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ABSTRACT
Every business whether big, medium or small, needs finance to carry on its operations and to
achieve its target. In fact, finance is so indispensable today that it’s rightly said to be the
lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish
its objectives. So this project deals with studying various aspects of working capital
management that is necessary to carry out the day-today operations. This project deals with
the study about “Working Capital Management” in Datazone Pvt Ltd.
In the management of working capital, the firm is faced by two key problems: First, given the
level of sales and the relevant cost considerations, what are the optimal amounts of cash,
accounts receivable and inventories that a firm should choose to maintain. Second, given
these optimal amounts, what is the most economical way to finance these working capital
investments. To produce the best possible results, firms should keep no unproductive assets
and should finance with the cheapest available sources of funds. Why? In general, is quit
advantageous for the firm to invest in short term assets and to finance short-term liabilities.
The scope of the study is identified after and during the study is conducted. The main
scope of the study was to put into practical the theoretical aspect of the study into real life
work experience. The study of working capital is based on tools like Ratio Analysis,
Statement of changes in working capital. Further the study is based on last5 years Annual
Reports of Datazone Pvt Ltd.
TABLE OF CONTENTS
1
CHAPTER PARTICULARS PAGE NO
3 Review Of Literature
4 Research Methodology
Ratio Analysis
Trend Analysis
6 Findings
Suggestion
Conclusion
LIST OF TABLES
2
5.2.1 Schedule of Changes in Working Capital (2017)
3
LIST OF CHARTS
4
5.2.13 Inventory to Current Asset Ratio
CHAPTER 1
Introduction
Working capital is a critical factor in the sustainability and viability of any business. Many
firms are forced to cease trading due to an inability to meet short-term obligations when they
are due. To remain in business, it is essential that a firm successfully manage its working
capital. Proper management of working capital helps to improve a firm’s liquidity position
and financial health and reduces risk.
In this course, you will be introduced to the concept of working capital and working capital
management. The course will examine the need for working capital management and identify
key factors that will have an impact on the size of the working capital requirement. This
course will also cover the financial planning concepts to estimate working capital
requirement. Finally, this course will describe some of the key strategies that can be used for
financing working capital.
The management and control of working capital is of vital importance to companies and
forms a major workload function of the finance manager and accountant. By working capital,
the commonly accepted descriptive term for these resources, we mean the company's
investment in short-term assets; traditionally these relate to items coming under the balance-
sheet heading of current assets (in practice, of course, all capital is working, whether invested
in fixed or current assets). Thus inventories (stocks), accounts receivable (debtors), short-
term investments and cash balances all come within the term working capital. (The words in
brackets represent alternative descriptions of the asset; throughout this book these terms are
5
used synonymously.) Apart from the efficient operation and control of these assets, the
finance manager will also be concerned with their financing. In this the finance manager will
be faced with numerous alternative sources, both short-term and long-term. Short-term
financing is generally shown under the heading of current liabilities and includes items such
as bank overdrafts and credit received from suppliers. The efficient financing of current
assets by short-term liabilities also comes within the scope of working-capital management
and is therefore included in the text.
This is the generally accepted terminology although some text books adopt different
definitions. A frequently used description of working capital is 'circulating capital' or
'circulating assets'; this description follows from the short-term cash cycle of the firm which
is described later. This terminology can be confusing, however, as in the long term all assets
are involved in the cash cycle. Because of this, the description 'circulating assets' is not used.
Component Items
Net working capital consists of current assets minus current liabilities. Current assets are
those which are used in the selling operation of the business and which. are held for short
periods of time. Sometimes they are defined as those that are expected to be converted into
cash within one year and this, in fact, covers virtually all the items. Many firms have assets
which they intend to keep for the long term although they are in an easily realisable form
such as investments. Although these are not termed current assets they can be utilised in
working capital management as they can often be easily converted into cash. The major
component items of current assets are set out below.
(a) Inventories or stocks. These are the materials, commodities or goods that the firm has at
any moment in time and which are expected to be used in the firm's production process or be
sold in the form of a finished product in the normal day-to-day operations of the business.
Inventories indude raw materials, bought-in components, finished goods, and products part-
way through a manufacturing process (known as work in progress).
6
(b) Debtors or accounts receivable. These are short-term debts owed to the company. In the
case of manufacturing and commercial firms debts receivable generally represent credit taken
by their sales customers.
(c) Prepayments or expenses paid in advance. These represent expenses that have been paid
for but for which the goods or service have not yet been received.
(d) Short-term investments. When a firm has short-term surplus cash, this is often invested in
securities on which a rate of return is expected, either in the form of interest received or
capital appreciation; these amounts may be certain (i.e. local-authority deposits) or uncertain
(equity shares). If a company decides to invest for the long term then the investment will not
be shown in current assets and its management will be kept separate.
OBJECTIVES
Working Capital Management is concerned with the problems that arise in attempting to
manage the Current Assets, the Current Liabilities and the inter-relationship that
exists between them. The term Current Assets refers to those Assets which in the ordinary
course of business can be, or will be, converted into Cash within one year without undergoing
a diminution in value and without disrupting the operations of the firm. The Major Current
Assets are Cash, Marketable Securities, Accounts Receivables and Inventory. Current
Liabilities are those Liabilities, which are intended at their inception, to be paid in the
ordinary course of business, within a year out of the current assets or the earnings of the
concern .The basic Current Liabilities are Accounts Payable, Bills Payable, Bank Overdraft
and outstanding expense
7
The goal of Working Capital Management is to manage the firm's Assets and Liabilities in
such a way that a satisfactory level of working capital is maintained.
