available and not the backend
details.
Future plans of the company will not be disclosed to the trainees.
Lastly, due to shortage of time it is not possible to cover all the factors and details
regarding the subject of study.
The latest financial data could not be reported as the companys websites have not
been updated.

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 INDUSTRY PROFILE

Indian Economy

Pump Industry

Global pump market outlook and

growth driver

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14
 INTRODUCTION TO THE INDUSTRY

Indian Economy

In the beginning of the year 2008 the economy was on a higher growth path with the macro-
economic fundamentals inspiring confidence and a general optimism about the medium to
long term prospects of the economy. The economy was expected to slow down marginally
from the three years of 9% plus growth in real GDP reflecting a cyclical downturn in the global
economy and expectations were that the growth would be around 8.5%. High oil prices and
domestic inflation and worsening of international financial crisis which had surfaced in 2007
have been definite areas of concern. But the global situation deteriorated massively after mid-
September 2008 following collapse of series of investment banks in the US. This resulted in
choking of credit and global crash in stock markets. Crisis of this magnitude in industrialized
countries has impact around the world especially in the emerging market countries like India.
The Indian economy which started with a strong economic performance lost the momentum
once the ripple effects of the gloom in the global economy set in. Sensex in January 2008
was all time high at 21206, came down to around 9000 towards the end. The high cost of
crude oil around US$ 150 per barrel in August, 2008 added to the countrys woes in terms of
higher import bill. Rupee weakened against dollar sliding down from Rs.39 in the beginning of
the year to Rs.48 towards the end.

According to the estimates released by Central Statistical Organisation (CSO) the real GDP
growth was 7.6% in the second quarter of 2008-09 as compared to 9.3% of the corresponding
quarter of 2007-08, reflecting deceleration in growth of industry and services. The agricultural
production was below the estimate. The index of industrial production recorded 3.9% as
compared to 9.2% in the previous year. Indias balance of payments position witnessed
widening of trade deficit. The crisis in global financial markets deepened since mid
September, 2008 exerting pressure on financial markets and crashing of equity markets
leading to wide spread volatility. The global turmoil in the financial markets spilled over the
emerging markets. This has finally affected the manufacturing sector. As a result, authorities
in several countries embarked upon an unprecedented way of policy initiatives to contain
systematic risk, arrest the plunge in asset prices and shore of the confidence in the
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15
international banking system. This has brought about some level of stability. The Indian
Government has not lagged behind. It has been successful in bringing down inflation from
12.9% in August, 2008 to around 6% towards the end of the year. The challenges of high
growth and now global recession have become more complex especially with increased
globalization of world economy and growing influence of global developments, economic and
no economic. Upgrading infrastructure such as energy, roads, inflation management,
promoting growth of industrial sector, stability in financial market, containing deficit, both
domestic and external, promoting exports amidst global recession are the major challenges
that are faced by Indian economy.

Pumps Industry

Indian pumps, catering to a range of sectors from agriculture to nuclear power generation, are
expected to capture a bigger slice of the world market. With exports already reaching around
70 countries, the Indian pump industry is poised to register a faster growth rate than the
global average, says an industry study. The Indian pump industry is set to grow at 6-7 percent
over the next three years (against the 4 percent of the world pump market).

The growth witnessed by the Pumps Industry was in line with the performance of the Indian
economy. The growth in these sectors mainly came from Energy sector. This was the result of
capacity additions in Super Critical plants including Ultra Mega Plants. On the other hand,
increased forays from Chinese contractors into Energy Sector continued to exert pressure on
the demand. Demand for Submersible pumps is weather dependent and varies with
geographical location. Growth in standard industrial pumps is closely linked to the
development in the industrial sector of the economy. Trends in waste water sewage market
are encouraging due to increased Government spending. The earlier buoyant demand for
industrial valves tapered off in the latter part of the year due to drop in activities in Steel and
General Industry.

