A

Project Entitled
““WORKING CAPITAL MANAGEMENT TO ITS OPTIMAL
EFFICIENCY “
Submitted for Post-Graduate Degree
Master in Business Administration( Evening Batch )
-: Submitted By:-
Pinky Yogesh Gandhi
-: Under the guidance of :-
Prof. Alok Pandey
-:For The Academic Year:-
2009-2010

M.S. Hostel

Ambe Vidyalaya

1
INDEX

Topic Page No

1. Definition of Working Capital 3

2. Need of Working capital 4

3. Types of working capital 5

4. Determinants of Working Capital 6

5. Data for Working capital of 3 Years for M.S. Hostel 7

6. Analysis of Working capital ( with graph ) 9

7. Analysis of Current Assets ( with graph ) 10

8. Analysis of Current Liabilities ( with graph ) 11

9. Actual Calculation / Forecast of W.C. for 2010-11 12

10 Analysis and Conclusion 15

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 DEFINITIONS
Working capital management is concerned with the problems arise in attempting to
manage the current assets, the current liabilities and the interrelationship that exist
between them.
The term current assets refers to those assets which in ordinary course of business can
be, or, will be, turned in to cash within one year without undergoing a diminution in
value and without disrupting the operation of the firm.

The major current assets are cash, marketable securities, account receivable and
inventory.

Current liabilities ware those liabilities which intended at there inception to be paid in
ordinary course of business, within a year, out of the current assets or earnings of the
concern.

The basic current liabilities are account payable, bill payable, bank over-draft,
and outstanding expenses.

The goal of working capital management is to manage the firm’s current assets and
current liabilities in such way that the satisfactory level of working capital is
mentioned. The current should be large enough to cover its current liabilities in order
to ensure a reasonable margin of the safety.

Definition:-
According to Guttmann & Dougall-

“Excess of current assets over current liabilities”.

According to Park & Gladson-

“The excess of current assets of a business (i.e. cash, accounts receivables,
inventories) over current items owned to employees and others (such as salaries &
wages payable, accounts payable, taxes owned to government)”.

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 Need of working capital management
The need for working capital gross or current assets cannot be over emphasized. As
already observed, the objective of financial decision making is to maximize the
shareholders wealth. To achieve this, it is necessary to generate sufficient profits can
be earned will naturally depend upon the magnitude of the sales among other things
but sales can not convert into cash. There is a need for working capital in the form of
current assets to deal with the problem arising out of lack of immediate realization of
cash against goods sold. Therefore sufficient working capital is necessary to sustain
sales activity. Technically this is refers to operating or cash cycle. If the company has
certain amount of cash, it will be required for purchasing the raw material may be
available on credit basis. Then the company has to spend some amount for labour and
factory
overhead to convert the raw material in work in progress, and ultimately finished
goods. These finished goods convert in to sales on credit basis in the form of sundry
debtors. Sundry debtors are converting into cash after expiry of credit period. Thus
some amount of cash is blocked in raw materials, WIP, finished goods, and sundry
debtors and day to day cash requirements. However
some part of current assets may be financed by the current liabilities also. The amount
required to be invested in this current assets is always higher than the funds available
from current liabilities. This is the precise reason why the needs for working capital
arise.

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 Gross working capital and Net working
capital
There are two concepts of working capital management

1. Gross working capital

Gross working capital refers to the firm’s investment In current assets. Current assets
are the assets which can be convert in to cash within year includes cash, short term
securities, debtors, bills receivable and inventory.

2. Net working capital

Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to mature
for payment within an accounting year and include creditors, bills payable and
outstanding expenses. Net working capital can be positive or negative. Efficient
working capital management requires that firms should operate with some amount of
net working capital, the exact amount varying from firm to
firm and depending, among other things; on the nature of industries.net working
capital is necessary because the cash outflows and inflows do not coincide. The cash
outflows resulting from payment of current liabilities are relatively predictable. The
cash inflow are however difficult to predict. The more predictable the cash inflows are,
the less net working capital will be required.

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 Determinants of working capital
The amount of working capital is depends upon a following factors

