PROJECT REPORT ON

WORKING CAPITAL MANAGEMENT

BACHELOR OF COMMERCE

M.COM (ACCOUNTANCY)

SEMISTER III

SUBMITTED BY

AKSHAY H JADHAV

ROLL NO.______________

UNDER THE GUIDANCE OF

PROF.SATISH R PHARATE

ADARSH COLLEGE OF ARTS & COMMERCE

KULGAON-BADLAPUR

UNIVERSITY OF MUMBAI

(2017-18)

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 ADARSH VIDYA PRASARK SANSTHA

ADARSH COLLEGE OF ARTS & COMMERCE

KULGAON BADLAPUR

2017-18

CERTIFICATE

THIS IS TO CERTIFY THAT Mr. AKSHAY H JADHAV OF MASTER OFCOMMERCE

(ACCOUNTANCY), SEMESTER III FOR THE ACADEMIC YEAR 2017-18 HAS COMPLETED

THE PROJECT ON WORKING CAPITAL MANAGEMENT AS A CAREER UNDER THE

GUIDANCE OF MR.SATISH R.PHARATE.

_______________________ ____________________

COURSE CO-ORDINATOR PRINCIPAL

(MR.SATISH R.PHARATE) (DR.VAIDEHI DAPTARDAR)

DATE: ____________

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 DECLARATION

I AKSHAY H JADHAV student of M.COM SEM III (ACCOUNTANCY) - 2017-18 of ADARSH

COLLEGE OF ARTS & COMMERCE, BADLAPUR (E) -421 503 do hereby declare that I have
Completed project work titled as a part of my academic fulfillment.
The information contained in this project work is true and original to the best of my knowledge
And belief.

Date: ________________________ ______________________

Signature of student

( )

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 ACKNOWLEDGEMENT

Finally, I would like to thanks MUMBAI UNIVERSITY who have introduced this course and

In which we assigned for project work. This has given us an opportunity to present our ideas in

An Innovation manner. I would like to thank our college and teachers. I would express my

Sincere thanks to my guide Principal Dr. Vaidehi Daptardar for encouraging and guiding me

Throughout my project. I would hearty thanks all the teachers, who continued to give their

Feedback till the completion of my project and giving moral support. I cheerfully acknowledge

The cooperation received from everyone at Library for helping me in searching of books.

Finally I acknowledge that this project would never have been possible without the constant

Supports, blessing and encouragement of my parents, my friends, who helped me at the last

Moment of my project for taking out the prints.

______________________

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 INDEX

Sr.No. Chapter Name Page No

1 Introduction
2
3
4
5
6

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 PROJECT REPORT ON

Working Capital Management

INTRODUCTION
The present research seeks to study in depth the Working Capital Management of selected paper companies in

India, with special emphasis on an examination of the management performance in regard to financial

management. It hardly needs mentioning that inventory, accounts receivables and cash and its alert administration

can go a long way in solving the problem of the efficient working capital management. In fact, the present

research of working capital management needs special attention for the efficient working and the business. It has

been often observed that the shortage of working capital leads to the failure of a business. The proper

management of working capital may bring about the success of a business firm. The management of working

capital includes the management of current assets and current liabilities. The present research undertakes to deal

with the net concept of working capital: excess of current assets over current liabilities. A number of companies

for the past few years have been finding it difficult to solve the increasing problems of adopting seriously the

management of working capital. Business concerns intent on developing their business have to use to the utmost,

their available resources for the improvement and development of the business there by enabling them to increase

their profits. Working Capital and change in working capital, especially in inventories, which is one of the

components of working capital form a very important part of the total gross-capital formation in the paper

companies. Efficient and the optimal utilization of fixed assets is very closely related to the proper management

of working capital. The present research attempts to recognize initially the importance of working capital as a

part of the total capital. It further goals to recognize the factors influencing the working capital, its volume, and in

the process try to suggest remedial measures which might help in optimizing the use of working capital. It also

considers as to how precisely financing working capital and further more what should be mix of different

components of working capital

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WORKING CAPITAL - Meaning of Working Capital

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities.
The goal of working capital management is to ensure that a firm is able to continue its operations and that it has
Sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of
Working capital involves managing inventories, accounts receivable and payable, and cash.

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms
funds are required to create production facilities through purchase of fixed assets such as p&m, land, building, furniture,
etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is
called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages
and other day to- day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part of the firms capital
which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories.
Funds, thus, invested in current assets keep revolving fast and are being constantly converted in to cash and this cash
flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short
term capital.