The industry, now holding euro 500 million worth of global market share, "is expected to grow
at a rate faster than the world pump market growth, capturing a larger share of the market,"
states the study released by the Confederation of Indian Industry (CII). According to industry
estimates, India produces around one million pumps of various kinds. There are around 800
large, medium and small units producing the pumps for sectors from agriculture to nuclear
power generation. "Indian pump manufacturers are able to meet most of the domestic market
demand," said Sarita Nagpal, head of manufacturing services of CII, which works closely with
the Indian Pump Manufacturers Association.

Exports have registered a 11 percent growth in the last two years after reversing a negative
11.5 percent trend in 2002-03 to clock 45 percent growth in 2003-04. India has today become
a reliable, technically competent, competitive and enterprising outsourcing option for many

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multinational companies in industrial pumps and systems.

The growth story has emerged through technical collaborations and joint ventures that Indian
companies have had with multinational majors. Technical know-how of global standard has
thus been well absorbed.
In addition, various research institutes such as the Small Industries Testing and Research
Centre (Si'Tarc) in Coimbatore, have developed energy-efficient designs for pumps to meet
the norms of Indian standards.

The Indian pump industry has an outstanding record of indigenous research and
development in all three areas of technological intensities - from mass-produced pumps for
agriculture to gigantic pumps for interlinking rivers, and pumps for critical services such as
nuclear power generation. The Bureau of Indian Standards has developed 42 specifications
for indigenous pumps.

GLOBAL PUMP MARKET OUTLOOK AND GROWTH DRIVERS

The world pump market is governed by the demand in United States, European Union and
Japan. With these countries burdened by recession, market forecasts up to 2013 have been
revised to a compounded average growth rate of just 0.3% from 3-4%. The global market for
centrifugal pumps in 2009 and 2010 is likely to contract, while that for positive displacement
pumps will post good gains. Consolidation of players in the pump industry through mergers
and acquisitions, may catch momentum in 2009 -10 in spite of the present recessionary
trends.

Although water and sewage, power, building services, industry, oil and gas are major drivers
of the global pump market, for KBL, water, power and irrigation will continue to be chief
market drivers.

Factors affecting growth of the global pump industry:

Per capita availability of water in Asia is less than other continents; and it will continue
to grow rapidly, thus increasing demand for delivery and treatment of that water. Rising
consumption with decreasing supplies of uncontaminated water is pushing up the
market of desalination plants for treating seawater.

Urbanization of Asia has seen relocation of more than one billion migrants from villages
to cities. This is creating pressure on the existing infrastructure including delivery of
utility water and removal and treatment of wastewater.

Most governments in Asia and in Africa are likely to increase their spending on
infrastructure projects like irrigation and drinking water schemes.
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 The world is moving towards energy efficient products and services to be able to
sustain the growth rates achieved in the past few years with petroleum being the
primary energy source.

Sintech Precision Product Ltd. An Overview

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18
 Companys Profile

Vision, Misson & Quality

Product Range

Key Players

Sectoral Overview

Introduction to the Company

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Company Profile

Sintech Precision Products Ltd., founded in 1986, by an enterprising technocrat Mr.

N.C.Dhingra is recognized as one of the largest pumping solutions provider today in India.
With headquarters located in NCR of India, Ghaziabad, Sintech Precision Products Ltd has
built a strong presence in the domestic market over the past three decades.

Sintech is an advanced pumping solution provider for water intensive heavy industries. With a
very diverse product portfolio, Sintech provides solutions for multifarious applications like
clear water, process, slurry, liquid with suspended solids, sewage, acids, alkalies, seawater
and many more. Sintech has branch offices and dealership network in throughout the nation
as well as catering the international market.

With tremendous growth potential in future pumping technology market, Sintech Precision
Products Ltd has acquired certification from Moody International based in UK, who operates
in terms of the UKAS license requirements. Our system is regularly audited for compliance to
these International Standards.

