Chapter 1

INTRODUCTION OF THE STUDY

INTRODUCTION OF THE STUDY

Finance is regarded as the lifeblood of a business enterprise. This is because money oriented economy finance is one of the basic foundations of all kinds of economic activities. It is the master key, which provides access to all the sources for being employed in manufacturing and merchandising activities. It has rightly been said that business needs money to make more money. However, it is properly managed. Hence, efficient management of every business enterprise is closely linked with efficient management of its finances. This can be termed as 'Financial Management'. Financial Management is concerned with the management decisions that results in the acquisition and financing of Long term and short-term credits for the firm. As such it deals with the situations that require selection of specific assets or combination of liabilities as well as the problem of size and growth of an enterprise. The analysis of these decisions is based on the expected inflows and outflows of funds and their effects upon managerial objectives.

In modern world, concept of financial management changed due to technological improvements, widened marketing operations, development of a strong corporate structure, keen and healthy business competition, which made the management to make optimum use of available financial resources for continued survival. Today, Financial management involves four broad decision areas. They are:
1)

Funds requirement decision:

This is the most important decision taken by the Finance manager. A careful estimate has to be made about the total funds required by the enterprise taking into account both fixed and working capital requirements. This is done by forecasting the physical activities of the enterprise.
2)

Financing decision:

Provision of funds required at the proper time is one of the primary tasks of the finance manager. Every business activity require funs and hence every financial manager is confronted with this problem. He has to identify the sources from which the funds can be raised, the amount that can be raised, the amount that can be raised from each source and cost and other consequences involved. A proper balance has to be kept between the fixed and non-fixed cost bearing securities.
3)

Investment Decision:

This comprises decisions relating to investment in both capital and current assets. The finance manager has to evaluate different capital investment proposals and select the best keeping in view the overall objective of the enterprise. This would involve fixing the criteria for evaluating different investment proposals, fixing priorities, committing funds for them etc. The investment in current assets will depend on the credit and inventory policies pursued by the enterprise. The credit policy is determined keeping in view the need of growth in sales and the availability of finance. Similarly, the inventory policy will be setup taking into account the requirement of production, the market trend of the price of raw materials and the availability of funds.
4)

Dividend decision:

The establishment of dividend policy is another important function of finance manager. The dividend decision involves the determination of the percentage of profits earned by the enterprise, which is to be paid to its shareholders. For any enterprise, it will have two types of capital requirement for its operations: 1) Fixed Capital requirements 2) Working capital requirements

1.Fixed Capital:
Fixed capital is the funds required for the acquisition of those assets that are to be used over and over for a long period. It is the capital which is meant for meeting the permanent or long term needs of the business. Management of Fixed Capital is concerned with the raising of required fixed capital at minimum cost and its effective utilization.

2. Working Capital:

Working capital is the capital required for day to day operations of a business enterprise particularly to complete the operating cycle.

WORKING CAPITAL
1.2 Meaning /what is working capital? Working capital refers to that part of total capital, which is available and used for carrying out the regular business operations. Thus the capital required for purchasing raw materials, payments of direct and indirect expenses for carrying out production , investment in stocks and stores receivable and to be maintained in the form of cash is generally know as working capital. In other words the capital received for day-to-day expects for organization in Working capital For running an industry or a concern, two types of capital are ired, viz Fixed Capital Working Capital Every business needs funds for two purposes for its establishment and to carry day-to-day operations. Long term funds Short term funds. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, buildings, land, furniture etc. investment in these assets represents that part of firm's capital, which is blocked on a permanent or fixed basis is called fixed assets. Funds are also needed for short-term purposes for the purchases of raw materials, payments of salaries, wages, power charges etc., and also for financing the interval between the supply of goods and the receipts of payments thereafter. In other words the working capital is the finance, uired meeting the costs involved during the operating cycle or the working ital cycle. Working capital refers to that part of the firm's capital which is uired

for financing short term or current assets such as cash, marketable rities, debtors and inventories.
Working Capital Management in SAIAGRO INDUSTRIES

1.3 CONCEPTS OF WORKING CAPITAL: The important concepts of working capital are: Gross Working capital refers to the firm's investment in current assets, currents assets are the assets which can be converted into cash within an accounting year [or operating cycle] and include cash, shortterm securities, debtors [accounts receivables or book debts], bills receivables and stock [inventories]. 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 [accounts payable], bills payable and outstanding expenses. Net Working capital can be negative or positive. A positive Working capital arises will arises when the current assets exceed the current liabilities and a negative working capital will arises when current liabilities exceed current assets. Cash Working Capital refers to the one that is calculated form the terms appearing in the profit and loss account. It shows the real flow of money or ue at a particular approach in working capital. It is the basic of the operation cycle concept. Which has assumed a great in financial management recent years. The reason is that the cash working capital indicates the adequacy of the cash flow, which is an essential prerequisite of a business.

