A

Project Report Entitled

“Study of Working Capital Management”

Submitted in partial fulfillment of Post-Graduate Degree of

Master in Business Administration

(2017-2019)
TO

KHALSA COLLEGE , MOHALI( AMRITSAR ) OF

TECHNOLOGY AND BUSINESS STUDIES.

SUBMITTED TO :- SUBMITTED BY:-

Tanya Arora
MBA – 3rd Sem
Roll No. - 32141

1
CERTIFICATE

2
 DECLARATION

I am Tanya arora Student of MBA IIIrd year (Finance) 2017-2019 studying at

khalsa college, Mohali declare that the project work entitled “Working Capital
management” was carried by me in the partial fulfillment of MBA program under
Punjabi university, Patiala

This project was undertaken as a part of academic curriculum according to

the university rules and norms and it has not commercial interest and motive. It is
my original work. It is not submitted to any other organization for any other
purpose.

Tanya Arora

M.B.A- IIIrd Sem.

Roll No. - 32141

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 PREFACE
Rapid strides in industries, technology and communication together with a market
shift in consumer preferences are posing with a great challenge to present day’s
management scenario. It has assigned a very crucial tasks to present day young
executives who have been given responsibilities of operating the economic lovers
of this country in order to wisher on self reliant and confident society. All this
requires competent management personnel with sharp mind capable to skilful
analysis and deduction and ability to take decision with speed and precision with in
limited time constraints.

The M.B.A. imparts the students a tint of such virtues and prepares them to take
business world in that stride. The students get chance to work in organization and
gain a practical experience. The practical experiences gather valuable experience
and learn from the tier field of specialization. The purpose of this training is to
expose the students or management sciences to real business situation and to
provide insight into the various functions carried out within the organization.

In order to use the theoretical knowledge I get the opportunity of “Industrial

Training” in snowflakes enterprises Ltd.

As complementary to training, I have prepared and submitted a project report on

Working Capital Management . It is an attempt to present on account of practical
knowledge and observations gathered during the vocational training.

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 ACKNOWLEDGEMENT

It gives me immense pleasure to present this project report on Working Capital

Management carried out at Snowflakes Enterprises Ltd. In partial fulfillment of
post-graduate course M.B.A.

No work can be carried out without the help and guidance of various persons. I am
happy to take this opportunity to express my gratitude to those who have been
helpful to me in completing this project report.

At the outset I would like to thank Mr. TARUN MEHENDIRATTA

(Finance Manager of Dept. (Accounts) for their valuable advice and guidance
during my project completion, concerning various aspects of project. I also thanks
to all staff members of account department for help me to complete the summer
internship program.

I would be failing in my duty if I do not express my deep sense of gratitude

to Mr.TARUN MEHENDIRATTA , without his guidance it wouldn’t have been
possible for me to complete this project work.

I would like to thank my parents, friends and well wishers who encouraged
me to do this research work and all those who contributed directly or indirectly in
completing this project to whom I am obligated to.

At last, I would like to thanks to God who blessed me always.

Tanya Arora

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 CONTENTS

Chapter no. Particulars Page no.

1. Title page 1

2. Certificate 2

3. Declaration 3

4. Preface 4

5. Acknowledgement 5

6. Contents of Table 6

7. Executive Summary 7

8. Objectives of the Study 9

9. Introduction of Company 11

10. Introduction of the Topic 31

11. Literature Review 59

12. Research Methodology 62

13. Data Analysis 66

14. Findings 96

15. Recommendations 97

16. Conclusion 98

17. Bibliography 99

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 EXECUTIVE SUMMARY

Company being established as GNA enterprises Ltd. in 1954, made an entry with
manufacture of hand tools, real axle shafts, gears, spindles, transmission speed
gears & soon diversified by including air conditioning & transmission equipments.

At GNA Enterprises Works up to date manufacturing facilities, including CNC

machines, Stringent quality control procedures and systems, research &
development, foundry, heat treatment facilities, screw rotor machines, gear
grinding machines, metallurgical laboratories, tool room and integrated computer
system, have all been set up with sole idea of achieving the highest standards of
quality & performance.

My Project is the study of working capital management.

The study was conducted at Snowflakes enterprises. The project was of 4weeks
duration. During the project, I made use of company records & annual reports.
The data collected were then compiled, tabulated and analyzed.

Working Capital Management is a very important facet of financial management

due to: Investments in current assets represent a substantial portion of total
investment. Investment in current assets & the level of current liabilities have to
be geared quickly to change sales.

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 OBJECTIVES OF THE STUDY

To identify the financial strengths & weakness of the company.

Through the net profit ratio & other profitability ratio, understand the profitability
of the company.

Evaluating company s performance relating to financial statement analysis.

To know the liquidity position of the company with the help of current ratio.

To find out the utility of financial ratio in credit analysis & determining the
financial capacity of the firm.

• To study the liquidity position through various working capital related ratios.

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• To study the working capital components such as receivables accounts, cash
management, Inventory position.

CHAPTER-1
9
XXX Enterprises Ltd.

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 COMPANY’S HISTORY

1947, GNA came into being in the village Bundala, District Jalandhar, in the
Indian state of Punjab. It was the year that India Attained freedom. And in
the years that have followed, GNA has added its mite to the endeavour of
nation-building. Today, GNA is a name that has made its presence felt in
the world of auto-parts, with values like integrity, commitment, dedication
and latest state-of-art technology.

GNA’s biggest asset is its people. A pool of highly trained and highly
motivated workforce of over 2500. Managed by a team of professional
managers who are second to none.

A fact that can be clearly discerned is in our client- roaster which reads like
the whos- who of the Automobile and Off highway industry. GNA has
indeed come a long way. Yet our journey towards excellence is never-
ending. Quality Management at GNA is a timeless concept wherein
changes in customer expectations is a driving force to go beyond
conformance to standards.

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COMPANY PROFILE

12
GNA is amongst the world’s leading manufacturers of automotive
transmission components. The world’s top OE manufacturers are amongst
our customers. GNA employs over 2500 people across 3 locations in
Mehtiana & Bundala, Punjab, North India. Our scale gives us the
manufacturing capability that OE customers demand, plus the flexibility and
reliability to meet any production challenge.

We work with our customers to engineer products that provide optimum

performance to driveline systems in a wide range of automotive
applications. Whatever the specification, it is likely we have done
something similar before and if not, our engineers are ever zealous to put
their expertise to work, to customize and deliver accurate product solutions.
Our product reliability has been proven in every market, while product
durability has passed tests in the most demanding environments.
Consistently stepping up to the challenge of manufacturing products that
are world-class, reliable and cost efficient for 60 years, we have come a
long way.

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Manufacturing Units

14
15
LOGO OF GNA COMPANY

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 ORGANISATIONAL CHART

CHAIRMAN

Mr. Rachpal Singh Sihra

MANAGING DIRECTOR

Mr. Gursharan Singh Sihra

MARKETING DIRECTOR WORKS DIRECTOR ADMINIS.N AND FINANCE

DIRECTOR
Mr. Jaswinder Singh Mr. Ranbir Singh
sihra Sihra Mr. Gurdeep Singh sihra

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FUNCTIONAL HEAD (FINANCE) FUNCTIONAL HEAD ( HR, ADMINIS.
Mr. Padam Lal & PERSONNEL)

Mr. P.S. Nanda

SWOT ANALYSIS OF THE COMPANY

STRENGTHS:-
Some of the strengths of the company in international trade are as follow:-

 Leader in original equipment market

 Technology

 Lower production cost

 Quality certificate

 Government promotion

WEAKNESSES :-
Location and infrastructure of the company have some negative effects such as
roads in the v i l l a g e s o f P u n j a b a r e n o t u p t o t h e s t a n d a r d s . Th e r e i s
e v e r y t i me a s h o r t a g e o f p o we r supply. Because the company is located in
the villages, the employment levels are very low, so there is lack of skilled
workers. Some weaknesses are :-

 Location

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  Less advanced technology

 Lack of skilled worker

OPPORTUNITIES:-
A u t o mo t i v e i n d u s t r y o f I n d i a h a s h a d i mp r e s s i v e g r o wt h i n I n d i a
andnowfindingsi n c r e a s i n g r e c o g n i t i o n w o r l d w i d e a n d a b e g i n
n i n g h a s b e e n m a d e i n e x p o r t s o f vehicles as well as components.
Some opportunities of the company in this environment are as follows:-

 Boom in auto industry

 Open market

 Trade agreement

 Outstanding

THREATS:-
India has a boom in auto industry but there is always a threat of
component of competition from countries like Brazil and China.
Domestic competitors such as SPM, Raja Forging and Tabors are becoming
more competitive in the market:-

 Competition

 Limited customers

 World trade organization

ACHIEVEMENTS OF THE COMPANY

Company Policies : -
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Mission & Vision

• To produce Quality Products to meet customer requirements.