1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed
capital is more rather than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no founds are blocked in piling
inventories and also no funds are blocked in receivables. E.g. public utility services like
railways, infrastructure oriented project etc. there requirement of working capital is
less. On the other hand, there are some businesses like trading activity, where
requirement of fixed capital is less but more money is blocked in inventories and
debtors.
2. Length of production cycle
In some business like machine tools industry, the time gap between the acquisition of
raw material till the end of final production of finished products itself is quit high. As
such amount may be blocked either in raw material or work in progress or finished
goods or even in debtors. Naturally there need of working capital is high.
3. Size and growth of business
In very small company the working capital requirement is quit high due to high
overhead, higher buying and selling cost etc. as such medium size business positively
has edge over the small companies. But if the business start growing
after certain limit, the working capital requirements may adversely affect by the
increasing size.
4. Business/ Trade cycle
If the company is the operating in the time of boom, the working capital requirement
may be more as the company may like to buy more raw material, may increase the
production and sales to take the benefit of favorable market, due to increase in the
sales, there may more and more amount of funds blocked in stock and debtors etc.
similarly in the case of depressions also, working capital may be high as the sales
terms of value and quantity may be reducing, there may be unnecessary piling up of
stack without getting sold, the receivable may not be recovered in time etc.
5. Terms of purchase and sales
Some time due to competition or custom, it may be necessary for the company to
extend more and more credit to customers, as result which more and more amount is
locked up in debtors or bills receivables which increase the working capital
requirement. On the other hand, in the case of purchase, if the credit is offered by
suppliers of goods and services, a part of working capital requirement may be financed
by them, but it is necessary to purchase on cash basis, the working capital
requirement will be higher.
6. Profitability
The profitability of the business may be vary in each and every individual case,
which is in turn its depend on numerous factors, but high profitability will
positively reduce the strain on working capital requirement of the company,
because the profits to the extend that they earned in cash may be used to meet
the working capital requirement of the company.
7) Operating efficiency
If the business is carried on more efficiently, it can operate in profits which
may reduce the strain on working capital; it may ensure proper utilization of
existing resources by eliminating the waste and improved coordination etc.

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 DATA FROM BALANCE SHEET OF M.S. HOSTEL

Size of Working capital

Particulars 2006-07
A Current Assets

Closing Stock 179300

Deposits ( Assets 757054.6
Loans and Advance ( Asset ) 28431858.82
Cash in Hand 1400877.11
Bank Account 278237.62

TOTAL OF CURRENT ASSETS 31047328.15

Current Liabilities

Duties and Taxes 1156972

Provisions 1357130
Sundry Creditors 13136576.75

TOTAL OF CURRENT LIABILITIES 15650678.00

WORKING CAPITAL ( Current assets -
Current Liabilities ) 15396649.40

Size of Working capital

Particulars 2007-08
A Current Assets
Closing Stock 155314
Deposits ( Assets 759554.6
Loans and Advance ( Asset ) 31489509.82
Cash in Hand 670786.11
Bank Account -184120.86

TOTAL OF CURRENT ASSETS 32891043.67

B) Current Liabilities

Duties and Taxes 1172564

Provisions 790755
Sundry Creditors 15803832.94

TOTAL OF CURRENT LIABILITIES 17767151.94

WORKING CAPITAL ( Current assets -

Current Liabilities ) 15123891.73

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 Size of Working capital

Particulars 2008-09
A Current Assets

Closing Stock 254666

Deposits ( Assets 757054.6
Loans and Advance ( Asset ) 37339776.5
Cash in Hand 1168781.81
Bank Account 87647.21

TOTAL OF CURRENT ASSETS 39607926.12

Current Liabilities

Duties and Taxes 1242783

Provisions 1134769
Sundry Creditors 16454370.13

TOTAL OF CURRENT
LIABILITIES 18831922.13

WORKING CAPITAL ( Current

assets - Current Liabilities ) 20776003.99

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 Working Capital Analysis

Years 2006-07 2007-08 2008-09

Net Working Capital 15396649.40 15123891.73 20776003.99

Indices 100 98.23 134.94

2008-09
150
2006-07 2007-08

100
Working
Capital
50

0
1
Years

Current Assets Analysis

Years 2006-07 2007-08 2008-09

Current Assets 31047328.15 32891043.67 39607926.12

Indices 100 105.94 127.57

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 140

120

100

80

60

40

20

0
Years

After analyzing the data for current assets . We see that the current assets are
increasing with the sales. Sales have increased due to hike in FEES and increase in
occupancy.

The excess of current assets is showing positive liquidity position of the

firm but it is not always good because excess current assets then required, it
may adversely affects on profitability.

Current assets include some funds investments for which company pay interest.
The Proportion of cash in the total assets in the year 2006-07 is very high , so
adequate steps had been taken to reduce it to half in 2007-08.
But the same has increased to double in 2008-09 which can adversely affect the
profitability as the same can in invested in short term advances and interest can be
gained on them .

Current assets components show LOANS AND ADVANCES ( Please note that
Outstanding fees are included in this head which constitute 95% of loans and advances
) are the major part in current assets. 91 % in 2006-07, 95% in 2007-08 and 94% in
2008-09 . This indicates inefficient collection management. After analyzing the whole
situation I realized that as it is a residential school and students come from out of
Vadodara . The fees are paid only when there is a parents teachers meeting is held.
And from last 3 years parents teachers meeting is not held in the month of February
and march and Parents pay the due fees only in April when the term is over. This has
been rectified by putting a parents teachers meeting in the 1 Week of March from
academic year 2010-11

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 Current Liabilities Analysis

Years 2006-07 2007-08 2008-09

Current Liabilities 15650678.00 17767151.94 18831922.13

Indices 100 113.52 120.33

140
120
100

80
60
40

20
0
Years

Current liabilities mean the liabilities which have to pay in current year. It includes
sundry creditor’s means supplier whose payment is due but not paid yet, thus
creditors called as current liabilities. Current liabilities also include short term loan and
provision as tax provision. Current liabilities also includes bank overdraft. For some
current assets like bank overdrafts and short term loan, company has to pay interest
thus the management of current liabilities has importance.