Sintech Precision Products Ltd. an ISO 9001 certified company is now a leading & respected
pump manufacturer in India. Sintech make pumps are manufactured as per DIN-24256/ISO-
2858/IS 5120 /HIS/IS - 1520 standards and tested as per IS-9137, API-610 & ISO 2548
standards. Sintech make pumps constitutes of highly standardized and is designed with
modular structures and offers the best possible interchangeability. This largely reduces spares
inventory. Sintech has a high production system with two Manufacturing units.
Sintech Precision Products Ltd. has now expanded in all type of pumps suitable for diverse
multifarious applications like clear water, process, slurry, liquid with suspended solids,
sewage, acids, alkalies, sea water and many more application.
Till date SINTECH has supplied thousands of pumps for various critical and non critical
applications, which are working quietly and efficiently to the entire customer satisfaction.

Vision
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Sintech seeks to be recognised as the Innovator and thought leader of pumping related
products and technologies in domestic and global markets.

Mission

Improve customer returns

Create value through a culture of excellence

Innovate product and service delivery

Imbibe Quality as companys bloodline

Quality

Sintech Precision Products Ltd s Q3 model is a move in that direction. Principally based on
three quality-integrated pillars, the Q3 model reflects the inside out approach of the
organization, that incorporates -

Q1 Applied engineering expertise

Q2 Superior pumping capabilities
Q3 Exceptional service

QUALITY ASSURANCE PROCEDURES

Our Quality Assurance Department is manned by qualified engineers to ensure completion of

raw materials and final pumps with relevant quality norms. The activities are divided into raw
material inspection, in-process inspection and final inspection.

Sintech Precision Products Limited has in house facilities and equipments required for
ensuring quality, such as

Hydrostatic machine for hydrostatic test of the casing

Dynamic balancing machine for dynamic balancing of the impeller.

For non-destructive testing such as ultrasonic test magnetic particle test inspection is carries
out through external reputed agencies.A well laid test field for performance testing having
sophisticated flow meter with digital display by which flow of the liquid can be tested
accurately is available at our works.

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Product Range

Type Design Rating Application/Sector

Boiler Feed

Mine De-watering

Capacity : upto 1,000 Water Supply

SMS m3/hr
Head upto 1,100 m Jockey
Multistage Pump
Condensate Transfer

Descaling Operations

Industrial and Municipal

Water Supply

Cooling Towers

Injection Water

Spray Pond
Capacity : upto 10,000
SCS &
m3/hr
SCSD Air-conditioning
Head upto 180 m
Horizontal Split
Casing Pump Water

Treatment Plant

Fire Fighting

Irrigation

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 Water Supply

Drip Irrigation

Cooling Tower

Condensate handling

Air-conditioning

Fire Fighting
Capacity : upto 1,000
SWP &
m3/hr Service Water
CPS
Head upto 140 m
Water Pump Chemical Process
Process Pump
Effluent Treatment

Hydrocarbon

Viscous Liquid

Acids Juice Pump

Distillery

Sea Water

Capacity : upto 20,000 River Water

SAF m3/hr
Head upto 10 m Canal Water
Axial Flow Pump
Sewage

SSHQ Capacity : upto 2,000

m3/hr Sewage
Head upto 60 m
Effluent Treatment
Non Clog Pump

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 Unscreened Juice

Slurry

Drainage

River water

Sludge

Grain Wash

Syrup

Melt

Mud

Injection Water

Sewage

Capacity : upto 7,000 Effluent Treatment

SMF m3/hr
Head upto 45 m Drainage
Mixed Flow Pump
River Water

Water Supply

SVT Capacity : upto 20,000

SVMF m3/hr General Water Supply
SVAF Head upto 300 m
Cooling Tower

Vertical Turbine Spray and Injection

Vertical Mixed Flow Water
Vertical Axial Flow
Irrigation

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 Hydropower

Chemicals

Pharmaceuticals

Food
Free Air Capacity :
SV upto 4,975 m3/hr Sugar
Vacuum upto 685 mmHg
Liquid Ring Vacuum Plastic
Pump
Paper