• Meet the quality standards of the domestic & international customers.

• Satisfy the internal & external customers.

• Facilitates the best facilities to its employees in comparison to other industries in

this belt.

• Overall growth & development of its employees.

• Initiate for the welfare of Society, State & of the Country.

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CHAPTER-2
21
 WORKING CAPITAL MANAGEMENT

“ More business fails for lack of cash than for want of profit…

Efficient management of working capital is one of the pre-conditions for the

success of an enterprise. Efficient management of working capital means
management of various components of working capital in such a way that an
adequate amount of working capital is maintained for smooth running of a firm and
for fulfillment of twin objectives of liquidity and profitability.

While inadequate amount of working capital impairs the firm’s liquidity. Holding
of excess working capital results in the reduction of the profitability. But the
proper estimation of working capital actually required, is a difficult task for the
management because the amount of working capital varies across firms over the
periods depending upon the nature of business, production cycle, credit policy,
availability of raw material, etc.

Thus efficient management of working capital is an important indicator of

sound health of an organization which requires
51 reduction of unnecessary blocking of capital in order to bring down the cost of
financing.

Definition
22
" Working capital is an excess of current assets over current liabilities. In other
words, The amount of current assets which is more than current liabilities is known
as Working Capital. If current liabilities are nil then, working capital will equal to
current assets. Working capital shows strength of business in short period of time.
If a company have some amount in the form of working capital , it means
Company have liquid assets, with this money company can face every crises
position.”

Working Capital = Current Assets - Current Liabilities

Working Capital Management:

Working Capital is the life blood and nerve centre of a business. Just as circulation
of blood is essential in the human body for maintaining life, working capital is
very essential to maintain the smooth running of a business. No business can run
successfully without an adequate amount of working capital.
Working capital refers to that part of firm’s capital which is required for financing
short term or current assets such as cash, marketable securities, debtors, and
inventories. In other words, working capital is the amount of funds necessary to
cover the cost of operating the firm.

Working capital refers to that part of the firm’s capital which is

required for financing short- term or current assets such as cash, marketable
securities, debtors & inventories. Funds, thus, invested in current assts 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.

Working capital management is concerned with the problems arise in

attempting to manage the current assets, the current liabilities and the inter
relationship 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

23
 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 were 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.

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)”.

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

1) Fixed Capital 2) Working Capital

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 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 firm’s 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.

Need for working capital

 The basic objective of financial management is to maximize shareholder’s

wealth. For this it is necessary to generate sufficient profits.

 The extent to it, which the profit can be earned, largely depends on the
magnitude of sales. However sales do not convert into cash instantly.

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  There is invariable the time gap between the sales of goods and receipts of
cash. There is, therefore, a need for working capital in the form of Current
Assets to deal with the problem arising.

 Out of the lack of immediate realization of cash again goods sold. Therefore,
sufficient working capital is necessary to sustain sales activity.

Working capital is needed for the following purpose :

1. For the purpose of raw-material, components and spares.

2. To incur day to day expenses and overhead costs such as fuel, power and
office expenses etc.

3. To meet selling costs as packing and advertising etc.

4. To provide credit facilities to the customers.

5. To maintain the inventories of raw-material, work in progress, stores and

spare and finished goods.

6. To pay wages and salaries.

IMPORTANCE OR ADVANTAGE OF ADEQUATE

WORKING CAPITAL

26
 PAYMENT TO
SUPPLIERS

DIVIDEND
EASY LOAN
DISTRIBUTI-
FROM BANKS
ON

SIGNIFICA
N--CE OF
WORKING
CAPITAL

INCREASE
INCREASE
DEBT
EFFECIENC-Y
CAPACITY

INCREASE IN
FIX ASSETS

 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:

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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.

 Ability to Face Crises:

A concern can face the situation during the depression.

Sources of working capital

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The company can choose to finance its current assets by

1. Long term sources

2. Short term sources

 Long term sources or Permanent Working Capital include equity and

preference shares, retained earning, debentures and other long term debts
from public deposits and financial institution. The long term working capital
needs should meet through long term means of financing. Financing through
long term means provides stability, reduces risk or payment and increases
liquidity of the business concern. Various types of long term sources of
working capital are summarized as follow:

1. Issue of shares:

It is the primary and most important sources of regular or permanent working

capital. Issuing equity shares as it does not create and burden on the income of the
concern. Nor the concern is obliged to refund capital should preferably raise
permanent working capital.

2. Retained earnings:

Retain earning accumulated profits are a permanent sources of regular working

capital. It is regular and cheapest. It creates not charge on future profits of the
enterprises.

3. Issue of debentures:

It crates a fixed charge on future earnings of the company. Company is obliged to

pay interest. Management should make wise choice in procuring funds by issue of
debentures.

 Short term sources or Temporary working capital

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Temporary working capital is required to meet the day to day business
expenditures. The variable working capital would finance from short term sources
of funds. And only the period needed. It has the benefits of, low cost and
establishes closer relationships with banker.

Some sources of temporary working capital are given below:

1. Commercial bank:

A commercial bank constitutes significant sources for short term or temporary

working capital. This will be in the form of short term loans, cash credit, and
overdraft and though discounting the bills of exchanges.

2. Public deposits:

Most of the companies in recent years depend on this source to meet their short
term working capital requirements ranging fro six month to three years.

3. Various credits:

Trade credit, business credit papers and customer credit are other sources of short
term working capital. Credit from suppliers, advances from customers, bills of
exchanges, etc helps to raise temporary working capital

4. Reserves and other funds:

Various funds of the company like depreciation fund. Provision for tax and other
provisions kept with the company can be used as temporary working capital.The
company should meet its working capital needs through both long term and short
term funds. It will be appropriate to meet at least 2/3 of the permanent working
capital equipments form long term sources, whereas the variables working capital
should be financed from short term sources. The working capital financing mix
should be designed in such a way that the overall cost of working capital is the
lowest, and the funds are available on time and for the period they are really
required.

DETERMINANTS OF WORKING CAPITAL NEEDS

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There are no set rules or formulas to determine the working capital requirements of
a firm. The corporate management has to consider a number of factors to
determine the level of working capital. The amount of working capital that a firm
would need is affected not only by the factors associated with the firm itself but is
also affected by economic, monetary and general business environment. Among
the various factors the following are important ones.

Nature and Size of Business

The working capital needs of a firm are basically influenced by the nature of its
business. Trading and financial firms generally have a low investment in fixed
assets, but require a large investment in working capital. Retail stores, for example,
must carry large stocks of a variety of merchandise to satisfy the varied demand of
their customers. Some manufacturing businesses' like tobacco, and construction
firms also have to invest substantially in working capital but only a nominal
amount in fixed assets. In contrast, public utilities have a limited need for working
capital and have to invest abundantly in fixed assets. Their working capital
requirements are nominal because they have cash sales only and they supply
services, not products. Thus, the amount of funds tied up with debtors or in stocks
is either nil or very small. The working capital needs of most of the manufacturing
concerns fall between the two extreme requirements of trading firms and public
utilities.

The size of business also has an important impact on its working capital needs.
Size may be measured in terms of the scale of operations. A firm with larger scale
of operations will need more working capital than a small firm. The hazards and
contin-gencies inherent in a particular type of business also have an influence in
deciding the magnitude of working capital in terms of keeping liquid resources.

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Manufacturing Cycle

The manufacturing cycle starts with the purchase of raw materials and is
completed with the production of finished goods. If the manufacturing cycle
involves a longer period the need for working capital will be more, because an
extended manufacturing time span means a larger tie-up of funds in inventories.
Any delay at any stage of manufacturing process will result in accumulation of
work-in-process and will en-hance the requirement of working capital. You may
have observed that firms making heavy machinery or other such products,
involving long manufacturing cycle, attempt to minimise their investment in
inventories (and thereby in working capital) by seeking advance or periodic
payments from customers.

Business Fluctuations

Seasonal and cyclical fluctuations in demand for a product affect the working
capital requirement considerably, especially the temporary working capital
requirements of the firm. An upward swing in the economy leads to increased
sales, resulting in an increase in the firm's investment in inventory and receivables
or book debts. On the other hand, a decline in the economy may register a fall in
sales and, consequently, a fall in the levels of stocks and book debts.