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CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises current assets are those

Assets which can convert in to cash within a short period normally one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

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 In a narrow sense, the term working capital refers to the Net working. Net working capital is the excess of
current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more
than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary
course of business within a short period of normally one accounting year out of the current assts or the income
business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation, if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting
concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following reasons:

1. It enables the enterprise to provide correct amount of working capital at correct time.

2. Every management is more interested in total current assets with which it has to operate then the source from
where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterprise would increase its working
capital.

4. This concept is also useful in determining the rate of return on investments in working capital. The net working
capital concept, however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability to meet to its operating expenses and short- term
liabilities.
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 It indicates the margin of protection available to the short term creditors.
It is an indicator of the financial soundness of enterprises.
It suggests the need of financing a part of working capital requirement out of the permanent sources of
funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

On the basis of concept.

On the basis of time.

On the basis of concept working capital can be classified as gross working capital and net working capital. On
the basis of time, working capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities
and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw material, work-
in-process, finished goods and cash balance. This minimum level of current assts is called permanent or fixed working
capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working
capital also increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands
and some special exigencies. Variable working capital can further be classified as seasonal working capital and special
working capital. The capital required to meet the seasonal need of the enterprise is called seasonal working capital.
Special working capital is that part of working capital which is required to meet special exigencies such as launching of
extensive marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required for short periods and
cannot be permanently employed gainfully in the business.

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IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

Solvency of The Business: Adequate working capital helps in maintaining the solvency of the business by
providing uninterrupted of production.
Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and
maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks
and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases
and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and
continuous production.
Regular Payment of Salaries, Wages and Other Day to Day Commitments: It leads to the satisfaction of the
employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and
enhances production and profits.
Exploitation of Favorable Market Conditions: If a firm is having adequate working capital then it can exploit
the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and
holdings its inventories for higher prices.
Ability to Face Crises: A concern can face the situation during the depression.
Quick And Regular Return On Investments: Sufficient working capital enables a concern to pay quick and
regular of dividends to its investors and gains confidence of the investors and can raise more funds in future.
High Morale: Adequate working capital brings an environment of securities, confidence, high morale which
results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its business operations. It should have
neither redundant or excess working capital nor inadequate nor shortages of working capital. Both excess as well as
short working capital positions are bad for any business. However, it is the inadequate working capital which is more
dangerous from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

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 1. Excessive working capital means ideal funds which earn no profit for the firm and business
cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories.

3. Excessive working capital implies excessive debtors and defective credit policy which causes
higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with banks and other financial
institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares may also fall.

7. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due to the time gap between
production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There
are time gaps in purchase of raw material and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

to pay wages and salaries
to incur day-to-day expenses and overload costs such as office expenses.
to meet the selling costs as packing, advertising, etc.
to provide credit facilities to the customer.
to maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.

For studying the need of working capital in a business, one has to study the business under varying circumstances
such as a new concern requires a lot of funds to meet its initial requirements such as promotion and formation etc.
These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends
upon the size of the company and ambitions of its promoters. Greater the size of the business unit, generally larger
will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains
maturity. At maturity the amount of working capital required is called normal working capital.

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There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as
electricity, water supply and railways because they offer cash sale only and supply services not products, and
no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires
less investment in fixed assets but have to invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require
higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and other supplies
have to be carried for a longer in the process with progressive increment of labor and service costs before the
final product is obtained. So working capital is directly proportional to the length of the manufacturing
process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger working capital than
in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines
the requirements of working capital. Longer the cycle larger is the requirement of working capital.

DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of working
capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover
will needs lower amt. of working capital as compared to a firm having a low rate of turnover.