OPERATING CYCLE/WORKING CAPITAL CYCLE

This process involved in the utilization of working capital is a cyclic one. What is at one stage a raw material, gets converted into goods in process in the next stage and then into finished goods, then book debts and the cash and then back again into the stage of raw material. In respect of trading concerns, operating cycle represents the period involved from the time the goods and services are purchased and the same are sold and realized.

In the case of manufacturing concerns, it is the time involved in the purchasing of raw materials, converting them into finished goods and the same are finally sold and proceeds are realized.

Fig: Operating cycle/ Working capital cycle. Receivable Raw Materials/Stores Expenses led goods Stock in process

The total working capital requirement for industrial units will depend upon the blocking period of assets and the operating of the cycle. As the regards the operating cycle, the duration of each stage of process cycle ; first decided upon having regards to the function it is suppose to perform conversion of raw materials into finished goods depends upon the echnical requirements and manufacturing facilities available similarly, the turnover of finished products and their

transformation into book debts, bills or cash could be related to factors like delivery schedule, business customs and competition. Thus, the working capital cycle of a manufacturing activity starts with the acquisition of raw materials and ends with the realization of cash for finished goods. The cycle is long in some cases and short in others, depending upon the nature of business. Cycle is fast in consumer goods industries and slow in capital goods industries. Cycle is short in case of perishable such as food articles, beverages, fruits, fish, etc. cycle is long in the case of tobacco, distilling, ber etc. seasonal industries like manufacturers of umbrella, woolen fabrics, fan etc, require higher stocks in some months and bare minimum, in remaining months. During the cycle funds are blocked in various stages of current assets viz., cash itself, inventory [consisting of raw materials, stock in process, finished goods] and receivables. These require finance. Finance involves costs. Quicker the cycle, more is the turnover normally and longer the cycle, the less is the turnover. Stagnation in any area affects turnover and profitability. Factors which affect working capital cycle are a) the concern's efficiency b) the concern's policy , c) Inventory management d) technical process involved / adopted e) trade practice f) government policy and economic conditions.

THE NEED OR OBJECTIVE OF WORKING CAPITAL

The objective of a firm is to earn sufficient returns from its operations for training a steady amount and profit there should be successful sales activity. The firm has to invest enough funds in current assets for the success. Every business needs some amount of working capital. The need of king capital arises due to the time gap between production and realizations of cash from sales. There are time gaps in purchase of raw materials and production; production and sales; and sales and realization of cash. Thus working capital is needed for the following reasons: For the purchase of raw materials, components and spares. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power and office expenses etc.

 To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers. To maintain the inventories of raw materials, work in progress stores and spares and finishes stocks. To meet all incidental expenses related to production. To carry the finished goods till sales are made. The funds would be needed to carry the receivables also as sales need to convert into cash instantaneously.

WORKING CAPITAL MANAGEMENT

Working capital in general refers to the excess of current assets er current liabilities. Management of working capital therefore is concerned the problems that arises in attempting to manage the current assets, the current liabilities and the inter relationship between them. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of king capital is maintained, that is, it is neither inadequate nor excessive. Management of working capital means the management of current assets, went liabilities and Net working capital.

1.7 Current Liabilities:

Current liabilities are short-term liabilities, which are repayable within a year. They are normally raised for meeting the working capital needs and to cquire current assets. Current liabilities are the main source of finance for raking capital and are normally identified with the operating cycle of the business. Current liabilities normally consist of: Industry borrowings for working capital Sundry creditors - Trade Other current liabilities and provisions

Current Assets:

Current assets are also called convertible assets, liquid assets or floating assets, They change their form every now and then and ultimately are converted |cash. Current assets in the form of finished goods are meant for sale and conversion in to cash in a period not exceeding one year. They indicate short-term deployment of funds and form gross working capital.

Cash Stock in trade consisting of raw materials, stock in process, finished goods, stores, and packing materials. Book debts, and Other loan and advances etc,

Working Capital Gap This represents excess of current assets over current liabilities excluding industry borrowings. A part of the current assets are financed by pent liabilities [other than industries borrowings]. The remaining portion of current assets, which requires financing, is called as working capital gap. Industry b not grant advances to the full extent of working capital gap. It is a well-established rule that the borrower has to finance a part [normally 25%] of working capital gap out of either capital or long term sources.

Net working capital This represents excess of current assets over current liabilities [including industries finances]. It is a liquid available surplus. This represents the | margin or long term sources provided by the borrower for financing a part of the current asset.