Seasonal fluctuations may also create production problems. Increase in production

level may be expensive during peak periods. A firm may follow a policy of steady
production in all seasons to utilise its resources to the fullest extent. This will mean
accumulation of inventories in off-season and their quick disposal in peak season.
Therefore, financial arrangements for seasonal working capital requirement should
be made in advance. The financial plan should be flexible enough to take care of
any seasonal fluctuations.

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Production Policy

If a firm follows steady production policy, even when the demand is seasonal,
inven-tory will accumulate during off-season periods and there will be higher
inventory costs and risks. If the costs and risks of maintaining a constant
production schedule are high, the firm may adopt the policy of varying its
production schedule in accordance with the changes in demand. Firms whose
physical facilities can be utilised for manufacturing a variety of products can have
the advantage of diversified activities. Such firms manufacture their main products
during the season and other products during off-season. Thus, production policies
may differ from firm to firm, depending upon the circumstances. Accordingly, the
need for working capital will also vary.

Turnover of Circulating Capital

The speed with which the operating cycle completes its round (i.e., cash → raw
materials → finished product → accounts receivables → cash) plays a decisive
role in influencing the working capital needs. (Refer to Figure 1(.1 on operating
cycle).

Credit Terms

The credit policy of the firm affects the size of working capital by influencing the
level of book debts. Though the credit terms granted to customers to a great extent
depend upon the norms and practices of the industry or trade to which the firm
belongs; yet it may endeavor to shape its credit policy within such constraints. A
long collection period will generally mean tying of larger funds in book debts.
Slack collection procedures may even increase the chances of bad debts.

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The working capital requirements of a firm are also affected by credit terms
granted by its creditors. A firm enjoying liberal credit terms will need less working
capital.

Growth and Expansion Activities

As a company grows, logically, larger amount of working capital will be needed,

though it is difficult to state any firm rules regarding the relationship between
growth in the volume of a firm's business and its working capital needs. The fact to
recognize is that the need for increased working capital funds may precede the
growth in busi-ness activities, rather than following it. The shift in composition of
working capital in a company may be observed with changes in economic
circumstances and corporate practices. Growing industries require more working
capital than those that are static.

Operating Efficiency

Operating efficiency means optimum utilisation of resources. The firm can

minimise its need for working capital by efficiently controlling its operating costs.
With in-creased operating efficiency the use of working capital is improved and
pace of cash cycle is accelerated. Better utilisation of resources improves
profitability and helps in relieving the pressure on working capital. 15
Management of Working Capital

Price Level Changes

Generally, rising price level requires a higher investment in working capital. With
increasing prices the same levels of current assets need enhanced investment.
However, firms which can immediately revise prices of their products upwards
may not face a severe working capital problem in periods of rising levels. The

34
effects of increasing price level may, however, be felt differently by different firms
due to variations in individual prices. It is possible that some companies may not
be affected by the rising prices, whereas others may be badly hit by it.

Working Capital Cycle

In manufacturing concern, working capital cycle starts with the purchase

of raw-materials and ends with realization of cash from the sale of
finished goods. The cycle involves the purchase of raw materials and ends with
the realization of cash from the sale of finished products. The cycle
involves purchase of raw materials and stores, its conversion in to stock
of finished goods through work in progress with progressive increment of
labor and service cost, conversion of finished stick into sales and receivables and
ultimately realization of cash and this cycle continuous again from cash to
purchase of raw materials and so on.

Business Cycle

Business Cycle refers to alternate expansion and contraction in general business

activities. In a period of born i.e. when the business is prosperous there is a need
for larger amount of working capital due to increase in sales, rise in prices,
optimistic expansion of business etc. On the country at the time of depression i.e.
when there is a down swing of the cycle, business contracts, sales decline,
difficulties are faced in collections from debtors and firms may have a large
amount of working capital lying ideal.

Availability of Raw Material

If raw material is readily available then one need not maintain a large stock of the
same, thereby reducing the working capital investment in raw material
stock. On the other hand, if raw material is not readily available then a large
inventory/stock needs to be maintained, thereby calling for substantial investment
in the same.

Other Factors

35
There are some other factors, which affect the determination of the need for
working capital. A high net profit margin contributes towards the working capital
pool. The net profit is a source of working capital to the extent it has been earned
in cash. The cash inflow can be calculated by adjusting non-cash items such as
depreciation, out-standing expenses, losses written off, etc, from the net profit.The
firm's appropriation policy, that is, the policy to retain or distribute profits also has
a bearing on working capital. Payment of dividend consumes cash resources and
thus reduces the firm ',s working capital to that extent. If the profits are retained in
'
the business, the firm s working capital position will be strengthened.

In general, working capital needs also depend upon the means of transport and
communication. If they are not well developed, the industries will have to keep
huge stocks of raw materials, spares, finished goods, etc. at places of production,
as well as at distribution outlets.

KINDS OF WORKING CAPITAL

36
Ordinarily, working capital is classified into two categories:

 Fixed, Regular or Permanent Working Capital; and

 Variable, Fluctuating, Seasonal, Temporary or Special Working Capital

Fixed Working Capital

The need for current assets is associated with the operating cycle, which, as you
know, is a continuous process. As such, the need for current assets is felt
constantly. The magnitude of investment in current assets however may not always
be the same. The need for investment in current assets may increase or decrease
over a period of time according to the level of production. Nevertheless, there is
always a certain minimum level of current assets, which is essential for the firm to
carry on its business irrespective of the level of operations. This is the irreducible
minimum amount necessary for maintaining the circulation of the current assets.
This minimum level of investment in current assets is permanently locked up in
business and is therefore referred to as permanent or fixed or regular working
capital. It is permanent in the same way as investment in the firm's fixed assets is.

Fluctuating Working Capital

Depending upon the changes in production and sales, the need for working capital,
over and above the permanent working capital, will fluctuate. The need for
working capital may also vary on account of seasonal changes or abnormal or
unanticipated conditions. For example, a rise in the price level may lead to an
increase in the amount of funds invested in stock of raw materials as well as
finished goods. Addi-tional doses of working capital may be required to face
cutthroat competition in the market or other contingencies like strikes and
37
lockouts. Any special advertising campaigns organised for increasing sales or other
promotional activities may have to be financed by additional working capital. The
extra working capital needed to support the changing business activities is called
the fluctuating (variable, seasonal, temporary or special) working capital.

Fixed working capital remaining constant overtime

Fixed working capital increasing over time

As seen in Figure 16.2, that fixed working capital is stable over time, where as
variable working capital is fluctuating-sometimes increasing and sometimes
decreas-ing. The permanent working capital line, however, may not always be
horizontal. For a growing firm, permanent working capital may also keep on
increasing over time as has been shown in Figure 16.3.

38
Both these kinds of working capital - permanent and temporary-are required to
facilitate production and sales through the operating cycle, but temporary working
capital is arranged by the firm to meet liquidity requirements that are expected to
be temporary.

OPERATING CYCLE

The time between purchase of inventory items (raw material or merchandise) and
their conversion into cash is known as operating cycle or working capital cycle.
The successive events which are typically involved in an operating cycle are
depicted in Figure. A perusal of the operating cycle would reveal that the funds
invested in operations are re-cycled back into cash. The cycle, of course, takes
some time to complete. The longer the period of this conversion the longer is the
operating cycle. A standard operating cycle may be for any time period but does
not generally exceed a financial year. Obviously, the shorter the operating cycle,
the larger will be the turnover of funds invested for various purposes. The channels
of the investment are called current assets. Sometimes the available funds may be
in excess of the needs for investment in these assets, e.g., inventory, receivables
and minimum essential cash balance. Any surplus may be invested in government
securities rather than being retained as idle cash balance.

39
 OPERATING CYCLE

 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 I 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.

40
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. The concept of working
capital was, first evolved by Karl Marx. Marx used the term ‘variable capital’
means outlays for payrolls advanced to workers before the completion of work. He
compared this with ‘constant capital’ which according to him is nothing but ‘dead-
labour’. This ‘variable capital’ is nothing wage fund which remains blocked in
terms of financial management, in work-in-process along with other operating
expenses until it is released through sale of finished goods. Although Marx did not
mentioned that workers also gave credit to the firm by accepting periodical
payment of wages which funded apportioned of W.I.P, the concept of working
capital, as we understand today was embedded in his ‘variable capital’.