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8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its product / services on
cash requires lesser amt. of working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need for larger amt. of
working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in
time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and
the firm may have a large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt. of working
capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due
to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations
and contribute to their working capital. The dividend policy also affects the requirement of working capital.
A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than
the firm that retains larger part of its profits and does not pay so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements.
Generally rise in prices leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in attempting to manage the current
assets, current liabilities. The basic goal of working capital management is to manage the current assets and
current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither
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adequate nor excessive as both the situations are bad for any firm. There should be no shortage of funds and also
no working capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on
its probability, liquidity and structural health of the organization. So working capital management is three
dimensional in nature as

1. It concerned with the formulation of policies with regard to profitability, liquidity and risk.

2. It is concerned with the decision about the composition and level of current assets.

3. It is concerned with the decision about the composition and level of current liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amount of working capital
is very much essential for the smooth running of the business. And the most important part is the efficient
management of working capital in right time. The liquidity position of the firm is totally effected by the
management of working capital. So, a study of changes in the uses and sources of working capital is necessary to
evaluate the efficiency with which the working capital is employed in a business. This involves the need of
working capital analysis.

The analysis of working capital can be conducted through a number of devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed
for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated
for these purposes:

1. Current ratio.

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2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from which additional funds were
derived and the use to which these sources were put. The fund flow analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital) business enterprise
between beginning and ending of the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be pursued in the future
period time. Working capital budget as a part of the total budge ting process of a business is prepared estimating
future long term and short term working capital needs and sources to finance them, and then comparing the
budgeted figures with actual performance for calculating the variances, if any, so that corrective actions may be
taken in future. He objective working capital budget is to ensure availability of funds as and needed, and to ensure

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effective utilization of these resources. The successful implementation of working capital budget involves the
preparing of separate budget for each element of working capital, such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF LIQUIDITY

The short term creditors of a company such as suppliers of goods of credit and commercial banks short-term
loans are primarily interested to know the ability of a firm to meet its obligations in time. The short term
obligations of a firm can be met in time only when it is having sufficient liquid assets. So to with the confidence
of investors, creditors, the smooth functioning of the firm and the efficient use of fixed assets the liquid position
of the firm must be strong. But a very high degree of liquidity of the firm being tied up in current assets.
Therefore, it is important proper balance in regard to the liquidity of the firm. Two types of ratios can be calculated
for measuring short-term financial position or short-term solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-
term obligations are met by realizing amounts from current, floating or circulating assts. The current assets
should either be liquid or near about liquidity. These should be convertible in cash for paying obligations of
short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with

Short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory.
On the other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is
bad. To measure the liquidity of a firm, the following ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

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 1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity and its most widely used to
make the analysis of short-term financial position or liquidity of a firm. It is defined as the relation between
current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories and work-in-
progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current
obligations in time. On the hand a low current ratio represents that the liquidity position of the firm is not good
and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of
2:1 i.e. current assets double the current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

e.g. (Rupees in crore)

Year 2011 2012 2013

Current Assets 81.29 83.12 13,6.57
Current Liabilities 27.42 20.58 33.48
Current Ratio 2.96:1 4.03:1 4.08:1

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Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three
years it has increased from 2011 to 2013. The current ratio of company is more than the ideal ratio. This depicts
that companys liquidity position is sound. Its current assets are more than its current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship
between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted
into cash with a short period without loss of value. It measures the firms capacity to pay off current obligations
immediately.

Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and
on the other hand a low quick ratio represents that the firms liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to
the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having
high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the other hand,
a firm having a low liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2011 2012 2013

Quick Assets 44.14 47.43 61.55
Current Liabilities 27.42 20.58 33.48
Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
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Interpretation :

A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time.
The ideal quick ratio is 1:1. Companys quick ratio is more than ideal ratio. This shows company has no
liquidity problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than inventories, yet there may be
doubts regarding their realization into cash immediately or in time. So absolute liquid ratio should be calculated
together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find
out the absolute liquid assets. Absolute Liquid Assets includes.

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2011 2012 2013

Absolute Liquid Assets 4.69 1.79 5.06
Current Liabilities 27.42 20.58 33.48
Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

These ratio shows that company carries a small amount of cash. But there is nothing to be worried about
the lack of cash because company has reserve, borrowing power & long term investment. In India, firms have
credit limits sanctioned from banks and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. The efficiency with which
assets are managed directly affects the volume of sales. The better the management of assets, large is the amount
of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its
resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted
or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These
are:

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 1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount of debtors due to
slow credit collections and moreover if the assets include high amount of slow moving inventories. As both the
ratios ignore the movement of current assets, it is important to calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO:

Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements
of the business. But the level of inventory should neither be too high nor too low. Because it is harmful to
hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will
therefore be advisable to dispose the inventory as soon as possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high
inventory ratio indicates an efficient management of inventory because more frequently the stocks are
sold ; the lesser amount of money is required to finance the inventory. Where as low inventory turnover
ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment
in inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low
profits as compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

(Rupees in Crore)

Year 2011 2012 2013

Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

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 Interpretation:

These ratio shows how rapidly the inventory is turning into receivable through sales. In 2012 the company
has high inventory turnover ratio but in 2013 it has reduced to 1.75 times. This shows that the companys
inventory management technique is less efficient as compare to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.