Current liabilities show continues growth each year because company creates
The credit in the market by good transaction. To get maximum credit from
Supplier which is profitable to the company it reduces the need of working
Capital of firm. As the proportion of Sundry creditors increased in Year 2007-08 , the
total working capital also decreased.

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Now The pilot project which is intended by me is estimating the requirement of
working capital for each month of the academic year 2010-11

For this , I have collected data for last 3 years to understand the trend of the cash in
flow and outflow.

Initially to calculate the debtors, we need to know the sales for the whole year and the
credit limit for each month .The sales for each year remains the same as the
occupancy of the residential school is Fixed and it is used to the optimum from last two
decades. The average Fee Structure is Rs. 45000/- for the academic year 2010-2011.

FACTS USED IN CALCULATION OF DEBTORS

1. Total Average fees is Rs. 45000/-

2. Total Occupancy is 1900 from which 1300 are old students and 600 are new
students. The Credit limit is Different for old and New students.
The payment Schedule as decided by the trend and the management is as follows

April( Durin
g Time of
Admission
or
readmission Total
) June September December February Fees
Old Students 5000 10000 10000 10000 10000 45000
New Students 20000 10000 10000 5000 45000

On the basis of the schedule we will predict the sales amount for each month for the
next academic year

April June September December February

Old Students 6500000 13000000 13000000 13000000 13000000
New Students 12000000 6000000 6000000 3000000 0

FACTS FOR COLLECTION OF FEES

The Parents Teachers meeting is Fixed in the month of June, September and
December. Hence the collection remains 100% for the first 4 installments. The Credit
is given only in the month of February , when no parents meeting is held hence the
collection is extended till April after Final Exams.

FORECAST OF WORKING CAPITAL 2010-2011

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CURRENT ASSETS

April May June July August September October November December January February March

Debtors 900000 0 0 0 0 0 0 0 0 0 13000000 13000000

Raw material Stock 510000 510000 1400000 1245000 1100000 825000 825000 510000 1100000 975000 825000 725000

Cash Predetermined 100000 100000 1000000 1000000 1000000 1000000 100000 1000000 1000000 1000000 1000000 1000000

Loans and Advances 20000000

TOTAL CURRENT ASSETS 1510000 610000 2400000 2245000 2100000 1825000 925000 1510000 2100000 1975000 14825000 34725000

CURRENT LIABILITIES

Sundry Creditors 1425000 1425000 1425000 1425000 1425000 0 1425000 1425000 1425000 1425000

Wages 850000 850000 850000 850000 850000 850000 850000 850000 850000 850000 850000 850000

Other Creditors ( Laundry ) 900000 900000 900000 900000 900000 900000 900000 900000 900000

Taxes and Duties 1200000

TOTAL CURRENT LIABILTIES 3175000 850000 850000 3175000 3175000 3175000 2275000 1750000 3175000 3175000 3175000 4375000

WORKING CAPITAL (A-B) -1665000 -240000 1550000 -930000 -1075000 -1350000 -1350000 -240000 -1075000 -1200000 11650000 30350000

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FACTS ABOUT THE CALCULATIONS DONE ABOVE

1. Raw material stock contains 2 components : -

a) Housekeeping material (Meant for month to month indent). No

Closing stock usually found .

b) Grains and vegetables : Has got 2 types :

i) Grains and vegetables which have to stock up eg. Rice ,

Wheat Potatoes etc during their peak season. Hence we
see a closing stock of Rs. 5.10,000 in the moth of April
and May as the grains are stored for whole year . The
stock value increases in the month of December because
the grains are purchased in bulk.
ii) Grains for which only stock is maintained for next month .
It Includes Spices, Pulses etc

3. Predetermined Cash : The minimum cash balance decided is Rs. 10,00,000 for
operating Months i.e. for all month except April, May and October as the school
remains closed for Summer vacation and Diwali Vacation Respectively. In the
months mentioned above the is only Rs. 1,00,000/-
4. Loans and Advances are on pure discretion of The management . Rs. 20000000
is put on the basis of analysis of data for last 3 years

CURRENT LIABILITIES

5. Sundry Creditors : One months credit is given.

6. Wages : Paid in One months Arrears
7. Other major expenses are laundry expenses . One month Credit is given
8. Approximate tax is calculated on the basis of the data given by the Finance
Department .

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 35000000

30000000

25000000

20000000

15000000

10000000

5000000

-5000000
April May June July Aug. Sept Oct Nov Dec Jan Feb Mar

Analysis of the Forecast

1. We enjoy Negative working capital for almost all the

month as the fees are taken in advance and we receive credit for one month from
all our vendors
2. In the month of June , When we start the new academic
year , We purchase in cash / Cheque for fast delivery of stock .
3. In the month of February and March , our Debtors are at
its peak as the fees remain outstanding for 2 months.

CONCLUSION

In order to have a zero budgeting for the whole year round , we need to have a
collection day in the month of February or March so that the debtors don’t increase .

As we are having a negative Working capital the cost of money locked in working
capital is saved .

Apart from the Financial Benefits , Negative working capital forces a company to serve
its customers quickly.

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