41
 Type of working capital
The operating cycle creates the need for current assets (working capital).However
the need does not come to an end after the cycle is completed to explain this
continuing need of current assets a destination should be drawn between permanent
and temporary working capital.

1) Permanent working capital

The need for current assets arises, as already observed, because of the cash cycle.
To carry on business certain minimum level of working capital is necessary on
continues and uninterrupted basis. For all practical purpose, this requirement will
have to be met permanent as with other fixed assets. This requirement refers to as
permanent or fixed working capital.

2) Temporary working capital

Any amount over and above the permanent level of working capital is temporary,
fluctuating or variable, working capital. This portion of the required working
capital is needed to meet fluctuation in demand consequent upon changes in
production and sales as result of seasonal changes.

42
Observation :

This graph shows that the permanent level is fairly castanet; while temporary
working capital is fluctuating in the case of an expanding firm the permanent
working capital line may not be horizontal. This may be because of changes in
demand for permanent current assets might be increasing to support a rising level
of activity.

 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

43
 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.

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.

44
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.

COMPONENTS OF WORKING CAPITAL

You have already noted that working capital has two components: Current assets
and Current liabilities. Current assets comprise several items. The typical items
are:

 Cash to meet expenses as and when they occur.

 Accounts Receivables or sundry trade debtors
 Inventory of:

 Raw materials, stores, supplies and spares,

 Work-in-process, and
 Finished goods

45
  Advance payments towards expenses or purchases, and other short-term
advances which are recoverable.
 Temporary investment of surplus funds which could be converted into cash
whenever needed.

A part of the need for funds to finance the current assets may be met from supply
of . goods on credit, and deferment, on account of custom, usage or arrangement,
of payment for expenses.. The remaining part of the need for working capital may
be met from short-term borrowing from financiers like banks. These items are
collectively called current liabilities. Typical items of current liabilities are:

 Goods purchased on credit

 Expenses incurred in the course of the business of the organisation (e.g.,
wages or salaries, rent, electricity bills, interest etc.) which are not yet paid
for.
 Temporary or short term borrowings from banks, financial institutions or
other parties
 Advances received from parties against goods to be sold or delivered, or as
short term deposits.
 Other current liabilities such as tax and dividends payable. Some of the
major components of current assets are explained here in brief:

Cash : All of us know that the basic input to start any business is cash. Cash is
initially required for acquiring fixed assets like plants and machinery which
enables a firm to produce products and generate cash by selling them. Cash is also
required and invested in working capital. Investments in working capital is
46
required, as firms have to store certain quantity of raw materials and finished
goods and also for providing credit terms to the customers.

A minimum level of cash helps in the conduct of everyday ordinary business such
as making of purchases and sales as well as for meeting the unexpected payments,
developments and other contingencies. As discussed earlier cash invested at the
beginning of-the operating cycle gets released at the end of the cycle to fund fresh
investments. However, additional cash is required by the firm when it needs to buy
more fixed assets, increase the level of operations or for bringing out change in
working capital cycle such as extending credit period to the customers.

The demand for cash is affected by several factors, some of them are within the
control of the managers and some are outside their control. It is not possible to
operate the business without holding cash but at the same time holding it without a
purpose also costs a firm either directly in the form of interest or loss of income
that could be earned out of the cash.

In the context of working capital management, cash management refers to

optimizing the benefit and cost associated with holding cash. The objective of cash
management is best achieved by speeding up the working capital cycle,
particularly the collection process and investing surplus cash in short term assets in
most profitable avenues.

We will be subsequently discussing certain issues like the management of cash

flows and determination of optimal cash balance, etc. (in this unit).

Accounts Receivable: Firms rather prefer to sell for cash than on credit, but
competi-tive pressures force most firms to offer credit. Today the use of credit in
the purchase f goods and services is so common that it is taken for granted. Selling

47
goods or providing services on credit basis leads to accounts receivable. When
consumers expect credit, business units in turn expect credit from their suppliers to
match their investment in credit extended to consumers. The granting of credit
from one business firm to another for purchase of goods and services is popularly
known as trade credit. 11 Management of Working Capital

Though commercial banks provide a significant part of requirements for working

capital, trade credit continues to be a major source of funds for firms and accounts
receivable that result from granting trade credit are major investment for the firm.

Both direct and indirect costs are associated with carrying receivables, but it has an
important benefit for increasing sales. Excessive levels of accounts receivables
result in decline of cash flows and many result in bad debts which in turn may
reduce the profit of the firm. Therefore, it is very important to monitor and manage
receivables carefully and regularly. We would be dealing with this topic in MS-41
: Working Capital Management.

Inventory : Three things will come to your mind when you think of a
manufacturing unit - machines, men and materials. Men using machines and tools
convert the materials into finished goods. The success of any business unit depends
on the extent to which these are efficiently managed. Inventory is an asset to the
organisation like other components of current assets.

Inventory constitutes a very significant part of working capital or current

assets in manufacturing organisation. It is essential to control inventories
(physical/quantity control and value control) as these are significant elements in
the costing process constituting sometimes more than 60% of the current assets.

48
Inventory holding is desirable because it meets several objectives and needs but an
excessive inventory is undesirable because it costs a lot to firms.

Inventory which consists of raw material components and other consumables, work
in process and finished goods, is an important component of `current assets'. There
are several factors like nature of industry, availability of material, technology,
business practices, price fluctuation, etc. that determines the amount of inventory
holding. Holding inventory ensures smooth production process, price stability and
immediate delivery to customers. Since inventory is like any other form of assets,
holding inventory has a cost. The cost includes opportunity cost of funds blocked
in inventory, storage cost, stock out cost, etc. The benefits that come from holding
inventory should exceed the cost to justify a particular level of inventory.

Marketable Securities: Cash and marketable securities are normally treated as

one item in any analysis of current assets although these are not the same as cash
they can be converted to cash at a very short notice. Holding cash in excess of
immediate requirement means the firm is missing out an opportunity income.
Excess cash is normally invested in marketable securities, which serves two
purposes namely, provide liquidity and, also earn a return.

49
CHAPTER-3

50
 LITERATURE REVIEW

The purpose of this chapter is to present a review of literature relating to the

working capital management. Although working capital is an important ingredient
in the smooth working of business entities, it has not attracted much attention of
scholars. Whatever studies have conducted, those have exercised profound
influence on the understanding of working capital management good number of
these studies which pioneered work in this area have been conducted abroad
,following which, Indian scholars have also conducted research studies exploring
various aspects of working capital. Special studies have been undertaken, mostly
economists, to study the dynamics of inventory investment which often represented
largest component of total working capital. Studies on Working Capital
Management Studies adopting a new approach towards working capital
management are reviewed here.

Sagan, (1955), perhaps the first theoretical paper on the theory of working capital
management, emphasized the need for management of working capital accounts
and warned that it could vitally affect the health of the company. He realized the
need to build up a theory of working capital management. He discussed mainly the
role and functions of money manager inefficient management. Sagan pointed out
the money manager’s operations were primarily in the area of cash flows generated
in the course of business transactions. However, money manager must be familiar
with what is being done with the control of inventories, receivables and payables
because all these accounts affect cash position. Thus, Sagan concentrated mainly
on cash component of working capital. Sagan indicated that the task of money
manager was to provide funds as and when needed and to invest temporarily
surplus funds as profitably as possible in view of his particular requirements of
safety and liquidity of funds by examining the risk and return of various
investment opportunities. He suggested that money manager should take his
decisions on the basis of cash budget and total current assets position rather than
on the basis of traditional working capital ratios. This is important because
efficient money manager can avoid borrowing from outside even when his net
working capital position is low. The study pointed out that there was a need to

51
improve the collection of funds but it remained silent about the method of doing it.
Moreover, this study is descriptive without any empirical support.

Vanhorne, (1969), recognizing working capital management as an area largely

lacking in theoretical perspective, attempted to develop a framework in terms of
probabilistic cash buthe level of liquid assets and the maturity composition of debt
involving risk-return trade-off. He proposed calculation of different forecasted
liquid asset requirements along with their subjective probabilities under different
possible assumptions of sales, receivables, payables and other related receipts and
disbursements. He suggested preparing a schedule showing, under each alternative
of debt maturity, probability distributions of liquid asset balances for future
periods, opportunity cost, maximum probability of running out of cash and
number of future periods in which there was a chance of cash stock-out. Once the
risk and opportunity cost for different alternatives were estimated, the form could
determine the best alternative by balancing the risk of running out of cash against
the cost of providing a solution to avoid such a possibility depending on
management’s risk tolerance limits. Thus, Vanhorne study presented a risk-return
trade-off of working capital management in entirely new perspective by
considering some of the variables probabilistically. Howeverd get for evaluating
decisions concerning some of the variables probabilistically. However, the
usefulness of the framework suggested by Vanhorne is limited because of the
difficulties in obtaining information about the probability distributions of liquid-
asset balances, the opportunity cost and the probability of running out of cash for
different alternative of debt maturities.