Year 2011 2012 2013

Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days

Interpretation:

Inventory conversion period shows that how many days inventories takes to convert from raw material to
finished goods. In the company inventory conversion period is decreasing. This shows the efficiency of
management to convert the inventory into cash.

3. DEBTORS TURNOVER RATIO:

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit policy
may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be
converted into cash within a short period and are included in current assets. So liquidity position of a concern
also depends upon the quality of trade debtors. Two types of ratio can be calculated to evaluate the quality of
debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

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 Debtors velocity indicates the number of times the debtors are turned over during a year. Generally higher
the value of debtors turnover ratio the more efficient is the management of debtors/sales or more liquid are the
debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid
debtors. This ratio should be compared with ratios of other firms doing the same business and a trend may be
found to make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

e.g.

Year 2011 2012 2013

Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation:

This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the
values or turnover into sales. The higher the values of debtors turnover, the more efficient is the management
of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows that company is
not utilizing its debtors efficiency. Now their credit policy become liberal as compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of days for which a firm has to wait
before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter the average
collection period the better is the quality of debtors as a short collection period implies quick payment by debtors
and vice-versa.

Average Collection Period = 365 (Net Working Days)

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 Year 2011 2012 2013
Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
Interpretation:

The average collection period measures the quality of debtors and it helps in analyzing the efficiency
of collection efforts. It also helps to analysis the credit policy adopted by company. In the firm average collection
period increasing year to year. It shows that the firm has Liberal Credit policy. These changes in policy are due
to competitors credit policy.

5. WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio
indicates the number of times the working capital is turned over in the course of the year. This ratio
measures the efficiency with which the working capital is used by the firm. A higher ratio indicates
efficient utilization of working capital and a low ratio indicates otherwise. But a very high working
capital turnover is not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales________

Networking Capital

e.g.

Year 2011 2012 2013

Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
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 Interpretation:

This ratio indicates low much net working capital requires for sales. In 2013, the reciprocal of this
ratio (1/1.64 = .609) shows that for sales of rs.1 the company requires 60 paisa as working capital. Thus this
ratio is helpful to forecast the working capital requirement on the basis of sale.

INVENTORIES

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Inventories 37.15 35.69 75.01

Interpretation:

Inventories is a major part of current assets. If any company wants to manage its working capital efficiency,
it has to manage its inventories efficiently. The graph shows that inventory in 2010-2011 is 45%, in 2011-2012
is 43% and in 2012-2013 is 54% of their current assets. The company should try to reduce the inventory upto
10% or 20% of current assets.

CASH BNAK BALANCE:

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Cash Bank Balance 4.69 1.79 5.05

Interpretation:

Cash is basic input or component of working capital. Cash is needed to keep the business running on a
continuous basis. So the organization should have sufficient cash to meet various requirements. The above graph
is indicate that in 2011 the cash is 4.69 crores but in 2012 it has decrease to 1.79. The result of that it disturb
the firms manufacturing operations. In 2013, it is increased up to approx. 5.1% cash balance. So in 2013, the
company has no problem for meeting its requirement as compare to 2012.

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DEBTORS:

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Debtors 17.33 19.05 25.94

Interpretation:

Debtors constitute a substantial portion of total current assets. In India it constitute one third of current
assets. The above graph is depict that there is increase in debtors. It represents an extension of credit to
customers. The reason for increasing credit is competition and company liberal credit policy.

CURRENT ASSETS:

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Current Assets 81.29 83.15 136.57

Interpretation:

This graph shows that there is 64% increase in current assets in 2013. This increase is arise because there
is approx. 50% increase in inventories. Increase in current assets shows the liquidity soundness of company.

CURRENT LIABILITY:

(Rs. in Crores)
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 Year 2010-2011 2011-2012 2012-2013
Current Liability 27.42 20.58 33.48

Interpretation:

Current liabilities shows company short term debts pay to outsiders. In 2013 the current liabilities of the
company increased. But still increase in current assets are more than its current liabilities.