This is so because if the firm cannot maintain a satisfactory level of working capital, it is
likely to become insolvent and may even be forced into bankruptcy. The Current Assets
should be large enough to cover its current liabilities in order to ensure a reasonable margin
of safety. Each of the current assets must be managed efficiently in order to maintain the
liquidity of the firm while not keeping too high a level of any one of them. Each of the short
term sources of financing must be continuously managed to ensure that they are obtained and
used in the best possible way.
The interaction between current assets and current liabilities is, therefore, the main theme
of the theory of management of working capital.
8
1.2 INDUSTRY PROFILE
Industry profile
India's IT Services industry was born in Mumbai in 1967 with the establishment of the Tata
Group in partnership with Burroughs. The first software export zone, SEEPZ – the precursor
to the modern-day IT park – was established in Mumbai in 1973. More than 80 percent of the
country's software exports were from SEEPZ in the 1980s.
The Indian economy underwent major economic reforms in 1991, leading to a new era of
globalization and international economic integration, and annual economic growth of over
6% from 1993–2002. The new administration under Sri Atal Bihari Vajpayee (Posthumus)
(who was Prime Minister from 1998–2004) placed the development of Information
Technology among its top five priorities and formed the Indian National Task Force on
Information Technology and Software Development.
Wolcott & Goodman (2003) report on the role of the Indian National Task Force on
Information Technology and Software Development:
Within 90 days of its establishment, the Task Force produced an extensive background report
on the state of technology in India and an IT Action Plan with 108 recommendations. The
Task Force could act quickly because it built upon the experience and frustrations of state
governments, central government agencies, universities, and the software industry. Much of
what it proposed was also consistent with the thinking and recommendations of international
bodies like the World Trade Organization (WTO), International Telecommunications
9
Union (ITU), and World Bank. In addition, the Task Force incorporated the experiences
of Singapore and other nations, which implemented similar programs. It was less a task of
invention than of sparking action on a consensus that had already evolved within the
networking community and government.
Regulated VSAT links became visible in 1994. Desai (2006) describes the steps taken to relax
regulations on linking in 1991:
Videsh Sanchar Nigam Limited (VSNL) introduced Gateway Electronic Mail Service in
1991, the 64 kbit/s leased line service in 1992, and commercial Internet access on a visible
scale in 1992. Election results were displayed via National Informatics Centre's NICNET.
"The New Telecommunications Policy, 1999" (NTP 1999) helped further liberalise India's
telecommunications sector. The Information Technology Act, 2000 created legal procedures
for electronic transactions and e-commerce.
A joint EU-India group of scholars was formed on 23 November 2001 to further promote
joint research and development. On 25 June 2002, India and the European Union agreed to
bilateral cooperation in the field of science and technology. India holds observer status
at CERN, while a joint India-EU Software Education and Development Center will be
located in Bangalore.
Contemporary situation
In the contemporary world economy India is the second-largest exporter of IT. Exports
dominate the Indian IT industry and constitute about 77% of the industry's total revenue.
However, the domestic market is also significant, with robust revenue growth.[2] The
industry’s share of total Indian exports (merchandise plus services) increased from less than
4% in FY1998 to about 25% in FY2012. The technologically-inclined services sector in India
accounts for 40% of the country's GDP and 30% of export earnings as of 2006, while
10
employing only 25% of its workforce, according to Sharma (2006). According to Gartner, the
"Top Five Indian IT Services Providers" are Tata Consultancy
Services, Infosys, Cognizant, Wipro, and HCL Technologies.
Future outlook
The Indian IT market currently focuses on providing low-cost solutions in the services
business of global IT. The presence of Indian companies in the product development business
of global IT is very meager, however, this number is slowly on the rise. The other prominent
trend is that IT jobs, once confined to Bangalore, are slowly starting to experience a
geographical diffusion into other cities like Chennai, Hyderabad and Pune. According to
Google estimates, the Indian community of developers will be the largest in the world by
2018.
Research in the industry was earlier concentrated in Programming languages like Java, but in
the recent times the research focus has changed towards technologies like Mobile computing,
Cloud computing and Software as a Service. This shift is attributed to the preference of
clients for ubiquitous computing over standalone computing.
Sharma (2006) states: "Today, Bangalore is known as the Silicon Platuea of India and
contributes 38% of Indian IT Exports. India's second and third largest software companies are
headquartered in Bangalore, as are many of the global Companies. Cities like Hyderabad,
Chennai, Pune and Gurgaon are also emerging as technology hubs, with many global IT
companies establishing headquarters there. Numerous IT companies are also based in
Mumbai.
Chennai
Bangalore
Bangalore is known as the Silicon Valley of India and the IT Capital of India. It is considered
to be a global information technology hub and it is India's largest exporter both of IT overall
11
and of software. Some of the top Indian IT service providers
like Infosys, Wipro, Mindtree and Mphasis are headquartered in Bangalore. It is also the site
of the national headquarters of many top international firms like Intel, Texas
Instruments, Bosch, Yahoo, SAP Labs,Google India, EA, Apple Inc, SanDisk, Harman, Dell,
Ericsson, Sabre, Goldman Sachs, HP, Boeing, Wells Fargo, Sony, AT&T, Flipkart,
Walmart,Juniper Networks Inc, CenturyLink, Aricent, Samsung, Oracle, LG, Adobe,
JPMorgan, Genpact, Accenture, IBM, Qualcomm, Cisco, LBrand, PayPal, eBay, Quest,
Broadcom, Cerner, EY, Amazon, LinkedIn, BT, and Continental, among others. Bangalore
alone accounts for more than 35% of all IT companies present in India and contains close to
5,000 companies, making it India's largest IT contributor.