Welter, (1970), stated that working capital originated because of the global delay
between the moment expenditure for purchase of raw material was made and the
moment when payment were received for the sale of finished product. Delay
centres are located throughout the production and marketing functions. The study
requires specifying the delay centres and working capital tied up in each delay
centre with the help of information regarding average delay and added value. He
recognized that by more rapid and precise information through computers and
improved professional ability of management, saving through reduction of working
capital could be possible by reducing the length of global delay by rescuing and/or
favourable redistribution of this global delay among the different delay centres.
However, better information and improved staff involve cost. Therefore, savings
52
through reduction of working capital should be tried till these saving are greater or
equal to the cost of these savings. Thus, this study is concerned only with return
aspect of working capital management ignoring risk. Enterprises, following this
approach, can adversely affect its short-term liquidity position in an attempt to
achieve saving through reduction of working capital. Thus, firms should be
conscious of the effect of law current assets on its ability to pay-off current
liabilities. Moreover, this approach concentrated only on total amount of current
assets ignoring the interactions between current assets and current liabilities.

Lambrix and Singhvi (1979), adopting the working capital cycle approach to the
working capital management, also suggested that investment in working capital
could be optimized and cash flows could be improved by reducing the time frame
of the physical flow from receipt of raw material to shipment of finished goods,
i.e. inventory management, and by improving the terms on which firm sells goods
as well as receipt of cash. However, the further suggested that working capital
investment could be optimized also (1) by improving the terms on which firms
bought goods i.e. creditors and payment of cash, and (2) by eliminating the
administrative delays i.e. the deficiencies of paper-work flow which tended to
extend the time-frame of the movement of goods and cash.

Aggarwal (1983) ,also studied working capital management on the basis of sample
of 34 large manufacturing and trading public limited companies in ten industries in
private sector for the period 1966-67 to 1976-77. Applying the same techniques of
ratio analysis, responses to questionnaire and interview, the study concluded the
although the working capital per rupee of sales showed a declining trend over the
years but still there appeared a sufficient scope for reduction in investment in
almost all the segments of working capital. An upward trend in cash to current
assets ratio and a downward trend in cash turnover showed the accumulation of
idle cash in these industries. Almost all the industries had overstocking of raw
materials shown by increase in the share of raw material to total inventory while
share of semi-finished and finished goods came down. It also revealed that long-
term funds as a percentage of total working capital registered an upward trend,
which was mainly due to restricted flow of bank credit to the industries.

53
 RESEARCH METHODOLOGY

For every comprehensive research a proper research methodology is indispensable

& it has to be properly conceived. The methodology adopted by me is as follows:-

 RESEARCH PROBLEM

 To know the working capital management of GNA with the help of ratio
analysis.
 To analyze the market strength of GNA Duraparts Enterprises Ltd..

 HYPOTHESIS OF THE STUDY

A research hypothesis is the statement created by a researcher when they speculate

upon the outcome of a research or experiment.

For the study of their customers and employees preference towards GNA duraparts
the following hypothesis was set up.

 H0: There is no significant relationship between factors and satisfaction

level.
 H1: There is significant relationship between factors and satisfaction level.

 RESEARCH DESIGN

According to Clifford Woody, “research comprises defining and redefining

problems, formulating hypothesis or suggested solutions; collecting, organizing
and evaluating data; making deductions and reaching conclusions; and at last

54
carefully testing the conclusions to determine whether they fit the formulating
hypothesis.

This research is divided in two parts:

(i) Working Capital Management through secondary data based on certain

parameters;
(ii) an exploratory research based on a survey of the concerning literature. A
sample survey was conducting with the help of Scheduling Method of
collecting data i.e. personally the enumerator visited and got the
questionnaires filled from the respondents. The enumerator in this
method helps the respondents in recording their answers to various
questions in the said schedules.

 SOURCES OF DATA

There are two types of data viz. primary and secondary. The primary data are
those which are collected afresh and for the first time, and thus happen to be
original in character.

The secondary data, on the other hand, are those which have already been
collected by someone else and which have already been passed through the
statistical process.

Secondary data was used for the working capital management of GNA that is
based on company’s annual reports, profit and loss account and balance sheet for
the years 2007-08, 2008-09, 2009-10, 2010-11, brochures from finance manager,
internet and already available data. .

 STATISTICAL TOOLS USED

55
The various statistical tool were used data distribution tables, graphs and pie
charts. Ratio analysis was used for determining the working capital management of
GNA Enterprises Ltd. Hypothesis testing through Chi Square test was used in
Customer Preference Towards GNA’s products.

CHAPTER-4
56
 Working capital level

The consideration of the level investment in current assets should avoid two danger
points excessive and inadequate investment in current assets. Investment in current
assets should be just adequate, not more or less, to the need of the business firms.
Excessive investment in current assets should be avoided because it impairs the
firm’s profitability, as idle investment earns nothing. On the other hand inadequate
amount of working capital can be threatened solvency of the firms because of its
inability to meet its current obligation. It should be realized that the working
capital need of the firms may be fluctuating with changing business activity. This
may cause excess or shortage of working capital frequently. The management
should be prompt to initiate an action and correct imbalance .
(In Lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11

57
A) Current Assets
Inventories 4747.44 3692.77 4033.26 5195.33
Sundry Debtors 4229.94 5338.00 5842.22 7889.26
Cash & Bank Balance
Cash in hand 43.07 15.61 15.82 19.63
Cash at Banks
In Current Accounts 92.14 30.57 65.00 93.45
In Other Accounts 47.07 58.34 128.13 8.44
Loans & Advances 1479.37 1715.78 1121.34 1239.99
Total of A(Gross W.C.) 10639.05 10851.09 11205.79 14446.12
B) Current liabilities
(a) Liabilities 3863.90 4467.99 7066.91 8131.87
(b) Provisions 345 168.30 132.56 -
Total of B 4208.90 4636.29 7199.47 8131.87
Net W.C.(A-B) 6430.14 6214.80 4006.32 6314.24
Working capital trend analysis
In working capital analysis the direction at changes over a period of time is of
crucial importance. Working capital is one of the important fields of management.
It is therefore very essential for an annalyst to make a study about the trend and
direction of working capital over a period of time. Such analysis enables as to
study the upward and downward trend in current assets and current liabilities and
its effect on the working capital position.

In the words of S.P. Gupta “The term trend is very commonly used in day-today
conversion trend, also called secular or long term need is the basic tendency of
population, sales, income, current assets, and current liabilities to grow or decline
over a period of time.”

According to R.C.Galeziem “The trend is defined as smooth irreversible

movement in the series. It can be increasing or decreasing.”

58
Emphasizing the importance of working capital trends, Man Mohan and Goyal
have pointed out that “analysis of working capital trends provide as base to judge
whether the practice and privilege policy of the management with regard to
working capital is good enough or an important is to be made in managing the
working capital funds.

Years 2007-08 2008-09 2009-10 2010-11

Net W.C.(A-B) 6430.14 6214.80 4006.32 6314.24

W.C. Indices 100.00 96.65 62.31 98.20

W.C. Indices

120.00

100.00

80.00

60.00

100.00 98.20
96.65

40.00

62.31

20.00

0.00
2007-08 2008-09 2009-10 2010-11

W.C. Indices

Observations:

It was observed that major source of liquidity problem is the mismatch between
current payments and current receipts from the Comparison of funds flow

59
statements of GNA for four years. It was observed that in the year 2009-10 current
assets decreased by around 35% and current liabilities increased only by 45%
which affect as working capital decreased by 39%.