NET WOKRING CAPITAL:

(Rs. in Crores)

Year 2010-2011 2011-2012 2012-2013

Net Working Capital 53.87 62.53 103.09

Interpretation:

Working capital is required to finance day to day operations of a firm. There should be an optimum level
of working capital. It should not be too less or not too excess. In the company there is increase in working
capital. The increase in working capital arises because the company has expanded its business.

RESEARCH METHODOLOGY

The methodology, I have adopted for my study is the various tools, which basically analyze critically financial position
of to the organization:

I. COMMON-SIZE P/L A/C

II. COMMON-SIZE BALANCE SHEET

III. COMPARTIVE P/L A/C

IV. COMPARTIVE BALANCE SHEET

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 V. TREND ANALYSIS

VI. RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the evaluation of each component, the
financial position from different angles is tried to be presented in well and systematic manner. By critical analysis with
the help of different tools, it becomes clear how the financial manager handles the finance matters in profitable manner
in the critical challenging atmosphere, the recommendation are made which would suggest the organization in
formulation of a healthy and strong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis, the organization
would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting procedure to convey
an under-standing of some financial aspects of a business firm. It may show position at a moment in time, as in the case
of balance sheet or may reveal a series of activities over a given period of time, as in the case of an income statement.
Thus, the term financial statements generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business firm.
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2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing out of business
activities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture
of a concern. The utility of these statements is dependent upon a number of factors. The analysis and interpretation of
these statements must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements is only
approximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, during the life of a
concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. The allocation
of expenses and income depends upon the personal judgment of the accountant. The existence of contingent assets and
liabilities also make the statements imprecise. So financial statement are at the most interim reports rather than the final
picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate position. The
value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount
which will be required to replace these assets. The balance sheet is prepared on the presumption of a going concern.
The concern is expected to continue in future. So fixed assets are shown at cost less accumulated depreciation.
Moreover, there are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are
shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs or original costs. The value of assets decreases
with the passage of time current price changes are not taken into account. The statement are not prepared with the

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keeping in view the economic conditions. The balance sheet loses the significance of being an index of current
economic realities. Similarly, the profitability shown by the income statements may be represent the earning capacity of
the concern.

5. There are certain factors which have a bearing on the financial position and operating result of the business but they
do not become a part of these statements because they cannot be measured in monetary terms. The basic limitation of
the traditional financial statements comprising the balance sheet, profit & loss A/c is that they do not give all the
information regarding the financial operation of the firm. Nevertheless, they provide some extremely useful
information to the extent the balance sheet mirrors the financial position on a particular data in lines of the structure of
assets, liabilities etc. and the profit & loss A/c shows the result of operation during a certain period in terms revenue
obtained and cost incurred during the year. Thus, the financial position and operation of the firm.

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 REFERENCES

1. Praveen Kumar jai, Working Capital Management, (R B S A Publishers: Jaipur) First Edition-1993
2. H. G. Guttmann, analysis Of Financial Statements,(New York: Prentice Hall) IV Edition-1953
3. Hoagland. J. Biermann, and A. K. Mc Adams, Management Decisions for Cash and Marketable Securities,( New York :
Graduate School of Business, Cornell University), 1962.
4. J. L. Brown and L.R. Howard. Principle and practice of management accountancy. ( London: Mac Donald & Evans Ltd.,)
1975
5. J. Fred Weston and F. Eugene Brigham, Managerial Finance,(New York: Dryden Press) First Edition-1975
6. Prof. J. J. Janie & others, Accounting & finance-2 (Finance Section)(Ahmedabad: C. Jamadars & Co.) First edition-2009-
2010
7. S.C. Nuchal, Financial Management An Analytical and Conceptual Approach, (Allahabad: Chaitanya publishing House)
1982
8. Adam Smith, The Wealth of Nations, (New York, Modern Library Inc., 1937)
9. H.G. Gotham, Analysis of Financial Statements (New York, 1953),
10. R.D. Kennedy and McMullen, Financial Statements Form Analysis and Interpretations, (1968)

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Project Description:

Title: Project Report on Working Capital Management

Pages:

Description : Project Report on Working Capital Management, Working capital analysis, Working Capital
Management - Meaning & Concept, working capital Classification, Importance, Advantages and Disadvantages of
Working Capital, Factors determining the working capital requirements & Ratio Analysis

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