Hyderabad
Pune
Pune is one of the leading Indian and international IT services and outsourcing exporters. The
next biggest IT park of India (Rajiv Gandhi IT Park at Hinjawadi) is expected to scale up to
phase 7.
Mumbai
Others
12
Telangana which includes Warangal and Khammam.,
Kerala where 55% of the exports come from its capital city Trivandrum and the majority of
the rest from Kochi. Calicut is also another contributor from the state. Trivandrum houses
technology giants like Oracle Corporation, TCS, Infosys, UST Global, Ernst & Young etc.
Kochi also houses TCS, Cognizant, Wipro, KPMG, Ernst & Young, EXL
Service, Etisalat, UST Global, Xerox etc.
Employment generation
The IT sector has also led to massive employment generation in India. The industry continues
to be a net employment generator — expected to add 230,000 jobs in fiscal year 2012, thus
directly employing about 2.8 million people and indirectly employing 8.9 million, making it a
dominant player in the global outsourcing sector. However, it continues to face challenges of
competitiveness in the globalised and modern world, particularly from countries
like China and Philippines.
India's growing stature in the Information Age enabled it to form close ties with both
the United States and the European Union. However, the recent global financial crises have
deeply impacted Indian IT companies as well as global companies. As a result, hiring has
dropped sharply, and employees are looking at different sectors like financial services,
telecommunications, and manufacturing, which have been growing phenomenally over the
last few years.
With fundamental structural changes visible everywhere in the IT services due to Cloud
computing, proliferation of Social media, Big data, Analytics all leading to digital services
and digital economy, many of the leading companies in India's IT sector reported lower
headcounts in their financial results.
13
1.3 COMPANY PROFILE
14
1.4 IDENTIFIED PROBLEM
This project deals with the study about “Working Capital Management” in Datazone Pvt
Ltd.
In the management of working capital, the firm is faced by two key problems:
1. First, given the level of sales and the relevant cost considerations, what are the optimal
amounts of cash, accounts receivable and inventories that a firm should choose to maintain?
2. Second, given these optimal amounts, what is the most economical way to finance these
working capital investments? To produce the best possible results, firms should keep no
unproductive assets and should finance with the cheapest available sources of funds. Why? In
general, is quit advantageous for the firm to invest in short term assets and to finance short-
term liabilities.
15
1.5 NEED FOR THE STUDY
This study has undergone by the researcher for fulfilling the research gap and also
for the management requirements.
The management wants to know whether the annual working capital requirement
has gone increase or decrease if the report produces a negative result then what
will do reduce the working capital so this study needed now.
16
1.6 OBJECTIVES OF THE STUDY
PRIMARY OBJECTIVE
To study on the management of cash flow through working capital in Datazone Pvt Ltd
SECONDARY OBJECTIVES:
17
1.7 SCOPE OF THE STUDY
The scope of the study is identified after and during the study is conducted. The
main scope of the study was to put into practical the theoretical aspect of the study
into real life work experience. The study of working capital is based on tools like
Ratio Analysis, Statement of changes in working capital. Further the study is based
on last5 years Annual Reports of Datazone Pvt Ltd.
18
CHAPTER 2
Many previous researches have indicated the relations between the working capital
management and profititability of a company in different environments
Krishnamurthy’s study (2000) was aggregative and dealt with inventories in the
private sector of the Indian economy as a whole for the period 1948-61, this study used sales
to represent demand for the product and suggested the importance of accelerator. Short-term
rate of interest has also been found to be significant.
19
Maynard E.Refuse (2002), argued that attempts to improve working capital by
delaying payment to creditors is counter-productive to individuals and to the economy as a
whole. Claims that altering debtor and creditor levels for individual tiers whin a value system
will rarely produce any net benef. Proposes that stock reduction generates system-wide
financial improvements and other important benefs.
Shin and soenen (2006) used a sample of 58,985 firm’s years covering the period
1975-1994 in order to investigate the relation between net-trade cycle that was used to
measure the efficiency of working capital management and corporate profititability. In all
cases, they found a strong negative relation between the length of the firm’s net-trade cycle
and s profititability.
According to Eljelly (2003) the relationship between the firm’s profititability and s
liquidity level, as measured by current ration. This relationship is more pronounced for firms
with high current ratios and long cash conversion cycles. At the industry level, however, he
found that the cash conversion cycle or the cash gap is of more importance as a measure of
liquidity than current ratio that affects profititability. The firm size variable was found to have
significant effect on profititability at the industry level.
Deloof (2004) investigated the relation between working capital management and
corporate profititability for a sample of 1,009 large Belgian non-financial firms for the period
1992-2002. The result from analysis showed that there was a negative gap between
profititability that was measured by gross operating income and cash conversion cycle well
number of day’s accounts receivable and inventories. Less profitable firms waed longer to
pay their bills.
20
Lazaridis and tryfonidis (2007) have investigated the relation between working
capital Management and corporate profititability of listed company in the Athens stock
exchange. A sample of 131 listed companies for period of 2002-2005 was used to examine
this relationship. The result from regression analysis indicated that there was a statistical
significance between profititability, measured through gross operating profit, and the cash
conversion cycle. From those results, they claimed that the managers could create value for
shareholders by handling correctly the cash conversion cycle and keeping each different
component to an optimum level.
Raheman and Nasr (2012) have selected a sample of 94 Pakistani firms listed on
Karachi stock exchange for a period of 6 years from 1999-2005 to study the effect of
different variables of working capital management on the net operating profititability. From
result of study, they showed that there was a negative relation between variables of working
capital management including the average collection period, inventory turnover in days, cash
conversion cycle and profititability. Besides, they also indicated that size of the firm,
measured by natural logarhm of sales, and profititability had a positive relationship.