 Current assets :

Total assets are basically classified in two parts as fixed assets and current assets.
Fixed assets are in the nature of long term or life time for the organization. Current
assets convert in the cash in the period of one year. It means that current assets are
liquid assets or assets which can convert in to cash within a year. (Rs. In Lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11

Current Assets
Inventories 4747.44 3692.77 4033.26 5195.3
Sundry Debtors 4229.94 5338.00 5842.22 7889.26
Cash & Bank Balance
Cash in hand 43.07 15.62 15.82 19.64
Cash at Banks
In Current Accounts 92.14 30.5 65.01 93.46
In Other Accounts 47.08 58.35 128.13 8.44
Loans & Advances 1479.37 1715.78 1121.34 1239.99
Total of C.A 10639.05 10851.09 11205.79 14446.11
C.A indices 100.00 101.99 103.27 128.92

60
 C.A indices

140.00

120.00

100.00

80.00

128.92
60.00

100.00 101.99 103.27

40.00

20.00

0.00
1 2 3 4
Years

 Composition of current assets:

Analysis of current assets components enable one to examine in which components

the working capital fund has locked. A large tie up of funds in inventories affects
the profitability of the business or the major portion of current assets is made up
cash alone, the profitability will be decreased because cash is non earning assets.

Particulars 2007-08 2008-09 2009-10 2010-11

Inventories 44.62 34.03 35.99 35.96

Sundry Debtors 39.76 49.19 52.14 54.61
Cash & Bank Balance 1.71 0.96 1.86 0.84
Loans & Advances 13.91 15.81 10.01 8.58
Total of C.A 100 100 100 100

61
 Current assets components in %

60.00

50.00

40.00
Inventories
Sundry Debtors
%

30.00
Cash & Bank Balance
Loans & Advances
20.00

10.00

0.00
2007-08 2008-09 2009-10 2010-11

(Rs. In Lakhs)

Particulars 2007-08 2008-09 2009-10 2010-11

Sales 17467.29 19326.06 18475.18 29963.49

Sales

35000.00

30000.00

25000.00

20000.00
Sales
15000.00

10000.00

5000.00

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

62
Observations :

It was observed that the size of current assets is increasing with increases in the
sales. 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 balance of current assets is highly increased
in year 2010-11, because of increase in Sundry Debtors. Current assets
components show sundry debtors are the major part in current assets it indicates
that the inefficient collection management. Over investment in the debtor affects
liquidity of firm for that company has raised funds from other sources like short
term loan which incurred the interest.

 Current liabilities :

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.

Years 2007-08 2008-09 2009-10 2010-11

Current liabilities
(a) Liabilities 3863.9 4467.99 7066.91 8131.87
(b) Provisions 345 168.3 132.56 0
Total of C.L 4208.9 4636.29 7199.47 8131.87
Indices of C.L 100 110.15 171.05 193.21

63
 Indices of C.L.

250.00

200.00

150.00

Current liabilities
100.00 193.21
171.05

110.15
50.00 100.00

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

Observations:
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 a current liability increase in the year 2008-09 by 35% it reduce the working
capital size in the same year. But company enjoyed over creditors which may
include indirect cost of credit terms.

Changes in working capital

There are so many reasons to changes in working capital as follow

1. Changes in sales and operating expenses:-

The changes in sales and operating expenses may be due to three reasons

64
1. There may be long run trend of change e.g. The price of raw material say oil
may constantly raise necessity the holding of large inventory.

2. Cyclical changes in economy dealing to ups and downs in business activity will
influence the level of working capital both permanent and temporary.

3. Changes in seasonality in sales activities.

4. Policy changes:-

The second major case of changes in the level of working capital is because of
policy changes initiated by management. The term current assets policy may be
defined as the relationship between current assets and sales volume.

5. Technology changes:-

The third major point if changes in working capital are changes in technology
because changes in technology to install that technology in our business more
working capital is required. A change in operating expanses rise or full will have
similar effects on the levels of working following working capital statement is
prepared on the base of balance sheet of last two year.

Statement of changes in working

Particulars 2009-10 2010-11 Changes in W.C.

Increase Decrease
A) Current Assets
Inventories 4033.26 5195.33 1162.07
Sundry Debtors 5842.22 7889.26 2047.04
Cash & Bank Balance
Cash in hand 15.82 19.64 3.81
Cash at Banks
In Current Accounts 65.01 93.46 28.45
In Other Accounts 128.13 8.44

65
Loans & Advances 1121.34 1239.99 118.65
Total of A(Gross W.C.) 11205.79 14446.12 3240.33
B) Current liabilities
(a) Liabilities 7066.91 8131.87 1064.97
(b) Provisions 132.56 0.00 132.56
Total of B 7199.47 8131.87 932.41

Net W.C.(A-B) 4006.32 6314.24 2307.92 132.56

Observations:
There is a positive working capital which shows the further growth as the company
is expanding its business into other sectors of the construction. The working capital
increased due to the following reasons:

1) There is 50% increase in the inventories from previous year because the
company is taking new projects in new sectors with good worth.

2) The current liabilities of the firm is very less.

3) The increased total current liabilities is very less compared to the total current
assets

Operating Cycle
The need of working capital arrived because of time gap between production of
goods and their actual realization after sale. This time gap is called “Operating
Cycle” or “Working Capital Cycle”. The operating cycle of a company consist of
time period between procurement of inventory and the collection of cash from
receivables. The operating cycle is the length of time between the company’s

66
outlay on raw materials, wages and other expanses and inflow of cash from sales of
goods.

Operating cycle is an important concept in management of cash and management

of cash working capital. The operating cycle reveals the time that elapses between
outlays of cash and inflow of cash. Quicker the operating cycle less amount of
investment in working capital is needed and it improves profitability. The duration
of the operating cycle depends on nature of industries and efficiency in working
capital management.

Particulars 2007-08 2008-09 2009-10 2010-11

ADD :-
1. Inventory Conversion Period
 Raw mat. Holding period 41 27 47 25
 WIP period 100 96 73 74
 Finished goods holding period 1 1 4 6
2..Debtors collection period 88 101 96 115
3.Gross operating cycle 230 225 220 220
LESS:-
4.Creditors payment period 115 143 138 203
Net operating cycle 115 82 82 17

67
 Net operating cycle

140

120

100

80
Net operating cycle
60

40

20

0
2007-08 2008-09 2009-10 2010-11
YEARS

Operating cycle components

250

200

Raw mat. Holding period

150
WIP period
Finished goods holding period
Debtors collection period
100
Creditors payment period

50

0
2007-08 2008-09 2009-10 2010-11
Years

Observations

Operating cycle of GNA shows the numbers of days are decreasing in recent year
it is reflect the efficiency of management. Days of operating cycle shows period of
lack of funds in current assets, if no of day are more than it increases the cost of

68
funds as taken from outside of the business. In 2007-08 shows the high no. of days
because of reduced of creditors holding period.

Working capital leverage

One of the important objectives of working capital management is by maintaining
the optimum level of investment in current assets and by reducing the level of
investment in current assets and by reducing the level of current liabilities the
company can minimize the investment in the working capital thereby improvement
in return on capital employed is achieved. The term working capital leverage refers
to the impact of level of working capital on company’s profitability. The working
capital management should improve the productivity of investment in current
assets and ultimately it will increase the return on capital employed. Higher level
of investment in current assets than is actually required means increase in the cost
of Interest charges on short term loans and working capital finance raised from
banks etc. and will result in lower return on capital employed and vice versa.
Working capital leverage measures the responsiveness of ROCE (Return on
Capital Employed) for changes in current assets. It is measures by applying the
following formula,

69
The working capital leverage reflects the sensitivity of return on capital employed
to changes in level of current assets. Working capital leverage would be less in the
case of capital intensive capital employed is same working capital leverage
expresses the relation of efficiency of working capital management with the
profitability of the company.

Particulars 2007-08 2008-09 2009-10 2010-11

EBIT 2409.20 2174.66 2398.32 3391.71

TOTAL ASSETS 19259.11 20919.01 24411.22 29068.59
Return on C.E 0.1251 0.1040 0.0982 0.1167
% ROCE 12.51 10.40 9.82 11.67
% Change in C.E 16.90 -20.33 -5.81 15.80
%Change in C.A 1.99 1.95 3.17 22.43
W.C. Leverage 8.49 -10.43 -1.83 0.70

W.C.Leverage

10.00

5.00

0.00
2007-08 2008-09 2009-10 2010-11
W.C.L

-5.00

-10.00

-15.00
Years

70
 Working capital leverage components
25.00

20.00

15.00

10.00

5.00

0.00 % ROCE
2007-08 2008-09 2009-10 2010-11 % Change in C.E
-5.00
%Change in C.A
-10.00 W.C.L

-15.00

-20.00

-25.00

Observations
The working capital leverage of the company decreased due to decrease in return
on capital employed. The change in capital employed went to the negative. The
return on capital employed basically tells about the return on capital assets
employed (excluding the liabilities) by the company. The decreasing capital
employed shows the inefficiency of the managements the value in total assets is
more than the earnings of the company. The investment in current assets as well as
the fixed assets both are very high. From year 2008 to 2011 every year the total
assets increases.