Pulp

Thick Viscous Liquid

Dyes

Capacity : upto 150 Coaltar

SGP m3/hr
Head upto 100 m Mollasses
Gear Pump
Soaps

Paint

Capacity : upto 100 Thick Mollasses

ST m3/hr
Head upto 50 m Highly Viscous Liquid
Lobe Pump
/ Star Pump
STF Capacity : upto 1,500
m3/hr Abrasive Slurries
Head upto 100 m

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 Sewage

Industrial Waste

Sugar

Pulp and Paper

Steel

Power
Torque Flow
Pump
Fibre

Textile

Waste Water

Grain Wash

Solid Handling

Cement Aquaculture

EB Capacity : upto 100 Massecuite

& m3/hr
EBM Head upto 50 m Magma
Rota Pump

Sump Drainage

Capacity : upto 250 Dewatering

SSPL m3/hr
Head upto 50 m Ash Slurry
Self Priming
Pump Wet Scrubber

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 SECTORAL OVERVIEW

Power

This business group caters to the needs of power industry - conventional and renewable.
Considering the chronic shortage of power, this sector is bound to emerge as a major market
driver for decades to come. The Power group is proud
to have successfully completed the sump model test of cooling water system for India's first
ultra mega power project of 4000 MegaWatt (5 x 800 MW) at Kirloskarvadi. Orders received
include:

Raka Saudia Power & Water - SWRO Barge Project

Co. Ltd.
Bhakra Beas Management
Board (P.W.)
Shri Chamundeswari Sugars
Clear Water Limited
Clear Water Limited
- Pong Power Project
- Co-gen Plant Limited
(Through Avant Garde)
- 2x250 MW Korba East
- 2x210 MW Rayalaseema
TPS Stage II, Unit 3 & 4

Water Resource Management

This business group addresses the needs of water supply, water treatment and waste water
treatment segments. Water, like power is a major market driver for the pump industry and
equipment peripheral to water industry. Water stressed regions in the world are on the rise,
thanks to uncurbed urbanization, growing industrialization, increasing pollution levels and
absence of sufficient teeth to the
legislation to deal with water pollution across the world. India is no exception. Such a scenario
demands better and better water management, with latest technologies, cheaper methods
and sustainable operations.

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This business group continues to serve municipal corporations, water and sewerage boards
of India. Delhi Jalboard's Vishwakarma project, Nagpur municipal corporation's Gorewada
and Mahadula projects and Maharashtra Jal
Pradhikaran's Malegaon project went on stream this year.

We made significant in-roads in waste water treatment segment in India as well as overseas,
based on the Gondwana Engineers Limited's strengths. Orders received include:

Steel Authority of India Llimted, Bhilai for a 30 million liters per day (MLD) sewage
treatment plant
Vadodara municipal Sewa Sadan for a 8.5 MLD sewage treatment plant
Pune municipal corporation for a 40 MLD sewage treatment plant

Sugar Industry

Some prestigious projects in sugar industry are:

Balrampur Chini Mills Limited Khumbi Project

Balrampur Chini Mills Limited
Bajaj Hindusthan Limited
Bajaj Hindusthan Limited
Uttam Sugar Mills Limited
Uttam Sugar Mills Limited
Gularia Project
- Kinauni Project
- Kinauni Expansion
- Barkatpur Project
- Shermau Project

Paper / Etp / Chemical / Food

Some prestigious projects in Paper / Etp / Chemical / Food are:

Satyam Industries Pvt. Ltd - Panipat Project

Clear Water Limited
Clear Water Limited
Ghaziabad Organics Ltd.
Adinath Enterprises
Winsor Sathyam Engineering
- Bhiwadi Project
- Kanoria Chemical &
Indus.Ltd.
- Ghaziabad Project
- FMC Satnam Agro Project
- Bombay Rayon Fashion
Limited

Steel

Some prestigious projects in steel industry are:

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28
 Maa Chinnamastika Steel & - Steel Project Power
Limited
IST Steel & Power Limited - Bellary Project
Shri Mahavir Ferro Alloys P Ltd. - Rourkela Project