Chakra borty (2013) evaluated the relationship between working capital and
profititability of Indian pharmaceutical companies. He pointed out that there were two
distinct schools of thought on this issue: according to one school of thought, working capital
is not a factor of improving profititability and there may be a negative relationship between
them, while according to the other school of thought, investment in working capital plays a
val role to improve corporate profititability, and unless there is a minimum level of
investment of working capital, output and sales cannot be maintained-in fact, the inadequacy
of working capital would keep fixed asset inoperative.
Singh and pandey (2013) had an attempt to study the working capital components
and the impact of working capital management on profititability of Hindalco Industries
21
Limed for period from 1990 to 2012. Results of the study showed that current ratio, liquid
ratio, receivables turnover ratio and working capital to total assets ratio had statistically
significant impact on the profititability of Hindalco Industries Limed.
According to Beneda, Nancy; Zhang, Yilei (2013), the working capital management
on the operating performance and growth of new public companies. The study also sheds
light on the relationship of working capital with debt level, firm risk, and industry. Using a
sample of inial public offering (IPOs), the study finds a significant positive association
between higher levels of accounts receivable and operating performance. The study further
finds that maintaining control (i.e. lower amounts) over levels of cash and securities,
inventory, fixed assets, and accounts.
According to Dubey (2013), the working capital in affirm generally arises out of four
basic factors like sales volume, technological changes, seasonal, cyclical changes and policies
of the firm. The strength of the firm is dependent on the working capital as discussed earlier
but this working capital is self dependent on the level of sales volume of firm. The firm
requires current assets to support and maintain operational or functional activies. By current
assets we mean the assets which can be converted readily into cash say whin a year such as
receivables, inventories and liquid cash.
Afza and Nazir(2014) made an attempt in order to investigate the tradional relations
between working capital management policies and a firm’s profititability for a sample of 204
non-financial firms listed on Karachi Stock Exchange (KSE) for the period 1998-2006. The
study found significant different among their working capital requirements and financing
policies across different industries. Moreover, regression result found a negative relationship
between the profititability of firms and degree of aggressiveness of working capital
investment and financing policies.
22
According to Amarj gill, Nahum Biger, Neil Mathur (2015) paper seeks to extend
Lazaridis and Tryfonidis’ findings regarding the relation between working capital
management and profititability. A sample of 88 American firms listed on New York Stock
Exchange for a period of 3 years from 2006 to 2012 was selected. They found statistically
significant relation between the cash conversion cycle and profititability, measured through
gross operating profit.
Mohammad Neab and Noriza BMS (2013) worked on crating the relationship between
Working Capital Management (WCM) and performance of firms. For their analysis they
chose the Malaysian listed companies. They administered the perspective of market valuation
and profitability. They used total of 172 listed companies from the databases of Bloomberg.
They randomly selected five year data (2004-2008). This research likewise the researches
quoted before studied the impact of the dimensions of working capital component i.e. C.C.C.,
current ratio (C.R.), current asset to total asset ratio (C.A.T.A.R), current liabilities to total
asset ratio (C.L.T.A.R.), and debt to asset ratio (D.T.A.R.) in effect to the firm’s performance
whereby firm’s value dimension was taken as Tobin Q (T.Q.) and profitability i.e. return on
asset (R.O.A.) and return on invested capital (R.O.I.C). They applied two different techniques
for analyzing the data that are multiple regression and correlations. They found that there is a
negative relationship between working capital variables and the firm’s performance.
Dong (2013) reported that the firms’ profitability and liquidity are affected by working
capital management in his analysis. Pooled data are selected for carrying out the research for
the era of 2007-2009 for assessing the companies listed in stock market of Vietnam. He
focused on the variables that include profitability, conversion cycle and its related elements
and the relationship that exists between them. From his research it was found that the
relationships among these variables are strongly negative. This denote that decrease in the
profitability occur due to increase in cash conversion cycle. It is also found that if the number
of days of account receivable and inventories are diminished then the profitability will
increase numbers of days of accounts receivable and inventories.
Saswata Chatterjee (2013) focused on the importance of the fixed and current assets in the
successful running of any organization. It poses direct impacts on the profitability liquidity.
There have been a phenomenon observed in the business that most of the companies increase
the margin for the profits and losses because this act shrinks the size of working capital
relative to sales. But if the companies want to increase or improve its liquidity, then it has to
increase its working capital. In the response of this policy the organization has to lower down
23
its sales and hence the profitability will be affected due to this action. For this purpose 30
United Kingdom based companies were selected which were listed in the London Stock
exchange. The data were taken of three years 2007-2009. It analyzed the impact of the
working capital on the profitability. The dimensions of working capital management included
in this research which is quick ratios, current ratios C.C.C, average days of payment,
Inventory turnover, and A.C.P (average collection period. on the net operating profitability of
the UK companies.
24
will be at the expense of profitability. Thus, the manager of a business entity is in a dilemma
of achieving desired tradeoff between liquidity and profitability in order to maximize the
value of a firm Working capital management deals with the most dynamic fields in finance,
which needs constant interaction between finance and other functional managers. The finance
manager acting alone cannot improve the working capital situation. In recent times a few case
studies regarding management of working capital in selected companies have been in order to
make in-depth analysis of the several experts of working capital management, The finding of
such studies not only throws new lights on the technical loopholes of management activities
of the concerned companies , but also helps the scholars and researchers to develop new ideas
,techniques and methods for effective management of working capital. An effort has been
made to make an in-depth study of working capital management with special reference to
Hindustan Newsprint Limited, Kottayam.
CHAPTER 3
25
RESEARCH METHODOLOGY
Research methodology generally refers to the procedure carried out in any project on research
study. Methodology gives clear picture of suable clarification and sequence of the different
stages of the study, as to arrive at a proper manifestation of the objective, and the scope.