71
 Working Capital Ratio analysis
Ratio analysis is the powerful tool of financial statements analysis. A ratio is
defined as “the indicated quotient of two mathematical expressions” and as “the
relationship between two or more things”. The absolute figures reported in the
financial statement do not provide meaningful understanding of the performance
and financial position of the firm. Ratio helps to summaries large quantities of
financial data and to make qualitative judgment of the firm’s financial
performance.

Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of there profitability and
efficiency of performance, either individually or in relation to other firms in same
industry. Ratio analysis is one of the best possible techniques available to
management to impart the basic functions like planning and control. As future is
closely related to the immediately past, ratio calculated on the basis historical
financial data may be of good assistance to predict the future. E.g. On the basis of
inventory turnover ratio or debtor’s turnover ratio in the past, the level of inventory
and debtors can be easily ascertained for any given amount of sales. Similarly, the
ratio analysis may be able to locate the point out the various arias which need the
management attention in order to improve the situation. E.g. Current ratio which
shows a constant decline trend may be indicate the need for further introduction of
long term finance in order to increase the liquidity position. As the ratio analysis is
concerned with all the aspect of the firm’s financial analysis liquidity, solvency,
activity, profitability and overall performance, it enables the interested persons to
know the financial and operational characteristics of an organization and take
suitable decisions.
72
 Limitations of ratio analysis

 The basic limitation of ratio analysis is that it may be difficult to find a basis
for making the comparison.
 Normally, the ratios are calculated on the basis of historical financial
statements. An organization for the purpose of decision making may need
the hint regarding the future happiness rather than those in the past. The
external analyst has to depend upon the past which may not necessary to
reflect financial position and performance in future.
 The technique of ratio analysis may prove inadequate in some situations if
there is differs in opinion regarding the interpretation of certain ratio.
 As the ratio calculates on the basis of financial statements, the basic
limitation which is applicable to the financial statement is equally applicable
In case of technique of ratio analysis also i.e. only facts which can be
expressed in financial terms are considered by the ratio analysis.
 The technique of ratio analysis has certain limitations of use in the sense that
it only highlights the strong or problem arias, it does not provide any
solution to rectify the problem areas.

73
 Classification of working capital ratio
Working capital ratio means ratios which are related with the working capital
management e.g. current assets, current liabilities, liquidity, profitability and risk
turnoff etc. these ratio are classified as follows:

1. Efficiency ratio

The ratios compounded under this group indicate the efficiency of the organization
to use the various kinds of assets by converting them the form of sale. This ratio
also called as activity ratio or assets management ratio. As the assets basically
categorized as fixed assets and current assets and the current assets further
classified according to individual components of current assets viz. investment and
receivables or debtors or as net current assets, the important of efficiency ratio as
follow:

1. Working capital turnover ratio

2. Inventory turnover ratio

3. Receivable turnover ratio

4. Current assets turnover ratio

Efficiency ratio

1) Working capital turnover ratio

It signifies that for an amount of sales, a relative amount of working capital is

needed. If any increase in sales contemplated working capital should be adequate
and thus this ratio helps management to maintain the adequate level of working
capital. The ratio measures the efficiency with which the working capital is being
74
used by a firm. It may thus compute net working capital turnover by dividing sales
by working capital.

Particulars 2007-08 2008-09 2009-10 2010-11

Sales 19326.06 17467.29 18475.18 29963.49
Net W.C. 6430.14 6214.80 4006.32 6314.24
W.C.TOR 3.01:1 2.81:1 4.61:1 4.75:1

W.C.TOR

5.00

4.50

4.00

3.50

3.00

2.50 W.C.TOR

2.00

1.50

1.00

0.50

0.00
2007-08 2008-09 2009-10 2010-11

75
Interpretation:

High working capital ratio indicates the capability of the organization to achieve
maximum sales with the minimum investment in working capital. This ratio
indicates low much net working capital requires for sales. Thus this ratio is helpful
to forecast the working capital requirement on the basis of sale. Working capital
turnover is high in 2010-11 because of increase in sales.

2) Inventory turnover ratio

Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its products. It is calculated by dividing the cost of good sold by average
inventory:

Particulars 2007-08 2008-09

2009-10 2010-11

Cost of Goods Sold 169168516 1475262501. 1607685303. 2657177671.

2.6 72 65 95
Average Inventory
390445589 422010627 386301725 461429651

Inventory turnover
ratio
4.33 3.50 4.16 5.76

76
 Inventory turnover ratio

7.00

6.00

5.00

4.00
Inventory turnover ratio
3.00

2.00

1.00

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

Interpretation:

Inventory turnover ratio measures the velocity of conversion of stock into sales.
Usually a high inventory turnover/stock velocity indicates efficient management of
inventory because more frequently the stocks are sold, the lesser amount of money
is required to finance the inventory. A low inventory turnover ratio indicates an
inefficient management of inventory. A low inventory turnover implies over-
investment in inventories, dull business, poor quality of goods, stock accumulation,
accumulation of obsolete and slow moving goods and low profits as compared to
total investment. The inventory turnover ratio is also an index of profitability,
where a high ratio signifies more profit, a low ratio signifies low profit.
Sometimes, a high inventory turnover ratio may not be accompanied by relatively a
high profits. Similarly a high turnover ratio may be due to under-investment in
inventories. In 2010 the company has 4.16 inventory turnover ratio and it increased
to 5.76. This shows that the company’s inventory management technique
ismore efficient as compare to last years

77
3) Debtors turnover ratio:

A firm sells goods and/ or services for cash and credit. When the firm extends
credits to its customers, debtors (Accounts Receivables) are created in the firm’s
accounts. The liquidity position of the firm depends on the quality of debtors to
great extent.

For an Infrastructure Company like GNA the gross sales considers as the contract
revenue. The scrap values are not included in Gross Sales because it further comes
into sales with other income. Average Debtors calculated by opening plus closing
balance divide by 2.Increasing volume of receivables without a matching increase
in sales is reflected by a low receivable turnover ratio. It is indication of slowing
down of the collection system or an extend line of credit being allowed by the
customer organization. The latter may be due to the fact that the firm is losing out
to competition. A credit manager engage in the task of granting credit or
monitoring receivable should take the hint from a falling receivable turnover ratio
use his market intelligence to find out the reason behind such failing trend.

Debtor turnover indicates the number of times debtors turnover each year.
Generally the higher the value of debtor’s turnover, the more is the management of
credit.

78
Particulars 2007-08 2008-09 2009-10 2010-11

Gross Sales 19326.06 17467.29 18475.18 29963.49

Average Debtors 4229.94 5338.00 7889.26 5842.22
Debtors Turnover Ratio 4.57 3.27 2.34 5.13

Debtors Turnover Ratio

6.00

5.00

4.00

3.00 Debtors Turnover Ratio

2.00

1.00

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

Interpretation:

Accounts receivable turnover ratio or debtors turnover ratio indicates the number
of times the debtors are turned over a year. The higher the value of debtors
turnover the more efficient is the management of debtors or more liquid the debtors
are. Similarly, low debtors turnover ratio implies inefficient management of
debtors or less liquid debtors. It is the reliable measure of the time of cash flow
from credit sales.

79
4) Current assets turnover ratio

Current assets turnover ratio is calculate to know the firms efficiency of utilizing
the current assets .current assets includes the assets like inventories, sundry
debtors, bills receivable, cash in hand or bank, marketable securities, prepaid
expenses and short term loans and advances. This ratio includes the efficiency with
which current assets turn into sales. A higher ratio implies a more efficient use of
funds thus high turnover ratio indicate to reduced the lock up of funds in current
assets. An analysis of this ratio over a period of time reflects working capital
management of a firm.

Particulars 2007-08 2008-09 2009-10 2010-11

Gross Sales 19326.06 17467.29 18475.18 29963.49

Total of C.A 10639.05 10851.09 11205.79 14446.12
Current assets turnover ratio 1.82 1.61 1.65 2.07

80
 Current assets turnover ratio

2.50

2.00

1.50

Current assets turnover ratio

1.00

0.50

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

Interpretation:

It was observed that current assets turnover ratio does not indicate any trend over
the period of time. Turnover ratio was 1.82 in the year 2007-08 and decrease to
1.61 and 1.65 in the year 2009 and 2010 respectively, but it increased in the year
2010-11, because of high debtors balance.