Mines

Some prestigious projects in mines industry are:

Singareni Colleries Co. Ltd. - 15 HP

Singareni Colleries Co. Ltd. - 40 HP
Singareni Colleries Co. Ltd. - 75 HP
Singareni Colleries Co. Ltd. - 125 HP
WORKING CAPITAL MANAGEMENT
CONCEPTUAL FRAMEWORK

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 Introduction
Significance of working capital management
Liquidity Vs. profitability: Risk Return trade off
Classification of working capital
Types of working capital needs
Factors determining working capital requirements
Working capital cycle
Sources of working capital
Working capital position
Inventory management
Cash management
Receivables management
Managing payables (Creditors)
Financing current assets
Working capital & short-term financing
Financing Current Assets

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 Introduction to working capital

Working Capital is the Life-Blood and Controlling Nerve Center of a business

The working capital management precisely refers to management of current assets. A firms
working capital consists of its investment in current assets, which include short-term assets
such as:
Cash and bank balance,
Inventories,
Receivables (including debtors and bills),
Marketable securities.
Working capital is commonly defined as the difference between current assets and
current liabilities.

Working Capital = Current Assets-Current Liabilities

There are two major concepts of working capital:

Gross working capital
Net working capital

Gross working capital:

It refers to firm's investment in current assets. Current assets are the assets, which can be
converted into cash with in a financial year. The gross working capital points to the need of
arranging funds to finance current assets.
Net working capital:
It refers to the difference between current assets and current liabilities. Net working capital
can be positive or negative. A positive net working capital will arise when current assets
exceed current liabilities. And vice-versa for negative net working capital. Net working
capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the
extent to which working capital needs may be financed by permanent sources of funds. Net

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 working capital also covers the question of judicious mix of long-term and short-term funds
for financing current assets.
Significance Of Working Capital Management

PAYMENT TO SUPPLIERS

EASY LOAN FROM BANKS DIVIDEND DISTRIBU-TION

SIGNIFICAN--CE OF WORKING CAPITAL

INCREASE EFFECIENY INCREASE DEBT CAPACITY

INCREASE IN FIX ASSETS

The management of working capital is important for several reasons:

For one thing, the current assets of a typical manufacturing firm account for half of its
total assets. For a distribution company, they account for even more.
Working capital requires continuous day to day supervision. Working capital has the
effect on company's risk, return and share prices,
There is an inevitable relationship between sales growth and the level of current assets.
The target sales level can be achieved only if supported by adequate working capital
Inefficient working capital management may lead to insolvency of the firm if it is not in a
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 position to meet its liabilities and commitments.

Liquidity Vs Profitability: Risk - Return trade of

Another important aspect of a working capital policy is to maintain and provide sufficient
liquidity to the firm. Like the most corporate financial decisions, the decision on how much
working capital be maintained involves a trade off- having a large net working capital may
reduce the liquidity risk faced by a firm, but it can have a negative effect on the cash flows.
Therefore, the net effect on the value of the firm should be used to determine the optimal
amount of working capital.
Sound working capital involves two fundamental decisions for the firm. They are the
determination of:
The optimal level of investments in current assets.
The appropriate mix of short-term and long-term financing used to support this
investment in current assets, a firm should decide whether or not it should use
short-term financing. If short-term financing has to be used, the firm must determine
its portion in total financing. Short-term financing may be preferred over long-term
financing for two reasons:
The cost advantage
Flexibility

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But short-term financing is more risky than long-term financing. Following table will
summarize our discussion of short-term versus long-term financing

Maintaining a policy of short term financing for short term or temporary assets needs (Box 1)
and long- term financing for long term or permanent assets needs (Box 3) would comprise a
set of moderate risk profitability strategies. But what one gains by following alternative
strategies (like by box 2 or box 4) needs to weighed against what you give up.

Working capital can be classified as follows:

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 On the basis of time
On the basis of concept

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