Research design
Research design can be thought of as the structure of research is the glue that holds
all of the elements in a research project together. We often describe a design using a
concise notation that enables us to summarize a complex design structure efficiently.
A research design appropriate for a particular research problem, usually involves the
consideration of the following factors:
The means of obtaining information.
The availability and skills of the researcher and his staff.
The objective of the problem to be studied.
The nature of the problem to be studied.
The availability of time and money for the research work.
Analytical research
In analytical research, on the other hand, the researcher has to use facts or information
already available, and analyze these to make a critical evaluation of the material.
26
3.3 METHOD OF DATA COLLECTION
Primary data
The primary data is that data which is collected fresh or first hand, and for first time
which is original in nature.
The Primary data has been collected from Personal Interaction with Finance manager and
other staff members.
Secondary data
The secondary data are those which have already collected and stored. Secondary
data easily get those secondary data from records, annual reports of the company etc. will
save the time, money and efforts to collect the data.
The major source of data for this project was collected through annual reports,
profit and loss account of 5 year period from 2014.
SAMPLING DESIGN
Sampling un : Financial Statements.
Sampling Size : Last five years financial statements.
Tool Used for calculations : MS-Excel.
27
Financial ratios are useful indicators of a firm’s performance and financial situation.
Most rations can be calculated from information provided by the financial statements.
Financial ratio can be used to analyze trends and to compare the firm’s financials to those of
other firms. In some cases, ratio analysis can predict future bankruptcy. Financial ratios can
be classified according to the information they provide. The following types of ratios
frequently are used:
Current Ratio
Current liabilities
Short-term creditors prefer a high current ratio since reduces their risk. Shareholders
may prefer a lower current ratio so that more of the firm’s assets are working to grow the
business. Typical values for the current ratio in order to remain solvent during downturns.
Quick Ratio
One drawback of the current ratio is that inventory may include many ems that are difficult to
liquidate quickly and that have uncertain inventory in the current assets. The quick ratio is
defined as follows:
Current liabilities
The current assets used in the quick ratio are cash, accounts receivable, and notes
receivable. These assets essentially are current assets less inventory. The quick ratio often is
referred to as the acid test.
Cash Ratio
28
Finally, the cash ratio is the most conservative liquidity ratio. excludes all current
assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:
Current liabilities
The cash ratio is an indication of the firm’s ability to pay off s current liabilities if for
some reason immediate payment were demanded.
Inventory turnover ratio is the ratio, which indicates the number of times the stock is
turned over i.e., sold during the year. This measures the efficiency of the sales and stock
levels of a company. A high ratio means high sales, fast stock turnover and a low stock level.
A low stock turnover ratio means the business is slowing down or with a high stock level.
Closing Inventory
Debtor’s turnover ratio indicates the speed of debt collection of the firm. This ratio
computes the number of times debtors (receivables) has been turned over during the
particular period.
Average Debtors
Creditor’s turnover ratio is the ratio, which indicates the number of times the debts are
paid in the year. This ratio is calculated as follows.
Average Creditors
29
Working Capital Turnover Ratio
This ratio indicates the number of times the working capital is turned over in the course
of the year. This ratio measures the efficiency with which the working capital is used by the
firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates
otherwise. But a very high working capital turnover is not a good situation for any firm.
The working capital cycle reserves to the length of time between the firm paying cash
for materials etc., this working capital also known as operating cycle. Working capital cycle
or operating cycle indicates the length or time between companies paying for materials
entering into stock and receiving the cash from sales of finished goods. The operating cycle
(Working Capital) consists of the following events.
CASH
RAW
MATERIALS
DEBTORS
30
Conversion of cash into raw materials.
Conversion of raw materials into work in progress.
Conversion of work in progress into finished stock.
Conversion of finished stock into accounts receivables(Debtors)through sale and
Conversion of account receivables into cash.
CHAPTER V
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.
31
The current should be large enough to cover its current liabilities in order to ensure a
reasonable margin of the safety.
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 for the 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
TABLE 5.1
32
Prepaid Expenses 14,650
13,730 - 920
Accrued Income
59,090 42,925 16,165
TOTAL CURRENT 54,65,300 62,04,638 23,00,820 15,49,125
ASSETS
LESS:
CURRENT
LIABILITIES
Sundry Creditors
64,53,315 69,10,610 - 4,57,295
TOTAL CURRENT
LIABILITIES 64,53,315 69,10,610 - 4,57,295
NET WORKING
CAPITAL (9,88,015) (7,05,972) 23,00,820 10,91,830
INFERENCE:
Working capital is required to finance day to day operations of a firm. There should
be an optimum level of working capital. From the above calculations it is clearly found that
the company’s working capital is not at the best level. The current assets are lesser than the
liabilities.
33
5.2 SCHEDULE OF CHANGES IN WORKING CAPITAL
TABLE 5.2
34
ASSETS
LESS:
CURRENT
LIABILITIES
INFERENCE:
In the above the working capital is negative due to more fluctuations in inventory and
loans. The company has borrowed more from outsiders for their purchase of fixed asset. The
creditors are increased at a very high rate that causes the company for many bad debts. More
care should be taken to avoid such fluctuations in the later years.
35
5.3 SCHEDULE OF CHANGES IN WORKING CAPITAL
TABLE 5.3
Inventory 4,07,390
5,42,920 9,50,310
Sundry Debtors 13,38,130
30,93,060 44,31,190
Cash & Bank Balance 2,33,655
6,05,030 3,71,375
Loans and Advances 31,92,231 33,71,511 1,79,280
LESS:
CURRENT
36
LIABILITIES
INFERENCE:
The company has an increased level in the year 2016. This is due to the control on
creditors. And increase in the inventory and loans. Moreover the company has to take a
special attention over this varying working capital.