2. Liquidity ratio

The ratios compounded under this group indicate the short term position of the
organization and also indicate the efficiency with which the working capital is
being used. The most important ratio under this group is follows:

1. Current ratio

2. Quick ratio

3. Absolute liquid ratio

81
1) Current ratio

The current is calculated by dividing current assets by current liabilities:

Current assets include cash and those assets which can be converted in to cash
within a year, such marketable securities, debtors and inventories. All obligations
within a year are include in current liabilities. Current liabilities include creditors,
bills payable accrued expenses, short term bank loan income tax liabilities and long
term debt maturing in the current year. Current ratio indicates the availability of
current assets in rupees for every rupee of current liability.

Particulars 2007-08 2008-09 2009-10 2010-11

Current Assets 10639.05 10851.09 11205.79 14446.12
Current Liabilities 4208.90 4636.29 7199.47 8131.87
Current ratio 2.53 2.34 1.56 1.78

82
 Current ratio

3.00

2.50

2.00

1.50 Current ratio

1.00

0.50

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

Interpretation:

The ideal level of current ratio is 2:1.we shown too much higher ratio for year
2007-08 and 2008-09 its good for the company. Higher the current ratio, the larger
is the amount of rupees available per rupees of current liabilities, the more is the
firm’s ability to meet current obligation and greater is safety of fund of short term
creditors. But for years 2009-10 and 2010-11 it is below ideal level.

2) Quick ratio

Quick ratios establish the relationship between quick or liquid assets and liabilities.
An asset is liquid if it can be converting in to cash immediately or reasonably soon
without a loss of value. Cash is the most liquid asset, other assets which are
consider to be relatively liquid and include in quick assets are debtors and bills
receivable and marketable securities. Inventories are considered as less liquid.
Inventory normally required some time for realizing into cash. Their value also be
tendency to fluctuate. The quick ratio is found out by dividing quick assets by
current liabilities.

83
Particulars 2007-08 2008-09 2009-10 2010-11

Quick Assets 5891.61 7158.32 7172.53 9250.78

Current Liabilities 4208.90 4636.29 7199.47 8131.87
Quick ratio 1.40 1.54 1.00 1.14

Quick ratio

1.80

1.60

1.40

1.20

1.00
Quick ratio
0.80

0.60

0.40

0.20

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

Interpretation:

Ideal level of this ratio is 1:1.compare to current ratio stock is deducted from
current assets because we can’t convert stock into cash in short period of time. We

84
can predict the position more accurately compare to current ratio, Higher the ratio
higher the company liquidity position.

We can see that Quick ratio of the year 2010-11 is 1.14 which is lesser then all
previous years except 2009-10 indicate company’s bad liquidity position.

3) Absolute liquid ratio

Even though debtors and bills receivables are considered as more liquid then
inventories, it can not be converted in to cash immediately or in time. Therefore
while calculation of absolute liquid ratio only the absolute liquid assets as like cash
in hand cash at bank, short term marketable securities are taken in to consideration
to measure the ability of the company in meeting short term financial obligation. It
calculates by absolute assets dividing by current liabilities.

Particulars 2007-08 2008-09 2009-10 2010-11

Absolute Current Assets 1661.66 1820.32 1330.30 1361.52

Current Liabilities 4208.90 4636.29 7199.47 8131.87
Absolute liquid ratio 0.39 0.39 0.18 0.17

85
 Absolute liquid ratio

0.45

0.40

0.35

0.30

0.25
Absolute liquid ratio
0.20

0.15

0.10

0.05

0.00
2007-08 2008-09 2009-10 2010-11
YEARS

Interpretation:

This ratio gains much significance only when it is used in conjunction with the
current and liquid ratios. A standard of 0.5: 1 absolute liquidity ratio is considered
an acceptable norm. 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.

86
CHAPTER-5

87
 FINDINGS

1. The company is not having sufficient working capital.

2. Inventories are decreased by year by year.

3. Loans & advances are decreases by year by year.

4. Current liabilities are less than current assets.

5. The working capital is positive working capital.

6. Current liabilities are increases by ever year.

7. Long – term liabilities are increased by every year.

8. The Quick Ratio > 1 which shows the sound short-term solvency.

9. The suggested current ratio is > 2:1for 2007-09 and 2009-

10.But it is not fixed as it various from; industry. Here in
this case the current ratio is more than 1 and it is enough to meet the current
liability.

11. When comparing Working capital is compared with net sales it is in

increasing trend indicating the effective utilization of the net working capital.

88
 RECOMMENDATIONS
Recommendation can be use by the firm for the betterment increased of the firm
after study and analysis of project report on study and analysis of working capital. I
would like to recommend:

 Company should raise funds through short term sources for short term
requirement of funds, which comparatively economical as compare to long
term funds.
 Company should take control on debtor’s collection period which is major
part of current assets.
 Company has to take control on cash balance because cash is non earning
assets and increasing cost of funds.
 Company should reduce the inventory holding period with use of zero
inventory concepts.

Over all company has good liquidity position and sufficient funds to
repayment of liabilities. Company has accepted conservative financial policy
and thus maintaining more current assets balance. Company is increasing sales
volume per year which supported to company for sustain 2nd position in the
world and number one position in Asia.

89
 Conclusion
 Working capital management is important aspect of financial management.
The study of working capital management of GNA Duraparts ltd. has
revealed that the current ratio was as per the standard industrial practice but
the liquidity position of the company showed an increasing trend. The study
has been conducted on working capital ratio analysis, working capital
leverage, working capital components which helped the company to manage
its working capital efficiently and effectively.
 Working capital of the company was increasing and showing positive
working capital per year. It shows good liquidity position. Positive working
capital indicates that company has the ability of payments of short terms
liabilities.
 Current assets are more than current liabilities indicate that company used
long term funds for short term requirement, where long term funds are most
costly then short-term funds.
 The company has very high amount of inventories. It means that company’s
efficiency in bidding is very less.
 The inventory holding period of the company is continuously increasing
because of the increase in the work in progress conversion period. The
working capital leverage is in negative from previous three years of the
company which shows the inefficiency of the management as the return on
capital employed is very less compared to its total asset employed.
 The liquidity ratio of the company is in excellent position as the current
assets and the quick current assets both are very high. The company can pay
it’s current liabilities and quick current liabilities.

90
 BIBLIOGRAPHY

WEBSITES :-

www.scribd.com

www.workingcapitalmanagement.com

www.gnagroup.com

www.google.co.in

www.finance.co.in

www.netbook.com

REFFERED BOOKS :-

Management Accountancy Sharma & Gupta

Financial Management I.M. Pandey

Financial Management Shashi K. Gupta

R.K. Sharma

Working Capital Management Shashi K. Gupta

R.K. Sharma

Research Methodology C.R. Kothari

91
 Balance sheet As on 31st March

Particulars 2007-08 2008-09 2009-10 2010-11

Sources of funds

Shareholders fund

Share capital 1516.54 1516.54 1516.54 1516.54

Reserve and surplus 2592.68 2897.66 3432.89 4317.07

4109.22 4414.20 4949.43 5833.61

Loan Funds

Secured Loans 7685.72 7825.52 7726.41 9377.58

Unsecured Loans 0.66 0.66 0.00 0.00

7686.38 7826.18 7726.41 9377.58

TOTAL 11795.60 12240.39 12675.84 15211.19

Application of Funds

Fixed Assets

Gross Block 8620.06 10067.92 13205.43 14622.47

Less: accumulated Depreciation 3254.60 4042.34 4929.77 6086.60

Net Block 5365.46 6025.58 8275.67 8535.87

Investments

A) Current Assets

92
Inventories 4747.44 3692.77 4033.26 5195.33

Sundry Debtors 4229.94 5338.00 5842.22 7889.26

Cash & Bank Balance

Cash in hand 43.07 15.62 15.82 19.64

Cash at Banks

In Current Accounts 92.14 30.57 65.01 93.46

In Other Accounts 47.08 58.35 128.13 8.44

Loans & Advances 1479.38 1715.78 1121.34 1239.99

Total of A 10639.05 10851.09 11205.79 14446.12

Less:

B) Current liabilities

(a) Liabilities 3863.90 4467.99 7066.91 8131.87

(b) Provisions 345.00 168.30 132.56 -

Total of B 4208.90 4636.29 7199.47 8131.87

Net W.C.(A-B) 6430.14 6214.80 4006.32 6314.24

Total 11795.60 12240.39 12281.99 14850.11

**************

93