37
5.4 SCHEDULE OF CHANGES IN WORKING CAPITAL
TABLE 5.4
CURRENT ASSETS
Inventory 37,58,140 -
9,50,310 47,08,450
Sundry Debtors - 13,64,970
44,31,190 30,66,220
Cash & Bank Balance 5,54,035
3,71,375 9,25,410
Loans and Advances 33,71,511 - 33,71,511
-
Advance Tax 5,89,870 2,78,850 -
3,11,020
Prepaid Expenses 1,43,770 1,20,610 --
23,160
Accrued Income - 56,555
2,26,385 1,69,830
TOTAL CURRENT 96,84,951 96,03,550 47,11,635 47,93,036
ASSETS
LESS:
CURRENT
LIABILITIES
38
TOTAL CURRENT 93,96,631 60,53,015 33,43,616 -
LIABILITIES
NET WORKING 2,88,320) 35,50,535 13,68,019 47,93,036
CAPITAL
INFERENCE:
It can be clearly inferred that the company has a fluctuating working capital. This
means that the management is not making a good attention to the flow of funds. The
company’s working capital for the year 2017 is again decreased at a very low rate this is due
to more Bad debts. Although the company has improved to an extent by decreasing its
liabilities.
39
5.2 RATIO ANALYSIS
DEFINITION OF RATIO:
LIQUIDITY RATIOS:
It measures the ability of a company to meet its current obligations, and indicate
the short term financial stability of the company. The parties interested in the liquid ratio
would be employees, bankers and short-term creditors.
CURRENT RARIO:
Current Ratio may be defined as the ratio of Current Assets to Current Liabilities.
It is also known as Working Capital Ratio 2:1 ratio. Current Ratio shows the relationship
between total current assets and total current liabilities expressed as a formula.
Current Assets
40
CURRENT RATIO =
Current Liabilities
QUICK RATIO:
A measure of company’s liquidity and ability to meet its obligations, Quick ratio,
often referred to as acid-test ratio, is obtained by subtracting inventories from current assets
and then dividing by current liabilities. Quick ratio is viewed as a sign of company’s financial
strength or weakness (higher number means stronger, lower number means weaker).
Liquid/Quick assets
QUICK RATIO =
Current Liabilities
This is also known as super Quick Ratio (or) Cash Ratio. This ratio
considers only absolute liquidity available with the firm. Absolute Liquid assets include cash
in hand, cash at bank marketable securities. A standard of 0.5: 1 absolute liquidity ratio is
considered an acceptable norm. It is calculated as follows:
Current Liabilities
41
Net Sales
Average Inventory
Credit Sales
Debtor
Net Purchase
Average creditors
This ratio indicates the extent to which the investment in fixed assets
contributes towards sales. If compared with a previous period, it indicates whether the
investment in fixed assets has been judicious or not, the Ratio is calculated as follows:
42
Sales
Net Sales
The cash asset ratio is similar to the current ratio, except that the current
ratio includes current assets such as inventories in the numerator. Some analysts believe that
including current assets makes it difficult to convert them into usable funds for debt
obligations. The cash asset ratio is a much more accurate measure of a firm's liquidity
Cash
Current Assets
43
Sales
Current Assets
Inventory
Sales
Average Inventory
Current Assets
The debt utilization ratio measures the proportion of debt and low
efficiently management used the debt capital. The higher the ratio, the greater the amount
other people’s money being used in an attempt to generate profits
DEBT RATIO:
44
The Debt Ratio measures the proportion of total assets financed by the time’s
creditor. The lighter the ratio the greater the amount other people’s money being used in an
attempt to generate profits, the ratio is calculated as follows,
Total Liability
DEBT RATIO=
Total Assets
PROFITABILITY RATIOS:
Gross Profit Ratio expresses the relationship of gross profit of sales to net sales
in terms of percentage, representing the percentage of gross profit earned on sales.
Gross Profit
Net Sales
45
ADMINISTRATIVEEXPENSESRATIO= *100
Net Sales
Current Asset
CURRENT RATIO =
Current Liabilities
TABLE 5.2.1
Rs Rs
INTERPRETATION:
The Current Ratio measures the ability of the firm to meet its Current Liabilities.
The standard norms of Current Ratio are 2:1. From the above table it can be inferred that the
Current Ratio of Datazone. Ltd Shows higher in the year 2017 (i.e.) 1.59 . The company is
having a good current ratio as the liabilities of the company has been in declining position
and the sundry debtors for the current year has been reduced
46
CURRENT RATIO:
FIGURE 5.2.1
47
5.2.2 QUICK RATIO:
Liquidity Assets
Quick Ratio =
Current Liabilities
Table 5.2.2
48
INTERPRETATION:
The Quick Ratio (or) Liquidity ratio gives a measure of Liquidity the expected
industry standard is 1:1. From the above table it can be inferred that the Quick Ratio of
Datazone fluctuating in trend from the year 2013 to 2017. The ratio has been decreased in the
current year due to higher current liabilities.
QUICK RATIO
FIGURE 5.2.2
49
5.2.3 ABSOLUTE LIQUIDITY RATIO:
Current Liability
TABLE 5.2.3
83,610 0.013
64,53,315
2013
58,400 69,10,610 0.008
2014
50
6,05,030 1,46,42,090 0.04
2015
3,71,375 93,96,631 0.04
2016
9,25,410 60,53,015 0.15
2017
INTERPRETATION:
From the above table it can be inferred that the Datazone has a high Absolute
Liquidity Ratio in the year 2017 (i.e.) 0.15. The ratios are being in a increasing position
which means that the company has a good cash utilization. The ideal cash position is .05:1.
So the company’s cash position ratio is satisfactory.
FIGURE 5.2.3
51
52
5.2.4 INVENTORY TURNOVER RATIO:
Net Sales
Average Inventory
TABLE 5.2.4
INTERPRETATION:
53
INVENTORY TURN OVER RATIO
FIGURE 4.2.4
54
5.2.5 DEBTORS TURNOVER RATIO:
Credit Sales
Debtors
TABLE 5.2.5
Rs Rs
INTERPRETATION:
From the above table it can be inferred that the Debtors Turnover Ratio of
Datazone increase in the year 2013 to 2017 (i.e.) 0.31 to 0.29 shows high in the year 2014
(i.e.) 0.36 .When compare to previous years.
55
DEBTORS TURN OVER RATIO:
FIGURE 5.2.5
56
5.2.6 CREDITORS TURNOVER RATIO:
Net Purchase
Average Creditors
TABLE 5.2.6
INTERPRETATION:
From the above table it can be inferred that the Datazone company’s creditors
turnover ratio in year 2013 to 2017 (i.e.) 5.28 to 12.77. The company has decreased its
creditors that make the ratio to increase.
57
CREDITORS TURNOVER RATIO:
FIGURE 4.2.6
58
5.2.7 FIXED ASSET TURNOVER RATIO:
Sales
TABLE4.2.7
Rs Rs
INTERPRETATION:
From the above table it can be inferred that the Fixed Asset Turnover Ratio of
Datazone, has increased by 6.11% in the year
59
FIXED ASSET TURNOVER RATIO:
FIGURE 4.2.7
60
5.2.8 CASH TO CURRENT ASSET RATIO:
Cash
Current Assets
TABLE 5.2.8
INTERPRETATION:
From the above table it can be inferred that the Ratio increase in the year 2013 to
2017 (i.e.) 0.01 to 0.15.The Cash to Current Asset Ratio shows higher in the year 2017 (i.e.)
0.15. This is due to increase in the cash balance and decrease in the sundry creditors.
61
CASH TO CURRENT ASSET RATIO:
FIGURE5.2.8
62
5.2.9 CURRENT ASSET TURNOVER RATIO:
Sales
Current Assets
TABLE 5.2.9
CURRENT
YEAR SALES ASSETS RATIO
Rs Rs
64,53,315 6.10
2013 39377300
69,10,610 8.3
2014 57364800
1,46,42,090 6.37
2015 63273350
93,96,631 8.21
2016 77237255
60,53,015 14.86
2017 89967680
INTERPRETATION:
From the above table it can be inferred that the Current Asset Turnover Ratio
of Datazone in year 2013 to 2017. It has been increased which shows the satisfactory level of
63
current asset correspondence to the sales in the subsequent years and the ratio finally
increases in the year 2017 (i.e.) 14.86 when compared to the previous years
FIGURE 5.2.9
64
5.32.10 INVENTORY TO SALES RATIO:
Inventory
Sales
TABLE 5.2.10
Rs Rs RATIO
0.15
2013 5825100 39377300
0.09
2014 5429251 57364800
0.06
2015 3880120 63273350
0.11
2016 9150310 77237255
0.05
2017 4708450 89967680
INTERPRETATION:
65
From the above table it can be inferred that the Inventory to Sales Ratio of Datazone.
Has been increased in the year 2015 (i.e.) 0.11.When compared to previous years. But I the
year2016, the ratio have been fall down to 0.05.
FIGURE 5.2.10
66
5.2.11 WORKING CAPITAL TURNOVER RATIO:
Current Liabilities
TABLE 5.2.11
Rs Rs
INTERPRETATION:
67
From the above table it can be inferred that the Working Capital
Turnover Ratio of Datazone. The Working Capital Turnover Ratio shows a negative ratio in
the first three years i.e.2013, 2014 and 2015. But on 2016 and 2017 there has been
continuously increase in the working capital due to decrease in the current liabilities.
FIGURE 5.2.15
68
5.2.12 INVENTORY TO CURRE NT ASSET RATIO:
Average Inventory
Current Assets
TABLE 5.2.12
54,65,300
2013 5825100 1.06
0.12
62,04,638
2014 5429251
4.94
70,06,659
2015 3880120
0.33
96,84,951
2016 9150310
0.49
96,03,550
2017 4708450 69
INTERPRETATION:
From the above table it can be inferred that the company’s Inventory to
Current Asset Ratio in the year 2013 to 2017. There is a fluctuating in this ratio. The highest
ratio is on 2014, 0.94 and get decreases and finally comes to 0.49
FIGURE 5.2.12
70
5.2.13 GROSS PROFIT RATIO:
Gross Profit
Net Sales
TABLE 5.2. 13
54,65,300
2013 3753500 0.68
62,04,638
2014 4172000 0.09
71
70,06,659
2015 5509950 0.70
96,84,951
2016 6793055 0.24
96,03,550
2017 8215230 0.86
FIGURE 5.2.13
INTERPRETATION:
72
From the above table it can be inferred that the company’s Gross Profit Ratio
increase in year 2017 (i.e.) 0.86. But from 2015 to 2016 there has been slowdown to some
extent, when comparing to the previous years.
Administrative Expenses
Net Sales
TABLE 5.2.14
INTERPRETATION:
From the above table it can be inferred that the company’s Administrative Expenses Ratio in
year 2013 to 2017 (i.e.) 16.91 to 15.82.has been increased in the year 2013 (i.e.) 16.91. In the
year 2017 the Administrative Expenses Ratio has been decreased (i.e.) 15.82.When
compared to previous years
73
ADMINISTRATIVE EXPENSES RATIO
FIGURE 5.2.14
74
TREND ANALYSIS
An aspect of technical analysis that tries to predict the future movement of a stock based on
past data. Trend analysis is based on the idea that what has happened in the past gives traders
an idea of what will happen in the future.
There are three main types of trends: short-, intermediate- and long-term.
75
CURRENT ASSET:
TABLE 5.3.1
CURRENT ASSET
YEAR (Y) X XY X2 Y=a+bx
-2 -11019320 4 5153980.3
55,09,660
2013
-1 -4,43,54,495 1 6271271.8
4,43,54,495
2014
0 0 0 57,18,534
78,46,689
2015
1 2,78,84,951 1 9889807.5
2,78,84,951
2016
2 19207100 4 11838135
96,03,550
2017
n ∑X2
76
CURRENT ASSET:
FIGURE 5.3.1
77
FIXED ASSET:
TABLE 5.3.2
FIXED ASSET
YEAR (Y) X XY X2 Y=a+bx
2015
1621368.217 1 1621368.217 1 1590940.204
2016
1664269.636 2 3328539.272 4 1839255.973
2017
∑Y=6713122.174 ∑X=0 ∑XY=2483157.689 ∑X2=10
Y = a + bX Where a = ∑Y ; b = ∑XY
n ∑X2
Fixed assets value for 2017 – 11 will be about Rs. 2, 08, 75,71.738
78
FIXED ASSET
FIGURE 5.3.2
79
CASH & BANK BALANCE:
TABLE 5.3.3
2017
∑Y=2553362.466 ∑X=0 ∑XY=1500354.524 ∑X2=10
Y = a + bX Where a = ∑Y ; b = ∑XY
n ∑X2
80
CASH & BANK BALANCES
FIGURE 5.3.3
81
INVENTORY
TABLE 5.3.4
3879602.726
2013 5825092.799 -2 -11650185.6 4
5649866.627
2014 5429251.165 -1 -5429251.165 1
5798643.734
2015 3880115.603 0 0 0
5947420.841
2016 9150310.374 1 9150310.374 1
6096197.948
2017 4708448.732 2 9416897.464 4
n ∑X2
82
INVENTORY
FIGURE 4.3.4
83
SUNDRY DEBTORS
TABLE 4.3.5
Y = a + bX Where a = ∑Y ; b = ∑XY
n ∑X2
84
SUNDRY DEBTORS
FIGURE 5.3.5
85
CHAPTER VI
FINDINGS:
In the year of 2013, 2014 and 2015 shows increase in Working Capital. This indicates
that the company has ability of payment of short-term Liability.
The fixed assets ratio indicates that the working capital of this company is funded by
long-term funds which indicate efficient funds management.
The Short –term Liquidity and long- term Liquidity position of the concern were studied
to evaluate the Working Capital of the concern. During the study period 2013 to 2017 the
current ratio of the concern varied from 8.63 to 2.21.But 2015 - 2016 is varied from 0.77
to 1.80. This was much less than the prescribed of 2:1. The inference is that the Current
Liability may not be easily met out of Current Asset by the Company.
The Quick ratio of the concern during the period 2013 - 2017 the study is varied from
7.22 to 1.67.Which was much greater than the prescribed standard of 1:1.So the company
Liquidity level is satisfactory.
In Trend analysis the Cash &Bank Balance have been increased from 2013 to 2016.So it
shows the Cash position of the company
86
CHAPTER VII
SUGGESTION:
The company is a profit seeking one; it has to commit all of its resources to achieve its
goal. To achieve this, profitability, liquidity and solvency position a crucial elements to
be monitored carefully, thereby the trade off can be reached
This company’s ability to meet its current obligations is satisfactory though it does not
meet the conventional norm. This company maintains current liabilities more than the
amount of current assets which has to be viewed seriously and improvement of this ratio
is required to achieve the optimum level.
Using trend analysis it can be suggested that the fixed assets curve shows steady upward
direction much than the current assets curve, which enable us to understand the
company’s funds are dumped in fixed asset, it is not a favorable condition to the
company
87
CHAPTER VIII
CONCLUSION
The present study reveals that the liquidity position of this company is comparatively good
as it approaches the standard norms throughout the period of study. On the
whole, it can be concluded that the company’s overall risk evaluation process is
not at desired level and the author has made the realistic recommendation for
the improvement in operational and managerial efficiency of the company as to
maintain and increase further by effective utilization and control of all the
assets.
88
CHAPTER IX
BIBILIOGRAPHY
BAGAVATHI
Web site:
1. www.google.com
2. www.finance.org
3. http://www.universityofcalicut.info/SDE/VISem_BBA_working_capital_mgmnt.pdf
4. http://www.icaiknowledgegateway.org/littledms/folder1/chapter-7-management-of-
working-capital.pdf
5. http://wps.prenhall.com/wps/media/objects/13070/13384693/Chapter18.pdf
6. http://shodhganga.inflibnet.ac.in/bitstream/10603/705/13/14_chapter5.pdf
89
7. http://shodhganga.inflibnet.ac.in/bitstream/10603/703/7/07_chapter1.pdf
8. http://faculty.london.edu/icooper/assets/documents/CapitalProjectPlanning.pdf
9. http://www.ediindia.org/doc/SpecialPDF/chp-14.pdf
ASSETS:
CURRENT ASSETS:
FIXED ASSET:
90
TOTAL FIXED 73,40,010 95,86,730 95,08,586 1,26,21,370 1,26,64,270
ASSETS:
LIABILITIES:
CURRENT
LIABILITIES:
RESERVES AND
SURPLUS:
UNSECURED
LOAN:
PROVISIONS:
91
benefits
92